ducati998

The Federal Reserve is expressing concern that there might be a tad of speculation going on.

The problem will only become a problem if people speculate that the Federal Reserve [might] will reverse this inflationary policy.

ChartAddict informs us that today is his birthday. This makes him a Sagittarius. I’m not particularly into astrology, well not at all actually, but, here’s what it has to say.

Traits of a Sagittarius:

Fun
Optimist
Good-natured
Sociable
Spiritual
Impatient
Fears responsibility
Self-indulgence
Fanaticism
Peter Pan syndrome
Tendency to gamble
Likes…

Freedom
Unusual ideas
Being on the move
Parties
Luxury items
Gambling
New friends
Flirting

Dislikes…

Public disapproval
Playing safe
Confinement
Monotony
Tight clothes/areas
Being doubted
Being refused

I’ve highlighted the Peter Pan Syndrome as I’ve never heard of it.

PETER PAN SYNDROME has been accepted in psychology and laypeople and, by some psychology professionals since the book “THE PETER PAN SYNDROME: MEN WHO HAVE NEVER GROWN UP) by Dr. Dan Kiley and published in 1983.

It characterizes the personality of an immature person and also includes narcissistic behavior. It groups those with this disorder an undependable, rebellious, anger, narcissism, dependency, and manipulation tendencies. According to Dr. Kiley, “Peter Pan” is the adult little boy who, when in a relationship or in seeking a relationship, acts out a need for mothering.

You know, maybe there’s something in this astrology?

INTERNATIONAL. Marc Faber, the Swiss fund manager and Gloom Boom & Doom editor, said eventually there will be a big bust and then the whole credit expansion will come to an end. Before that happens, governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to continued stimulus.

Speaking at a conference in Singapore on Wednesday, Faber said: “The crisis has not solved anything. On the contrary there is less transparency today than there was before. The government’s balance sheet is expanding, and the abuses that have led to the one cause of the crisis have continued”.

“I think eventually there will be a big bust and then the whole credit expansion will come to an end,” Faber added.

“Before that happens, governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to stimulus”.

In one of his Gloomiest predictions, Faber, referred to as Dr Doom, said “the average family will be hurt by that, and then in order to distract the attention of the people, the governments will go to war”.

“People ask me against whom? Well, they will invent an enemy,” Faber said.

“At some stage, somewhere in future, we will have a war – that you have to be prepared for. And during war times, commodities go up strongly,” said Faber.

“If you want to hedge against war, you don’t want to own derivatives in UBS and AIG, but you have to own them physically, like farmland and agricultural commodities. That is something to consider for you as a personal safety and hedge. You have to own some commodities,” he added.

In a Bloomberg Television interview in Singapore Wednesday, Faber said “What will continue to happen is that the S&P 500 and the Dow Jones will go down relative to gold.

“I think gold will go up more,” he added.

“Will it go US$2,000, US$200,000 or US$2 trillion? I don’t know,” Faber said. “But if you have money printing in the world, then the price will over time rise. It will go up more for things that you just can’t increase the supply, and the supply of precious metals is very limited.”

Faber expects the US government to increase its stimulus spending should the Standard & Poor’s 500 Index fall toward 900. The US budget deficit under President Barack Obama’s administration reached a record US$1.4 trillion in the fiscal year that ended Sept. 30. Debt amounted to 9.9% of the nation’s economy, triple the size of the 2008 shortfall.

“I don’t think the S&P will drop below 800 or 900, and eventually will go higher in nominal terms, but not necessary in real terms,” he said, predicting a correction in the measure in the “near term.”

Faber has been warning about a collapse of the capitalistic system ‘as we know it today,’ massive government debt defaults and the impoverishment of large segments of Western society.

In a May interview with CNBC, he said central banks will continue to print money at full speed, but long-term this strategy will lead to a fall in purchasing power and living standards, especially in developed countries.

The years 2006 and 2007 were “the peak of prosperity” and the world economy is not likely to return soon to that level, he added.

Unless the system is cleaned out of losses, “the way communism collapsed, capitalism will collapse,” according to Faber. “The best way to deal with any economic problem is to let the market work it through.”

“I repeat what I have said in the past,” Faber said. “No decent citizen should trust the Federal Reserve for one second. It’s very important that everyone own some gold because the government will make the dollar (in the long term) useless.”

From the closing of all portfolio positions yesterday. There are some interesting outcomes. It would have actually been easier and more profitable to simply buy SPY.

The Managed Funds for example PIV performed particularly badly, a bit of a surprise considering they are Value Line stockpicks according to their methodology.

Also the thesis on oil was correct. Buying the major oil company however was absolutely the wrong way to play oil. You would have been better to buy the futures.

Dividends played a huge part in bumping the returns. Always worth remembering. Historically this has also been the case.

Name..Date………..Price……….Closed Price…..%Return
FXY……………………………………………………………………+32%
NHI..3/3/08……..$29.95………..$33.40………….+11.5%
PIV..3/4/08……..$14.81…….….$10.90………….[-26%]
BWP.15/4/08…….$24.03……….$28.03………….+16.6%
PCF…21/4/08……..$7.76………..$6.80………….[-12%]
CST.28/4/08……..$2.35………..$3.95…………..+68%
FNM.8/9/08……..$0.01………….$1.00…………..+100%
COP.7/11/08….$51.03………….$53.51…………+4.8%
MOO..18/11/08…$25.03……….$43.52…………+73.7%
BRK.b.19/11/08….$2684……….$3481……………..+30%
UNG…06/08/09…$13.35……….$9.20…………..[-31%]

Total……………………………………………….………..+22.3%
Dividends…………………………………………………..+13.0%
Total…………………………………………………………+35.3%

Seasonals for Gold remain strong through February.

There has been an endless amount of chatter about the price of gold being too high (it’s not) and perhaps representing a bubble. It also seems that fair amounts of ink and windage have been wasted on worries about the gold trade being “too crowded.”

Why is gold so valuable?
In my daily column on my own Web site, on Sept. 17, I noted a remark by Dennis Gartman of The Gartman Letter that the gold market was “terribly, egregiously, preposterously, shockingly overpopulated.”

That day, gold closed at $1,014 an ounce. Here we are, about two months later, and gold is more than 10% higher.

In a bull market, worrying about an idea being too crowded with like-minded investors is not very productive. More likely than not, it will help to eliminate you from a winning position.

At some point, when the gold market is finally reaching a top, it will, in fact, be too crowded. But we’re almost nine years into this bull market in gold, and to me it seems that there are more people of the mind that “the trade” is too crowded than there are who say it isn’t.

We’ll know gold is overcrowded when . . .
For the long-gold trade to really become too crowded, certain events will need to occur:

Goldman Sachs (GS, news, msgs) will have had “bus tours” to a bunch of mines, like the tours it and other companies have arranged for different industries, particularly technology.

The public will have to be involved in a major way, and we’ll see ads on Bubblevision encouraging people to buy gold instead of prodding them to sell their jewelry, as is the case these days.

Banks will need to find a way to put money into gold — because no modern mania has ever ended without the banks finding a way to lose money in it.

We will most likely need to see a frenzy of mergers and acquisitions, and a leveraged buyout or two.

Last, BusinessWeek will have to put gold on the cover, telling us how it’s the wave of the future, or some variation of that theme.

I put this list together somewhat tongue-in-cheek, but over the past couple of decades, most of these events have occurred before a big mania has ended — be it energy in the late 1970s and early ’80s, stocks in the late 1990s or real estate in the middle of this decade.

So it seems to me that what’s crowded is not the long-gold trade but more likely the camp of folks who think it’s too crowded.

At the intersection of yellow dog and greenback, it’s worth noting that the tiny island of Mauritius became the third central bank to buy gold in the past month — specifically, 2 metric tons worth $71.7 million from the International Monetary Fund (following in the footsteps of India and Sri Lanka).

I don’t know what the fourth central bank will be, but I’m pretty sure there will be one.

Meanwhile, the Buttonwood column in last week’s Economist, “Paper promises, golden hordes,” cited the small quantity of gold that actually exists: “Two hundred metric tonnes of gold” — that’s what India bought — “would occupy a cube of a little more than two metres on a side; it would fit into a small bedroom.”

(For folks who might not know, all the gold that’s ever been found would fit into two Olympic-size swimming pools!)

The column noted the psychological sea change that appears to be taking place at the central-bank level: “For bullion bulls, the implication is clear: central banks no longer trust the creditworthiness of other governments. And if they have lost confidence, private investors should do the same.”

I think that pretty much sums up how the groupthink process gets started. Of course, that idea will have cut a wide swath through all levels of asset managers (witness my scenario above) before gold finally becomes too crowded and tops out.

Gold sky at morning, bonds take warning
The corollary of folks wanting to buy gold — i.e., having no faith in dollars and other colored paper — also has implications for the bond market. It’s what I have alluded to with my shorthand nickname “the funding crisis.”

That the Buttonwood column took this up for discussion is potentially an early sign that the concept of a funding crisis may now be going mainstream (at least sophisticatedly so):

“Developed-country governments have attempted to control bond yields through quantitative easing and to support stock markets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold’s surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets.”

That is a succinct warning of what I believe will likely be next year’s serious problem for the xera, where weakness is no longer described as just excess volatility but a genuine cause for concern.

Why is gold so valuable?
We’ll know that it’s time to start paying close attention to a potential funding crisis when the bond market trades lower in lock step with the dollar trading lower. That will be an indication that the foreign-exchange market is calling the tune — the implications being higher interest rates and, I would think, lower price-to-earnings ratios and, ultimately, a weaker economy.

Dollar weakness is so widespread lately that even the Icelandic króna and the Latvian lats have been rallying against it, which suggests to me that the belief in our green paper as the world’s reserve currency is being questioned seriously everywhere.

Due to the uncertainity of liquidity support, I’m now cashed-out. I’ll re-evaluate, or take swing-trades based on technicals, through January only. I’ll total it all up later.

I see that the Federal Reserve are as helpful as ever:

St. Louis Fed member Bullard said over the weekend that he favors extending the Fed’s program of purchasing mortgage-backed securities beyond the 1st Q next year.

This adds many more months to the low rates for an ‘extended period of time.’ His comments have pummeled the US Greenback, and as the dollar fell, stock futures soared. Gold hit fresh record highs.

This chart was offered up as further evidence of a deflationary cycle.

This data being used displays a fundamental misunderstanding of capital and the role that it plays within the productive structure. The argument guido is advancing goes something like this: there exists a great deal of unused capacity [productive capacity] thus should consumer demand rise, there is plenty of capacity that can be brought back to create supply.

Unfortunately, that’s simply incorrect.

Capital can take predominantly two forms, fixed and mobile, or otherwise known as specific and general. Mobile or general capital can be moved, and will be moved, based on the natural rate of interest. Fixed, or specific capital, cannot be adapted, it is productive to specific goods/services.

It is the natural rate of interest that determines the allocation of capital. The natural rate of interest is determined by individual time preferences.

The government, via manipulation of interest rates, QE/money printing, fiscal policy, seeks to influence individual time preference choices, shifting them towards consumption.

If they succeed, the natural rate of interest rises in industries that are closest to consumption, and falls in higher stages. The result is that capital flows to lower stages from higher stages.

The chart data depicts higher stages of production. It also implies that this is sitting idle, that capital is eternal. This is incorrect. The capital is flowing, due to the natural rate of interest, or pure interest, to lower stages, thus increased demand, that raises the natural rate, creates even further liquidation of capital in higher stages. Thus we see increased demand is increasingly meeting impaired supply.

The result of falling supply and rising [steady] demand = inflation.

Peter Schiff has an analysis of the Chinese currency peg here. There are some problems with his analysis.

The common understanding is both incomplete and naive. Most analysts simply see the peg as China’s principal weapon in an economic struggle for global ascendancy. The peg, they argue, offers China a competitive advantage by making its products cheaper in U.S. markets, thus allowing Chinese firms to gobble up market share and steal jobs from U.S. manufacturers. The thought is that were China to allow its currency to rise, American manufactures would regain their lost edge, and both manufacturing firms and the jobs formerly associated with them would return. In this narrative, the struggle centers on the United States’ diminishing leverage in persuading the Chinese to lay down their unfair weaponry. It’s a sympathetic picture, but it tells the wrong story.

Actually this conventional view is quite accurate.

Contrary to the conventional wisdom, when China drops the peg, the immediate benefits will flow to the Chinese, not to Americans. Yes, prices for Chinese goods will rise in the United States – but so will prices for domestic goods. As a corollary, the Chinese will see falling prices across the board. As anyone who has ever been shopping can explain, low prices are a good thing.

Our short-term loss will be in sharp contrast to the gain felt by foreigners, who will be rewarded with falling consumer prices and a more abundant supply of investment capital. In other words, the American standard of living will fall while that of our trading partners will rise.

First let’s actually examine how China performs their economic miracle.

* Chinese goods manufactured
*Sold to US for US$
*US$ transferred back to China
*Chinese government prints YUAN
*Pays Yuan to Chinese manufacturers
*Takes US$ and purchases US Securities [Treasury & MBS, etc]

Essentially then China simply inflates, on a massive scale, far larger than even the US. The miracle of Chinese growth, is in large part, simply inflation.

Therefore as in any inflation, the created money is inequally distributed. Thus to sell the now increased supply of goods, due to falling US demand, the price must fall. This is not a good outcome for the Chinese, and the opposite of the conclusion arrived at by Peter Schiff.

It is not good for the Chinese because their productive stages arranged their mix of capital and productive factors on existing consumer spending [gross revenues] When this falls, a capital loss occurs. Capital is consumed.

The reason for this is that the current state of Chinese [wealth] development, is far behind that of the US. This in practical terms means that the ordinal utilities of the Chinese are likely to be very different than that of the US consumer. This means simply that the stock of goods might not command a utility at any price in China. Chinese manufacturers, from manufacturing with only an export mindset, may have to liquidate capital entirely, as demand is in effect non-existent.

This is a classic outcome of inflation. The inefficient allocation of capital. China has, in following massive inflationary policies, placed themselves in the same boom-bust cycle that the US finds itself embroiled.

Not actually touched upon, is the effect of a Yuan revaluation within the currency speculation market. Would a rising Yuan, spark a speculative frenzy that would reinforce this trend, actually taking the Yuan past any fundamental trade based valuation?