Saturday, March 29, 2008

The true meaning of the gold

The true meaning of the gold standard is not gold, any more than the value of a piece of paper money is in the quality of the engraving. The true meaning of it is a convention and the faith of that convention must be kept, not in gold, but in credit. Gold is the accidental figure in which the convention is embodied. It might be almost anything else, except that after long experience it was found that gold served better than anything else, merely as the figure. Once it was silver. The pound sterling originally was a pound of silver. The American dollar was originally silver. Yet when the figure was silver the convention was the same; so also were the penalties for breaking the faith.

The value of gold is arbitrary; so is the length of a yardstick. But just as it is necessary to sell cloth by the yard or coal by the ton, so it is necessary to have some arbitrary unit of value in which to price the yard of cloth and the ton of coal. It would be ideal to have something of absolutely invariable value in which to price them. But there is no absolutely invariable thing in the world. The relative constancy of the gold supply, the durability of the metal, the fact that over the centuries the amount of human exertion necessary to get it out of the rocks changes very slowly—for these and other reasons gold is the least unstable thing man has found for purposes of money, hence his preference for it.

Once the quantity of it was important, merely as money. That is no longer true. The total stock of monetary gold in the world could be stored in one small barn. Yet if the mechanism of credit and exchange were perfect and all people could be trusted, by themselves and by one another, to keep the convention, one ton of it, one ounce of it, in fact, would serve the modern purpose.

 One of the singular characteristics of gold is its extensibility. Between two pieces of fine leather made from the intestines of an ox it may be beaten to the impalpable thickness of l/3OO,OOOth part of an inch, so that one troy grain may be made to cover 56 square inches. On the number of pure gold leaves, 4" x 7", that could be beaten from one ounce, worth $20.60, you could print the Old Testament in the ordinary Bible type, if the leaves would bear printing.

The ancient goldbeater's art may astonish the senses. More astonishing to the imagination is the extensibility of gold in a fictional dimension. Out of this same tame and friendly metal, men have beaten a pure fiction of gold, the very spirit of it, and this fiction or spirit is infinitely extensible and infinitely divisible. The gross name for this fiction or spirit of gold is credit. The business of extending and dividing the spirit—the business, that is to say, of creating credit and setting it free— is in the hands of bankers, banking systems and governments; and the convention, namely, the true meaning of the gold standard, is simply their undertaking that the amount of credit created and set free shall bear a certain relation, called a ratio, to the amount of actual gold in their possession. The ratio is variable, from time to time. If and as the business of the world increases faster than the gold supply, so that there is really a need for more money and credit, the ratio may be raised.

It is not the ratio itself that is so all-important, as many people think, especially debtors who are always wanting cheap money with which to pay their debts, or, on the other hand, creditors, whose advantage is in dear money. The imperatives are simple and three. 

First that there shall be some definite ratio.

Second, that it shall have been agreed upon when we were all in our right minds.

Third, that we hold to it in good faith. For this now is the modern function of gold—to limit the amount of money and credit that may be willfully, irresponsibly created and set free.

Organized credit is relatively a strange thing in the economic life. New and experimental forms of it are continually being invented and we love to deceive ourselves with them. We forget that credit in any form represents debt in some other form. We know about ourselves that we have seizures of ecstasy and mass delusion; that again a time may come when the temptation to throw the monetary machine into wild motion so that everybody may become infinitely rich by means of infinite debt will rise to the pitch of mania, as it did, for example, in 1928 and 1929. With this intelligent knowledge of ourselves we make bargains beforehand with reason; we agree that money, credit and debt shall not be inflated beyond a certain ratio to gold, under certain penalties such as we shall be very loath to pay and yet such as we cannot refuse to pay under worse penalties still.

 So long as the convention is reasonably kept in the faith of credit nobody wants gold. People know what the fiction is. They may read for themselves in the published figures of the bank that its liabilities exceed its gold tenor twentyfold, and yet they feel no anxiety about the gold value of their deposits. They may read for themselves in the figures from the public treasury that the gold reserve is only one half or one third as much as the amount of paper money in circulation. Yet they will treat that paper money as if it were gold. Nobody would dream of  supposing that a country, no matter how rich, could redeem its bonds in gold. Yet its bonds will be treated as if they were gold, and one who happens to want gold for them may freely have it. All so long as the convention is kept. 

Does this mean, as some of the silly textbooks used to say, that we are all gambling upon a mythical law of averages? No. It means a very definite thing. It means that if every kind of physical wealth were priced in gold, all in one moment of inventory, the aggregate value of it would not be less than the total amount of money, credit and debt outstanding against it. Then all the money is as good as gold, all the credit is gold credit, gold itself is a nuisance in the pocket.

But let the faith be broken, let the delusion arise that the fiction is the reality, let the limit upon the amount of credit that shall be set free be left to imagination, and presently there is no way of telling what anything is worth by pricing it.

 For a while this difficulty of not knowing what anything is worth but inflames the ecstasy. Everything will be priced higher and higher to make sure it is high enough; there will be the illusion that things are becoming dear and scarce. They seem to be dear because the value of the money and credit in which they are priced is falling; they will seem to be scarce because people are buying in the expectation that prices will go higher and higher still. Suddenly doubt, then coming awake and panic. The spirit of gold has been debased by senseless inflation. The faith is lost. All with one impulse people rush to seize the gold itself as the only reality left—not only people as individuals ; banks, also, and the great banking systems and governments do it, in competition with people. This is the financial crisis.

All of it has happened. It was not the gold standard that did it; it was breaking faith with the gold standard that did it, and the case would be the same if the standard were anything else.

And who is responsible for breaking the faith? In this country no one is responsible. American banking is governed by law; the law assumes that bankers cannot be trusted not to ruin themselves and their depositors. Therefore, we have more laws to mind banking practice than any other people—and more bank failures in spite of them. The federal and state governments employ thousands of examiners who go round and round, looking into the private books of the banks to see if they are solvent and law-keeping, and the law says that when they find one to be insolvent they must shut it up immediately. And still they fail.

We go on the assumption that a bank is more interested in gain than in its own solvency and if it is not watched its greed for gain will wreck it. Therefore it must be policed. Examiners clothed with arbitrary power must appear at unexpected moments, taking the bank by surprise in any wickedness, and say: "Throw open your books." And yet they fail.

It will be always impossible to keep a bank solvent by law. The law that specifies the maximum risk a bank may legally take with other people's money turns out to be a law of minimum security. A good banker will not take a risk simply because the law says he may; he will use his own judgment. On the other hand, a reckless banker will find a way to do what his greed desires, no matter what the law is, even a legal way.

A BUBBLE THAT BROKE THE WORLD By  GARET GARRETT  June 1 1932

 

S&P Bank Sector

Market is rolling over again..
 

Friday, March 28, 2008

UK house prices drop for fifth straight month



http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/03/28/bcnnation228.xml

http://www.nationwide.co.uk/hpi/historical/Mar_2008.pdf

What is interesting is that nationwide believes that they will not expernence anything similar to the US, an interesting comment. However, trends always overshoot to the downside as much as they do to the upside; their own charts clearly illustrate this.

Based on historical Real Estate bubbles (IMF) the UK could see a 30% drop in prices, over a period of 5 years.

Scandinavian understatement ...

http://www.rgemonitor.com/blog/setser/251660/

But Iceland's banks borrowed heavily to expand abroad. They seem to be having a bit of trouble rolling over their debt, and could face additional risks if depositors start to pull their deposits. A world that is deleveraging rather than gearing up isn't good for them.

More margin call problems…

Thursday, March 27, 2008

Debt and Delusion

Home sales plummet in Spain

http://www.businessweek.com/ap/financialnews/D8VLAP384.htm

 

Stock market's faults must be addressed

Once investor confidence is no longer as solid as it was, the market will only slide further. Seeing the market lose 40 percent from its peak within months only further dampens investor confidence, and this could lead to panic.

Central banks' preoccupation with inflation has blinded them to the dangers of unbridled credit expansion outside the banking system. These widely respected institutions have ushered in a largely unregulated credit system in North America and Western Europe and have promoted many complex financial innovations, including a dramatic expansion in the use of derivatives. At the same time, they have failed to grasp the significance of a vast increase in government debt. In helping governments to create an illusion of personal wealth and national prosperity, central banks have fostered the very conditions in which past financial crises have occurred.

 Peter Warburton  Debt and Delusion

 

Is the world waking up to that delusion?

 

Wednesday, March 26, 2008

FTSE Global Banks

For the credit cycle to turn, we will need to see improvement in the FTSE Global Bank Index.
 

Wilshire with Coppock

The coppock curve a long-term price momentum indictor is far from signalling any new buy signal, while not perfect it long-term record of accomplishment comes in about 82%, that with other indicators helps with me with long-term confirmation for major buys in the stock market.

 

Thursday, March 20, 2008

WLI Shows US Economy in Recession

The U.S. economy is "unambiguously" in a recession, a research group said on Thursday, as a weekly gauge of future U.S. economic growth fell, marking a nine-month decline.
http://www.businesscycle.com/news/press/1476/


Finally they admit what everyone else already knows!!

Top 16 big, fat lies de nos jours

1. Derivatives reduce volatility

2. The BRIC economies are decoupling

3. Inflation is 2 per cent

4. Greenspan was a maestro

5. The Chinese won't let their market fall in Olympics year

6. (Junichiro) Koizumi reformed Japan

7. The Americans are devoted to free market solutions

8. The Swiss are prudent

9. The French are brilliant derivatives traders

10. The UK is suffering a housing shortage

11. Private equity funds add value to the companies they buy

12. The cap rate for real estate should be the government bond yield

13. Alastair Darling is in charge of the situation

14. Ben Bernanke is in charge of the situation 1

5. The G8 is in charge of the situation

16. Anyone is in charge of the situation

By Peter Tasker

 

 

June 1 1947

Deflation watch, US Interest rates fall below Japan’s

http://www.nakedcapitalism.com/2008/03/deflation-watch-us-short-term-rates.html

.56% on monthly basis 3 month US TBills, have not seen these lows since June 1 1947, the record low was 0.01% Jan 1 1940, the high May 1 1981 at 16.30%.

Attached is the 1 month TBill, at a new low of 45%

Wednesday, March 19, 2008

CRB INDEX

That was one heck of a blow off, take a look at the long-term monthly chart, have you ever seen such craziness in a commodity index?

 

G.I.C.

Irish Market

Country/Region

DivYld

P/B

P/CF

IBES
FYO P/E

12M
Trailing P/E

IBES
FY1 P/E

P/Sales

ROE

Ireland

4.19

1.88

7.89

10.19

9.72

8.98

0.87

18.42

Global

2.52

2.21

8.91

14.62

14.60

13.26

1.13

15.20

Europe

3.66

2.02

7.00

11.81

11.43

11.43

0.96

17.17

United States

1.91

2.53

11.14

15.81

17.26

13.94

1.28

16.07

Down 42% from its peak, and still falling , but you can see comparatively to the world the markets is moving into the historical normal ranges, the problem like all bear markets is that the dividend yield will probably rise above 6% or higher before it’s all said and done.

Global Investment cycles

Monday, March 17, 2008

US T-BILL RATE

The secular decline in interest rates are now confirmed with the US T-BILL rates at a new low, the Fed will be probably forced to lower rates 1% tomorrow as they did in the last depression.

Global Investment cycles

Upcoming turn date

The sentiment is extremely negative, the markets are very oversold; technical indicators confirm this, are the market near a bottom.

 

Martin Armstrong turn date is this Saturday March 22 2008, the last turn date was the top for many indexes, (Feb 24 2007), one of them was the SP Banking index. The other index that I follow very closely is the Irish market, the reason is that market was one of the most overvalued that led the stock market and Real Estate market manias, that market is a down over 4% this morning, the chart does not reflect this.

 

I don’t think that this is the bottom, since this is not 2001, 1998 or even 1990, the major differences is that the  credit cycle is unwinding at that won’t end until all global Real Estate values stop falling.

 

This is not just a US problem; this credit cycle mania inflated the most expansive global business cycle in 200 years, the last five-credit cycle manias all ended in deflationary busts.

 

Global Investment cycles

 

 

Saturday, March 15, 2008

1.12%

Japan experienced a deflation in recent years because the bursting of its asset-price bubble in the early 1990s created huge losses in its banking system. The Japanese banks had financed the asset-price bubble. When it burst, the debtors could not keep current on their loans to the banks and therefore were forced to turn back the collateral to the banks. The market value of the collateral, of course, was less than the amount of the loans outstanding, thereby inflicting huge losses of capital to the Japanese banks. With the decline in bank capital, the Japanese banks could not extend new credit to the private sector even though the Bank of Japan was offering credit to the banks at very low nominal rates of interest.

Banks are an important transmission mechanism between the central bank and the private economy. If the banks are unable or unwilling to extend the cheap credit being offered to them by the central bank, then the economy grows very slowly, if at all. This happened in the U.S. during the early 1930s.

U.S. banks currently hold record amounts of mortgage-related assets on their books. If the housing market were to go into a deep recession resulting in massive mortgage defaults, the U.S. banking system could sustain huge losses similar to what the Japanese banks experienced in the 1990s. If this were to occur, the Fed could cut interest rates to zero but it would have little positive effect on economic activity or inflation.

Short of the Fed depositing newly-created money directly into private sector accounts, I suspect that a deflation would occur under these circumstances. Again, crippled banking systems tend to bring on deflations. And crippled banking systems seem to result from the bursting of asset bubbles because of the sharp decline in the value of the collateral backing bank loans.

Paul L. Kasriel
Sr. V.P. and Director of Economic Research

"And if the over-indebtedness with which we started was great enough, the liquidation of debt cannot keep up with the fall of prices which is causes. In that case, liquidation defeats itself. While it diminishes the number of dollar owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increase it because of the mass effect of the stamped to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing. But the over-indedbetness is not sufficent great to make liqudate this defeat itself, the situation is different and simpler. It is then more analogous to a stable equilibrium; the more the boat rocks the more it will tend to right itself.

Irving Fisher

(1933) The debt deflation theory of Great Depressions.

The cycle of deflation according to Fisher

Asset deflation indebtedness > distress selling > repayment monetary contraction> decreased spending> more deflation‼

What will happen to the markets once it realizes that debt deflation can occur under Bernanke's watch?

Global Investment cycles

Friday, March 14, 2008

ECRI Weekly Leading Index


The ECRI Weekly Leading Index (WLI) declined to 132.2 for the week ending March 7 from a downwardly revised 132.5 (previously 132.6). The smoothed, annualized growth rate was little changed, decreasing to -10.4% from an unrevised -10.5%.


http://www.dallasfed.org/data/data/us-charts.pdf


This is the good news for the US, and why I believe ECRI has not called a recession.

Global Investment cycles










Canada Home affordability at worst level since 1990

http://www.rbc.com/economics/market/pdf/house.pdf

Therefore, the prospects for Canadian Real Estate are, Canadian banks will not tighten as their balance sheets deteriorate, that commodities will not collapse, the US does not go deeper into a recession and the world does not follow, and if interest rates do not fall. Canada you probably have a one&four chance.

Global Investment cycles

FTSE EPRA/NAR INDEX

The FTSE EPRA/NAREIT Global Real Estate Index Series is designed to represent general trends in eligible real estate equities worldwide.

Relentless, and pervasive, the index also topped on Feb 20 2007, let us see how this index performs with the upcoming turn date.

Global Investment cycles

Thursday, March 13, 2008

Irish Market

Persistent and pervasive, the Irish market I believe was one of the most overvalued markets and a good judge for most if not all of the developed markets. Interesting it did peak within 4 days of Martin Armstrong date of Feb 24 2007, next turn date March 22 2008. We should watch the market here because they are very oversold, and sentiment is very negative. The next two weeks should give us a final washout, or could turn within the next two weeks.

Global Investment cycles

Vicious Cycle'

http://www.bloomberg.com/apps/news?pid=20601087&sid=ap2K3X5hzfQ8&refer=home

``We're in a vicious cycle,'' Sharga said. ``We've got depreciating home values and loans resetting at an outstanding volume just as banks are retrenching. Even people who want to buy a home now are having trouble getting a mortgage.''

The one thing that all credit cycles have is a persistent and pervasive surprise to the downside; the simple reason is that there is a continued adjustment of overvalued assets, and those overvalued assets are still deflating, they are actually increasing to the downside, especially Real Estate, and now Real Estate deflation is now spreading around the world. This is extremely important since all Real Estate crises have caused distortion to the capital markets, add in global stock markets are unwinding; you have huge deflationary forces to the downside.

Most banks are levered 8:1 or higher, hedge fund ever more, so what are the risks as the great unwind continues. Mortgage resets are yet to peak, forecloses are heading higher, and the global banking system is tightening. I will not even address the advantage in derivatives, who really knows how much risk there is, this puts even more pressure to the downside.

Europe is slowing, the yen carry trade in unwinding, we can also add in record gas prices real and nominal for most countries, along with commodity price increases, which in itself could trigger a huge adjustment to the global economy.

So the supercycle of credit has burst, the stock market cycle is still unwinding (2000), the Global Real Estate cycle (Kuznets) is unwinding, add in the (Jugular) cycle, which I believe is centred in Asia, is to peak this year, China should also expect a slowdown after the Olympics. Add in the generational (crisis) cycle and Baby boom generation (spending wave) cycle, you have these long cycles putting downward forces on the global economy; these forces are a huge and extremely deflationary, counter to the concerns of stagflation.

A vicious cycle to the downside is just starting.

Global Investment cycles

Wednesday, March 12, 2008

Wilshire 5000

See Attached,

The next six months should very telling about the long-term confirmation of the bear market.

Global Investment cycles

Stagflation Fears Escalate

http://www.bcaresearch.com/

It is unlikely that rising commodity prices will lead to a rise in core CPI inflation because manufacturers will be unable to raise prices amidst weak demand. Moreover, the softening job market will help prevent second round effects. Bottom line: Stagflation has returned as a hot word. However, as occurred the last time stagflation had its moment in the limelight in 1990; weak growth will soon undermine pricing power.

See att,

The important key to the whole economy is more debt, and that debt must come from lower rates or else stock markets and Real Estate markets will collapse further because of valuation metrics. Based on historical data, it will require coordinated efforts from all central banks to bring short and long-term rates to near zero to have any success in reflation, and it require a willing lender and borrower to facilitate that reflation, or else deflation will become the dominant outcome.

Global Investment cycles


Renewables 2007 Global Status Report

http://www.ren21.net/pdf/RE2007_Global_Status_Report.pdf

xRenewable electricity generation capacity reached an estimated 240 gigawatts (GW) worldwide in 2007, an increase of 50 percent over 2004. Renewables represent 5 percent of global power capacity and 3.4 percent of global power generation. (Figures exclude large hydropower, which itself was 15 percent of global power generation.)

xThe fastest growing energy technology in the world is grid-connected solar photovoltaics (PV), with 50 percent annual increases in cumulative installed capacity in both 2006 and 2007, to an estimated 7.7 GW. This translates into 1.5 million homes with rooftop solar PV feeding into the grid worldwide

The energy revolution continues

Global Investment cycles

Tuesday, March 11, 2008

Short term Yields

See attached,

While the market today could rally with the temporary reprieve, the panic will probably start once it become evident that there are no more bullets, or when the Deflation expert theories proven incorrect.

Less than 4% before we encounter accelerating deflationary forces.

Global Investment cycles

The Economist house price index

See Attached,

The 1st, 2nd, 3rd and 30th, largest economies Real Estate values are showing negative year over year returns, the 5th largest the UK, has over the past 4 months has registered negative returns, as its economies slows dramatically, add the stock market losses, and you have the recipe for financial accidents similar to the thirties. These countries account for almost half of the world GDP.

It seems with the systemic tightening by the markets, that within two years most if not all Real Estate markets could be witnessing similar negative year over year returns.


The supercycle of debt or the big unwind, is spreading very quickly.


Global Investment cycles









Clean-Energy Trends 2008

http://www.cleanedge.com/reports/reports-trends2008.php

The Masdar development,
http://www.masdaruae.com/text/v-files.aspx

The oil-rich territory of Abu Dhabi in the United Arab Emirates recently broke ground on Masdar City, which aims to be the world's first zerocarbon, zero-waste, car-free city. The government's Masdar Initiative includes $4 billion in direct funding of infrastructure, such as solar PV canopies over pedestrian walkways, and an additional $18 billion in corporate investments. Those include a $250 million Clean Technology Fund whose partners include Credit Suisse and Siemens. "Abu Dhabi," wrote the New York Times, "hopes to show that petrodollars can develop innovation in clean energy." Among the fund's U.S. investments are HelioVolt, NanoGram, and Segway. By 2016, Masdar City aims to have 50,000 residents and 1,500 businesses, all powered by solar energy. Drinking water will come from solarpowered desalination, with treated wastewater irrigating the landscape. Masdar selected global engineering firm CH2M Hill as program manager for the first phase of development.


Add in hydroponics, and the city could become almost self sufficient.

Global Investment cycles














Disclaimer

This Global Historical probability model is intended for information only and under no circumstances should items be considered as recommendations to purchase or sell investments.
Any statements contained herein that are not based on historical fact are forward-looking statements. Any forward-looking statements represent the Investment advisor’s best judgment as of the present date as to what may occur in the future. However, forward-looking statements are subject to many risks, uncertainties and assumptions, and are based on the Investment advisor’s present opinions and views. For this reason, the actual outcome of the events or results predicted may differ materially from what is expressed. Furthermore, this investment advisor’s views, opinions or assumptions may subsequently change based on previously unknown information, or for other reasons. The Investment advisor assumes no obligation to update any forward-looking information contained herein. The reader is cautioned to consider these and other factors carefully and not to place undue reliance on forward-looking statements.

These are my own views, please enjoy these insights