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“Wrestling with Something Else”: Why this Gold Bear Market Is Different

The Daily Reckoning - 2 hours 24 min ago

This post “Wrestling with Something Else”: Why this Gold Bear Market Is Different appeared first on Daily Reckoning.

Earlier this month, I had the pleasure to appear on Jim Puplava’s Financial Sense Newshour radio program and discuss the state of the gold market. Along with my peers John Doody of the Gold Stock Analyst and Ross Hansen of Northwest Territorial Mint, I shared my thoughts on how we arrived in the current bear market, what factors might help us get out of it and the role real interest rates play in prices.

Below I’ve highlighted a few of my responses to Jim’s questions.

Q: Let’s begin with the bear market that began in 2011. Two questions I’d like you to answer. Number one: What do you believe caused it? Number two: Do you think this is cyclical or a secular bear market?

A: As I often say, two factors drive gold: the Love Trade and the Fear Trade.

In 1997 and 1998, the bottom of the emerging market meltdown took place. Four years later, we saw China and Asia starting to take off and GDP per capita rise. This is an important factor in this whole run-up that I would characterize as the Love Trade. A strong correlation is rising GDP per capita, and in China, India and the Middle East, they buy gold and many gifts of love.

We saw the Fear Trade starting to take place after 9/11. The biggest factor behind the Fear Trade is negative real interest rates. So when you had both–negative real interest rates and rising GDP per capita in the emerging countries–you had gold demand going to record numbers.

At the very peak of 2011, the dollar had just been basically downgraded by Moody’s and we had negative interest rates on a 10-year government bond. It was a record negative real rate of return, like in the ’70s. You saw this spending from the Fear Trade, but this Love Trade was in negative real interest rates.

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Since then, the U.S. has gone positive. But we’re seeing that in Europe, gold is taking off in euro terms, and in Japan it’s taking off in yen terms. They’re running at negative real interest rates the way we were on a relative basis up to 2011.

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Q: So would you define this bear market as a cyclical bear market, a correction in a long-term trend, or would you define it as secular very much in the way that we experienced the price of gold between, let’s say, the 1980s and 1990s?

A: I think that we’re wrestling with something else. When we look at the other basic metals, what drives the demand for iron, copper, anything that makes steel? It’s fiscal policies. Huge infrastructure spending and fiscal policies. What’s happened since 2011–and after the crash of 2008 but particularly in 2011–is that when the G20 central bankers get together, they don’t talk about trade. It’s all about tax and regulation. They have to keep interest rates low to try to compete, to try to get exports up, to drive their economies. That is a big difference on the need for all these commodities, and it seems to have ended the bull market. Until we get global fiscal policies up and increase infrastructure building, then I have to turn around and look the other way, and say it’s going to take a while.

I do think that gold is going through a bear market. A lot of it has to do more with the central bankers and everything they try to do to discredit gold as an asset class, at the same time try to keep interest rates low to keep economic activity going strong. That’s been a much different factor in driving the price of gold.

The other thing that’s been fascinating is this shift of gold from North America to Switzerland to China. The Chinese have a strategy for the renminbi. Not only do they have 200 million people buying gold on a monthly program throughout their banking system, but the government is buying gold because it needs to back the renminbi to make it a world-class currency of trade.

Q: Explain two things: one, why we never saw the hyper-inflation that people thought we were going to see with the massive amounts of quantitative easing (QE), and two, investor preferences changing from hard assets into stocks.

A: Well first of all, a lot of money didn’t really go directly into the economy. We never had a huge spike in credit supply in 2011, ’12, ’13. Only in ’14 did we start to see it really pick up.

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We never got this big inflation some expected because the money is so difficult, outside of getting a car loan or an extension on a house. Even Ben Bernanke, after he left the Federal Reserve, had trouble refinancing his house following his own procedures. It’s extremely onerous to get a loan.

I think the biggest part is to follow the money. And where is the money going? It’s showing up in stocks. When I look at gold stocks, it’s amazing to see that the indexes are down since 2011, but a basket of the royalty companies is positive. So why is money finding its way to them? What are the factors driving that? Well, not only do they have free cash flow, but they also have a higher profit margin and they’ve been raising their dividends. Franco-Nevada again just raised its dividend. Since 2011, the dividend yield on Franco-Nevada and Royal Gold has been higher than a 5-year government bond and many times higher than a 10-year government bond. So money all of a sudden starts going for that yield and growth.

Q: What’s happened to the industry since the downturn began in 2011?

A: Well, when you take a look at the big run we had until 2006, we had very strong cash flow returns on invested capital. We had expanding free cash flow. And then a lot of the mining companies lost their focus on growth on a per-share basis. They kept doing these acquisitions, which made a company go from “$1 billion to $2 billion in revenue.” However, the cost of that meant that there was less gold per share in production and there were less reserves per share. You had this run-up in the cost for equipment, for exploration, for development. The result was you had seven majors lose their CEOs. And in the junior to mid-cap size, you probably had another 20 in which management was thrown out.

The new management is much more focused on capital returns. They have to be. Otherwise they get criticized. That will hold a lot of these managements accountable, and I think that’s very healthy. And now it’s starting to show up that the returns on capital are improving for several of these companies.

Q: What would you be doing with money right now if you were to be in the gold market? How much would you put in the gold market? How would you have that money invested.

A: I’ve always advocated 10 percent and rebalance every year. Five percent would go into gold bullion, coins, gold jewelry–you travel around the world and you can buy gorgeous gold jewelry at basically no mark-up compared to the mark-up on Fifth Avenue. The other 5 percent is in gold stocks, and if it’s a basket of these royalty companies, I think you’ll do well over time, and you rebalance.

If not, then you go to an active manager, like we have. Speaking from a buyer’s position, Ralph Aldis– portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX)–is a TopGun ranked in Canada as an active manager.

Q: Explain your caution in terms of gold in the percentage you recommend.

A: I’ve always looked at gold as being a hedge from the imbalance of government policies. Having that 10-percent weighting and rebalancing every year might help protect your overall portfolio. There are many studies going back 30 years that show that rebalancing helps.

It’s also advisable to put half your money in dividend-paying blue chip stocks that are increasing their revenue. When there are great years in the stock market, people often take some profits. And when gold’s down, as it is now, it might be time to put money in gold and gold equities.

Frank Holmes
for The Daily Reckoning

P.S. Ever wonder how you can make a lot of money from oil without owning a well? Or whether or not you should buy gold and silver? Or is fracking just a flash in the pan? Get insight, insider scoops and actionable investment tips twice a week with Daily Resource Hunter? Just click here for a FREE subscription!

The post “Wrestling with Something Else”: Why this Gold Bear Market Is Different appeared first on Daily Reckoning.

Categories: Economics

The Market Ticker - Clarity Is Improving (Slightly)

The Market Ticker - 2 hours 55 min ago

When the "embassy" in Benghazi was attacked I said at the time that the available public information did not support any part of the government narrative, but rather was consistent with a planned military-style "hit" on the location and that the people involved were seeking something specific and knew it was there.  It was neither spontaneous nor speculative as the exhibition of coordinated command and control over that operation by the rebels was clear and convincing.

Nobody wanted to get into that on the political side and it is my belief that the reason for same is that doing so would blow wide open the fact that plenty of lawless behavior had been going on over there and both sides of the aisle knew it and failed to stop it.  This is why it was "safe" in terms of inquiry; while you can pin the acts.......

(Click link to read more)

Categories: Economics

A visit to the heart of Canada’s oil sands industry – Fort McMurray

ASPO International - 3 hours 15 min ago

Since 2007 when we published our article, ”A crash program scenario for the Canadian oil sands industry” a visit to Fort McMurray and the areas where oil sands are mined has always been high on my wish list. On my current trip I passed Calgary on the way to Toronto so I finally got an opportunity to visit the oil sands. The flight from Calgary became an interesting introduction to the industry. It was on a small aircraft with around 50 seats and about 40 of the passengers were presumably workers on their way back to Fort McMurray after a week’s leave. A three week session of work on the tar sands awaited them. This report is a description of my trip and does not take a position for or against the mining of oil sands.

During the weekends from May until and including autumn the Oil Sands Community Alliance (OSCA) in Fort McMurray organizes round trips to interesting places. I was able to put together my own trip with their help.

read more

Categories: Peak oil news

How to Bag Easy Gains from the “Mass Affluent”

The Daily Reckoning - 3 hours 40 min ago

This post How to Bag Easy Gains from the “Mass Affluent” appeared first on Daily Reckoning.

Fickle fashion trends are damn near impossible to figure out.

But today, you’ve got a chance to bag an easy 15% gain off the rapidly changing tastes of the “mass affluent” – but you have to pounce on this thing now before they change their minds…

So who are these “mass affluent” types? They’re the people rich enough to demand premium products and services—but not rich enough to be considered wealthy. They’re more like the 11% than the 1%. So they don’t get hit as hard as your typical middle-class family when recession hits. And they love to spend money.

Everyone wants a piece of the mass affluent market these days. And why not?

I mean, who doesn’t want an overpriced soy latte to go with the overpriced leather handbag? So these upwardly mobile types (and their offspring) are the primary targets of nose-in-the-air brands like Starbucks and Coach.

But these mass affluent sorts have the loyalty of a hooker. They’ll dump one high-end brand for another at the first whiff of a better deal. And a company’s profits can go poof if it doesn’t figure out in advance what the hell this bunch wants next season.

So some of these luxury stocks can be captains of the market at any given moment—while others get stuck scrubbing the toilets. And that’s exactly what the market is showing us right now…

This earnings season has been Christmas morning for some luxury retailers and a total bust for others. For a tale of two brands, just take a look at Tiffany and Co. (NYSE:TIF) and Michael Kors (NYSE:KORS).

Tiffany reported a big earnings beat yesterday, easily topping first quarter estimates. Its shares hadn’t done much this year, but now it looks like the iconic jeweler is serious about a comeback. Shares popped more than 10% Wednesday. Here, see for yourself:

Then there’s Michael Kors. That’s the sad line on the chart today. Shares of this high-end handbag maker plummeted to 52-week lows after missing earnings estimates. And it didn’t help that its second quarter outlook painted a dark picture.

Look, I can’t tell you the first thing about fashion except that most runway models are so skinny they can hang glide off a Dorito. But I can sure as heck tell the difference between a crashing chart and a popping chart. KORS is tossing its cookies going down the drop tower right now while TIF is clearly on the jump.

The choice here is obvious. If you you’re looking for a hot stock to trade in this sector, Tiffany could be a solid bet heading into the summer.

Regards,

Greg Guenthner

for The Daily Reckoning

P.S. How about a soy latte with that handbag? If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out. Click here now to sign up for FREE.

The post How to Bag Easy Gains from the “Mass Affluent” appeared first on Daily Reckoning.

Categories: Economics

The Market Ticker - How About That Reversal?

The Market Ticker - 4 hours 54 min ago

Last night a very curious thing happened.

The Shanghai market, for those who haven't been living under a rock, has been on an absolute tear this year, rising some 70%.  That's reminiscent of the Nasdaq in 1999 and early 2000, of course.... during which it doubled, and in fact if you just look back a couple more months on the Shanghai you find the same pattern.

Last night, however, it was down 6.4% on the back of a gap up two days ago and then a failure to follow through over the previous two sessions.

Technically, the market is in a very-clear blow-off pattern; the trendline from back around November which confirmed in mid-March.......

(Click link to read more)

Categories: Economics

Production for Use and the Cooperative Commonwealth: A Necessary Addition to the Sustainability Conversation

Energy Bulletin - 6 hours 20 min ago

Producers and consumers cooperate in the creation of value and have a common interest in stable, sustainable economic processes.

Categories: Peak oil news

No Climate Protection without Climate Justice; No Climate Justice without Degrowth

Energy Bulletin - 6 hours 34 min ago

...[T]he...climate movement tends to deny...that renewables are unable to maintain our Western...consumer lifestyles on a global level.

Categories: Peak oil news

The Market Ticker - KaBOOM!

The Market Ticker - 6 hours 44 min ago

I know quite a few people who were enamored with this stock and had fairly large positions in it....

That's basically a round-trip from 2013.

PS: I suspect there will be many more cries just like this one in the coming weeks and months.....

Categories: Economics

Back in Time: Retracing the Path to Diversity

Energy Bulletin - 7 hours 7 min ago

How are some plant breeders, farmers, millers and bakers retracing the path to ancient, diverse grains that will see us eating healthier, tastier bread into the future?

Categories: Peak oil news

Towards a New Municipal Agenda in Spain?

Energy Bulletin - 7 hours 47 min ago

A new film explains why Spain’s right-wing press reflections on the elections are wrong: they fail to understand where the new leaders really come from.

Categories: Peak oil news

Peak Oil in an Era of Fossil Fuel Abundance

Energy Bulletin - 7 hours 51 min ago

Chris Nelder on why peak oil isn't dead.

Categories: Peak oil news

Peak Oil Notes - May 28

Energy Bulletin - 7 hours 53 min ago

Oil prices have fallen for three straight sessions this week closing Wednesday at $57.51 in New York and $62.06 in London

Categories: Peak oil news

The Era of Response

Energy Bulletin - 8 hours 3 min ago

The third stage of the process of collapse, following what I’ve called the eras of pretense and impact, is the era of response

Categories: Peak oil news

Calls for more action on renewable energy - Dorset Echo

Transition Towns in the media - 9 hours 41 min ago

Dorset Echo

Calls for more action on renewable energy
Dorset Echo
Other signatories are Dorset Energised, the Charminster Clean Energy Group, the Dorchester Quaker Meeting, West Dorset Pro Wind, the Bridport Renewable Energy Group, Weymouth Environmental Action Centre and Transition Town Bridport. They claim ...

and more »
Categories: TT news

The Era of Response

The Archdruid Report - 17 hours 24 min ago
The third stage of the process of collapse, following what I’ve called the eras of pretense and impact, is the era of response. It’s easy to misunderstand what this involves, because both of the previous eras have their own kinds of response to whatever is driving the collapse; it’s just that those kinds of response are more precisely nonresponses, attempts to make the crisis go away without addressing any of the things that are making it happen.
If you want a first-rate example of the standard nonresponse of the era of pretense, you’ll find one in the sunny streets of Miami, Florida right now. As a result of global climate change, sea level has gone up and the Gulf Stream has slowed down. One consequence is that these days, whenever Miami gets a high tide combined with a stiff onshore wind, salt water comes boiling up through the storm sewers of the city all over the low-lying parts of town. The response of the Florida state government has been to ssue an order to all state employees that they’re not allowed to utter the phrase “climate change.”
That sort of thing is standard practice in an astonishing range of subjects in America these days. Consider the roles that the essentially nonexistent recovery from the housing-bubble crash of 2008-9 has played in political rhetoric since that time. The current inmate of the White House has been insisting through most of two turns that happy days are here again, and the usual reams of doctored statistics have been churned out in an effort to convince people who know better that they’re just imagining that something is wrong with the economy. We can expect to hear that same claim made in increasingly loud and confident tones right up until the day the bottom finally drops out. 
With the end of the era of pretense and the arrival of the era of impact comes a distinct shift in the standard mode of nonresponse, which can be used quite neatly to time the transition from one era to another. Where the nonresponses of the era of pretense insist that there’s nothing wrong and nobody has to do anything outside the realm of business as usual, the nonresponses of the era of impact claim just as forcefully that whatever’s gone wrong is a temporary difficulty and everything will be fine if we all unite to do even more of whatever activity defines business as usual. That this normally amounts to doing more of whatever made the crisis happen in the first place, and thus reliably makes things worse is just one of the little ironies history has to offer.
What unites the era of pretense with the era of impact is the unshaken belief that in the final analysis, there’s nothing essentially wrong with the existing order of things. Whatever little difficulties may show up from time to time may be ignored as irrelevant or talked out of existence, or they may have to be shoved aside by some concerted effort, but it’s inconceivable to most people in these two eras that the existing order of things is itself the source of society’s problems, and has to be changed in some way that goes beyond the cosmetic dimension. When the inconceivable becomes inescapable, in turn, the second phase gives way to the third, and the era of response has arrived.
This doesn’t mean that everyone comes to grips with the real issues, and buckles down to the hard work that will be needed to rebuild society on a sounder footing. Winston Churchill once noted with his customary wry humor that the American people can be counted on to do the right thing, once they have exhausted every other possibility. He was of course quite correct, but the same rule can be applied with equal validity to every other nation this side of Utopia, too. The era of response, in practice, generally consists of a desperate attempt to find something that will solve the crisis du jour, other than the one thing that everyone knows will solve the crisis du jour but nobody wants to do.
Let’s return to the two examples we’ve been following so far, the outbreak of the Great Depression and the coming of the French Revolution. In the aftermath of the 1929 stock market crash, once the initial impact was over and the “sucker’s rally” of early 1930 had come and gone, the federal government and the various power centers and pressure groups that struggled for influence within its capacious frame were united in pursuit of a single goal: finding a way to restore prosperity without doing either of the things that had to be done in order to restore prosperity.  That task occupied the best minds in the US elite from the summer of 1930 straight through until April of 1933, and the mere fact that their attempts to accomplish this impossibility proved to be a wretched failure shouldn’t blind anyone to the Herculean efforts that were involved in the attempt.
The first of the two things that had to be tackled in order to restore prosperity was to do something about the drastic imbalance in the distribution of income in the United States. As noted in previous posts, an economy dependent on consumer expenditures can’t thrive unless consumers have plenty of money to spend, and in the United States in the late 1920s, they didn’t—well, except for the very modest number of those who belonged to the narrow circles of the well-to-do. It’s not often recalled these days just how ghastly the slums of urban America were in 1929, or how many rural Americans lived in squalid one-room shacks of the sort you pretty much have to travel to the Third World to see these days. Labor unions and strikes were illegal in 1920s America; concepts such as a minimum wage, sick pay, and health benefits didn’t exist, and the legal system was slanted savagely against the poor.
You can’t build prosperity in a consumer society when a good half of your citizenry can’t afford more than the basic necessities of life. That’s the predicament that America found clamped to the tender parts of its economic anatomy at the end of the 1920s. In that decade, as in our time, the temporary solution was to inflate a vast speculative bubble, under the endearing delusion that this would flood the economy with enough unearned cash to make the lack of earned income moot. That worked over the short term and then blew up spectacularly, since a speculative bubble is simply a Ponzi scheme that the legal authorities refuse to prosecute as such, and inevitably ends the same way.
There were, of course, effective solutions to the problem of inadequate consumer income. They were exactly those measures that were taken once the era of response gave way to the era of breakdown; everyone knew what they were, and nobody with access to political or economic power was willing to see them put into effect, because those measures would require a modest decline in the relative wealth and political dominance of the rich as compared to everyone else. Thus, as usually happens, they were postponed until the arrival of the era of breakdown made it impossible to avoid them any longer.
The second thing that had to be changed in order to restore prosperity was even more explosive, and I’m quite certain that some of my readers will screech like banshees the moment I mention it. The United States in 1929 had a precious metal-backed currency in the most literal sense of the term. Paper bills in those days were quite literally receipts for a certain quantity of gold—1.5 grams, for much of the time the US spent on the gold standard. That sort of arrangement was standard in most of the world’s industrial nations; it was backed by a dogmatic orthodoxy all but universal among respectable economists; and it was strangling the US economy.
It’s fashionable among certain sects on the economic fringes these days to look back on the era of the gold standard as a kind of economic Utopia in which there were no booms and busts, just a warm sunny landscape of stability and prosperity until the wicked witches of the Federal Reserve came along and spoiled it all. That claim flies in the face of economic history. During the entire period that the United States was on the gold standard, from 1873 to 1933, the US economy was a moonscape cratered by more than a dozen significant depressions. There’s a reason for that, and it’s relevant to our current situation—in a backhanded manner, admittedly.
Money, let us please remember, is not wealth. It’s a system of arbitrary tokens that represent real wealth—that is, actual, nonfinancial goods and services. Every society produces a certain amount of real wealth each year, and those societies that use money thus need to have enough money in circulation to more or less correspond to the annual supply of real wealth. That sounds simple; in practice, though, it’s anything but. Nowadays, for example, the amount of real wealth being produced in the United States each year is contracting steadily as more and more of the nation’s economic output has to be diverted into the task of keeping it supplied with fossil fuels. That’s happening, in turn, because of the limits to growth—the awkward but inescapable reality that you can’t extract infinite resources, or dump limitless wastes, on a finite planet.
The gimmick currently being used to keep fossil fuel extraction funded and cover the costs of the rising impact of environmental disruptions, without cutting into a culture of extravagance that only cheap abundant fossil fuel and a mostly intact biosphere can support, is to increase the money supply ad infinitum. That’s become the bedrock of US economic policy since the 2008-9 crash. It’s not a gimmick with a long shelf life; as the mismatch between real wealth and the money supply balloons, distortions and discontinuities are surging out through the crawlspaces of our economic life, and crisis is the most likely outcome.
In the United States in the first half or so of the twentieth century, by contrast, the amount of real wealth being produced each year soared, largely because of the steady increases in fossil fuel energy being applied to every sphere of life. While the nation was on the gold standard, though, the total supply of money could only grow as fast as gold could be mined out of the ground, which wasn’t even close to fast enough. So you had more goods and services being produced than there was money to pay for them; people who wanted goods and services couldn’t buy them because there wasn’t enough money to go around; business that wanted to expand and hire workers were unable to do so for the same reason. The result was that moonscape of economic disasters I mentioned a moment ago.
The necessary response at that time was to go off the gold standard. Nobody in power wanted to do this, partly because of the dogmatic economic orthodoxy noted earlier, and partly because a money shortage paid substantial benefits to those who had guaranteed access to money. The rentier class—those people who lived off income from their investments—could count on stable or falling prices as long as the gold standard stayed in place, and the mere fact that the same stable or falling prices meant low wages, massive unemployment, and widespread destitution troubled them not at all. Since the rentier class included the vast majority of the US economic and political elite, in turn, going off the gold standard was unthinkable until it became unavoidable.
The period of the French revolution from the fall of the Bastille in 1789 to the election of the National Convention in 1792 was a period of the same kind, though driven by different forces. Here the great problem was how to replace the Old Regime—not just the French monarchy, but the entire lumbering mass of political, economic, and social laws, customs, forms, and institutions that France had inherited from the Middle Ages and never quite gotten around to adapting to drastically changed conditions—with something that would actually work. It’s among the more interesting features of the resulting era of response that nearly every detail differed from the American example just outlined, and yet the results were remarkably similar.
Thus the leaders of the National Assembly who suddenly became the new rulers of France in the summer of 1789 had no desire whatsoever to retain the traditional economic arrangements that gave France’s former elites their stranglehold on an oversized share of the nation’s wealth. The abolition of manorial rights that summer, together with the explosive rural uprisingsagainst feudal landlords and their chateaux in the wake of the Bastille’s fall, gutted the feudal system and left most of its former beneficiaries the choice between fleeing into exile and trying to find some way to make ends meet in a society that had no particular market for used aristocrats. The problem faced by the National Assembly wasn’t that of prying the dead fingers of a failed system off the nation’s throat; it was that of trying to find some other basis for national unity and effective government.
It’s a surprisingly difficult challenge. Those of my readers who know their way around current events will already have guessed that an attempt was made to establish a copy of whatever system was most fashionable among liberals at the time, and that this attempt turned out to be an abject failure. What’s more, they’ll have been quite correct. The National Assembly moved to establish a constitutional monarchy along British lines, bring in British economic institutions, and the like; it was all very popular among liberal circles in France and, naturally, in Britain as well, and it flopped. Those who recall the outcome of the attempt to turn Iraq into a nice pseudo-American democracy in the wake of the US invasion will have a tolerably good sense of how the project unraveled.
One of the unwelcome but reliable facts of history is that democracy doesn’t transplant well. It thrives only where it grows up naturally, out of the civil institutions and social habits of a people; when liberal intellectuals try to impose it on a nation that hasn’t evolved the necessary foundations for it, the results are pretty much always a disaster. That latter was the situation in France at the time of the Revolution. What happened thereafter  is what almost always happens to a failed democratic experiment: a period of chaos, followed by the rise of a talented despot who’s smart and ruthless enough to impose order on a chaotic situation and allow new, pragmatic institutions to emerge to replace those destroyed by clueless democratic idealists. In many cases, though by no means all, those pragmatic institutions have ended up providing a bridge to a future democracy, but that’s another matter.
Here again, those of my readers who have been paying attention to current events already know this; the collapse of the Soviet Union was followed in classic form by a failed democracy, a period of chaos, and the rise of a talented despot. It’s a curious detail of history that the despots in question are often rather short. Russia has had the great good fortune to find, as its despot du jour, a canny realist who has successfully brought it back from the brink of collapse and reestablished it as a major power with a body count considerably smaller than usual.. France was rather less fortunate; the despot it found, Napoleon Bonaparte, turned out to be a megalomaniac with an Alexander the Great complex who proceeded to plunge Europe into a quarter century of cataclysmic war. Mind you, things could have been even worse; when Germany ended up in a similar situation, what it got was Adolf Hitler.
Charismatic strongmen are a standard endpoint for the era of response, but they properly belong to the era that follows, the era of breakdown, which will be discussed next week. What I want to explore here is how an era of response might work out in the future immediately before us, as the United States topples from its increasingly unsteady imperial perch and industrial civilization as a whole slams facefirst into the limits to growth. The examples just cited outline the two most common patterns by which the era of response works itself out. In the first pattern, the old elite retains its grip on power, and fumbles around with increasing desperation for a response to the crisis. In the second, the old elite is shoved aside, and the new holders of power are left floundering in a political vacuum.
We could see either pattern in the United States. For what it’s worth, I suspect the latter is the more likely option; the spreading crisis of legitimacy that grips the country these days is exactly the sort of thing you saw in France before the Revolution, and in any number of other countries in the few decades just prior to revolutionary political and social change. Every time a government tries to cope with a crisis by claiming that it doesn’t exist, every time some member of the well-to-do tries to dismiss the collective burdens its culture of executive kleptocracy imposes on the country by flinging abuse at critics, every time institutions that claim to uphold the rule of law defend the rule of entrenched privilege instead, the United States takes another step closer to the revolutionary abyss.
I use that last word advisedly. It’s a common superstition in every troubled age that any change must be for the better—that the overthrow of a bad system must by definition lead to the establishment of a better one. This simply isn’t true. The vast majority of revolutions have established governments that were far more abusive than the ones they replaced. The exceptions have generally been those that brought about a social upheaval without wrecking the political system: where, for example, an election rather than a coup d’etat or a mass rising put the revolutionaries in power, and the political institutions of an earlier time remained in place with only such reshaping as new necessities required.
We could still see that sort of transformation as the United States sees the end of its age of empire and has to find its way back to a less arrogant and extravagant way of functioning in the world. I don’t think it’s likely, but I think it’s possible, and it would probably be a good deal less destructive than the other alternative. It’s worth remembering, though, that history is under no obligation to give us the future we think we want.
Categories: Peak oil news

When Genius Fails Again, Part III

The Daily Reckoning - 28 May 2015 - 9:05am

This post When Genius Fails Again, Part III appeared first on Daily Reckoning.

“All of the gold in the world was confiscated in 2020,” writes Jim Rickards from the year 2024, “and placed in a nuclear bomb-proof vault dug into the Swiss Alps.

“The mountain vault had been vacated by the Swiss army and made available to the World Central Bank for this purpose. All G-20 nations contributed their national gold to the vault. All private gold was forcibly confiscated and added to the Swiss vault as well. All gold mining had been nationalized and suspended on environmental grounds.”

During a long conversation, not long after we teamed up with Jim, we asked him to speculate on what the world would look like after the House of Cards comes tumbling down. What he came back with a week or so later was a dystopian vision even Orwell would appreciate.

“The purpose of the Swiss vault was not to have gold backing for currencies, but rather to remove gold from the financial system entirely so it could never be used as money again. Thus, gold trading ceased because its production, use and possession were banned. By these means, the G-20 and the World Central Bank control the only forms of money.

“Some lucky ones had purchased gold in 2014 and sold it when it reached $40,000 per ounce in 2019. By then, inflation was out of control and the power elites knew that all confidence in paper currencies had been lost. The only way to re-establish control of money was to confiscate gold. But those who sold near the top were able to purchase land or art, which the authorities did not confiscate.”

Rickards’ America 2024 — replete with microchips embedded in your arm for access to national health care, the abolition of all paper currencies and the digital redistribution of all wealth — caused a stir on the discussion board and in the Daily Reckoning inbox.

“It is hard to grasp a future so bleak, so dystopian,” writes reader Dale Holmgren, “until you realize what’s happened so far. The neighborhood I grew up in 50 years ago in a medium-sized manufacturing city in the Midwest had jobs and was safe. Now there is the noise of guns many nights, and most of the residents are on welfare. Despite this poverty, the price of homes is 500% higher now than then.

“Back then, the national debt was $317 billion. Today, it is $17 trillion. The national population has increased by 77%, while the national debt has increased 5,400%.

“Fifty-six percent of Americans have a subprime credit rating. Total U.S. debt — that is, its government, businesses and people — has gone from about $1.5 trillion to $60 trillion. We are awash in debt. It has infested and infected every aspect our lives.

“Considering the above, is Mr. Rickards’ cautionary tale so outlandish?”

Debt and leverage.

For over a decade, we’ve been on a quest to understand what the endgame of central bank and political meddling in the U.S. economy — and, by extension, the global economy — is likely to be. Jim’s dystopian account of the world in 10 more years is nothing if not entertaining in a macabre sense: a cautionary tale should the policies and models used by the Fed and Congress persist.

For some light background reading, Jim recommended Simply Complexity: A Clear Guide to Complexity Theory, by Neil Johnson. “It’s the best single book I’ve read. Johnson’s one of the founders in the field. This guy’s the real deal. He’s a Ph.D. and Cambridge scholar but has a very clear writing style. He has a whole chapter on finance. And the book is written for average smart people. So you don’t have to say gee, hm, how does this fungus relate to the stock market?”

Rickards quoting from Simply Complexity at random:

“The method that your pension fund manager or stocker broker uses to manage risk, and the contents of your portfolio, will always have one huge built-in limitation. No matter how clever he or she is, it can only be as good as the model he or she employs.

“Financial markets are complex systems. They cannot be described accurately by anything other than the theory of complex systems.

“Standard finance theory may therefore appear to work for a while, but it will eventually fail. And this is far from being a minor flaw since it is precisely these moments when your money is most at risk…

“At this stage, your emotions are probably mixed. On the one hand, it’s fascinating stuff from the point of view of the science of complexity. But on the other hand, it sounds like terrible news for a pensionist in that we cannot trust the standard models of finance.”

“So the standard model that most of the finance world uses to calculate how markets move is not accurate.”

“I don’t know how you can be more blunt,” Jim said looking up after reading from the book.

“At the most basic level,” we asked, continuing what amounts to an interview, “the standard models don’t work because they don’t include feedback loops.”

“Correct,” Jim replied, “They assume equilibrium.”

“And efficiency,” we added.

“They assume efficiency, too,” Jim continued. “Efficiency, equilibrium, random distribution, stochastic method. And all four of those things are wrong. Complex systems are not equilibrium systems. There are feedback loops, and the output is not ordered. Except when sometimes it is. That is the tricky part. The outcome looks ordered until it isn’t.

“As you say,” we agreed, having made similar statements about rising debt and leverages right here in these pages many times, “it’s not a problem until it’s a problem.”

“Right,” Jim went on. “But you can be guaranteed that it will be a big problem. The idea that the crisis is all behind us is dangerous… ‘Oh, that’ll never happen again’… Yeah, right. 1998 was strike one. 2008, strike two. Strike three, you’re out. The next one’s gonna wipe everything out. That’s coming.

“But it doesn’t mean there’s nothing you can do.”

For brevity’s sake, we paraphrase Jim from here:

You have to stop short of saying, “Well, it’s going to melt down on this day.” If that day comes and goes and it doesn’t happen, then you look like an idiot. Instead, go back and read what I said in The Death of Money. There are many possible triggers for the meltdown. If it’s not one, it’ll be another. Either way, you’re going to get the same result.

So set your goals now. Warren Buffett’s bought a railroad. You might be able to do that. But if you’re an individual investor, you can buy some oil, natural gas or hard assets. But do some of those things now. It doesn’t have to be 100% of your portfolio. If I’m completely wrong, you won’t be hurt… and if I’m right, it’ll save your life.

“My mission,” Jim says with a spark of passion, “is to help everyday Americans not be ripped off by people who know better that won’t be honest with the American people. Essentially bankers, government — both parties.

“Christine Lagarde, current head of the IMF, is not a complexity theorist, but she knows it’s all going to crash. And she won’t say that. Janet Yellen actually might not know it’s going to crash, because she’s too much of an egghead. But there are enough people in positions of real power who see what I see and won’t be honest with people about it. And they are perfectly prepared for all those people to lose all their money.

“And I think that’s despicable.”

“Look,” Jim ended somewhat abruptly, “I gotta run. But I’ll come back. I didn’t get my crabcake this time around. I’ll be back, and we’ll cover a lot of the specifics…”

Regards,

Addison Wiggin
for The Daily Reckoning

P.S. In today’s email edition of The Daily Reckoning, we unveiled a way to meet Jim Rickards in person. Jim also wrote to readers to explain why the Fed’s bad models take so long to die. If you’re not subscribed though, you missed out. Signing up is free. Just click here, enter your email, and you’ll begin receiving our daily reckonings. If you like Jim Rickards, it’s the surest way to get content from him that you can’t find anywhere else.

The post When Genius Fails Again, Part III appeared first on Daily Reckoning.

Categories: Economics

Beginning to Taste the Fountain of Youth

The Daily Reckoning - 28 May 2015 - 6:16am

This post Beginning to Taste the Fountain of Youth appeared first on Daily Reckoning.

The biggest causes of death have always been part of the aging process. If you live long enough, you will develop a cancer. The longer you live, the more likely you are to develop heart disease, stroke, osteoporosis and Alzheimer’s, to list only a few.

That may seem like the normal inevitable fact of human existence, but it is not normal or inevitable to scientists and researchers. Aging is caused by genetic triggers in the human body, so scientists have long speculated that figuring out which genes cause aging could lead to much longer lives, if not an aging process that approaches immortality.

The problem has been that it looks like many genes are involved in aging, and the complex interplay between them and other environmental factors is so difficult to untangle that we may be far from anything approaching a fountain of youth.

Until recently, that is. On April 30, researchers at the Salk Institute for Biological Studies and the Chinese Academy of Sciences announced they found a shortcut in research that reveals the key driver in the aging process. The shortcut was to study a strange disease called Werner syndrome, which rapidly and prematurely ages the body.

Fewer than 1,500 people have been diagnosed with the disease, which usually begins to advance after puberty. People with Werner syndrome die in their 40s and 50s, and almost always of cancer and heart disease. The disease is genetic and occurs more often in Japan than anywhere else — about 20 times more frequently there than in the United States.

The Salk scientists studied the genetic mutations in Werner syndrome cases and focused on heterochromatin, bundles of DNA that deteriorate in these patients.

Juan Carlos Izpisua Belmonte, a senior author of the study, said in a press release that “The gene mutation that causes Werner syndrome results in the disorganization of heterochromatin, and this disruption of normal DNA packaging is a key driver of aging. This has implications beyond Werner syndrome, as it identifies a central mechanism of aging — heterochromatin disorganization — which has been shown to be reversible.”

Using human stem cells and state-of-the-art gene editing methods, researchers at Salk created a line of cells that mimicked the genetic mutation found in Werner patients. As if they were a more modern equivalent of lab rats, the cells allowed scientists to study the disease and discover changes as the stem cell line began to age prematurely. Researchers were able to establish that a mutated WRN gene’s protein will lead to destabilization of heterochromatin.

Izpisua Belmonte says this suggests that “accumulated alterations in the structure of heterochromatin may be a major underlying cause of cellular aging. This begs the question of whether we can reverse these alterations — like remodeling an old house or car — to prevent, or even reverse, age-related declines and diseases.” He added that further studies could show how heterochromatin is involved with shortening the ends of human chromosomes, called telomeres. Shortened telomeres are known to be part of the aging process. Each time a cell replicates itself, the telomeres are shortened.

Last month, researchers at Harvard and Northwestern Universities announced results of a long-term study of telomeres that may make it possible to predict human cancers with a simple test that measures telomere shortening, which cancer cells can somehow survive indefinitely.

The Salk study may be the clearest, most direct leap in understanding aging in the history of medical research and opens extraordinary possibilities for slowing down or even halting the aging process in humans.

To your health and wealth,

Stephen L. Petranek
for The Daily Reckoning

Ed. Note: Get the top investment trends for 2015 in medicine and technology from the former head of the most popular science magazine in the world. Simply sign up for our Tomorrow in Review e-letter for FREE right here. Don’t miss out. Click here now to sign up for FREE.

The post Beginning to Taste the Fountain of Youth appeared first on Daily Reckoning.

Categories: Economics

The Market Ticker - Yes, It's A (Major) Bubble

The Market Ticker - 28 May 2015 - 6:10am

Broadcom is allegedly in "advanced" talks to be acquired.

Ok, except that it sells at forty-seven times earnings and more than three times sales.

Is this a good company?  Yes, and has been for a long time.

Is there any argument for paying nearly 50x earnings for a chip manufacturer?

That, my friends, is the question.

Categories: Economics

The Market Ticker - Clinton Foundation Monkey-Hammered

The Market Ticker - 28 May 2015 - 5:33am

Now we're getting somewhere.

Bill and Hillary Clinton and the Clinton Foundation have been hit with a racketeering lawsuit in Florida court.

The lawsuit, filed by Larry Klayman of Freedom Watch, includes a legal request to have the Florida judge seize the private server on which Hillary Clinton and her aides hosted their emails while she served as secretary of state.

Freedom Watch is known to be rather litigious when various politically-connected folks try to flout FOIA laws and otherwise obfuscate what's going on.  Some people don't like them very much but that's understandable when you're the target.

(Click link to read more)

Categories: Economics
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