Bearer Bonds Story - A Waste of My Time as I was "Snookered"
There were plenty of developments in the story of the 134 Billion Dollars in US Bearer Bonds today, so we will start there.
First off, the bonds have been declared fakes as the Treasury informs us:
June 17 (Bloomberg) -- U.S. government bonds found in the false bottom of a suitcase carried by two Japanese travelers attempting to cross into Switzerland are fake, a Treasury spokesman said.
“They’re clearly fakes,” said Stephen Meyerhardt, a spokesman for the U.S. Bureau of the Public Debt in Washington. “That’s beyond the fact that the face value is far beyond what’s out there.”
So there is that. As Karl Denninger notes:
Ok, let's accept both parts of that statement (yes, there are two) at face value:
The "bonds" seized in Italy are fake.
"The face value is far beyond what's out there."
The latter is exactly what I noted is out there in authorized issuance in my second story on the matter:
Mr. Holmes would be initially puzzled by such a caper. On the one hand we have the impossibility of the bonds being real, because there simply isn't $130 billion of issues remaining outstanding.
As it turns out, the Bloomberg update tells us something surprising:
Meyerhardt said Treasury records show an estimated $105.4 billion in bearer bonds have yet to be surrendered. Most matured more than five years ago, he said. The Treasury stopped issuing bearer bonds in 1982, Meyerhardt said.
$105 billion? Uh, that's a lot more than the DTC estimates I've seen, which were in the area of $3.5 billion outstanding! Suddenly there's thirty times that on deposit with the DTC out there according to Treasury?This also leaves the second part of the question open:
On the other hand we have the impossibility of negotiating a fake $500 million bearer instrument, making the exercise of counterfeiting one expensive and futile.
Finally, what happened to the two gentlemen caught with them?
The latter is a rather important question, I'd think. See, counterfeiting is a serious offense. Just try printing up some fake $100s or $20s and see how amused the Secret Service is (hint: don't try this at home unless you are interested in a free stay at Club "This Ain't Fun" Fed.)
So the Treasury reports that there are 30X more bonds than previously thought out there somewhere, but still less than the 134 Billion amount found on the two guys. So they are fake.
My interest in this story was due to to the obscene amounts being reported. I was never of the opinion that these things were undeniably real, but there was that possibility. The story has so many angles I found it compelling reading. Add to this that it seems the Sicilian Mafia may be behind the bonds and this tale is still a great read. That the treasury has now disclosed the 105 Billion amount was another thing I wanted to come out of this caper; just how many of these things are out there?
But it seems I was wasting my time. One of my most respected bloggers and inspirations to write this blog is the author of Calculated Risk. On a few occasions I have emailed CR asking to use his charts, and he has always been a great help. I was a bit bemused to see CR finally post this about the bond story:
Some mid-day amusement ...
This was funny ... I never posted on this, because it was pretty clear there wasn't any real story. Maybe the post should be titled: "How some blogs were snookered!"
But a false bottom in a suitcase?
Now I would venture that CR really means the blogs that were writing things like "Bonds are real, US is toast" and such things, but really I took the dig a bit personal. I felt, and continue to feel that this story has real merit. If the mafia is using bonds like this on this scale, just who is buying them? How does this fake money relate to the troubles countries under strong mafia influence (think EASTERN EUROPE) have been having financially? There is plenty of stories here, but move along as forgery of US debt instruments on a massive scale can never cause any issues worth paying attention to.
Jobs Numbers and Moving Goalposts
I am not going to parse the jobs numbers, they are still terrible. But hey, getting less terrible at better rates so that's nice. Today my favorite economist who shall remain nameless offered that for unemployment to stabilise and to call the end of the recession, the initial jobless claims will have to come down to -400,000. Today's print was over -600,000. A few years back this guy was railing because employment was only GROWING at about +300,000 jobs a month (a positive 300,000) and said that was not even enough to support workers entering the job force. But now losing 400,000 a month will be just so great. That 700,000 spread is hard to reconcile, but he does have a Nobel prize.
Gold on it's Way to Zero; At Least the Top Will be in for "Gold Stinks" Stories
As gold continues its path towards a new range of 0-$10 an ounce at least I will be spared the avalanche of "gold stinks" stories because nobody writes about anything when it is at zero. We know that gold is going to be worthless in an upcoming metal route because it is going to be sold in gram quantities in ATMs. Also, I find the reasons set forth by this author, on Minyanville no less, so persuasive I have to share them with the readers right this second:
Five Reasons Not to Be a Gold Bug
The arguments for why you should sell your cat, pawn your mother-in-law, and use the proceeds to buy gold are well known: The friendly Fed is printing money faster than you can read this; it will result in inflation; the government is borrowing like a drunken monkey; the dollar will be devalued; all currencies will be debased; the only thing that will save you is that shiny yellow metal, and so forth.
Here are some arguments, however, for why you should think twice before jumping into bed with gold bugs.
1. For investors (not speculators), it's very hard to own gold because they can't put a value on it. Unlike stocks or bonds, gold has no cash flows, and has a negative cost of carry (meaning, it costs you money to hold it). It's only worth something if people perceive it to be worth something.
2. GLD ETF (GLD) is the sixth largest holder of physical gold in the world. If its holders decide (or are forced -- think hedge-fund liquidations) to sell it, to whom will they sell it?
3. In the past, gold had a monopoly on inflation and the fear trade -- not anymore. Now you have newly emerged competition from TIPS, currency ETFs, short US Treasury ETFs, and so on.
4. If gold fails to perform because of reason number 2 or 3, the perception that gold is worth something may be violated.
5. Over the last 200 years, gold wasn't really a good investment. It may yet have its day in the sun, but it also may not. The cost of being wrong is pretty high.
Oh My god! That was some powerful stuff! I mean the reasoning is so solid we could even take another look at it and be awed by the sheer brilliance.
Number 1 is hard to argue against:
"For investors (not speculators), it's very hard to own gold because they can't put a value on it. Unlike stocks or bonds, gold has no cash flows, and has a negative cost of carry (meaning, it costs you money to hold it).It's only worth something if people perceive it to be worth something."
Now this one really opened my eyes. Something only has a value based on perception? Who knew? All those houses in Phoenix Arizona that were selling for $400k in 2005, and now sell at $150k was is based on cash flow? Did the price/rent ratio get skewed that bad in that time?
So you say stocks and bonds can be valued by cash flow? Is GOOG trading on it's cash flow? No? Is it trading on what people perceive some future cash flow may be should GOOG ever really be able to monetize eyeballs? Nah. GOOG is always trading at cash value no doubt. How did the S&P ever get to 666 when the cash flow models were so much better? Who knows, but gold is dead. Great argument.
Number 2 is as mind changing as number 1, only less so:
"GLD ETF (GLD) is the sixth largest holder of physical gold in the world. If its holders decide (or are forced -- think hedge-fund liquidations) to sell it, to whom will they sell it?"
I had never really considered this. For every sell there is a buy, except when gold is sold, then the buyers fail to materialize. I mean, when all that toxic mortgage debt had no takers, the government took it all in. They were the buyers of last resort. I do not think uncle SAM has any need for gold though, so in a forced liquidation gold would have to go to zero, no negative whatever the carrying costs are, in order to be moved. I guess GLD is crap out of luck on this one!
Number three may make you want to sell your wedding ring, so be warned:
"In the past, gold had a monopoly on inflation and the fear trade -- not anymore. Now you have newly emerged competition from TIPS, currency ETFs, short US Treasury ETFs, and so on."
Brilliant! I had never considered that if the US government printed so much money that they were forced to debase the dollar and hyperinflation occurred that I could simply buy more debt instruments, backed by the full faith and credit of the US, to offset that inflation! Amazing! I read that Zimbabwe made their TIPS holders whole, even at 1000% monthly inflation. This is sooooo simple!
Number 4 just scares you with what the writer already said:
"If gold fails to perform because of reason number 2 or 3, the perception that gold is worth something may be violated."
Hard to argue with that. Performance anxiety is an issue for all of us!
Number 5 is a summary:
Over the last 200 years, gold wasn't really a good investment. It may yet have its day in the sun, but it also may not. The cost of being wrong is pretty high.
Obviously if your investment time lime is 200 years you need to stay away from gold. It is far better to go with tulips (think dividends) and cabbage patch kids (think rarity) when planning for the long term.
Very convincing stuff!
Full Disclosure: Long gold and silver and will be all the way to zero for each. As they fall I will simply dollar cost average in (as they suggest on CNBC) so I will be protected. Oh, wait......
Inflation vs. Deflation and the Limits of Rational Discourse
I think the inflation vs deflation debate is an attractive thought experiment with far reaching implications. I will say up front I am pretty strongly in the "deflation now, inflation later" camp and that is no cop out. I never mince what I say or mean. I could care less about pleasing any audience by changing my opinions based on group think. I think the great debates and interactions featured here in the comments section here at Economic Disconnect have been some of the best, most civil, most accepting debates anywhere on the net. I appreciate all for their great ability to keep it intellectual.
That said, there has been a change in tenor from both sides of the debate as of late. Inflationists are calling deflation thinkers "dumb". Deflationists are attacking inflation types with terms like "blind", and "unable to see what is in front of them". This has to stop. I will delete any such comments from this blog, but I doubt I will ever have to police the comments as the crowd here is top notch. We even have outliers in the "Stagflation" camp, though that one has moved to the "Negflation" outlook as of late, but he is a bit crazy anyways! (just kidding Mark)
To see why this debate is hard to reconcile, we should start with the clear fact that NOBODY EVEN AGREES WHAT THE DEFINITIONS ARE for inflation and deflation. Some point to money supply, others to prices paid, and others to random data points.
I would like to put out an idea I have been working on that may help many of us get onto the same page. I have not fully developed this idea, but I thought it would be good to get it out there and get some feedback. Perhaps deflation and inflation proponents are closer in view than they know. Consider:
Classic Inflation Definition: Tons of "cash" (whatever iteration) chasing too few goods pushes prices up. How that cash was made (money supply, easy credit, etc) is not central to the argument. Many cannot keep up and hardship occurs due to lack of ability to buy needed goods/services.
Classic Deflation Definition: Money supply (whatever iteration) normal or low but not being put into purchases of goods, causing prices to fall. This reinforces the pattern and a spiral down ensues that causes hardship through various channels (loss of job, loss of equity in home or investment etc) which feeds itself.
Yes simplistic, but remember I am the easily "snookered" type. (Still burns)
In inflation (be it regular or hyper) you have ever increasing asset values, but the pace of increases of all the things you need are going the same rate or faster. You either go nowhere or fall behind.
In deflation (I think there is only regular) asset values are falling which destroys the equity in them, decreasing money supply as debt is defaulted on. Everything falls in price INCLUDING YOUR WAGES, hence you are chasing necessities that are falling in price, but your assets are worth less and your paycheck getting smaller. You either go nowhere or fall behind.
I think the core issue to think about is how much relative income you have that will have to chase relative prices and here I think the two views are more alike than thought.
Again, this is a theorem in progress and I would ask all readers to offer their ideas in the comments section. I value your opinions and I think this thing has some merit. Or not. Leave a comment anyway!
Ok, enough for the night. I will be online for a bit, so please get involved as I would like to get some feedback.
Have a good night.