Friday, June 19, 2009

Friday Night Clarity

Very active comment thread on last night's post both here and at Seeking Alpha. Great ideas and thorough explanations were in abundance, and I would expect no less from the usual crew. Plenty of stories tonight, so an around the world wrap up and then some entertainment.

Gold as an Investment - Final Thoughts
Your author is a big fan of the precious metals, both gold and silver. I have dropped enough pixels with my ideas on the "why" that I will not rerun all that now. I wanted to clarify any misconceptions of ideas any may have about my stance on the metals.
-I am not and have never implied or stated that anyone should run out and convert all of their wealth to gold. I think gold needs to be a part of any portfolio. As a fan of the metals, gold and silver make up about 20% of my investment capital and about 5% of my entire net worth. So in no way am I an all or nothing kind of thinker on this.
-Gold is a terrible "end of the world" play for all the reasons many have noted (Mark and others). If everything goes down, some metal coins or bars may have some value and use, but not really. I do not think the end of the world is coming. I prefer to think of an Argentina type currency issue instead. If you like the whole "end of the world" type thought exercise, take a trip to The Survival Blog and you can find some good stuff. Look, I live about 35 miles north of Boston, if the SHTF I am screwed royally and unless I have a private army I will have to do the best I can.

Hope that clears things up!

Deflation and Inflation Wrap Up
I really liked my simplistic analysis of the common thread of both Deflation and Inflation. The comments section had plenty of great debate, and I would refer you there to see the discussion.

There is no doubt that deflation is going on right now. Nobody can argue other wise, and if they do they are in a losing position. Mish notes today that "Flow of Funds Report Offers Hard Evidence of Deflation", and I totally agree. If any of my posts have implied that I thought inflation was an issue right now, then I am sorry for the confusion.

When I talk about inflation I am of course talking about the longer term. Next year and into the next 3 years I think we will see policies at work to make inflation happen. Remember, Ben Bernanke's whole claim to fame is his paper titled "Deflation: Making Sure It Does Not Happen Here".

While the system has been stabilised, deflation will rule the day unless more is done. Consider that:
-The FED is about to get an extension of powers through which they will have even more room to bypass the US Congress. With no check on their activities, the academic elites may well have a real world blackboard (dry erase for you younger folks)to try out their silly Keynesian ideas.

So deflation is here stay? Not if the leading thinkers on economics have their way. People like Paul Krugman are chomping at the bit for more stimulus. A new $4500 car buying credit is coming out. The new $15000 home buying credit is out, and will get bigger.

Still not convinced spending will be forced no matter the cost? Here are two respected economists asking, no begging for more firepower to be deployed:
-Paul Samuelson; Fiscal Policy Must be Sustained
Key excerpt:
"Back to some middle-term and long-term policy questions..., do you worry about the rising deficit and the potential risk of inflation? There's been a lot of articles on this in the past two weeks -- Paul Krugman and Niall Ferguson and others.

I think it would be surprising if, down the road -- not in the long long run but in the somewhat short run -- we don't have some return of inflation. On the other hand, I'm of the view that if we come out of this with some kind of temporary stabilization at least, and the price level is let's say 10-12% above what it was before we got into the meltdown, I think that's a price I would be willing to pay! ...

A 10-12% inflation end point is just dandy for this guy.

Mark Thoma: Don't "Nullify" Fiscal policy
Key excerpt:
As Brad DeLong notes, if it is the long-run budget you are worried about, ending the stimulus package, say, six months or a year earlier makes little difference to the long-term budget outlook. That being the case, and given the dangers of not doing enough and the dangers of ending the help too soon, why are we in such a hurry to end the stimulus package, and we are we so reluctant to consider doing more?

Not today, and not next week, but at some point panic will hit about deflation and a depression and then the money accelerator will be matted until something changes. It is at that point I envision a dollar crisis or other major event.

The Real Threat of Deflation
The real danger of deflation was revealed to me by a great comment over at the Seeking Alpha print of my last blog:
ejhickey writes;
Another question. If we are still going through deflation and deleveraging , then prices for most things should continue to fall. For anyone who has a lot of assets in cash, why bother to invest in stocks or bonds or anything that has a risk of declining in price? If the deflation theory is correct, a cash based non investor could increase his purchasing power simply by doing nothing . This would not only avoid risk but taxes as well. In the short , medium or long run this is the whole purpose of investing - increasing one''s ability to buy stuff.

ejhickey, thanks for the great insight.

Faced with a new thinking that cash must be preserved and risk shunned, just what do you think is going to happen to America's last industry, the banking sector? Do you think that the Goldman Sachs-FED-JP Morgan-Treasury cabal is just going to sit tight and watch it all unfold?

I think of the line from a Dylan Thomas poem:
"Rage, Rage Against the Dying of the Light!"

Savers are already being punished by obscene low rates on savings. Bond yields are as low as they have ever been. Risk free is also return free. The very system is being set up to dare you to reach for a return.

Now, I do not think the efforts will work, but I am sure they will try. It is when this process kicks into high gear that we will see the "major event" occur. But not this week.

Entertainment Section
A bit short on time, and you all know how much I love the fun section! Lets dive in.

Cipher Texts
A while back I was posting puzzles that were sentences spelled out using DNA bases and amino acid single letter designations. I love ciphers and coded texts. If you like such things, an interesting piece of artwork resides at the US CIA headquarters at Langley.

The puzzle is called "Kryptos" and it has yet to be fully translated. Some think the artist that made it actually made a mistake on the final cipher, and hence it will never be solved. Fascinating item indeed.

LOL Cats
Easy laughs!

Remember the old school yard bully's favorite torture?:
funny pictures of cats with captions
see more Lolcats and funny pictures

If the SHTF and zombies start walking the earth it may look like this:
funny pictures of cats with captions
see more Lolcats and funny pictures

Rock Blogging
A little music ladies and gentlemen!

There is nothing wrong with Bon Jovi and "Runaway":

It is hard to know if the film "The Breakfast Club" was so iconic due to the great story and acting, or the great soundtrack. Here is Simple Minds and "Don't You Forget About Me":

I love the song from Danzig called "How the Gods Kill". Great acoustic work and a nice blending of speeds and beats make a great listen:

Just so you know I am not totally stuck in the past (well, not totally) here is a band I like that is pretty recent, 7 Mary 3. This song is called "Cumbersome" and the video i found was a live acoustic version played on a radio show. Not bad!:

Last Call!

Final tune for the night.

Let's hope you follow Ratt's advice and be "Back for More" when I post my next blog! And yes the girl is the same girl from the Whitesnake videos, Tawny Kitaen:

Have a good night.


getyourselfconnected said...

I will try and check in later, enjoy all!

Anonymous said...


I look at gold as insurance, I look at cash the same way. Have you ever tried to get say 50k in actual cash out of your account at the bank in one shot? If you need that cash today and try to withdraw it from a smaller bank, good luck come back in a week. They will be more then happy to give you a check though. That is the glory of fractional reserve banking, the banks ain't got the actual cash in any large amount.

Guns, gold, generators, some food in the pantry and some cash are insurance to me. I hope I don't need them but if I do I'll be a lot better off if I at least have them.

Silver is more of something I trade, and I'll part with the silver long before the gold.
I sold 25% of the silver I bought in 03 for around 5 at 21.5 in that last ram job that covered the cost of my initial investment.

In time's of turmoil one can never be sure what they will need so some diversification is probably the way to go.

Anonymous said...

To fight deflation, abolish cash. Could Japan make reality of ‘science fiction’?
With recovery elusive, a population doddering into old age and perhaps a decade of deflation in prospect, Japan may start mulling the most radical monetary policy of all — the abolition of cash.

Goverment's hate cash.


Stagflationary Mark said...


"Look, I live about 35 miles north of Boston, if the SHTF I am screwed royally and unless I have a private army I will have to do the best I can."

I hear that. I'm 20 miles out of Seattle. I have very little SHTF insurance. I hoard things like toilet paper simply because I think it is a decent investment alternative.

1. It takes energy to make toilet paper.
2. It takes energy to visit Costco to buy toilet paper.
3. I have the space to store it free of charge.
4. I expect it to rise with inflation.
5. I won't have to pay capital gains taxes as it appreciates since I'll never resell it.

Points 1 & 2 make it a decent hedge against rising energy costs. Points 4 & 5 makeit a decent hedge against future taxes. Point 5 is the main reason I like hoarding in general. As an added bonus, I have to pay property taxes on my house but not on its contents.

Toilet paper represents only about 1/2300th of my net worth. There are quite a few similar household items I have hoarded, that in total add up to maybe 1% of my net worth at best. Every little bit helps though. That translates into 1% less income on my investments and a 1% lower tax bracket.

Here's my main point as it applies to gold and silver. If you must hoard, hoard the other things you know you will personally consume first. Only then shoud you hoard the things you will need to someday sell to others (if you feel so inclined to hoard such things).

Toilet Paper Pros

1. There's no market risk (no greater fool needed).
2. There's a huge tax advantage (no capital gains tax).
3. Household items are still "relatively" cheap (there's a silver ETF, there's a gold ETF, but there's no toilet paper ETF).

Toilet Paper Cons

1. Gold and silver are much "sexier" than toilet paper. No doubt about it. Nobody is ever going to make a Bond movie titled Toiletpaperfinger! Let's hope not anyway! Hahaha!
2. Hoarding toilet paper might make people think you are insane. They might even be right. ;)

In 2004, my nephew asked me why I bought gold and silver. Before I could answer, my brother said, "So he can sell it to others!" He was right of course. That's what most gold hoarders expect to do at some point. I told a friend I was willing to hold for 30 years if necessary. He was a bit surprised when I sold in 2006. I told him it wasn't necessary. Gold and silver vastly outperformed my savings account. Using hindsight, I could have done better but I certainly can't complain.

Gold, just like every other investment, is not good at any price. I have no idea what the fair price should be. $400? $1000? $5000? I don't see how any one gold hoarder could possibly know, since it is some OTHER person who will determine what he's willing to pay to buy it from you. In sharp contrast, I've got a pretty good idea what toilet paper is worth though, based on how many hours I'd be willing to work for it.

Just the excessive rantings of an anonymous mad man on your blog. :)

Anonymous said...


"I have to pay property taxes on my house but not on its contents."


getyourselfconnected said...

certainly you are well versed in all thing toilet paper! Maybe we should call you the 2 ply king!
great points as always, thanks for the input.

I just got home with a new computer so I may be offline for a bit as I try to set it up. If I do not have a comment or a post up by Monday you something went very wrong!
Take care.

GawainsGhost said...

Well, I live about 20 miles north of Mexico in the Southern tip of Texas. We might get maybe four days of winter down here, so I cannot conceive of the world you guys live in.

That said, I'm going to go way off topic here and recommend a book to you, GYC. Thinking in Complexity: The Complex Dynamics of Matter, Mind, and Mankind. Klaus Mainzer. 3rd edition. Springer-Verlag Berlin Heidelberg New York, 1997. ISBN: 3-540-62555-0.

It might be hard to find these days, but I cannot recommend more highly another book to read. It will change the way you think.

getyourselfconnected said...

Wow, this computer works right out of the box! Miracles do happen.

I will try and find a copy, I trust your recommendations.

Stagflationary Mark said...



That made me laugh out loud. I have no doubts that the government would tax it if they could. Perhaps TP of the future will have RFID technology combined with government taxation vehicles literally scanning the neighborhood, lol. Modern governmental financial and technological innovation! In that world, my hoard might be considered contraband!


"Maybe we should call you the 2 ply king!"

If I ever deserve that title then our country is in serious trouble!

Who is that guy?

That's the 2 ply king!

How many rolls does he have?

Rumor has that it could be 1000!

Holy s#$t! He' stinkin' rich!!!!

Yeah, but he's not the richest. The SPAM king takes that honor. He has a blog too! ;)

GawainsGhost said...

That is a really good book, GYC, and I hope you can find a copy of it.

Back when I was in graduate school and immersing myself in chaos and complexity, I went out to California to visit my best friend, who is a rather brilliant systems analyst. We got into this long discussion about matter and mind, spontaneous self-organization, complex system formation, emergence, but I couldn't adequately explain myself because I hadn't yet fully understood the intellectual foundation from which I was arguing.

So I sent him a copy of Thinking in Complexity. After he read it, he called and said that it radically changed his entire thought process.

I know you're a DNA manipulator, and I don't mean to go way off topic here, but I do have a degree in biology and have studied genetics and evolutionary theory extensively. I am so far off the Newtonian/Darwinian ranch it isn't even funny.

What Mainzer discusses is far closer to a Leibnizian view of matter. This was at the center of debate in the late 17th century (see The Leibniz-Clarke Correspondence), and as a Romantics scholar became of particular interest to me.

Basically, Newton argued for the existence of atoms, which are inanimate particles. Leibniz argued that the idea of inanimate particles denied the possibility of intellect to matter.

Thus, Leibniz proposed the idea of monads, which are something like atoms except that they have a mind, memory and intellect. It's a wholly different way of thinking about matter.

Centuries later, Ilya Prigogine demonstrated, in Order Out of Chaos, that matter, in a high disequilibrium state, was capable of spontaneous self-organization. Which, of course, flies in the face of Newtonian physics.

Darwinism, for example, only makes sense in a Newtonian construct, where random events are determinative. I no longer believe that genetic mutation is a random event. I do believe that genetic mutation can occur randomly, every once in a while, but that is not determinative.

Rather, I look upon DNA or a chromosome as a self-regulating feedback system that is somehow in some way capable of processing information about the environment and deliberately mutating, or altering its configuration, in response to that information. Adaptation and speciation occur far too rapidly and with far too much specificity for it to be otherwise.

I look upon the economy in much the same way, as a self-regulating feedback system composed of animate individuals, all of which are acting not randomly but deliberately. There will be shocks to the system of course--people make mistakes--but in the end an economy will emerge as a new whole, brought about through spontaneous self-organization.

Yeah, I know I'm way out there where the weird don't go, but that's what I believe.

Anonymous said...

Guns, children and cattle are the new currency of war in Southern Sudan


Anonymous said...

"Yeah, I know I'm way out there where the weird don't go, but that's what I believe."

Shari Arison, Israel's richest woman and the controlling shareholder of the country's second-largest bank, said in a televised interview she receives messages "from above" and sees things before they happen.
"For many years I've received messages, you could call them transmissions or messages. I see many things before they happen,"

"Apparently I got this gift to see ahead of time, not in order to run and buy and sell to make more money but to lead the world elsewhere."

Arison, who is also known in Israel for her philanthropy, said that two years ago she got a message that there would be an economic crisis and people would go crazy.
But she said she believes the world is moving towards redemption.
"How long it will take isn't clear. Before the big light the great darkness comes, and I think we are in the period of darkness," she said.

Some of the best advice I ever got was this: "You can believe anything you want to believe, just know WHY you believe it."

There are a lot of us swimming in the deep end of the pool but that doesn't mean we are all wrong. Some are and some are not.

watchtower said...

Happy Fathers Day everyone!

I've been fortunate to have had a dad that is rich, not in the conventional sense, but rich in the things that matter the most.

Thanks dad.

GawainsGhost said...

Not to ruin everyone's morning, but you might want a stiff shot of whiskey with your coffee when you read this.

Peter Schiff is wrong on a couple of things, but he's right on most others.

getyourselfconnected said...

fascinating comment above. Interesting thought exercise.

For all the Dads out there, happy fathers day. My own father passed away 13 years ago (was it so long ago?) but I think of him all the time.

Anonymous said...

Goldman to make record bonus payout

Your tax dollars at work.


GawainsGhost said...

Yes, happy Father's Day. My father passed away seven years ago, after a long struggle with cancer, and I think of him every day.

But to continue the discussion from above, the thing about the Newton vs. Leibniz debate is this. While Newton is attributed with devising calculus, Leibniz actually devised and published it first. And there significant differences between the two's mathematics.

Newton based his calculus on what he called "fluxions," while Leibniz based his on differentials. In fact, the calculus we use today is much closer to Leibniz's than it is to Newton's.

But Leibniz published first, and that was an afront that Newton, egomaniac that he was, could not abide. So he accused Leibniz of plagiarism, slandered him in front of the Royal Academy, and had him thrown out of respectable society. (There is a fascinating book on this subject, titled The War of the Philosophers.)

So Leibniz went to Germany where he continued his work. He actually invented the first calculating machine, which was a crank driven box that could perform the four general rules of math. Mainzer has an illustration of it in his book, and it was the grandfather of all later calculating machines and computers.

What I find most fascinating about this is that, if you read Leibniz's theories closely, he is laying the foundation for chaos and complexity, sciences that were not fully realized until 200 years later, after the advent of the supercomputer.

Basically, it goes like this. A monad, the basic substance of the cosmos, is a plurality of monads. What does that mean? It means that two monads, each with its own intellect, interact together and self-organize to form a whole, which is greater than the sum of its parts. This whole then interacts with other wholes, each with their own intellects, which self-organize to form an even greater whole, and so on. This is called emergence, and it is the foundation of complex system dynamics.

To say that a system is complex, that is, dynamic, is not to say that it is complicated, because complication is static. Rather, it is to say that the system is emergent, capable of spontaneous self-organization across all levels of scale. At each new level of complexity, component parts are interacting and self-organizing to form larger, emergent wholes.

The same is true for the economy. The problem we are experiencing now is that the economy became too complicated, rather than more complex. At a certain degree of complication, the system, being static, becomes incapable of self-organization and emergence, so the whole thing comes crashing down. Which is where we are now.

I could go on and on about this, but that's my two cents.

GawainsGhost said...

By the way, here is the latest on the forged bearer bonds and the safety of the dollar.

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