Tuesday, March 1, 2011

Don't Believe The Hype

Don't believe a word Bernanke says even though he is under oath in front of Congress and don't believe the manipulated economic reports spewing out of the Government, or even the hyperbolic data coming from private "research" organizations and many corporations.  Here are some good examples:

1) Yesterday the Institute of Supply Management released its monthly Purchasing Managers Index and it showed unexpected strength.  The media did cartwheels over the headline number and then moved on.  HOWEVER, if you are like me, you want to see the details right?  Here's the details and the data is heavily skewed to the upside by price inflation:  LINK  Now, please read the wikipedia description of how this index is constructed, and you will discover that it is constructed based on subjective questioning and response choices by industrial managers - i.e. very "touchy, feelie" (I would use the word for excrement but many of my clients read this blog and don't appreciate my foul mouth to the extent that I like to flaunt it lol).  Here's the LINK  The point here is that what looks like a strong number in the headline is largely a product of inflation and subjective adjectives.

2) Today the ISM released its manufacturing index.  It came in a few points higher than expected and CNBC went bonkers.  BUT, here are some comments from the respondents to this survey:
•"A continued weak dollar is increasing the cost of components purchased overseas. It is going to force us to increase our selling prices to our customers." (Transportation Equipment)
•"We continue to see significant inflation across nearly every type of chemical raw material we purchase." (Chemical Products)
•"Our plants are working 24/7 to meet production demands." (Fabricated Metal Products)
•"Prices continue to rise, while business limps along at last year's pace." (Nonmetallic Mineral Products)
•"Overall demand is off 10 percent." (Plastics & Rubber Products)
For sure there will be some growth in demand for industrial products.  The lower dollar is helping exports limp along and GM and Chrysler, the two automobile wards of the Taxpayer, are pumping out production that is mostly sold to and sitting on dealer lots.  Both companies are getting some help from Government-subsidized lease-finance deals but that won't last.  I know in January that a large % of GM's sales were still sitting in dealer inventory when the numbers were released on Feb 1 (see my blog post around then for the data).  GM stuffed its dealer channel once again.  Here's the report, with the dealer inventory information about halfway down:  LINK
3)  This one really cracked me up.  Geithner made a speech today in which he said that we can't reform the housing market and related financing frauds too quickly because it will hurt the "recovery" in housing.  Well, first there is no recovery.  See previous recent posts of mine on this for truth and proof.   BUT, essentially what Geithner is saying is that it's okay for financing fraud to linger as long as it helps hold up the value of housing.  I can't say what I really want to say about and still be perceived as a gentleman.  Here's a news report of his comments:  LINK Suffice it to say that Geithner is an idiot.
4) Finally, Bernanke was in front of the Senate today pontificating about the low risk of inflation and promising that any inflation would be temporary.  The golden truth is that the Fed officials are already setting us up for QE3 - more on that in a minute - and we are on the cusp of hyperinflation that will eventually hit the system, completely taking most people by surprise, and which will destroy the net worth of anyone not invested heavily in precious metals.  Here is a quote from Ben Davies that I couldn't have said it better myself: 
By June, the US will have monetized 100% of all of the debt issuance. This will lead to continued debasement of the US dollar. Fed Chairman Bernanke refers to commodity strength as a derivative of emerging market demand. This is the same man that suggested a savings glut from emerging markets was exporting deflation to the rest of the world a few years ago.
Here's the LINK - please read that.  Bernanke is outright full of shit and I'm sure he must know it.  
Regarding QE3.  Already a couple of regional Fed heads have made comments alluding to its possibility and even Bernanke has made comments which indirectly allude to its possibility. I've already counted QE3 as in the books and am taking over/under bets on when QE4 will hit.  If anyone disagrees, then please tell me how the Government plans on raising more debt financing if the Fed does not print money and buy it?  Anyone?  I've been waiting for close to 10 years for someone to explain the solution to that math problem to me and the problem gets worse by the day.  The alternative?  Hyperinflation - it's coming but I won't stick a calendar date on when it hits.  Just be prepared.
Anyone who does not have at least 50% of their assets in physical gold, silver and mining stocks right now has absolutely no understanding of what is going to hit the globe financially and geopolitically.  I have over 90% in the sector and so do the high profile investors who have been communicating and accurately predicting what is unfolding for more than a decade (John Embry, Eric Sprott, Bill Murphy, James Turk, etc.).  Hell, even the Ben Davies and John Paulsons and David Einhorns didn't get involved and start pontificating about this sector until the last couple of years.  They have NOTHING on those of us who have analyzed and predicted the now-unfolding demise of our system. Even Jim Rogers and Marc Faber were poo-poo'ing gold until the mid-2000s.

"I think we are all doomed."  I will end with a great quote on zerohedge.com from Marc Faber.  I don't always agree with his market views but I am in full agreement with this statement of his:
I think we are all doomed. I think what will happen is that we are in the midst of a kind of a crack-up boom that is not sustainable, that eventually the economy will deteriorate, that there will be more money-printing, and then you have inflation, and a poor economy, an extreme form of stagflation, and, eventually, in that situation, countries go to war, and, as a whole, derivatives, the market, and everything will collapse, and like a computer when it crashes, you will have to reboot it.
Here's the LINK 

What is most perplexing is that there are still many paper millionaires out there who I chat with about my fund and they think that having cash in the bank is bulletproof.  But, just like in Weimar Germany, when the dollar finally collapses the value of that paper will be close to zero (it will have value as furnace fuel) and these fiat dollar millionaires will be fiat dollar paupers.  Gold and silver are bulletproof, as they have been for over 5,000 years...


  1. Given your last paragraph, what good is gold and silver mining stocks or the metals themselves for that matter if, as a US citizen, they have to be converted to US dollars in order to eat pay bills etc. Sounds like the money will be essentially worthless so other than seeing a large figure in your brokrage account what good will it be on a practical basis? FWIW, I've been in PMs for years now but I'm most interested in the practical effect of the Great Fed Experiment. Thanks Dave.

  2. I know what you mean about the stocks, but they do represent a "claim" on gold in the ground and the leverage effect should enable that capital to go up faster than the dollar declines.

    On the other hand, I like to play the odds and I'm betting on my ability to time it so that I can get out of the stocks and convert into physical before the physical is totally in hiding (Gresham's Law)

  3. Thanks Dave. Let's continue with the analysis. Let's say when the dollar reaches "zero" status 5-10 years from now my brokrage account is hypothetically worth $5 million up from $200,000. All mining stocks. That's a huge percentage increase granted. So now I convert $4 million into gold (the metal) and I have $1 million in cash. Literally worthless cash which I will "eat" through aweful quickly (because it's worth "zero") which means I'll have to convert more gold to cash etc. which sounds like I'll/we'll be on the proverbial treadmill going nowhere fast. I'm not trying to be smart guy as you raise a good point. I just don't know how much better off us gold folks will be given what you think will be a dollar worth "zero". After all, my gold won't do me any good if the currency which values it says it's worthless no matter how much gold I own. If that's the end game we're all in alot of trouble. I can see the advantage now (the dollar has value and I can convert my shares if I so choose to cash)but where's the advantage should the dollar reach "zero" status in owning the metal? Again thanks in advance. I appreciate your analysis. Keeps me thinking.

  4. HL's still lagging today... have to wonder when that pig's gonna fly

  5. Just checked Tulving, the dealer you recommend, and they are OUT of silver eagles. APMEX has some, but the premium is $3.29 over spot now for a monster box.

  6. To Gallo's question about what is the point of miner stocks, I was thinking the timing will be tricky. Dave you said it, "I'm betting on my ability to time it..."

    For me, I don't expect to pick the top. I'm simply trying to hold on to some of what I have!

  7. Dave,
    Check out Tulving tonight... must of had a big run on Silver Eagles, not even currently offered.

  8. Mish’s article below says it all (you can read the larger report to get even more sick). Even Warren Buffet on CNBC today has changed his tune tremendously from what I recall and views the current spending by the US gov’t as unsustainable. As he states, there are 3 things to solve the gov’t debt crisis:

    1. Increase taxes

    2. Default/change the terms/break the promises of the obligations to pay

    3. Inflate your way out (i.e. print $)

    He thinks the US gov’t has already chosen #3 as their solution.

    The government’s current reply to this is that all their Quantative Easing (QE) thus far has not increased inflation much (well that is a whole other topic in itself if you believe gov’t statistics and can’t see that gas has gone up 25% in the past year and by the way the gov’t statistics don’t even include food and energy in their calculations !) to which Warren has a great analogy:

    You can’t always measure the eventual outcome of an action by what has happened thus far. If a man jumps off a 45 storey building, nothing has really changed during the first 40 floor freefall, it’s the last few that make it interesting and we all know what the final outcome is.


  9. CNBC calls for $130 Silver.


    Joe M.

  10. My thoughts on the matter, Gallo-

    If the US Dollar turns into the new Zimbabwe Buck, and an ounce of gold can be swapped for, say, a billion Wiemarican Dollars-
    why bother trading gold for dollars and then trading dollars for food when you ca trade gold directly For food?

    Here is a quote that I saved that explains the point quite clearly-

    “When the Red Army placed Budapest under a siege those who had gold ate; those who didn't went hungry.” Antal E. Fekete

    No doubt there was paper money available in Budapest at that time, but food sellers preferred gold over fiat, expect the same thing to happen in the future.

    Even if fiat is still acceptable during hyperinflation, we should take lessons from what happened in Wiemar, Zimbabwe, and much of South America when inflation raged out of control. Foreign currencies were accepted alongside the local currency, and in many cases foreign currencies were the currency of choice.

    Trading gold for Swiss Francs during a hyperinflationary period might make more sense than trading gold for the local fiat.

  11. This is going to crank it up. Forget Eygpt, Iraq, Algeria, Tunisia or even the good old Hashemite Kingdom this is US power straight on the line. Can't hold Saudi then the dollar will blow for sure and $130 silver will look real cheap.

    DEBKAfile Special Report March 3, 2011, 11:09 AM (GMT+02:00)

    Ahead of the first Day of Anger planned in Saudi Arabia for March 11, a senior Iranian figure close to Iranian President Mahmoud Ahmadinejad warned Riyadh Wednesday, March 2, against launching preventive security measures against, or cracking down on, the kingdom's two million Shiites who live and work in the oil regions of the east. In Washington, Secretary of State Hillary Clinton accused Iran of using its Lebanese surrogate Hizballah to shape events in the Arab world.

  12. Dave and Anon

    Thank you for your repsonses.

    The Salt Lake Tribune
    First published Mar 02 2011 03:56PM
    Published Mar 2, 2011 04:02PM
    Updated Mar 2, 2011 03:56PM
    A bill that recognizes U.S. gold and silver coins as legal tender and exempts their sale from the state capital gains tax passed the Utah House Government Operations Committee Wednesday.
    Supporters say HB317, introduced by Rep. Brad Galvez, R-West Haven, is a first step to creating an “inflation-proof” alternative to the “paper dollar.”
    Larry Hilton, a local attorney and supporter of the “sound money movement,” said that “un-backed money” created by the Federal Reserve to stimulate the economy, is “hanging over us like the sword of Damocles waiting to just come down in an avalanche and destroy the value of our currency.”
    While the bill says the use of gold and silver coin as currency would be voluntary, it requires the Legislature to study the “possibility of establishing an alternative form of legal tender,” and to come up with further recommendations for the 2012 session.
    Jeffrey Bell, the policy director for the Washington, D.C.-based American Principles Project, told legislators the bill would be seen as a “symbolic act.”
    But it sends a signal, he said, to Washington “political elites who want to leave the value and staying power of our currency uncertain, indefinite, so that they can at will intervene to do what they think would ameliorate the situation” facing the U.S. economy.
    “The last time we had the system that we are recommending — the international gold standard — it set a record for least inflation,” Bell added.
    The bill passed 7-1 and will go on to the full House for debate. The lone dissenter, Rep. Rebecca Chavez-Houck, D-Salt Lake City, said her only reservation was the bill’s potential effect on tax revenues.
    “I hesitate to implement some of the tax code changes in advance of a study,” she said.
    The bill’s fiscal note predicts a loss in tax revenue of over $260,000 in 2012 and over $600,000 in 2013. But Galvez said that is based on an assumption that the sale of such coins currently accounts for 0.5 percent of capital gains tax revenue.