A Paradigm Shift

We suspect last week’s events, in which both the ECB and Fed committed to open-ended base money creation – against a geopolitical environment in which China’s USD reserves are being held astride an increasingly dynamic domestic political regime and in which the petro-dollar regime of the past forty years seems under attack – may be the catalyst that begins to raise public awareness of the link between monetary inflation and price inflation.   -  Lee Quaintance/Paul Brodsky, QB Asset Mgmt  LINK

"Raise public awareness of the link between monetary inflation [i.e. QE] and price inflation" (real price inflation, not the insidiously corrupted Government CPI).  Paul Brodsky's writing, in my view, is intellectually and stylistically brilliant.   That one sentence captures the "essence" underlying the reasons the broad public has not yet understood the role gold plays as both a currency and an investment and why the latest round of Central Bank balance sheet expansion could begin to trigger the much-awaited massive move of public/institutional/pension money into gold and silver as an asset class.  I've linked the entire essay and it's worth a close read (c'mon, it's less than four full pages).

I wanted to post and comment on a few news items released yesterday but not widely publicized.  But first I want everyone to see that the Government is already spending the money being printed from the Fed's latest mortgage purchase QE.  Fannie Mae has rolled out new mortgage product that enables the borrower to refinance up to 105% of the appraised value of the home.  The program has the appearance of implementing some control over assessing the borrower's credit quality, but it leaves plenty of room for mortgage brokers to go outside of the "guard rails."  Furthermore, it provides Taxpayer subsidized mortgage principle insurance.

Maybe on the surface this sounds okay.  Why not let good credit mortgage borrowers refinance an underwater home at a lower rate and stretch out the amortization schedule, thereby lowering the monthly payments.  But there's several problems with this scheme, two of which can put the Taxpayer at substantial risk.   First, how trustworthy are the appraisals?  Egregiously inflated appraisals were rampant during the housing bubble.  Why has this changed, especially with a mortgage broker who is incentivized to process as many applications as possible and banks who underwrite the mortgages can flip them into Fannie Mae and take their skim?  Second, the program is based on the assumption that housing values have bottomed.  Let's assume my view is correct, which it is, and we have another 25-30% of downside.  Now the Government/Taxpayer is sitting on a large pile of mortgages that are 30-35% underwater.  That's a Taxpayer obligation if the homeowner decides to "strategically" default.  Once again Government intervention into the marketplace is going to end up in serious misallocation of Taxpayer money and huge losses for everyone involved - except the mortgage brokers...

A couple of news items caught my attention yesterday which have implications for the economy.  Phil Anschutz is putting his sports entertainment empire on the market:  LINK  I find the timing of this move interesting because I've noticed that historically Anschutz is one of the savviest market timers in terms of selling at peak valuations.  The value of sports entertainment assets is based on the ability to generate large broadcasting contracts, advertising revenues and all the other consumer-based spending associated with sports viewing (ticket sales, concessions, parking, team paraphernalia, etc).  For Anschutz to be selling now, he must have the view that consumer disposable income, and therefore the ability to generate the consumer spending vital to sports franchises, is going to go into decline.  It's something to keep in mind the next time you read or hear a bullish economic forecast.

Also yesterday American Airlines announced 11,000 layoffs related to its emergence from bankruptcy: LINK  The implications there for the economy are obvious.  It would be interesting to know if some of the employees who receive notice file for social security disability before they lose their job.  As we know, Obama has made that an easy option for many LINK  I'm sure the BLS will figure out a way to not include the 11,000 lost jobs in its monthly employment report.

Finally, non-US/European/British Central Bank buying of gold is becoming a widespread monthly occurrence.  South Korea, which has been buying gold now for at least a year,  has become the 40th largest in sovereign gold holdings LINK   In addition, the State Oil Fund of Azerbaijan announced the purchase of 10 tonnes of gold  LINK  I find this very interesting, especially when considered in light of the reports that China has started selling its oil in yuan, not U.S. dollars.

There's a structural paradigm shift going on and most people in this country are not only unaware of it, but will be blind-sided by it.  Those who position themselves in gold and silver (not GLD, SLV, etc), will benefit greatly from the dynamic described in the quote at the top...