The wildfire spreading across the Middle East is capturing all of the headlines in recent weeks. Country by country, people are taking to the streets in opposition of long-standing authoritarian rule. It almost seems like each country is trying to out-do the previous one. Currently, Libya is at the forefront in the most violent protests seen yet.
All of this has sent the price of oil way up (with some analysts predicting $200/barrel), which in turn sent oil stocks up. The rest of the market actually sold off for the most part amid all of the uncertainty. One of the most interesting observations is that the US dollar didn't strengthen like you normally see in times of crisis/shock. This comes back to our core theme of long-term dollar devaluation. Real, tangible goods are the best bet when currency is being destroyed. While recent events are clearly more of a supply side shock, it is all part of the same story. Hopefully, peace ensues and prices stabilize (Americans don't need $4 gasoline right now....although it will be far higher in the future), but our portfolios should be structured to gain from higher prices....much higher.
All of this brings up another very valuable point. Why are we still dependent on foreign oil? Well, the truth is because it is still cheaper for the most part. But times like this open our eyes to the plethora of other options we have and the benefits they will one day provide. Specifically, natural gas is abundant in the US, prices are low, and we have the means to implement the infrastructure across the country. We are huge advocates of the Picken's Plan and we hope this oil price spike reinvigorates the debate. We also have been watching (and investing) in companies that will hugely benefit from a conversion to natural gas. It keeps money at home, it creates jobs, and it's better for the environment. We shall see how this story develops.
Times of crisis are also times of opportunity!
Sean Kelly
Monday, February 28, 2011
Tuesday, January 11, 2011
The Way Forward, From a 1960’s Former Radical
The problem with the current economists is they never dropped acid……It will take a former Timothy Leary devotee, like yours truly, to think of a way out of this economic mess. Any logical individual applying traditional economic theories would draw the conclusion that US credit quality and resulting rating will deteriorate rapidly in the near term, resulting in higher US Govt. interest rates on Treasuries. The problem is about $3-4T of US debt will be issued annually for the foreseeable future in the form of new debt and debt rolling over If rates go up by a point, or two, or three, the effect on the US budget will be unimaginable. (Let’s not even get into the fact that the majority of US debt is off Balance Sheet debt in the form of unfunded Social Security and Medicare).
Currently, annual US tax revenues come in at around $2T and annual interest on the national debt at around $200B. However the average interest rate for all interest bearing debt fell to 3.29% at the end of 2009. At the end of 2009 total public debt outstanding was $14T and was 99.3% of GDP of $14.1T. At year end 2009 43% of US public debt needed to be rolled over within 12 months. The average maturity was around 50 months. So some back of the envelope calculations: If around 40% of US public debt is due within 12 months, and the current average interest rate on that debt is .25% that is .25% times $5.6T, or about $15B annualized. If over the course of 1 year the interest rate jumped back up to the historical short term average of 3%, ridiculous I know but just for argument sake, that would increase the interest expense on $5.6T of debt 12 fold from $15B annualized to $180B annualized, on just that part of the debt. Longer term rates would go up in tandem. So quickly, very quickly indeed, we could see total interest expense double to around $400B or triple to $600B. If US debt were downgraded from AAA to some lower level, possibly even junk, then the interest rates could go to $1T annually, half of the current tax receipts. In addition US tax receipts are projected to be below expenditures by about $1T per year for the next 10 years.
So if the US Govt. raises tax receipts from $2T annually to $3T annually which is 50%.....that is insufficient to fund the projected deficits and increase in expenditures due to the higher interest rates even in the most conservative scenario above. If the more pessimistic scenario comes to pass, then even a doubling of tax receipts would not work. So the budget expenses would have to be cut and cut dramatically. This simply will not occur.
In essence the United States is like a person who has unknowingly run through a glass door, and noticed part way through. To go back against the glass, which is now broken but broken in the direction of the forward motion, would cut and bleed and kill. The only solution for that person is to keep running through. To shatter all the glass, to completely break the door, but at least be through it….
So how to do this – this would be the headline news:
“”””””The Federal Reserve announced today a bold new quantitative easing program to lead the United States economy to the next millennium. The program boldly embraces the Feds dual mandate of maximum employment and price stability. The program is called “All In” named after a manner of placing a wager in Texas Holdem. The Federal Reserve forthwith issues a standing order to purchase all newly issued United States Treasury Notes and Bills issued at Public Auction at even par. Any investor who desires to enter a bid is welcome to make an offer with par as the floor. Highest bids will continue to be accepted in the best interest of the United States taxpayer, but by purchasing any newly auctioned debt at par the Federal Reserve is essentially creating an intrinsic fair value floor for US debt. This fair value floor is consistent with the status of the United States as the premier economy in the world, the central marketplace for goods and services, the deepest credit and equity markets in the world, and the status as the global default currency under which world wide trade is settled. It is in the interest of global price stability that such an intrinsic floor value is created for all US Govt. debt.
In addition under “All In” the Federal Reserve will redeem any maturing treasury debt at par through the secondary market. This commitment guarantees all holders of US debt the full face value of their investment. This commitment is backed by the full faith and credit of the United States of America.
What does this accomplish? It maintains interest expense on US Govt. debt at stated interest. It fixes interest rates at par. The budgets submitted to Congress will not require increased allocation to interest expense. The Govt. can continue this program indefinitely until the deficits are eliminated. No social programs are cut, no decreases in defense spending. Dollars flow….Price inflation returns, and the threat of deflation or second depression are ended. Such measures may require commensurate restrictions on the flow of foreign held US dollars into the United States to mitigate potential inflation. The flow of foreign dollars into the US can be maintained at levels commensurate with the Federal Reserves target inflation.
The “All In” Fed program takes effect at Monday morning’s open……”””””””””
-Michael
Currently, annual US tax revenues come in at around $2T and annual interest on the national debt at around $200B. However the average interest rate for all interest bearing debt fell to 3.29% at the end of 2009. At the end of 2009 total public debt outstanding was $14T and was 99.3% of GDP of $14.1T. At year end 2009 43% of US public debt needed to be rolled over within 12 months. The average maturity was around 50 months. So some back of the envelope calculations: If around 40% of US public debt is due within 12 months, and the current average interest rate on that debt is .25% that is .25% times $5.6T, or about $15B annualized. If over the course of 1 year the interest rate jumped back up to the historical short term average of 3%, ridiculous I know but just for argument sake, that would increase the interest expense on $5.6T of debt 12 fold from $15B annualized to $180B annualized, on just that part of the debt. Longer term rates would go up in tandem. So quickly, very quickly indeed, we could see total interest expense double to around $400B or triple to $600B. If US debt were downgraded from AAA to some lower level, possibly even junk, then the interest rates could go to $1T annually, half of the current tax receipts. In addition US tax receipts are projected to be below expenditures by about $1T per year for the next 10 years.
So if the US Govt. raises tax receipts from $2T annually to $3T annually which is 50%.....that is insufficient to fund the projected deficits and increase in expenditures due to the higher interest rates even in the most conservative scenario above. If the more pessimistic scenario comes to pass, then even a doubling of tax receipts would not work. So the budget expenses would have to be cut and cut dramatically. This simply will not occur.
In essence the United States is like a person who has unknowingly run through a glass door, and noticed part way through. To go back against the glass, which is now broken but broken in the direction of the forward motion, would cut and bleed and kill. The only solution for that person is to keep running through. To shatter all the glass, to completely break the door, but at least be through it….
So how to do this – this would be the headline news:
“”””””The Federal Reserve announced today a bold new quantitative easing program to lead the United States economy to the next millennium. The program boldly embraces the Feds dual mandate of maximum employment and price stability. The program is called “All In” named after a manner of placing a wager in Texas Holdem. The Federal Reserve forthwith issues a standing order to purchase all newly issued United States Treasury Notes and Bills issued at Public Auction at even par. Any investor who desires to enter a bid is welcome to make an offer with par as the floor. Highest bids will continue to be accepted in the best interest of the United States taxpayer, but by purchasing any newly auctioned debt at par the Federal Reserve is essentially creating an intrinsic fair value floor for US debt. This fair value floor is consistent with the status of the United States as the premier economy in the world, the central marketplace for goods and services, the deepest credit and equity markets in the world, and the status as the global default currency under which world wide trade is settled. It is in the interest of global price stability that such an intrinsic floor value is created for all US Govt. debt.
In addition under “All In” the Federal Reserve will redeem any maturing treasury debt at par through the secondary market. This commitment guarantees all holders of US debt the full face value of their investment. This commitment is backed by the full faith and credit of the United States of America.
What does this accomplish? It maintains interest expense on US Govt. debt at stated interest. It fixes interest rates at par. The budgets submitted to Congress will not require increased allocation to interest expense. The Govt. can continue this program indefinitely until the deficits are eliminated. No social programs are cut, no decreases in defense spending. Dollars flow….Price inflation returns, and the threat of deflation or second depression are ended. Such measures may require commensurate restrictions on the flow of foreign held US dollars into the United States to mitigate potential inflation. The flow of foreign dollars into the US can be maintained at levels commensurate with the Federal Reserves target inflation.
The “All In” Fed program takes effect at Monday morning’s open……”””””””””
-Michael
Tuesday, November 30, 2010
News according to the Manic Man
Today our President acted to freeze pay across the board for federal workers. The analysts estimate the savings will be $60B over 10 years…..The daily deficit is $4B…..So in 15 days the govt. will borrow what they save by freezing wages for 10 years…..15 days of borrowing equals 10 years of saving. In addition, there were a couple of other gems…..The Obama panel on deficit reduction decided to delay their report. They want to make sure they have their airline tickets and bullet proof vests purchased first. And lastly, drum roll please………………………………Our President and the Congress agreed to negotiate on taxes…..They actually released news to this effect. That is like me saying, “I will go to work today”.
In order to get out of the mess we have made there are ONLY 2 choices – Declare default on national debt or Print and Pay. Neither course of action is good, but inevitable. And you know what? Under either course of action we must pave the road of the future to make sure we do not end up here again. Like a company going through bankruptcy. So here are my recommendations: 1. This year - 10% across the board spending cuts. No exceptions for any programs – applied to every single budgetary department. 2. Next year – same thing. 3. The year after that – same thing…..This continues until the budget is in balance. 4. Thereafter, in order to spend more money than we take in, a vote of the people in the form of a constitutional amendment is required.
-Michael
In order to get out of the mess we have made there are ONLY 2 choices – Declare default on national debt or Print and Pay. Neither course of action is good, but inevitable. And you know what? Under either course of action we must pave the road of the future to make sure we do not end up here again. Like a company going through bankruptcy. So here are my recommendations: 1. This year - 10% across the board spending cuts. No exceptions for any programs – applied to every single budgetary department. 2. Next year – same thing. 3. The year after that – same thing…..This continues until the budget is in balance. 4. Thereafter, in order to spend more money than we take in, a vote of the people in the form of a constitutional amendment is required.
-Michael
Thursday, November 18, 2010
Conspiracy? No, I'm from the 60's.
My son must approve my blogs, ain’t that special……He thinks I am too conspiracy oriented, too radical…..And I tell him it is the 60’s…..I am a product of the 60’s.
Under the 2010 HIRE ACT the United States Treasury Dept. was granted the authority to collect withholding taxes from foreign financial institutions. Under a new Chapter 4 foreign financial institutions with US account holders may be subject to a 30% withholding tax on income from US financial institutions unless they agree to disclose the 1. Identify of any US person, 2. Account number, 3. Account balance or value, and 4. Gross receipts and gross withdrawals. Another Code Section imposes new reporting requirements on individuals who hold more than $50,000 in any financial account. And lastly, the statute of limitations is suspended.
So the United States of America is tightening the noose…..They are laying the foundation to prevent or reduce capital flight…..Capital flight….Something countries like Argentina have dealt with forever…..When economies face huge debt loads which must result in increased tax rates, and citizens want to move their money, powers that be work to prevent that. Capital flight exacerbates economic trouble. So how does a Govt. prevent its citizens from moving their money to another country? First they have to find it…..Then they have to tax it…..Not easy to do in a hurry, so they are paving the road now…..
We will not go gently.
-Michael
Under the 2010 HIRE ACT the United States Treasury Dept. was granted the authority to collect withholding taxes from foreign financial institutions. Under a new Chapter 4 foreign financial institutions with US account holders may be subject to a 30% withholding tax on income from US financial institutions unless they agree to disclose the 1. Identify of any US person, 2. Account number, 3. Account balance or value, and 4. Gross receipts and gross withdrawals. Another Code Section imposes new reporting requirements on individuals who hold more than $50,000 in any financial account. And lastly, the statute of limitations is suspended.
So the United States of America is tightening the noose…..They are laying the foundation to prevent or reduce capital flight…..Capital flight….Something countries like Argentina have dealt with forever…..When economies face huge debt loads which must result in increased tax rates, and citizens want to move their money, powers that be work to prevent that. Capital flight exacerbates economic trouble. So how does a Govt. prevent its citizens from moving their money to another country? First they have to find it…..Then they have to tax it…..Not easy to do in a hurry, so they are paving the road now…..
We will not go gently.
-Michael
Tuesday, November 2, 2010
GOLD!
As many of you know, we have been extremely bullish on Gold for a few years now. Why? Where does it go from here? And doesn't $1,400/oz sounds really expensive?
The economic collapse has spurred unprecedented action by governments across the globe. To aid domestic recovery, governments have injected money into their economies and artificially devalued their currencies. The former action aids domestic consumption while the latter boosts export demand. The trick is that the value of a currency is relative. The Yen is strong or weak only in comparison to something else. So what happens if the Euro is artificially devalued to the same extent? The Euro/Yen ratio would remain the same. That is why gold (and other commodities) have sustained such long term growth. Commodities don't change in value, they reflect the value of the currency in which they are priced. And with governments continuing to print money, gold has no reason to lose "value."
Take a look at these stats from Agora Financial:
"Let’s take a look at some of the great gold bull markets of the last hundred years:
From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.
From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.
From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.
From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.
From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.
From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz."
Each of these periods is a time when that currency collapsed.
So how do you value gold and where does it go from here?
Another quote from the Agora writer:
"The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money."
By no means is anyone predicting a billion dollars an ounce or even ten thousand, but the point is that gold is gold. Its price reflects the value of the underlying currency. So as long as the US keeps running deficits and the Fed keeps announcing "quantitative easing" (printing), why won't gold continue to rise in terms of US dollars? The same goes for other currencies (400 to 1000 Euros/oz in the last 5 years).
Going forward, government policy will be the determinant. With the US having over 111 Trillion dollars of unfunded liabilities (www.usdebtclock.org) I don't see how we can avoid printing currency... a lot of it. And what if there is a full blown collapse one day? Can you afford not to own gold? Right now, we don't think so.
-Sean
The economic collapse has spurred unprecedented action by governments across the globe. To aid domestic recovery, governments have injected money into their economies and artificially devalued their currencies. The former action aids domestic consumption while the latter boosts export demand. The trick is that the value of a currency is relative. The Yen is strong or weak only in comparison to something else. So what happens if the Euro is artificially devalued to the same extent? The Euro/Yen ratio would remain the same. That is why gold (and other commodities) have sustained such long term growth. Commodities don't change in value, they reflect the value of the currency in which they are priced. And with governments continuing to print money, gold has no reason to lose "value."
Take a look at these stats from Agora Financial:
"Let’s take a look at some of the great gold bull markets of the last hundred years:
From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.
From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.
From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.
From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.
From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.
From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz."
Each of these periods is a time when that currency collapsed.
So how do you value gold and where does it go from here?
Another quote from the Agora writer:
"The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money."
By no means is anyone predicting a billion dollars an ounce or even ten thousand, but the point is that gold is gold. Its price reflects the value of the underlying currency. So as long as the US keeps running deficits and the Fed keeps announcing "quantitative easing" (printing), why won't gold continue to rise in terms of US dollars? The same goes for other currencies (400 to 1000 Euros/oz in the last 5 years).
Going forward, government policy will be the determinant. With the US having over 111 Trillion dollars of unfunded liabilities (www.usdebtclock.org) I don't see how we can avoid printing currency... a lot of it. And what if there is a full blown collapse one day? Can you afford not to own gold? Right now, we don't think so.
-Sean
Monday, October 11, 2010
Social Security turns cash-flow negative.
Social Security paid out more in benefits than it took in during the first half of 2010. The severe economic collapse and sustained unemployment have seriously dented the inflows while some baby boomers have been forced to start collecting benefits early. Some projections estimate that 70% of baby boomers don't have retirement savings. Many people aren't even aware that the social security "fund" was lost long ago when it was decided to lump that money in with with the general fund thereby masking the true deficit/debt problems our country faces.
Of course, if the economy picks up and employment increases, we could see tax receipts bring the cash-flow positive. But that would be just a short term correction. The long term problem can only be solved a number of ways:
-Benefits can be reduced (as well the cost of benefits paid).
-Taxes can be increased.
-The government can print its way out.
Currently, the political will doesn't exist to accomplish the first two options and by the time it does, the problem will probably be too big for it to make a difference anyways (many say it is already). That leaves us with choice #3; print print print (well, these days all it takes is a computer keystroke). So how do investors take advantage of this long term theme? Buy stuff! Tangible assets will be the primary benefactor of an environment in which the value of the US dollar is eroded, especially commodities and foreign companies/currencies. That is the main reason we are so bullish on Gold, but more on that later...
-Sean
Of course, if the economy picks up and employment increases, we could see tax receipts bring the cash-flow positive. But that would be just a short term correction. The long term problem can only be solved a number of ways:
-Benefits can be reduced (as well the cost of benefits paid).
-Taxes can be increased.
-The government can print its way out.
Currently, the political will doesn't exist to accomplish the first two options and by the time it does, the problem will probably be too big for it to make a difference anyways (many say it is already). That leaves us with choice #3; print print print (well, these days all it takes is a computer keystroke). So how do investors take advantage of this long term theme? Buy stuff! Tangible assets will be the primary benefactor of an environment in which the value of the US dollar is eroded, especially commodities and foreign companies/currencies. That is the main reason we are so bullish on Gold, but more on that later...
-Sean
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