Viernes 27/02/15 PBI (GDP)

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3 Things - High Yield Warning, Yellen's Employment & Economy
Tyler D
A High-Yield Warning

With Janet Yellen recently warning about overvaluation in the bond market, I thought it would be important to look at potentially one of the single most overvalued areas in that market - high yield. To wit:

"However, the staff report noted valuation pressures in some asset markets. Such pressures were most notable in corporate debt markets, despite some easing in recent months. In addition, valuation pressures appear to be building in the CRE sector, as indicated by rising prices and the easing in lending standards on CRE loans. Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes. The effects on the largest banking firms of the sharp decline in oil prices and developments in foreign exchange markets appeared limited, although other institutions with more concentrated exposures could face strains if oil prices remain at current levels for a prolonged period."

There is a significant chunk of high-yield debt that is associated with the oil and gas drilling sector that was used to chase "fracking" opportunities in Texas, Oklahoma and North Dakota. The one-two punch will come from a sustained period of low oil prices and a potential rise in borrowing costs for the sector. As I have discussed previously:

"But with valuations in the energy space exploding due to falling revenue and profitability, there is likely a good bit of "shaking out" left before this reversion is complete. (Also be careful of highly indebted oil related investments, there will likely be more liquidations than acquisitions in the not so distant future.)"

There is little doubt that a "bubble" has formed within the high-yield sector due to the incessant "chase for yield" given the Fed's ongoing drive to push interest rates toward the zero-bound. This has led investors to take on substantially more "risk" than they most likely realize which will result in substantial loss of principal during a mean-reverting event.

The chart below shows the spread between high-yield (junk bonds) and both AAA corporate bonds and 10-year Treasury bonds. When the spread between corporate AAA bonds and BB yields has historically gapped above 3%, the markets have historically experienced a fairly sharp contraction as "risk" was repriced. Currently, that spread is sitting at 3.04% as of the end of January.

next chart shows the impact of the Federal Reserve's liquidity push as it relates to "risk taking" by investors. Notice the high yield (junk bonds) rose sharply in price while the Federal Reserve was injecting the financial system with liquidity. However, when the Federal Reserve began "tapering" QE3, the price of high yield bonds declined pushing rates higher.

In other words, "risk" is coming out of the market as money seeks "safety" which has pushed Treasury bond yields below 2%. (Note: the last two times T-bond yields fell below 2% was during the debt ceiling debate/government default threat in 2011 and the Eurozone crisis in 2012. In both cases the market experienced a rather sharp correction.)

While the markets currently await the arrival of the ECB's version of QE, the warning being thrown off by high yield bonds warrants some attention.

Just One Chart For Janet Yellen

This past week, Janet Yellen gave her semi-annual Humphrey-Hawkins testimony before Congress. During her testimony, she made some very interesting statements overall but one really jumped out the most - "the economy is looking stronger."

I will agree that if you look only at the headline statistics of the unemployment rate or GDP it is certainly apparent that she is correct. However, in order for there to be a real recovery in the economy, which leads to higher demand, production, and consumption, there has to be employment gains beyond population growth in the 16-54-aged bracket.

The reason that I look at this group is that not only are they responsible for household formation and higher levels of consumption; but primarily because it strips out the argument of "retiring baby boomers." (Note: In truth, baby boomers aren't retiring either as those 55 and older that are employed is at their highest levels on record.)

Considering that the employment-to-population ratio of this age group is lower today than it was at the end of the financial crisis suggests that improvements in the labor market are not as robust as they appear.

The problem for Janet is that the monetary policy tool of lifting interest rates is a tool used to slow the rate of economic growth. With employment and wage growth weak, an economy that continues to churn along barely above 2% and an extremely overvalued range of assets; there may be much less room for the Fed to hike rates than currently believed.


Economy Not As Strong As Yellen Thinks

Continuing with Yellen's commentary about a "strengthening economic recovery," this is one thing that has yet to happen since the end of the financial crisis. As I discussed at length yesterday:

"Furthermore, a look at the extended history of the economic composite index, and comparing it to both GDP and the Leading Economic Index for validation, paints a very interesting picture.(The gold dots represent the start and end of QE1, QE2, LTRO, and QE3) Since the financial crisis ended, the economic composite index has remained confined to levels that have historically been associated with recessions in the U.S. economy. This goes a long way to explaining the weak wage and economic growth that has persisted since 2009."

The reason I bring this up, again, is because it clearly shows the "recovery/slowdown" cycle that has been reflective of the "range bound" economy over the last 5-years.

It also confirms the latest economic confidence poll from Gallup that showed confidence fell to an average of -2 for the week ending February 22nd. To wit:

"Gallup's U.S. Economic Confidence Index fell to an average of -2 for the week ending Feb. 22. This is the first time the index has had a negative weekly average since late December. Prior to that, the index had consistently been in negative territory since Gallup began tracking it daily in 2008.

The Economic Confidence Index fell five points from the week prior, the largest drop since July. The weekly index numbers are usually fairly stable, not changing more than a couple of points unless there is some significant event."

The most interesting aspect is that while the economy is showing some signs of impact from falling oil prices, a port strike in California, weak global demand for exports and an exceptionally cold winter; the markets are pushing all-time highs. There is much hope being placed on the ECB's plans for launching QE in March, however, much remains to be seen as to just how effective it will be in a negative interest rate/deflationary enviroment. But then again...there is always "hope."

LawsofPhysics: "Prices" are becoming more and more irrelevant around the globe as the fiat dies.

Everyone should recognize that there simply is no monetary, fiscal, economic, or political solution to resource scarcity.

taketheredpill: Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes.

The HY ETFs grew to their current size over 8 years. IF/When the Credit/HY markets ever snap down this money will try to leave in 8 days. That will be fun to watch.

londoncalling:
londoncalling's picture

without money printing (endless bid on gov debt) interest rates would be higher

the drag of the interest payments on all the outstanding debt would kill the economy (even more) and likely blow up a few countries and something like 50% off of stocks would probably be kind

but

there is money printing

there is an endless bid on gov debt

the risk free return on money is being surpressed

the drag of outstanding debt on all holders is less than it otherwise might have been

it is keeping the plate spinning for longer than many (inc me) thought

best to trade it as it is, not as you thought it was going to be

the truth is for even the smartest minds (not me) the music has played for longer than anyone thought possible

maybe this divergence is the canary in the coal mine maybe not

my guess is it will all fall apart on the back of some tiny unforeseen event (that in hindsight of course we all saw coming)



EU Fixed? Spanish Credit Risk Up 30% Since Greek Elections

Despite some compression today in anticipation of ECB QE (as if that was not anticipated enough in the
idioctically marginal yields across European peripheral bonds), it appears Europe is 'not' fixed. With Brexit odds around 1 in 6 and Podemos' lead in Spain extending, it appears redenomination risk (as we discussed, clearly lacking in many spreads) is re-emerging. Since the Greek election, Spanish credit risk is up 30%... more than Greece!

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The Global Economy Is Not "Off The Lows"
Tyler D.
On the day when the MSCI World Stock Index hits a fresh record high - enthused by the exuberance of the US markets - we thought it more than a little ironic that Global GDP growth expectations for 2015 just hit a fresh record low...

Growth Expectations not "off the lows"

Equities not "off the highs"



Don't Show This To Warren Buffett (Gold vs. The Financial System)

Warren Buffett once famously chided that all the gold in the world would form a cube of 67 feet (20 meters) on each side.

In doing so, he was attempting to argue that there was no point in owning gold since all the gold in the world would be an unproductive, useless hunk of metal.

What’s ironic (and completely lost on the venerable Mr. Buffett) is that you could make the same argument about the paper-based financial system.

It’s estimated that the derivatives market now exceeds $1 QUADRILLION (15 zeros) in notional value. If you were to somehow accumulate and stack up $1 quadrillion, the pile would be thousands of feet high and hundreds of yards long… much bigger than the cube of gold.

It’s a similar story with government debt, which exceeds $56 trillion worldwide.

My friends at Silver Bullion (a state-of-the-art precious metals depository here in Singapore) recently put together a great infographic which visualizes all of this—over $1 quadrillion in the paper financial system stacked against the known supply of gold and silver in the world.

click image for massiuve legible version

Now, it may be a cute thought experiment to blast gold as a useless hunk of metal. But the reality is that gold will never require a taxpayer-funded bailout. It won’t crash the financial system. And it won’t enslave future generations to higher taxes and inflation.

On the balance, at least as a means of preserving assets over the long-run, ‘useless’ certainly beats ‘destructive’.

(Actually gold can be put to productive use and generate a rate of return—it’s just that such platforms are extremely rare. I’ll share some exciting developments on this front with you soon.)

northern vigor: Gold went up and down in a organized manner from 2005 until 2011. I traded certificates like a bandit...let it go up $60, sell...let it drop $40, buy. Bought and sold certificates at Scotia Bank...until the certificates started to arrive slower and slower. Sold everything at $1600 and started to buy actual in 2012. No more paper for me...everything was lost in an unfortunate boating accident.

Grouchy Marx: If Buffett said gold was a great hedge, price would rise. He might be trashing and stacking, who knows.

Anyone who doesn't see the clear and present danger to fiat currency in this age of CB pumping is not paying attention.

TradingTroll: Fiat money used to be worth more. In the 80's interest rates were 18% because there was demand. Now that rates are 0% it proves two points - fiat is a barbaric relic and Buffet is a shill for the fiat financial system he bet the farm on. By the time it's over Buffet will have to cut back to one cherry cola a day.

A New Way to Hold Gold
Right alongside the bills in your wallet
by Adam T
Saturday, January 18, 2014
What if you could carry and exchange gold in the exact same manner as you do with the dollar bills in your wallet?

I've recently been introduced to a technology that's making this possible.

In today's podcast, I speak with Adam Trexler, President of Valaurum, about this technology and the gold-infused notes it creates. Valaurum's mission is to democratize ownership of gold by converting it into a form affordable to anyone.
Democratizing Gold

In short, a fractional gram's worth of gold is affixed to layers of polyester, creating a note – called an "Aurum" – similar in dimension and thickness to a U.S. dollar bill. This gold (usually 1/10th or 1/20th of a gram) is commercially recoverable. So an Aurum offers similar potential as a coin or bar, in terms of providing a vehicle for storing and exchanging known, dependable increments of precious metals – just in much smaller (and more affordable) amounts than commercially available to date.

The big idea here? In a world where a 1oz coin of gold costs over $1,200, an Aurum will let you hold a few dollars' worth of gold in a single note. If you've got pocket change, you can be a precious metals owner.

And you don't have to change your behavior. You can store and transport an Aurum in your billfold along with your dollars.
Understanding the Aurum

As the saying goes, a picture's worth a thousand words. Here's a picture of an Aurum designed for Peak Prosperity that the Valaurum team produced for us:

(click here to purchase - PP.com will NOT receive a fee if you do)

You'll see that with even just 1/20th of a gram of gold involved, it's enough to make the Aurum appear to be "made of" gold. The characteristic luster, color, and shine of the 24-karat gold used is immediately apparent.

The Aurum is designed to be handled in the same manner as we do with our "paper" money. And, despite having a more 'plastic' feel to it (resulting from the polyester backing), it's as flexible, lightweight, and familiar-feeling as paper currency.

The big difference, of course, is that instead of being a claim on something else, it simply is what it is: a fractional gram of gold. It can be stored, traded, or melted down – just like a coin or bar.

Implications

Being able to hold gold in this form is significant for several reasons.

First, it makes gold ownership available to all budgets. Many of the world's households have been priced out of gold to date. This changes that completely.

Second, it enables the potential for everyday transactions should we ever return to a precious metal-backed monetary standard. It answers the challenge: How will you pay for your groceries with gold? With an Aurum, it's now easy.

Whether Valaurum's product emerges as the winning horse or not, the world definitely needs this type of solution (i.e., convenient fractional physical metal) to go mainstream.

I'm very excited by this new innovation in the bullion industry, and I explore the matter in depth in this podcast. If you're similarly intrigued, it's worth the listen.

And for those of you interested in owning an Aurum of your own, you can learn how to purchase the Peak Prosperity Aurum pictured above by clicking here (Peak Prosperity does NOT receive a fee on these sales).

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Transcript

Adam Taggart: Hello, and welcome to the Resilient Life podcast. Resilient Life is part of PeakProperity.com, and it is where we focus on practical and actionable knowledge for building a better future. I am your host, Adam Taggart, and today’s guest is Adam Trexler. Adam Trexler is the president of Valaurum, which is a very interesting company that Chris and I have come across.

One of the very common criticisms, I guess you could say, that we will oftentimes encounter with people when we talk about the wisdom of owning precious metals, particularly in physical form, is, Well, hey, if you are … read more

Adam Taggart: Hello, and welcome to the Resilient Life podcast. Resilient Life is part of PeakProperity.com, and it is where we focus on practical and actionable knowledge for building a better future. I am your host, Adam Taggart, and today’s guest is Adam Trexler. Adam Trexler is the president of Valaurum, which is a very interesting company that Chris and I have come across.

One of the very common criticisms, I guess you could say, that we will oftentimes encounter with people when we talk about the wisdom of owning precious metals, particularly in physical form, is, Well, hey, if you are ever at a point where we are using precious metals to actually make real purchases in the world, you are not going to bring down your one-ounce gold coin to buy a loaf of bread. How practical actually is returning to some sort of metals-backed standard really going to be?

Well, this company, Valaurum, that Adam has helped found and is running, has built a product that could potentially be an excellent solution for that use-case. What Valaurum does is it has a proprietary technology that applies a certain amount of precious metals – I think right now their majority product is a gold-backed one or a gold-based one – and it injects that gold directly onto a surface; they can put it pretty much on any surface, but right now it is doing it in note form. So it is a product that looks very much, in terms of dimensions, like the dollar bills that you would put in your wallet, but it actually has a certain percentage of a gram of gold actually injected into the product. And it is enough gold that you can actually very clearly see that this product has gold on it or in it. So it is your opportunity and ability to basically transact or share fractional grams of gold with other people.

We will have some images of what Valaurum’s product, it is called the Aurum, looks like, that will accompany this podcast, so you see visually what we are talking about. But I wanted to talk with Adam about the product, about the mission behind the company, why he has decided to create this technology, what his vision for the future is. And how people that are interested in potentially owning some physical precious metal in this format, where they can go to learn more about it, and if they want to actually buy some for themselves, how they can do that as well.

So I would like to welcome Adam to the program. Adam, thank you so much for joining me today.

Adam Trexler: Thanks for having me, Adam.

Adam Taggart: You are very welcome. I know we are going to get a little confusing, I think, with the Adams here, but hopefully our audience can follow along.

Well, first, Adam, I want to give thanks to a mutual friend of ours, a Peak Prosperity reader, who brought Valaurum to our attention. I believe he might be on your board of advisors, and I am sure this person is listening and knows who he is. But I had not been familiar with your product until he made the recommendation. And since you and I have been talking and I have actually gotten the opportunity to hold some Aurums in my hot little hands, I have really become a big fan of the product. And then you and I met when you were out here in Northern California a few months ago, meeting with your production team. We got to talk a little bit more in detail about the company, and I have really found it very intriguing, so I wanted to bring this to the attention of the Peak Prosperity audience.

And I think probably the easiest way to start here is just at the beginning. What is the mission behind the company? Why was it created?

Adam Trexler: Well, Aurum was actually invented, I should say, by a husband-and-wife team, Paul and Laurie, and all credit to them for having the vision that you could have a gold instrument of this size, of a sub-gram size. I came across the technology and thought it was just the most fascinating thing that you could have $2, $4, $6 worth of gold embedded in a form that was far easier to use. And what I saw pretty quickly, when I began to think about this, was that this made gold investment available to all people, and also made gold easier to hold in the physical form than anything else on the market.

And I thought this was a product that people in the U.S. would want, people in the developed world would want, but also where the gold market has been going is in Asia in the developing markets. That is where we see the largest demand for gold. And as gold has gone up from $300 – there was a high there a couple years back, but still, at $1200, $1300 an ounce, people just cannot afford to own gold, and cannot afford to own gold in the increments that are available. And this product makes that possible.

So I believe in gold ownership. I believe in precious metals. I believe in physical assets and an investment relationship to the real world. And I saw that this was something that was truly novel and had the opportunity to be huge, and I wanted to serve that vision.

Adam Taggart: Great. So it really sounds like the democratization of the ownership of precious metals, particularly gold, was a driving force here. And we will get into the Aurum itself in just a moment, but the samples that I have held, one had a 10th of a gram of gold in it and one had a 20th of a gram of gold.

Adam Trexler: Right.

Adam Taggart: And I am not going to embarrass myself by doing the math on the fly here at current prices. But basically, to your point, it is a couple of dollars’ worth of gold that is applied there to the note. So you are taking an option that is probably not affordable for most people, if they are considering buying an ounce of gold, and you are giving them the ability with fractional grams to really take pocket change and actually convert that into precious metals, should they want to.

Adam Trexler: That is right. And one thing that really hooked me when I was first researching this project was, I was traveling in Costa Rica looking at some artisanal gold mines. I got very interested in where gold comes from. And I talked to a gentleman who had had a gold production facility. He made rings, and he had a wonderful business, where all men in Costa Rica had to have gold rings. And it was a way for them to hold tradable, physical wealth.

And what happened is, the rings just became too expensive. Nobody could afford them anymore, and they moved to a more consumerist model of holding wealth. People wanted cheap cars, and suddenly nobody had gold anymore. And there was a transfer away from that, which I think is really significant. And this idea of democratizing gold ownership as gold goes up, as the world recognizes that we need these kinds of hard assets, to me seems really important, a critical issue for our time.

Adam Taggart: Yeah, and one of the things I love about what the technology enables – and I do not know if this is the vision of the company, so do not make me ascribe a motive here to you – but as I have reflected on the product, now that I have actually held samples of it, is, were we ever to move back to a precious metal backing to a currency or our currency, you can have what we had back in the early 1900s, where you have a paper note that is a claim on a certain amount of precious metal, and that you can take your paper note down to the central bank and exchange it for some amount of actual, physical metal. What I love about Valaurum’s technology is, you remove a step there. You actually inject the metal in the note itself, so the note does not need to be brought anywhere to be exchanged. It actually is the amount of precious metals that it says it is. It is one of the things I love about with the promise of the technology here. I do not know if your plans are as grandiose as to have it be used for a national currency somewhere, but I suppose the technology or one like it could do that. Is that correct?

Adam Trexler: That is correct. And it is worth saying that we have anti-counterfeiting features built into it. If a government was ever to adopt it as tender, that would be very interesting. My interest in the technology is that it really puts the gold into the hands of people, and there is not that counterparty risk. So when you see gold held in a vault, promises of gold, these kinds of things, that is wonderful. And it makes a lot of sense for certain kinds of transactions. But I think that people should also seriously consider that they might want to actually, physically hold their metal, and this is a means to do that.

Adam Taggart: And as Peak Prosperity listeners know, Chris and I have been longtime advocates of the precious metals. We have also been longtime advocates of holding a material portion of that, at least, physically. This is just yet another way to do that.

So let us use this to segue into a description of what exactly an Aurum is. And again, just not to lose people here, we have talked about the company itself, which is called Valaurum, and the product they have, which is the note with precious metal actually injected into it, that is called an Aurum. On your website, Adam, for the product, you list a couple of benefits here. I am just going to quickly read them, and then I am going to give you floor to talk about the product in any way you think is meaningful for listeners to know about it.

Adam Trexler: Sure.

Adam Taggart: You describe these precious-metal-injected notes as safe, easier to verify, and harder to counterfeit than conventional gold coins, bars, or foil. They are convenient. They are thin, lightweight. They easily fit in a wallet or purse, so you do not need to change your behavior at all in terms of how you carry this around.

Adam Trexler: Right.

Adam Taggart: They are divisible. They can be in much smaller quantity than traditional coins or bars – and that is very true; we have been talking about fractional grams here versus ounces. They are durable, protected between layers of strong and transparent polyester film. I will let you talk more about that when you talk about the creation process. You have here “beautiful.” That is a design element here, where just like coins can be works of art, the Valaurum notes have designs on them. And to be honest, I think the design options are probably – you have a substantially greater number of options with Valaurum, because basically if you can design it, you can apply that to the surface here, just like you could with any note.

Adam Trexler: That is right.

Adam Taggart: And you experiment with colors and all sort of different things, and I will let you talk about that. I will also give a little preview that we will be previewing what some of these Valaurum look like in the post along with this podcast.

And lastly, they are affordable. We have talked a bit about this, but you can have them in all sorts of increments. But in particular, very small increments, at least relative to other types of precious metals, so you could literally be holding a couple of dollars of gold in your hand, which is actually pretty hard to do with coins and bars.

So those are the benefits that the company itself has been touting. Let me hand the mic over, here, to you, and tell people, what is an Aurum?

Adam Trexler: Well, it is a funny thing, Adam. It is the sort of thing, and I think you can vouch for this, that the Aurum makes much more sense when you see it in a hand. It is something that does not describe well, but as soon as you see it, you get it. It looks just like a dollar bill or a note from another country. It is plastic on the outside, which is what gives it its strength. There is a polyester layer, and laminated within it is 24-karat pure gold. We are able to print on the polyester layer, in quite high-resolution with color, which means that we can put anything we want on it; there is a customizable element. And in fact, we have begun designing a Peak Prosperity Aurum that has some of your stuff on it. We really like Peak Prosperity.

And basically, you can carry it, hold it, just like you would a dollar bill. You can carry it in your wallet. It is really quite durable, and you can do the same sorts of things with it. It moves well. It travels well. For five hundred years, we have had bars and coins, and not much has changed in that; certainly for several thousand years we have had gold coins. The need for the Aurum really emerges when you start to see gold at $1300 an ounce for long periods of time, $1200 an ounce, certainly over $1000 an ounce.

I actually have a one-gram bar. It is almost impossible to hold on to. The only way they sell it is laminated into a credit card. When you start talking about a 10th of gram, a 20th of a gram, it is very, very difficult, almost impossible to keep track of that sort of thing. Similarly, as I am sure many of your readers do, I have one-ounce silver rounds. They are just not very friendly in the pocket. It is not a handy thing to carry around. You can carry the same worth of gold in your wallet quite easily with an Aurum, and I think that’s the convenience – and, frankly, the beauty. We have had some great designers work on them. We hope to continue in that vein, and we are still learning more about the artistic capacities of this. We actually had Aurum in an art show at one of MoMA’s galleries in New York City. We can print in very high resolution, and because of the way that the gold is layered, it actually creates a unique image on the back which is kind of a negative image. It looks almost like the gold is engraved. And that creates quite a striking effect, as well.

Adam Taggart: I will agree with that. And you mentioned a few minutes ago that we have actually created an Aurum for Peak Prosperity. I really like how it looks. And we will have a picture of that, as I mentioned earlier, on the post accompanying this podcast, so people can see it for themselves.

One of the things that is striking about the Aurum is that it makes me think when you go and visit some of these churches and domed structures around the world where they have gold leaf on the dome, and you find out that it takes actually a surprisingly small amount of gold to be hammered into that incredibly thin gold leaf that then gets applied to these structures. But even in that incredibly thin leafing, it is still very bright and very obvious that it is gold. Even though we have a fractional gram on these Aurum notes here, it is certainly enough to coat the entire surface of the bill here such that the whole thing looks like it is made out of gold. So it is very bright; it is very striking to the eye. And I have shown it to a number of people, and I have shown it to a number of people in the gold and silver space. I mean, a lot of the people who, I think a lot of folks listening to this podcast actually read their work or purchase bullion from their dealerships. I have had the pleasure of being the first person to hand them an Aurum and see their eyes light up and them hold it up to the light and have a delighted reaction to it.

So anyways, like you said earlier, it is much better seeing the product than actually hearing someone explain it. And like I said, we will have some pictures on the site, so in this case, I am sure the pictures will be worth thousands of our words here.

Adam Trexler: I would like to pick up, Adam, on something you said comparing it to gold leaf. One of the fascinating things about gold is that it is one of the most malleable materials that we have. It can be drawn into very, very long wire, and it can be hammered into gold leaf. And when people see this, one common thing for people to think is, Oh, well, what is so different about this? There has been gold leaf for, again, thousands of years.

Well, the way that gold leaf is made is that basically people – largely in India, often families, it is kind of a cottage industry – will take a piece of gold, and with a leather mallet, hammer it repeatedly until it gets thinner and thinner and thinner. And there are two problems with that. The first, for our purposes, it works wonderful for art, but it is very delicate, for obvious reasons. And more importantly, at an atomic level, it is not regular at all. It is really wavy, as you would expect if you just hammered something. It is thin but not precise.

And what one of the main benefits of the Aurum and the technology underpinning the Aurum – and really the genius of the inventor; I cannot take any credit for it at all – is that we can get within one percent and never below this precise amount of gold and this small increment of gold. So, using an electron microscope, when you look at an Aurum, the atoms are completely flat, whereas it would look like mountains and valleys with gold leaf. And that precision is what makes this a value instrument that is unprecedented for these increments in precious metals.

Adam Taggart: Right; meaning, you can have confidence that it has exactly what it says it has in there, because the control is so fine.

Adam Trexler: Exactly. And developing that control was no small engineering feat, I can tell you. The other thing I would say, and you mentioned this earlier about verifiability, is that the Aurum has a real benefit in terms of, the gold atoms are spread out very thin. So whereas, with bars, we have heard about scandals with tungsten in the middle of them. With coins, of course, people have been counterfeiting this for centuries by gold-plating other metals. It is much more difficult to do this with an Aurum; the fact that the gold is on such a small surface, the fact that the equipment to make it is far more expensive and very difficult to develop. Anti-counterfeiting features, we have it built in. And for the thinner Aurum, you can actually see through the gold with a strong light. And gold, unlike most other metals, has a precise turquoise/aqua/blue-green color when you look through it. Even most gold experts do not know this, but if you look through a 1/20th gram Aurum, you will see this blue-green color, and it is actually the color of gold as the light passes through it. And that is another anti-counterfeiting feature.

Adam Taggart: Great, and so, to say this in other words, one of the ways in which you can assay or at least quickly check to see if an Aurum, indeed, is gold or not, is, you can shine a light through it.

Adam Trexler: Correct. With the 1/20th. The 1/10th starts to get thick enough that it is difficult to do that, and we have other anti-counterfeiting features. But that word “assay” is very important to us. We assay every batch.

The gold is actually quite easy to recover from an Aurum. If you melt off the plastic and pull out the impurities related from the plastic, you get a very small gold pellet. And we assay every single batch to make sure – we have other checks, but – to make sure that every Aurum that is sent out is a precise amount of gold for our customers. We live and die on that.

Adam Taggart: Great, and that is where I wanted to go next, which is, I think, one of the first questions that arises when somebody has this is in their hand is, How do I know this is real gold? And if I ever want to recover the gold, how is that done? So speak just a little bit more about the process of, let’s just say somebody is holding on to a bunch of Aurums, whether it is an individual, but maybe let us think about the gold dealer. Let’s just say you have decided to actually start accepting Aurums, and at some point, you have got a big stack of them. And you want to recover the gold itself. How would you go about doing that?

Adam Trexler: Well, it is a very simple process. We use a fire assay in our lab, really for every batch. And what we do is we put it into a crucible; we use some borax to pull out the material from the plastic that is residual, and then you have a weighable pellet. It is very common in the gold industry to recover gold from substrates of various kinds; we can provide a list of that.

But there is something else to emphasize, which is that people say, Can I melt this down? Yes, you absolutely can. The gold is absolutely recoverable. It is not lost in any way. We have to do this ourselves. We have to recover the gold because we have overspray when we manufacture these, so we do this quite regularly. But what is important to emphasize as well is that gold in this form is more valuable than a lump of gold. And this is the same as coins and bars. A U.S. tenth of an ounce coin is much more valuable per increment than a kilo bar would be. So you actually lose money by melting them down. And there is a clear economic argument for that. Gold in this form is more useable, it is more precise, it is more easily tradable than gold in a huge lump. So we think there is real value in maintaining the Aurum in this form, and we would want to encourage dealers and individuals to trade for it on that basis.

Adam Taggart: Great, so let us talk about that, then. I had never heard about the Aurum before we were introduced, and of course, I think it is really innovative and interesting. And it or a product like it should be in the solution set of ways to hold physical gold. What type of traction are you seeing right now among the important opinion leaders, participants that are going to help determine whether or not this product – or, again, a product like it – will potentially go mainstream? Are you seeing bullion dealers react positively to it? Are consumers able to find it and start buying? Just where are we in the adoption cycle here?

Adam Trexler: Sure. It is a very exciting time for Valaurum. We are really starting to get huge traction with bullion dealers throughout North America. We are talking to one currently about having the U.S. exclusive distribution rights for a year or two. I cannot announce that as of today yet, but that is looking very exciting. We are setting up Canadian dealers, and it is just a very exciting time.

Sorry, Adam; there was another piece to your question. I want to make sure I answer it.

Adam Taggart: I really just wanted to know what type of reception are you getting so far in introducing it into the ecosystem. Are you getting positive reactions? Sounds like you are, from some of the initial dealers that you have talked to. And what do you see as the key milestones for getting this from something we are telling people about for the first time to something that is hopefully a little bit more mainstream?

Adam Trexler: Sure. I think that it will become mainstream, and it is just a process. The dealers that we see are very, very excited about this. They see that it makes gold available. I have shown it to a dozen industry gold leaders – people who comment on gold, people that your readers would be very familiar with – and I would say that two-thirds of them see it, and their jaw drops, and they say, Oh, my gosh, this makes gold usable in a way that it just has not been. And they are thrilled about it. The other third – and I am willing to admit this – the other third doesn’t get it, and the reason they do not get it is because they say, Hey, what is the problem? All my readers can buy kilo bars. I say to them, I believe that this is the personal computer of gold. There was a time when people thought, Oh, nobody will really need a computer. We have mainframe. Big businesses will need them, but why would you need a computer in the home? I think this is very similar. This makes gold available to all people. And we will see a widespread push to own gold in this form, and we will also see, at some point, a push in terms of the demand for gold as a result as well. That is my real vision for this company.

Adam Taggart: Okay, great. And let us flash forward five, ten years. Hopefully you have hit your strategic objectives for this product. If one of our listeners were to go buy an Aurum in the future, is your hope that this would be something that, they would walk into their typical coin dealer and it would just be there amongst the options right next to the coins and the bars?

Adam Trexler: I think that is right, and one of the reasons we’ve wanted to grow a dealer network is precisely so there is a buy-and-sell market, and that is the first objective. But I think in the longer term, if the Aurum is accessible enough, you will start to see it in other spaces. I would love to see it in financial exchanges. So when you go to the airport, and you are going to England, and you would say, I would like some British pounds or euros, that you would also be able to change that into gold. And I think that could happen at banks as well.

So in the longer term, I think that this will become a means by which you can buy and sell gold just as easily as you buy and sell the paper currency of other countries.

Adam Taggart: Interesting, great. Well, it would be interesting to see if India lets you in, in that scenario. They still have their gold controls in place; hopefully they won’t. So it is also worth noting as with gold coins and bars, that, as you said earlier, the smaller the increment, the higher its economic value, because it is more tradable, etc., but there is also more work involved to breaking a kilo bar up into a bunch of 1/10th of an ounce gold coins. So the premiums per smaller unit are higher in the precious metal space. And I am assuming, too, the technology is still relatively new. And the scale is not where you will be, hopefully, in five or ten years, at least given your goals. So we should probably be very clear about – if people are buying an Aurum – that there is a premium involved in it, and it is going to be a higher premium than you would have if you bought a one-ounce coin, and that is because it is a much smaller fragment.

Do you want to just elaborate a little bit on the percentage of the premium in the current product, where you think that is going to go, just so people have an eyes-wide-open understanding of, when they are buying a Valaurum, what the economics are?

Adam Trexler: Sure. This is a little bit tricky to answer because we generally do not sell direct to the public, so it’s really up to dealers to price this product. And we do not have a set RRP; we let dealers make their decision about what they think the market will bear. Typically what we are seeing is roughly in the double spot area. If you draw an economic curve of what gold should cost as different increments, this seems roughly in line with the curve that you see from kilo bars down to ounce coins, down to sub-ounce coins, and then down to the Aurum. It is very simple – and our readers and your readers, I am sure, are familiar with this – it is not special to precious metals. It is the same reason you can go to Costco and buy a case of detergent much cheaper than if you go to 7- Eleven and buy a one-use set of tabs. My argument would be that you might want the convenience of the Aurum in addition to holding the majority of your gold in ounces or bars.

Adam Taggart: Right, right. Yeah, and I think right now, because you are so early in the adoption curve, most uses I have seen of the Aurum have been almost more sort of, it is more of a collectible, it is more of a fun way for a company to brand itself and whatnot. But as a consumer who actually is looking at this and saying, I am actually willing to pay a premium to have precious metals in this format at this point in time, just for the insurance factor if we ever got to a point where I needed to give somebody a little slice of gold to do something for me, this is a fantastic medium for that. And as you said, there is an economic curve at which the smaller you go, the higher the premium will go anyways. And as I mentioned earlier – if you can comment on this, it would be great – I am sure you have got a cost of production right now that is also going into that premium that will decrease over time if your business grows and you get greater economies of scale. Is that true?

Adam Trexler: That is absolutely true. This is a high-tech nanotechnology, and doing a couple thousand for Peak Prosperity is not the cheap way to manufacture this. But as we grow, we have clear projections and a pretty clear schedule that shows that the price goes radically down.

Adam Taggart: Great, well, hopefully those dealership relationships that you mentioned you have been getting traction with, as those begin to grown and order volumes begin to increase, you begin to hit those economies of scale. So let us transition quickly to talking about the Peak Prosperity Aurum, because we do have one designed. I think it is very pretty; of course, I am an incredibly biased source. But we will have an image of it here, and people can take a look for themselves.

If you are listening to this and looking at the Peak Prosperity Aurum and thinking that might be a fun thing to own, we are going to have a link there, Adam, that is going to plug into Valaurum’s commerce system, and people will actually be able to buy these. Is that correct?

Adam Trexler: That is correct, yes. And you can go ahead and order them from our site, and we will deliver.

Adam Taggart: All right. Well, fantastic. And I assume over time, if Valaurum gains the traction that it hopes it will, and I hope you guys do, they will start seeing other designs with other providers out there in the world as more people decide that having an Aurum of their own makes strategic sense for them – or is just good art and pleasing to the eye.

Adam Trexler: That is right, and I think it is both those things. I think that your readers will hopefully think, Oh, I would like to see one of those and just see what this is about. And then may think, as I do, that If I am going to hold several ounces of gold, I might want to have an ounce worth in an Aurum, or two ounces worth or some percentage of their precious metal ownership.

Adam Taggart: Yep, that is definitely the approach I am taking. So let us see here, Adam, as we begin to wrap up here, you just happen to live and breathe the precious metal space, given this product, so I would be remiss not to ask you if you are seeing any trends or if you have any market intelligence that our readers who are reading other precious metal sites right now may not have already gotten exposure to in terms of your insider viewpoint, your perspective, or whatnot. Basically this is the Where do you see precious metals going from here? question.

Adam Trexler: Sure. I think that the underlying drivers of precious metals are only going up. I think that there will continue to be global risk. I think there will continue to be global debt problems, and we have seen why people want to own that. But I think the larger trends is the growth of wealth in Asia and other developing countries, where people have historically, for hundreds and hundreds of years, owned gold as a way to hedge their wealth. And the demand trends are very clear. The demand for physical gold has continued to grow even as the price has gone down.

And one thing that I look at that most other commentators may not is I look very, very carefully at the demands numbers for jewelry because there is a sector that is buying coins and bars, and you see that quite often in the United States – people who want to invest, invest in coins and bars. In other countries – I mentioned that ring manufacturer. The way that people invest in other countries is they buy jewelry. And it is typically a lower-increment investment, and that is the overlap with the Aurum. And what you see is that as the price of gold has fallen, that number has surged, both in the U.S. and abroad. And what it says to me is that as gold becomes more affordable, more people jump in and want it. And what I think that represents is a huge pent-up demand for gold, and people not being able to afford the increments that have been on the market.

So I think that the future of gold is very bright. I think that we have an increasing population, a limited supply of gold in the entire world. I don’t see that going anywhere except up over the medium term. And I think as more people have access to gold, have access to incremental wealth that lets them want to stick a bit of money away in this form, it can only go up.

Adam Taggart: All right. Well, I cannot say any of that disagrees with my perspective or that of Chris, so I think we do see the world very similarly to you. And as we see and embrace that trend of more people wanting to own gold more widely, which means having it be available to people at price-entry points that they can afford, it is really wonderful to see innovation and new products like the Aurum on the marketplace. So we wish you all the best.

And, Adam, I know I am going to get a ton of questions after this podcast about the actual process for manufacturing and Aurum and the technology that is involved. And I had intended to get into that, but we just did not have the time for it. I know we have a short video clip that you created that I’ll post along with this write up on the site. But I can definitely see myself inviting you back in the not-too-distant future to talk maybe a little bit more nuts-and-bolts about how the product is actually made.

Adam Trexler: Oh, that would be great, Adam. I have really enjoyed my time, and thanks for having me on.

Adam Taggart: Oh, really, my pleasure. Well, great talking with you, Adam, and best of luck with all your goals for world dominance with the Aurum here.

Adam Trexler: Well, it is really about dominance of the world and recognizing that the physical wealth that we can all have a part in, we should all have access to, and the Aurum is just a piece of that.

Adam Taggart: Very well said. All right, look forward to talking to you again soon, Adam.

Adam Trexler: Thank you.

[Fenix]

raywolf: As the population, technology, infastructure and etc. grow, it is necessary to add to the money supply.

You can't do that with gold unless you

a.) print more paper backed by gold that doesn't exist

or

b.) strip mine the planet for resources wihch must be at a rate equal to or greater than the economic growth.

Then of course you have the Spanish problem where they found so much gold in the americas it completely debased the currency.

It's not about gold, it's about confidence in the currency.... in Roman times, Roman coins were forged, using similar roman stamps and MORE gold than the originals.... why would anyone do that ? Because it's about confidence in the currency. Even in a Casino, you have confidence in the chips and know the casino will pay out cash against them.

DrNybble: Incorrect.
Point "a)" is only valid if all the paper money (currency) printed is already equal to the value of all the gold backing it - AND that the value of gold is absolute.

But you're right about it being confidence in the currency. However, governments (politicians and central banks) have eroded that confidence by "printing" as much as they need to keep spending, thus reducing its value.

[admin]

http://elcomercio.pe/economia/negocios/ ... ia-1794257

[Fenix]

ECB Warns UK: Excluding Russia From SWIFT "Could Undermine Confidence In The Whole System"
Submitted by Tyler D 26Feb*15
As "isolated" Russia signs a military deal with Cyprus, agrees bilateral trade with Greece, ratifies the $100 billion BRICS Bank, and offers to trade advanced anti-aircraft missiles to Iran, it seems threats of more sanctions against Putin and his nation are finding resistance from an unexpected place. With British PM David Cameron re-demanding that Russia be excluded from the SWIFT global financial payments system, none other than ECB Governing Council member Ewald Nowotny has exclaimed, "one has to be very careful here, exclusion of Russia from Swift would be very problematic because it could potentially undermine confidence in this system as a whole."


2 Years Of Abenomics Later: Joblessness Jumps As Retail & Household Spending Slump

For all the constant foolishness, spewing from the mouths of any and every Japanese monetary and fiscal policy maker about a "continued moderate recovery", the facts are the facts and the data is the data - 2 years of Abenomics has utterly failed. The lastest example is tonight's triple whammy of surging joblessness (up to 3.6% from 3.4% - highest in 6 months), a 2.0% tumble in retail sales YoY (double expectations and worse since the tax hike), and a plunge in household spending (-5.1% YoY - down for the 10th month in a row). But, of course, Japanese stocks are at 15-year highs - so "everything must be awesome" - what a farce.


The Austrian Solution to Greece
Fill In The Blank: "Greece will achieve economic success when ____"

Arnold Kling asks economists to fill in the blank:

“Greece will achieve economic success when ____”

There is an answer from the Austrian perspective, but first I want to highlight some thoughts from other prominent bloggers.

Option A: Paul Krugman of The New York Times believes that they need a major reduction in their debt burden.

“Two years after the Greek program began, the I.M.F. looked for historical examples where Greek-type programs, attempts to pay down debt through austerity without major debt relief or inflation, had been successful. It didn’t find any.”

Option B: John Cochrane urges structural reforms:

“Advice remains, stop fooling around, massive structural reform tomorrow morning, grow like crazy, pay off debt.”

Option C: Scott Sumner wants the country to build a factory that pumps out nGDP units at an ever increasing, but predictable, pace (I’m kidding, he thinks leaving the euro is likely their best bet):

“a Grexit may be the best outcome for Syriza. There would probably be six months to a year of financial chaos (as occurred in Argentina), followed by many years of very strong RGDP growth for which Syriza would get credit (as in Argentina.) The new Greek currency would immediately lose half of its value, creating a huge boom in industries such as tourism.”

Option D: none of the above

So which is it from an Austrian perspective, A, B, C or D? Surprisingly it’s option E: All of the above. Before we get into that though, a brief rephrasing of Austrian Business Cycle Theory (ABCT) will be helpful. The Austrian description of a recession comes down to the market’s realization that the path of the economy is unprofitable, and that the path must be altered until a profitable way forward can be found. If we piece together our three answers we can create a larger solution that not only should work for Greece but also agrees in principal with major voices in the field of economics.

First we have Krugman’s prescription for reduced debt, and specifically reduced debt servicing. This is widely accepted as sound advice for companies that enter bankruptcy protection, and the same holds true for countries. Many have suggested that austerity alone is the way to go to demonstrate Greece’s willingness to pay for their mistakes (while Krugman goes the other way and says debt reduction with no austerity). This is conceptually problematic for the Austrian as this pathway is highly limiting. It is possible that there is a path to growth that can be found with this combination, but it is far from certain. Pursuit in this direction eliminates any possibility that would contain a short term reduction in income as that would lead to a ballooning of debt and probably an increase in the debt/GDP ratio.

The repudiation or reduction of debt fits nicely into the Austrian model and into generic advice from this perspective. The debt was built up during the unsustainable practices that caused many of Greece’s problems and attempting to pay it off tie Greece’s path to those choices for even longer while also convincing investors in Greek bonds that those purchases were sound for even longer. It should be noted that the debt is not limited to bondholders, obligations to Greek citizens such as pensioners should also face a similar haircut. The same double effect can be noted in this case as well. The government will reduce their expenditures but if they do so without touching pensions those who work in the public sector will be granted greater security than those in the private one. Such a mismatch can only lead to more interest in working in the public sector and thus higher costs for the Greek private sector as they fight for quality employees.

Moving on to Cochrane’s advice, this is just straightforward common sense. Virtually every analysis of Greece’s situation at least nods to major structural problems in Greece. If your issues are caused by cronyism, corruption and government interference in markets then it shouldn’t be a shock if the only way out is to cut back on those issues. No one expects Greece to jump to the top of the corruption perceptions index, but any improvement could open up opportunities for entrepreneurs to help push the economy forward.

Scott Sumner’s suggestion is more subtle than either of our first two, and at first it might seem surprising that a return to a national currency would be included in an Austrian analysis but there is a strong case that it would be a step in the right direction. One of the foundations of ABCT is that prices carry information crucial to properly functioning markets. Moving to the euro was supposed to bring the stability of a powerful currency to peripheral European countries that would encourage foreign investment by reducing exchange rate risk. This logic failed because it is healthy markets that drive the stability of the larger zones which allows for strength and stability of their currency. Trying to impose stability to create healthier markets is backwards as that instability was actually information about the health of those economies. As part of the euro, the immediate effects of Greek policy decisions were swamped by even minor actions of more influential members. The excesses that built up over time were not consistently punished by market forces because the question of how much debt they could service became swallowed by the greater questions of what would happen with that debt when it became an issue for the euro as a whole. An astute investor that realized the structural problems early and shorted Greek debt could be wiped out by a political decision made in Berlin, which made the question of solvency more complicated and opaque than necessary. Additionally the lack of their own currency totally eliminated a secondary pathway of transmitting information- that of fluctuating exchange rates. Returning to the Drachma would allow for greater transparency and in all likelihood the better functioning of Greek markets.

To answer Arnold Kling’s question that started this piece, Greece will achieve economic success when the weight of past mistakes is reduced, including not only bond prices but promised benefits as well as reforms to cut back government influence and corruption, and markets are once again allowed to set prices that reflect Greece as a country and not Greece as a tiny portion of a massive conglomerate.

[Fenix]

U.S. Healthcare And The Tragedy Of The Commons

When the system is set up to encourage maximizing self-interest, accountability for the whole is lost.

The lessons drawn from the U.S. healthcare system's failures can be fruitfully applied to a variety of large-scale problems around the world. Let's start with an insightful look at the fixes that have largely failed to rein in costs and improve actual care/patient health.

Dilemma over Deductibles: Healthcare costs crippling middle class:
"Physician Praveen Arla is witnessing a reversal of health care fortunes: Poor, long-uninsured patients are getting Medicaid through Obamacare and finally coming to his office for care. But middle-class workers are increasingly staying away.

"It's flip-flopped," says Arla, who helps his father run a family practice in Hillview, Ky. Patients with job-based plans, he says, will say: " 'My deductible is so high. I'm trying to come to the doctor as little as possible. … What is the minimum I can get done?' They're really worried about cost."

It's a deep and common concern across the USA, where employer plans cover 60% of working-age Americans, or about 150 million people. Coverage long considered the gold standard of health insurance now often requires workers to pay so much out-of-pocket that many feel they must skip doctor visits, put off medical procedures, avoid filling prescriptions and ration pills — much as the uninsured have done."

The average hourly wage is nearly identical to what it was 50 years ago in today's dollars: $19.18 in 1964 compared with $20.67 in 2014, according to U.S. Bureau of Labor data analyzed by the Pew Research Center. Meanwhile, U.S. health spending ballooned from 5% of gross domestic product in 1960 to 17% in 2013."


While I have often discussed unintended consequences of centralized policies such as ObamaCare, my focus today is how U.S. healthcare perversely reflects the Tragedy of the Commons, the seminal paper by Garrett Hardin which described the failure of the market to value/price communally owned assets, i.e. "the commons."

Here is a basic example of the dynamic: Each individual farmer will graze his cattle/sheep on the communally owned pastures ("the commons") to boost his own profit, since the commons are "free". This exploitation of what the market has determined is "free" leads to overgrazing and the destruction of the commons--a huge loss to the entire community as well as to the farmers who were grazing their animals in the commons.

When everyone sees the commons as "free for the taking," then the commons is soon destroyed for all.

To the degree that Central State (federal) revenue is a form of public commons (since it is collected from taxpayers), the siphoning of that resource to serve individual gain leads to the loss of the commons, as well as the loss of any notion of the "common good."

This dynamic is reflected in the extraordinary expansion of healthcare's share of the national economy, from 5% to 18% (on its way to 20%). While healthcare for practioners is about patients, from the financial point of view, healthcare is focused on increasing revenues and profits by whatever means are necessary.

Financially, the commons (tax revenues) are being stripped by those with the most political power.

Though we don't normally think of the health of a nation's citizens as a commons, I think this makes a lot of sense. After all, the healthier a population is, the more productive and happy it will be, and that serves the interests of the nation and its citizenry.

From this perspective, we have to ask if the enormous expense of healthcare is improving the health and happiness of the populace as much as it could, were it spent more effectively. I think it is fair to say that the overall health of the U.S. populace is actually declining, despite modest advances in longevity and survival rates.

This does not reflect any lack of effort from the often-overworked providers--rather, it seems to reflect a deterioration of the populace's own habits and lifestyles, and the lack of focus and accountability of the entire system.

We can trace this failure to the Tragedy of the Commons: when every participant is driven to seek maximum gain from exploiting the commons for their own interests, no one is accountable for protecting the commons as a whole.

When we ask, who is responsible for improving the overall health and well-being of the citizens, we get an answer that boils down to: everyone and no one.


When the system is set up to encourage maximizing self-interest, accountability for the whole is lost. And once accountability for the effectiveness and health of the whole system is lost, the system will degrade and eventually collapse, for the same reason that unrestricted grazing by individuals eventually destroys the commons.

Put another way: if I concern myself with the health of the commons (or the overall health of the populace), I earn nothing for this work. Even worse, while I devoted myself to the common good, someone else increased his herd grazing the commons. I will eventually be forced to either join in the exploitation or go broke.

That's the Tragedy of the Commons dynamic, and I think it applies to many systems around the globe.

[Fenix]

Gas Prices Hit 2-Month Highs, Rise At Fastest In a Decade

Despite still low crude oil prices, gas prices at the pump have been on the rise recently. While still at levels not seen since 2009, gas prices in February have surged at the fastest pace in at least a decade to 2-month highs. As SMRA notes, shutdowns at some refineries due to strikes has been a good part of the reason for the gain in recent weeks, but prices for gasoline also typically start to rise with the approach of spring as refineries prepare to change over to less polluting formations for the summer months. We assume, in some incredible way, higher gas prices are also a positive for the US economy (just as lower gas prices were... not).

This is the biggest surge in prices (around 14%) in February for at least a decade...

Notice also above the seasonality of gas prices.

Of course - levels remain notably 'low' relative to the last few years...

SMRA provides some further color...

In spite of still low prices for crude oil, the cost of gasoline prices has reversed in the past four weeks, ending a generally downward trend that began in early July and extended through January. From a near-term peak of $3.704 per gallon for regular gasoline in the June 30 week in the EIA data, the price plunged over $1.60 to $2.044 in the January 26 week. The price has now retraced 28.8 cents of that to $2.332 in the February 23 week.

Still, even at current levels, consumers have not seen prices like this since the summer of 2009 in the depths of the recession when low demand for oil helped reduce costs for gasoline.

Shutdowns at some refineries due to strikes has been a good part of the reason for the gain in recent weeks, but prices for gasoline also typically start to rise with the approach of spring as refineries prepare to change over to less polluting formations for the summer months.

Consumers may be a little disappointed at losing a bit of the discretionary income freed up by the substantial decline in gas prices, but on the whole the pinch should be small. Fro now, prices more affordable than any time since 2010.



Greenspan: "The Stock Market Is Great", But The Economy Feels Like In "The Late Stages Of The Great Depression"

While conflicting economic data leaves hope for both buills and bears, Alan Greenspan warns that, unlike Yellen, "US economic growth is not strong." He then slays another pillar - suggesting the exuberant job growth is anything but (as he focuses on weak productivity as he pinpoints entitlements as "crowding out capital investment" in America. The maestro then breaks the golden rule of central bankers and explains how The Fed was, in fact, the main driver of the P/E multiple expansion in stocks; and when asked if this ends as badly as last time? He concludes "It depends...When real interest rates start to move up, that's when the crisis could hit." The interview is somewhat stunning in its honesty (for a central banker) as he warns global "effective demand is extraordinarily weak - tantamount to the late stages of the great depression."

Some other excerpts...

"Lower long-term rates is not a conundrum, its an indication of how weak global economic growth is."

"effective demand is extraordinarily weak - tantamount to the late stages of the great depression."


"Monetary policy is not responsible for economic weakness - it's a fiscal issue."


The Fed is responsible for the inflation of the stock market


"Almost all the problems are due to a lack of long-term capital investment" - reflecting perfectly on our detailed explanations of company's preference for shareholder enhancement through buybacks rather than investing in the corporate growth of the economy... "nobody wants to invest in the long-term because nobody knows what is going to happen."

Greenspan...

And finally:

"Stock market is great - the economy is not."

You are right Alan...



* * *

We suspect this will be the last time Greenspan is invited on The Truth Channel.

Pinto Currency: Congress created $58 trillion of total US credit market debt and blew bubbles for decades with loose monetary policy.

That $58 trillion of debt is crushing the economy.

Remember - that's Congress and not the Fed that did this.

http://research.stlouisfed.org/fred2/series/TCMDO/
/sarc

Mentaliusanything: It depends...When real interest rates start to move up, that's when the crisis could hit."

A Nanny Moose: Well...now we know what's really on all those container ships sitting off the SoCal coastline. H1-B workers.

Did that "labor" dispute ever end?
Note: Real Interest rates !!!

Kassandra: And what followed "The Late Stages Of The Great Depression" ?

Oh right... WWII

Ding, ding, ding...we have a WINNER!!

negative rates: At least him and volker are no longer in denial about it, golden parachutes and all.

[Fenix]

daveO: Yes, the gold statement. Now, his second warning. Sounds to me like he's setting up the muppets, again. Gold will probably fall to $1000/oz. while the S&P soars for 6-8 months.


Since July of '11 (debt ceiling debacle) China has sold off $71 billon in US treasury debt while Belgium, Luxembourg, Ireland, and Cayman Islands have purchased $697 billion to the Federal Reserves $800 billion in Treasury purchases over the same period.

Ham-bone: If you add in China's likely sales in it's typical secondary treasury buying locations of HK and UK and perhaps Canada...China has dumped maybe $300 billion while running record trade surplus with the US...and Treasury's yields collapse on the largest buyers walking away...riggggggght.

HonkyShogun: Maybe keeping rates too low for too long had something to do with that you festering POS?

Frank N. B.: I didn't down vote or up vote you, but I will take a stab at answering you. I think Greenspan was exalted as the great wizard of the economy by mainstream press and pundits (because they couldn't decipher what the hell he ever said), and despite what he started with keeping rates too low, and the verdict still out on Greenspan (at least in the mainstream), Bernancke thought his best move was to continue the maestro's policies and not rock the boat.

Future J: Rates were about 5% around the end of Greenspan's term.

Rates were a lot lower for a lot longer under Bernanke.

cheech_wizard: I recall reading one of William J. O'Neill's books on investing, and he clearly writes about Greenspan's tenure. Something about managing to tank the market three times during his tenure. I'll have to get the book out and find the paragraph.

yogibear: CNBC won't be inviting him back anytime soon. He's ruining their party.

Yen Cross: "effective demand is extraordinarily weak - tantamount to the late stages of the great depression." WTF?

Is he suggesting we're close to the bottom, or that the bottom is about to fall out?

brushhog. "Economy acting like the last stages of the depression"... sort of hints that we are coming out of one. What that says to me is Greenspan is predicting that things are getting better. I hope he is right but the economy just feels like its about to plunge to me. We'll see

riphowardkatz: If it wasnt him it would have been someone else. It is the ideals and principles (take from one to give to another) of the people of the US that caused this mess. He just kept the ship afloat longer than most would have. Look at what happened and the changes after ge left. Too big to fail, QE etc. This all would have happened in the 80s if not for Greenspan.

He told congress as much everytime he testified. Its not going to work but this is what you want so here it is.

[Fenix]

FreedomG: Greenspan is not an idiot or evil. He seems to have diverged a bit from his early writing but he is practicing monetary policy in accordance with the common beliefs of most central bankers in the world. They are all into some form of Keynesian monetary policy and also economic control. He is capable of rational economic analyses many of which, like this one we would agree with. Now, Krugman is an over the top apologist and I believe incapable of honest analysis, but that is not Greenspan or Bernanke or Volcker before him. Not sure about Yellen but she is practicing the monetary policy religion in line with all others of this era.

It was Obama who grabbed the last half of healthcare, not Greenspan. It was the FTC that just grabbed the internet in the name of "fairness". It is the leftist governments of the world that control wages on both ends. It is the SEC that sets trading rules, not the Fed. Government, more than the Fed or any of it's chairs is where to paint the bull's eye.

I disagree with Greenspan, central bankers, central planners, and essentially all government control of free markets, but I do not think Greenspan has a tail and pitchfork and frankly it does no good to deal with it that way. It may make you feel better to vent but I believe you are looking at the wrong person.

disabledvet: As if stock buybacks have nothing to do with high p/e's.

Thanks Alan!

techstrategy: Few understand what you posted. It is completely correct. TBTJ PD/MM abused QE flow, knowledge if positions and control of the effective money supply to turn everyone upside down while collecting IOER rather than investing in the real economy and generating inflation. Now, they are taking all real assets down hard to use their essential fraudulent phantom FRB claims to acquire real assets and real options on the cheap. We can stop them. Simply liquidate all long duration financial assets and split the proceeds between cash and gold. There are orders of magnitude more financial assets, do the gold squeeze will expose the bullion banks and the financial asset ponzi.

quikwit: What is the overall strategy? Why is Greenspan opening his mouth so much and talking anti-Fed? Is he interested in Peter Schiff's job/his own legacy ("the Maestro extraordinare" who saw the coming collapse), or is this coordinated with the Fed? To what end?

Bunga B.: Who cares about the real economy when the stock market is doing so great?

FreeNewEnergy: Beyond the usual snarky comments, one thing I noticed is that he kept saying "real" interest rates, as in, subtracting out inflation. So, if, in reality, inflation is -0.25 (actually, deflation, as evidenced by today's CPI), and the Fed raises interest rates 0.25, isn't the net effect a big fat ZERO?

I think that's the bogey in the room that has Yellen up at night (beyond Bernanke sneaking into her bedroom for a peek at her rather large "thang"). The Fed is so far behind the curve, having kept interest rates so low for so long, that they've entered the deflationary twilight zone.

Problem is, if deflation persists, which it should in a weak economy, and goes to numbers like during the GD, like -10%, what are they going to do, price the fed funds rate at 10%, 12%, just to offset it. That would only spook markets further, pricing out not just consumers, but most businesses. Of course, it won't happen, because who wouldn't like to collect 10% on bonds when inflation is -10%. Like making 20% on your money... hmmm, Janet may get a boner over that thought. Enrich the rich just a little bit more while completely killing the middle class. YAHTZEE and JENGA all at once!

[Fenix]

FreedomG.: What the Fed and central bankers are seeing is that they cannot stimulate actual demand or economic activity with zero interest rates. If you are unemployed you cannot take out a loan at any interest rate. If you have a flat income and uncertain future you may not be able to take out additional loans or even want to.

Keynesian monetary and economic policy stresses only the consumption side of the economic models. Austrian models show that savings actually correlate better with prosperity and create a useful reserve in any downturns in an economy.

So, the Fed is up against economic mortality but governments everywhere are whipping the central bankers for some economic alchemy to change moribund leftist economies into golden free market economies. I think we are seeing the monetary end game and limits of these beliefs.

MASTER OF U: Anyone that listens to Alan Greenspan spew deserves what they are about to get IMO. Greenspan is just being called upon by MSM to attempt to make you believe his charade one more time. They figure if they pull Greenspan out every once in a while to boost your expectations of a market return you will keep pumping up the dead bubble economy that has already sprung fifty million leaks to Sunday. In effect, Greenspan is holding another carrot out before the audience and is egging everyone on to believe they can get the carrot that he is dangling on a stick in front of your faces. Frankly, we are not looking at metrics that indicate we are coming out of the "Great Depression" because we have already surpassed the "Great Depression" milestones by leaps and bounds. This crash since Bear Stears went down is still ongoing with no let up in sight. Greespan knows that he is feeding everyone pure public relations garbage but he does not care, and never did.

TruthTalker: yet Greenspan is now telling people to own Gold.

Atomizer. What if you burned down all the housing inventory of 2007? Remember, that was a option. Bet no is the answer, the taxpayers would of footed the bill. So how did this spin out of control Alan Greenspan?

This power is the result of the position he held for 19 years under four different presidents. Greenspan served as the chairman of the Federal Reserve Board from 1987 to 2006.

[Fenix]

IllusionOfChoice: Regardless of Greenspan's background, there are at least three good takehomes. 1. Gold has no counterparty risk, is the best money, and has its highest value in times of stress. 2. Solving the banking system situation we are in is relatively simple: make the banks hold capital to cover their bets and keep contagion out of the real economy. 3. It takes time and community understanding before the actions of government/banks sink in and have full affect on behavior be it currency inflation or the pricing of risk.

Vendetta: " tantamount to the late stages of the great depression" = " tantamount to the beginning stages of the greater depression"

There, fixed it for ya Alan.

Batman11: Irving Kahn, the world's oldest investor, dies at 109

Being very lazy I always liked the idea of being an investor, using Capital to ride on the back of others who do all the hard work.

It puts you on the right side of the trickle up effect:

a) Those with excess capital invest it and collect interest and rent.

b) Those with insufficient capital borrow money and pay interest and rent.

It used to be quite easy in the early days, but later on everyone wanted to be an investor and no one wanted to do anything useful. For every person doing something constructive, they had ten investors riding on their backs.

Anyway, I managed to make it to 109 without a single day of hard work producing anything useful. I just used Capital to ride on the backs of others that did all the work.

Can’t complain.
Too many investors and no one doing anything useful.

[Fenix]

falak pema: The role of the IMF in burdening countries with unsustainable debt.

Here is an interesting and SHOCKING insight into the IMF shenanigans played by the them in relation to the ongoing Greek conundrum.

As I have already pointed out here, in 2009/2010, DSK the french director of IMF tried to negotiate a bank haircut in the first PIGS domino --when the Euro crisis began-- by asking the banks in Ireland to accept a huge "haircut" in order to make Ireland's public debt sustainable. The banks involved were Anglosaxon (no skin of DSK's french nose).

That scheme was shot down by DSK's main shareholder : Tim Geithner, who represented the Anglo bank interests. And Ireland's public ledger got totally screwed in the subsequent deal, leading to huge austerity nationally.

Now a new TV enquiry shows that the SAME DSK took a totally DIFFERENT line when it came to the IMF handling of the same type of crisis in Greece. The IMF BENT its owns rules with Greece making the debt deal totally unsustainable for the incumbent Greek government!

In other words DSK did a Geithner on Greece!

WHY ? The reply is simple. The French banks were HEAVILY exposed in Greece and DSK did not want to make them bleed by proposing a huge haircut in Greece like he had for Ireland.

DSK was thinking of his OWN future as political candidate in the next presidential elections in France! (Whence his leniency to the extent of bending over backwards to make NEW lending rules especially for Greece that were tougher than what was normally used).

Both Mutti and Sarkozy loved that ! As did Berlu, 'cos all three countries' banks had skin exposed in Greece.

The poor Greeks got shafted by the IMF, and DSK

Sorry_about_Dresden: It should be noticed, the public should be aware, that dsk was detained in NYNY the exact same day George Soros unwound his gold position.

Same day! Coincidence????

jannenet: Greenspan allowed on CNBC inducing fear sentiment like this makes sense if viewed from an IMF perspective as about now the time has come for the credit infused bubble to be popped, exactly in line with how IMF has made and popped bubbles in Japan, tiger economies etc.

Create bubbles - check
Pop bubble - about to
Create loans from nothing and force privatization etc etc IMF classic style.

Additional bonus this time - CBs broke, so introduce the mega mother printer of SDR and make it world bail out currency enabling privatization and stealth theft on global scale.

Genius

writingsonthewall: so about 7 YEARS into the depression and the fuckwit greenspan calls it 'like a depression'

If you look at the FACTS this was obviously a depression when it started in 2008.

These wankers need hanging, apart from Greenspans part in this awful bad mess, he's taking the piss by telling us what most of us knew 7 YEARS ago.

[Fenix]

ClowardPiven2016: WTF - economic weakness is being caused by fiscal issues, not monetary policy???

What does he think is the root cause of the "fiscal issues"

Stock buybacks wouldn't have been at such extreme levels if interest rates were so low. The government couldn't run these huge deficits if the fed wasn't monetizing treasury debt and they had to rely on tax revenue.

He's either lying, senile or his adult diapers were full and he wasn't thinking straight.

orangegeek: yellen has run out of volume - so shitbag greenspan states a contradiction of health to pull in the shorts

the yellen runs over the shorts and forces covering

and presto, you have volume

that's this week's strategy - next week is a different story - yellen is such a visionary

[Fenix]

The Stage Is Set For The Syrian Invasion

One week ago, when reporting on the latest bizarre plan presented by the Pentagon, namely providing Syrian rebels (but only the moderate ones, not the jihadists like al Nusra, or, well, ISIS) with B-1B Bomber air support in their attacks on ISIS, when we wrote that this "means in the coming weeks and months look forward to a surge in false flag "attacks" blamed on the Assad regime, aiming to give Obama validation to expand the "War against ISIS" to include Syria's regime as well." We didn't have long to wait: in an entirely unsourced Time article written today by Aryn Baker, the Middle East Bureau Chief, the stage for the second attempt at invading Assad regime is finally set.



Q4 GDP Revised Down To 2.2% From 5.0%: Full Breakdown

There was much hope that when Q3 GDP soared to 5%, primarily on the back of Obamacare spending recalendarization and a massive consumption/personal saving data revision, that the US economy would finally enter lift-off mode. Those hopes were reduced by about 60% when moments ago the BEA announced that Q4 GDP was revised from the original 2.64% print to only 2.18%, which while better than expected, was the lowest economic growth rate since the "polar vortex."

The main reason for the revision: a substantial drop in growth contribution from private inventories, which instead of adding 0.82% to the bottom GDP line, only contributed 0.12% in Q4 following the first revision. To be sure, this was perfectly expected, and is exactly what we said would happen last month after the first inventory number:

... here is what Q4 inventories did: rising by $113.1 billion in Q4,
this was the second highest quarterly increase in the 21st century,
second only to September 2010. It's all GDP-crushing liquidations from here.


Following out post, the BEA revised the entire data series.

Some other changes:

* Personal Consumption was 2.83% of the final GDP, down from 2.87%
* Fixed Investment was 0.71%, vs 0.37% before, a number that will plunge in Q1 as a result of the shale capex halt.
* Net trade subtracted even more from growth, with Net Exports less Imports amounting to -1.16%, down from -1.02%
* Government offset the decline modestly, subtracting -0.32% from growth, compared to -0.40% in the first revision.



January's brief 'hope' bounce following 3 months of weakness is long forgotten as February's Chinago PMI crashes to 45.9 (missing expectations of 57.5) - its lowest since July 2009. This is the biggest MoM drop since Lehman in Oct 2008. New Orders suffered the largest monthly decline on record, leaving them at the lowest since June 2009. Seems like it is time to blame the weather... PMI says it is "difficult to gauge magnitude of weather and port strike" but blames it nonetheless.


Despite a modest 1.7% rise (after dropping 1.5% in December), Pending Home Sales missed expectations of a 2.0% rise - the 5th monthly miss in a row. It appears NAR's chief economist Lawrence Yun has flip-flopped: On existing home sales, NAR blames drop on lack of supply (as prices drop); on pending home sales, NAR says buyers overcame lack of supply.



The "Cashless Economy" Is A Myth

Via ConvergEx's Nick Colas,

The “Cashless economy” is myth. Forget what you think you know about credit and debit cards, PayPal, bitcoin, Apple Pay and any other modern conveniences meant to displace physical currency. The truth is that transactional currency ($1 through $20 bills) in circulation per capita today in America is essentially where it was, inflation adjusted, in 1994: $661 then and $649 today. Moreover, the Federal Reserve’s orders from the U.S. Treasury for small bills have grown faster in the last five years than the 20 year average: 4.5% annually versus a 3.5% long run growth rate. This year should be no different, with the Fed ordering $49.9 billion of “small bill” currency, the largest amount since 2010. One bit of good economic news in terms of transactions: $1 bills wear out fastest, and the Fed’s 2015 order of 2.5 billion bills is higher than 2014 (2.3 billion) and 2013 (1.8 billion). That’s growth and relevance any startup online payment company would be happy to see.

* * *

As a New York City resident, the “Fast Cash” button at ATMs in other U.S. cities always amuses me. The most typical offering is $20. That doesn’t even buy you a 7 day unlimited MetroCard in Gotham ($30) or a sandwich at the Carnegie Deli (the Reuben is $29.99). If you want to see “Fifty Shades of Grey” at the Ziegfeld you’ll get a Lincoln back for your Jackson, but you’ll have to choose between a drink or popcorn. You won’t be able to afford both.

And yet there is actually some good data behind that $20 Fast Cash option. According to the Diary of Consumer Payment Choice, a 2012 survey done by three regional Federal Reserve branches, the average adult American carries $56 and the median observation is $22. Only 5.2% of Americans carry a $100 bill, and a Boston Fed paper from November 2014 estimated that 65% of those notes actually circulate overseas. So a $20 bill from the ATM in Des Moines or Charlotte is actually enough to replenish the average American’s wallet. Just don’t try that in NYC.

All this got me to thinking about how many small bills - $1 through $20 notes – it takes to keep the U.S. economy in business. The Federal Reserve issues paper money, ordered from the Treasury’s Bureau of Engraving and Printing (BEP), and keeps records of cash in circulation available on their website. With all the fuss about online payments, credit and debit cards, virtual currencies and the like you’d think paper money would be leaving the stage. As it turns out nothing could be further from the truth.

We pulled the circulation statistics from the last 20 years of Fed data, as well as BEP print runs and the U.S. central bank’s 2015 orders for currency, and here’s what we found (several charts included immediately after this note):

The growth of what we will call “Transactional currency” ($1 through $20 bills) has been remarkably stable over the last 20 years. In 1994 there was $109 billion in such currency outstanding, growing to $207 billion in 2014. There was one hiccup in 1999, as the Fed prepared for worries over Y2K glitches in the banking system, when transactional currency in circulation grew by 15% to $150 billion and shrank by 13% the following year. On average, however, the balance of such bills has grown by an average of 3.5% annually.

Look at transactional currency per capita, adjusted for inflation, and you’d be hard pressed to find any real change over the last two decades. With 263 million Americans in 1994, per capita transactional cash amounted to $414 back then. That is $661 in today’s money. Fast forward to 2014, with 319 million Americans, and the per capita number is $649. That’s a compounded rate of change of only 0.1% annually, or 1.8% over the whole period. Cashless economy indeed!


The most popular transactional note in circulation is the $1 bill, followed by the $20 note. There are some 11 billion of the former in circulation currently and 8.1 billion of the latter. Together they make up 74% of all the transactional currency moving through the U.S. economy. Interestingly, the ratio of the two notes in circulation hasn’t changed very much since 1994. Back then, there was 13.2x the amount of $20’s in the system versus $1’s - $80.5 billion versus $6.1 billion. Now, the ratio is 14.8x - $162.2 billion versus $11.0 billion.


Not only is paper currency holding its own in the Internet age, it is actually growing faster than U.S. GDP. For example, aside from the correction in 2000 to reabsorb bills issued in 1999 for Y2K, transactional money in circulation has risen every year since 1994 – no recessions here. Over the last 4 years, the average growth of $1s through $20 in circulation has been 5.1%. Look at the Federal Reserve’s currency order from the Bureau of Engraving and Printing for 2015, and you’ll see they are expecting to receive $49.9 billion of new transactional notes. That’s the largest order since 2007 ($51.4 billion) and 2010 ($50.3 billion).


The $1 bill wears out the fastest of any face value, for the obvious reason that it changes hands the most in small value transactions. On average, a $1 bill circulates for 5.9 years, according to the Federal Reserve. Twenty-dollar bills last an average of 7.7 years. For reference, $100 bills stay in circulation for 15 years since they are typically more a store of value than a transactional currency.


Despite the half-decade average life, the Federal Reserve has ordered more $1 bills for 2015 than either of the last two years. The amounts are 2.5 billion this year versus 2.3 billion in 2014 and 1.8 billion in 2013. Given that the Federal Reserve bases their orders mostly on how much they need to replace paper money worn out through use, this is a promising sign about economic growth in the U.S. More money usage should mean more transactions, after all.

So what’s going on here? After all, the rise of shopping on the Internet, the “App economy”, virtual currencies, incentive program credit and debit cards, and online banking were all supposed to make paper currency obsolete. Yet the American economy is using more paper currency, even adjusted for inflation, than ever before. Population growth only takes this calculation to flat, with the net $12/person reduction we noted above but a still-sticky $650/person in circulation today. And, of course, there is the simple fact that the Federal Reserve is still growing the supply of transactional currency faster than GDP or population growth combined with inflation.

A few possible explanations fall to hand:

The underground economy is growing faster than reported/official economic growth. Ask any housekeeper or day labor how they would prefer to be paid, and the answer is invariably cash. There are plenty of good reasons for this response, ranging from tax avoidance and immigration status to the lack of a bank account. The same goes for a myriad of other workers, from New York City doormen at Christmas to the local automotive repair shop or the burly guy manning the ropes at a hot new club. Cash talks… You know the rest.


Cash is still more convenient than many other payment options for small amounts. The Diary of Consumer Payment Choice showed that the typical American uses cash some 50% of the time for transactions less than $50. It is still the preferred method payment for food and personal expenses (51%) and personal to person gifts and transfers (67%).


Contrary to popular belief, young people (18-24) prefer to use cash more than any other age group. Fully 40% prefer old school legal tender; their parents (45 to 64) only rate it as the preferred method of payment some 25% to 32% of the time. Since this age cohort typically has a larger amount of small transactions, this preference does make some sense. It does, however, present a real challenge for online and app-enabled payment solutions to gather this most tech-savvy group into their fold.


Low inflation and interest rates make holding cash less costly. After all, if the opportunity cost of holding cash is zero – that’s currently the average interest rate on a bank deposit, after all – then what incentive is there to keep money in the financial system?


The rise of lower income households. Another finding from the “Diary”: households making less than $25,000/year preferred to pay in cash some 55% of the time. That compares to 22% for households with $50-75,000 in income and just 10% for those making more than $200,000 annually. The preferred payment mechanism for those high-earning households is actually credit cards, at 66%, likely due to the various incentive programs on offer.


Everyone uses cash for something. Regardless of income, every household uses cash for approximately 22 transactions per month, again according to the “Diary”.

The “Cashless Economy” seems very far away indeed, and the demographic targets and use cases for companies seeking to build alternative payment systems are harder to develop than many entrepreneurs likely realize. In the meantime, real cash money continues to grow in relevance and use. They might just be dead presidents and Treasury secretaries, but when it comes to the American economy, they are very much alive and well.