Sunday, April 28, 2013

How To Trade In A World Of Currency Wars And Potential Collapse

"Jim Rickards of JAC Capital Advisors and Currency Wars fame gave a presentation last week at Jim Grant's Spring 2013 conference titled Easing at the Zero Bound: Beyond QE & the 'Foolproof Way'.

Rickards is a prominent gold bull and has been tweeting a lot about the difference between physical and paper gold in light of the precious metal's recent price collapse.

The presentation discusses Federal Reserve monetary policy and the future of the international monetary system.

Rickards lays out four options for the future – a world with multiple reserve currencies, a system based on IMF Special Drawing Rights, a new gold standard, or total collapse.

He also gives some trade ideas to play the uncertainty surrounding the future of the system."

- Source, Business Insider:

Thursday, April 25, 2013

The FED Pays IOUs

"The Fed earns huge profits every year on the interest received on Treasury bonds the Fed owns. The Fed normally pays these profits back to the Treasury. Behind closed doors, the Fed and Treasury agreed that the Fed could suspend the repayments and keep the cash. The amount the Fed would usually pay to the Treasury would be set up as an IOU."

- Jim Rickards

Monday, April 22, 2013

The Difference Between Paper and Physical Gold

Gold ownership is now divided between strong hands and weak hands. The strong hands are Russia, China, some of the other central banks, and anybody else who is buying gold for cash in physical form, without leverage.

The weak hands are retail jumping into GLD, at a top, using margin, futures players, and people who don't really understand gold. There are a lot of trend followers out there who started following gold on a trend basis, but didn't really understand anything about gold, or how it works, etc.

The hedge funds turn out to be weak hands, not strong hands. The reason is they've got redemptions. Hedge funds don't have permanent capital. They may have monthly redemptions, or quarterly redemptions, or one-year lockups, or whatever it is, but it's not permanent capital.

When they get the drawdowns, and they start getting redemption notices, guess what? They have to sell to get cash to meet the redemptions. And that feeds on the selling.

So, there is a lot of dynamic that is not unique to gold, because it would be true of any over-leveraged situation, there are a lot of new players who don't understand gold, and then there were a couple of very specific events that started the unwinds.

But it looks like it's found its level. The last weak guy puked, and now we'll go from here.

- Source, Business Insider, read the full article here:

Saturday, April 20, 2013

Here's What It Would Take To Get Me To Sell My Gold

"What would make me bearish on gold, what would make me want to sell gold?

Well, if the President and the Chairman of the Fed came out and said, "We're going to raise interest rates, we're going to stop quantitative easing – in fact, we're going to reverse it a little bit – we're going to cut corporate taxes to zero, we're going to eliminate the capital gains tax, we're going to reduce regulation, we're going to make America a magnet for savings and investment. We're going to have an investment-driven model rather than a debt and consumption-driven model, and we're going to have positive real rates."

I would say, "Great. Sell your gold, or put it to one side, because gold is over."

But none of those things are true. Not one of those policies that I just mentioned is on the table.

In fact, the opposite is true. We're getting higher taxes, more regulation, more quantitative easing, zero interest rates as far as the eye can see."

- Excerpt from a recent Business Insider article, read the full article here:

Sunday, April 14, 2013

A New Crisis is in the Near Future

"If the Fed begins a new round of money printing and the Treasury continues with trillion-dollar plus deficits, there may come a time when even the credit of the Treasury and Fed are called into question and the money printing circus grinds to a halt. At that point the Fed could “phone a friend” at the IMF and be bailed out by a kind of IMF funny money called “special drawing rights” or SDR’s, or the Fed could use its nuclear option and go back to the gold standard using the gold in Fort Knox. Given the limited amount of gold and the huge amount of paper money that would have to be backstopped, the new gold price would be $7,000 per ounce or higher. These kinds of spikes in the price of gold during money crises have happened before – in 1930’s and the 1970’s. Those crises were forty years apart and the last one was forty years ago so a new crisis in the near future would be right on time."

- Jim Rickards

Wednesday, April 10, 2013

At No Time Were Savers Rewarded For Prudence

The principal victims of the Fed’s policies are those at or near retirement who face a Hobson’s Choice of gambling in the stock market or getting nothing at all. A summary of these deleterious effects on retirement income security, explained in more detail below, includes the following:

  • Increasing income inequality. Zero rate policy represents a wealth transfer from prudent retirees and savers to banks and leveraged investors. It penalizes everyday Americans and rewards bankers, hedge funds and high-net worth investors.
  • Lost purchasing power. Zero rate policy deprives retirees and those nearing retirement of income and depletes their net worth through inflation. This lost purchasing power exceeds $400 billion per year and cumulatively exceeds $1 trillion since 2007.
  • Sending the wrong signal. Zero rate policy is designed to inject inflation into the U.S. economy. However, it signals the opposite – Fed fear of deflation. Americans understand this signal and hoard savings even at painfully low rates.
  • A hidden tax. The Fed’s zero rate policy is designed to keep nominal interest rates below inflation, a condition called “negative real rates”. This is intended to cause lending and spending as the real cost of borrowing is negative. For savers the opposite is true. When real returns are negative the value of savings erodes – a non-legislated tax on savers.
  • Creating new bubbles. The Fed’s policy says to savers, in effect, “if you want a positive return invest in stocks.” This gun to the head of savers ignores the relative riskiness of stocks versus bank accounts. Stocks are volatile, subject to crashes, and not right for many retirees. To the extent many are forced to invest in stocks, a new stock bubble is being created which will eventually burst leaving many retirees not just short on income but possibly destitute.
  • Eroding trust and credibility. Economics has been infused in recent decades with the findings of behavioralists and social scientists. While this social science research is valid, the uses to which it is put are often manipulative and intended to affect behavior in ways deemed suitable by Fed policy makers. This approach ignores feedback loops. As retirees realize the extent of market manipulation by the Fed they lose trust in government more generally.

The effects on retirees and retirement income security are both the intended and unintended results of the Fed’s efforts to revive the economy through a replay of the debt-fueled borrowing and consumption binges of the past fifteen years. Beginning with Fed rate cuts in 1998, which fueled the tech stock boom-and-bust, through the rate cuts of 2001, which fueled the housing bubble, until today the Fed has resorted to repetitive bouts of cheap money for extended periods. This monetary ease has found its way into inflated asset values that in turn provided collateral for debt-driven consumption. These binges drove the economy until the inevitable asset bubble collapses caused a contraction in consumption and launched another cycle. At no time were savers rewarded for prudence.

- Excerpt from Jim Rickards submitted testimony as a witness in the Senate Banking Committee’s Subcommittee

Monday, April 8, 2013

Wipe Out the FED's Capital

"The Fed has capital of about $60 billion and assets approaching $3 trillion. If the Fed’s assets declined in value by just 2 percent, that decline applied to $3 trillion in assets produces a $60 billion loss—enough to wipe out the Fed’s capital. A 2 percent decline is not unusual in today’s volatile markets."

- James Rickards

Saturday, April 6, 2013

Replace a Consumption and Debt Driven Economy

"Solutions are straightforward. The Fed should raise interest rates immediately by a modest amount of one-half of one percent and signal that other rate increases will be coming. The White House and Treasury should signal that they support the Fed’s move and support a strong dollar as well. The Fed and Treasury could commit to facilitate the conversion of savings into private sector investment by closing or breaking-up too big to fail banks whose balance sheets are littered with distressed assets. This will facilitate the creation of clean new banks capable of making commercial and industrial loans to small businesses and entrepreneurs.

The result, over time, would be to replace a consumption and debt driven economy with a savings and investment driven economy that rewards prudence and protects the real value of the hard earned assets of retirees and near-retirees."

- Excerpt from Jim Rickards submitted testimony as a witness in the Senate Banking Committee’s Subcommittee on Economic Policy hearing.

Thursday, April 4, 2013

The FED Looks Like a Poorly Run Hedge Fund

"The United States now has a system in which the Treasury runs huge deficits and sells bonds to keep from going broke. The Fed prints money to buy those bonds and loses money owning them. Then the Treasury takes IOUs back from the Fed to keep the Fed from going broke. This arrangement resembles two drunks leaning on each other so neither one falls down. Today, with its 50-to-1 leverage and investment in volatile securities, the Fed looks more like a poorly run hedge fund than a central bank."

- Jim Rickards