QE, The Velocity of Money And Dislocated Gold
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While I have a lot more respect for Keen than for any number of other economists. I think that it should be kept in mind that his predictions for the Australian property market have been wrong – by a very large margin – over the past 5 years. He has little idea of the power of delusional thinking.
I think that just in the same way Australians (especially women) are totally fixated on housing, some others (Chinese and Indians?) are totally fixated on gold. It is a sort of disease – an infection of which I do not claim to be immune.
Right now, it is quite impossible for a young educated employed male to contemplate marrying a similar lady as the ladies want the guys to be deeply in debt as well – but to “own” property. It has to be seen to be believed. 🙂
Dave,
2 trillion in reserves would not be an effective limit on lending either.
Ain’t THAT the truth! Not sure a Keynesian threatened by the “D” word knows any limits.
On Keens piece, still trying to wrap my mind around that one.
Nassim,
Housing fixation= American Dream and Castles. Also, one of three historical components of “Great Estate” building.
My take on India and Gold is, years of Colonial abuse ingrained a sense of self reliance and distrust of authority.
China, similar, especially following “The Long March” through poverty and oppression. Some of those same minded power brokers are still at the helm there. Insurance seems warranted.
Professor –
I’m not seeing any “shunning of the buck overseas” – perhaps you could point out in the following chart this shunning of which you speak. USDX bottomed in mid 2008 at 71 and is now at the higher end of its recent trading range at 83.
In fact, in recent months there has been a marked flight of money out of emerging markets and into USD. There are apparently a vast number of USD short positions that are being unwound…and this has caused interest rates to jump, as longer term US treasury bonds are likely being unloaded by emerging market central banks to try and stem the drop in their currencies.
Yeah, dave,
I probably should have used a term like declining faith in currencies in general, by the proles. I am amazed at the people I meet these days on the streets who are wealth preservation savvy.
My statement was more directed towards stickiness in the gold price for these reasons, than it was at FX indices influenced by specializing institutions and central banks.
Many distortions here, no doubt. The PM related ETF industry and other similar factors might be the counter force, who really knows.
dave,
ps. Not to mention all currencies being devalued simultaneously, or that chart might indicate a general down trend.
I’ll admit as well, I just completed a minor round trip out of the ten year at first whiff of taper talk, and back in at economic slowdown rumors. 2.00? Gotta stay with Stoneleigh’s deflation theme, no?
GO,
I’m not sure which “sir” you’re addressing, but it’s entirely possible that the author of the piece may not read this comment section.
As for John Williams, I followed him for years, and stopped doing that when he outed himself as a hyperinflationist. That in itself may not make his stats entirely irrelevant, but his interpretation of them certainly is.
And that’s still without even mentioning the fact that equating inflation with (any and all) rising prices is a fundamental flaw that turns any and all stats derived from it into meaningless gibberish.
Yes Professor, Gold most likely did an overshoot in price temporarily.
It is my view that when the banksters decided to screw us all by going off the Gold standard and severing any relationship of the dollar to sanity, they had to make Gold to appear just like any other commodity to trick the dim.
Thus we have a myriad of derivatives, options, futures, margins, the entire array of speculative and manipulative devices attached to them. This also brings of course the assorted fiat worshiping lice along with it. Speculators, pool operators, hedge funds, bankster trading desks. mad men gamblers, financial geniuses from Princeton with their learned equations, the whole gamut of lice that have destroyed the financial system.
A far and sad cry from the mostly cash market that was once the privy of gold.
Likewise, I am and admirer of Mr Williams, his credentials are first rate, and since I see much inflation in our future, whether or not we have a deflationary bust first, I do not discredit him because of his hyperinflation outlook. He merely replicates the figures the government used to use before they decided to become liars, spin doctors, and bull shit artists of the highest caliber.
Thanks for your reply, I look forward to your posts Professor, and would like you to know I feel I learn a lot from them.
GO –
The constant cry of the Goldbug is the unfairness of the leveraged market, the manipulation, the Deux Ex Machina that messes up the whole one-way trade in gold.
I believe reality is something different.
For 11 years, leveraged longs pushed up the price of gold. For the past two years, some of them pulled out because hyperinflation, long promised once QE started, just hasn’t happened. Now you complain about the shorts and how evil they all are but its really just the lack of buying the hyperinflation story thats responsible.
Again – I didn’t hear ANYONE complain about the leveraged longs and how they moved the price on the way up. Do you imagine it was just the virtuous buying of physical gold that pushed prices from $250 to $1900?
If you just look at the $CCI (overall commodity price index) over the past two years, perhaps you will understand why leveraged longs have bailed out. During inflationary times, $CCI rises. But since 2011, what has happened? Exactly the opposite.
Or is the entire commodity complex, the prices of all commodities everywhere, under the wicked thumb of the evil speculators?
Conjuring modern-day demons to explain market reactions that don’t adhere to your storyline smacks of Cargo Cult analysis techniques. Might it be possible these techniques are flawed?
I think gold has quite possibly bottomed. It will move up again when the leveraged longs return. But judging from how things are going today, the whole hyperinflation storyline seems busted, so you might want to float a new one if gold is going to get off the ground again.
Professor –
I know the goldbug storyline is that currencies are being devalued simultaneously, but if you really look at the magnitude of the printing operation, its quite small compared to the amount of money floating around out there. And if you add in the deflation that’s hidden on the banks’ balance sheets, why, it certainly explains why after 5 years of QE, we’re farther from hyperinflation that ever.
I believe that any hard-headed analysis from an independent thinker will reveal this. That’s what my analysis has shown me, and I care more about truth than about salving my ego in front of my nervous goldbug flock.
Now of course if the Fed really prints – 10-20 trillion – then that’s another matter entirely. But it has to be serious money to move the needle, not this penny-ante stuff most of which ends up parked in Excess Reserves anyway.
The 10-year makes me nervous. If the emerging markets start to get really sick, hot money will flee, and all the emerging market central banks will sell their trillions in US treasury bonds to prevent their currencies from rapid depreciation, and this will cause the 10-year to get pounded like it did in May/June. To me, May/June was a warning shot across the bows.
Outcome: dollar up, emerging market currencies down, US treasury down. Safe haven: < 1 year treasury bonds. Who knows, we might even get negative yields like they have in Switzerland.
dave,
Don’t misunderstand, I’m not a “gold bug” in the sense it is an end all to investment philosophy. I don’t speculate with a core portfolio, a part of which is in gold related instruments. I don’t sell core PM’s. That will be a task I will hopefully leave to my heirs.
That said, since I am a net buyer, attention to price trends is necessary to maintaining a low dollar cost average. One of the reasons I backed up the truck in 2001, and filled my IRA. At that time, I had spent some time at a significant gold mining region and deduced a production cost of around $350-$400, so had to consider the “educated” portion of that decision overweight to the speculative.
On to devaluation, I don’t invest in inflation hedges with hyper inflation in mind. I do so with an eye on slow erosion of purchasing power over time. Assemble any basket of necessary goods, and over time, project the trend in purchasing power of a dollar, and I believe you will see my point.
Because my dead reckoned average production cost analysis is in the range I quoted earlier in another post here, I use that as a guideline, or point of possible entry, if you will.
Regarding treasuries, you lost me on a rising dollar and a falling 10 year price. My take on that trade is again, as safe haven aspect. Seems to me at this point, the 10 year is target one for a dollar investor, especially in a low inflation, bordering on deflation crowd mentality, but I welcome your input on that. Certainly, a 2.60 yield is going to fall if short rates go under zirp?
GO,
I absolutely agree. Financialization is nothing short of a license to operate a casino. One must look at the portion of GDP represented by the Financial sector and ask, what does it really “produce?” Other than enhancement of it’s own empire, that is?
The latest absurdity? Financialize the Climate! We’ll see how THAT works out.
Sure, GDP is a poor measure, as it’s the same GDP which rises when an Air Force purchases a missile and destroys a factory with it, but what else is there to use as a marker? (Humm, financial instruments of mass destruction? Ha!)
Again, not to sound gold buggish, but what are those Wiemar Bearer Bonds worth today? What of Caesars Municipal Water Improvement Bonds? Or Joe Stalin’s War Bonds? Bank of Saigon…awe, hell, point made?
Where does it all lead? In a word, lift up the edge of the TARP over the Derivatives World and peek in! In VK’s expose, around a Quadrillion in these derivative “somethings” needed to be added to the bottom line of that, to turbocharge the impact.
But wait, “it” can’t happen here…we’re special, yes?
I’ve likely mentioned this here before, but during the fall of Saigon, gold coin bought a chopper ride out to an Aircraft Carrier. Piasters bought a bullet, to make room for another gold tender.
So, put chopper fare away there at the bottom of the pond, then play the games of chance as best as you can, with an eye on the exits and a hair trigger on the cash out button, maybe?
Might be this rings a bit sophomoric, but I HAVE been around the world once, and to a couple county fairs 😉
Full Show 5/25/12: Conversations with Great Minds: Paul Krugman
https://www.youtube.com/watch?v=TY1JZuhCj5shttps://www.youtube.com/watch?feature=player_embedded&v=UFHQER_Hetk
Reggie MiddletonThese 2 videos are worth watching
Professor –
I too was a bit surprised at what happened to the 10 year – one expects a run to the longer duration bonds when deflation hits, but the link between the 10 year bond and the emerging market currencies is tough to deny. Just look at the data and you’ll see what I mean.
Check out:
* TLT
* Ruble, Mexican Peso, Thai Baht, Indian Rupee, Brazil RealCurrency moves aren’t in lock step, but they’re close. Thai Baht which I follow relatively closely moved from 28.7 to 31.2 – a 9% move in less than two months.
Thailand also showed up on the “sellers of US treasury bonds” report at that same time.
TLT also dove at that same time.
For quite some time people have been selling the buck, and the yen, and buying emerging market investments. To slow the appreciation of their currencies, the emerging markets central banks have been selling their currency and buying US treasury bonds. Just last year Brazil was muttering about currency wars and imposing all sorts of hot money inflow restrictions.
Taken all together, exporting nations own 5.8 trillion in foreign currency reserves, perhaps 60% of that are US Treasury bonds. If money flees from these nations back to the US unwinding that short dollar-long emerging markets trade, those central banks will need to sell some portion of those treasury bonds in order to stabilize their currency.
In that instance, we could see (perhaps) a neutral-to-positive dollar, and a really hammered treasury bond.
Well, its what we saw over the past few months anyway. I agree, chart shows TLT may be a decent buy right now. Macro potential for trouble is there, however, if investors decide emerging markets need to be sold further.
I don’t think we’re at the point where we have a Fall of Saigon helicopter scene in Washington. In fact, we’re likely to see the opposite. Buck is still the safe haven. That’s what the charts show, at least. Things fail starting from the periphery and only then moving towards the core. Europe and Japan are next on the list; until they go, the US will be fine.
You heard it here first. 🙂
dave,
I see the 10y as a foreign retail paper conduit to the safety of the dollar, thereby helping put a bid under it, short term. Besides, “Taper Terror” was a bit over done. “Shot across the bow” in Ilargi’s terms, but I think it was “Firing for Effect,” and Beardo didn’t like the echo.
But we are in uncharted waters, no doubt. And desperate Central Banks can do some crazy things.
I’ll most likely soon be hunkering down in local FDIC coverage and some cash. All else is in place. New avatar ‘splains the road I think we’re traveling.
Those of you interested in a “Big Bad” part 2 time frame should take a look at the US organic GDP trend…
US Organic GDP Trend Analysis [PDF file download]
https://www.keepandshare.com/doc/6458432/us-organic-gdp-trend-analysis-48k?dn=y
US organic GDP is contracting $500 billion per quarter right now.
As you see from the chart, it is dropping like a rock since 2010 – much faster than it dropped leading into 2008.
Biggest Finance Capital (BFC), the cabal that controls much of the world’s wealth, the mega banks and the central banks – and yes, they can move the entire bond market big when they have an agenda to do so – knows they cna’t stop the collapse of organic US GDP and so now they are creating a pretext in which to cut off the debt issuance and lead to the world Nicole so eloquently elucidates.
I don’t think we make it 2 years out because the economy is simply too damaged to function at an annualized organic GDP contraction rate of $5 trillion – or 1/3 of the entire economy, including the results of deficit issuance.
If you aren’t ready now, this is the incentive to get it done and get it done quickly.
PS – no, Bernanke is under no illusion he can stop organic GDP collapse in the US – and that assumes he wants to which, which is a false assumption. Biggest Finance Capital doesn’t want paper, they want to rule the world in feudalist fashion over a bunch of hapless, impoverished, slave minded serfs… same as it every was.
The inflation transfers the monetary wealth to Biggest Finance Capital.
The looting transfers even more monetary wealth to BFC.
The deflationary spike pit turns their paper into society’s real assets.
Hyperinflation will likely be the end game, but only after the banksters own the real planet and only to balance their books after they own almost everything.
My only wish is that this bankster Machiavellian Art of War operation was more challenging than taking candy from a baby.
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