The Goldwatcher

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No Goldman lipstick on the pig?

On 23rd April Goldman Sachs posted a lengthy  rebuttal  to all charges of impropriety alleged by the SEC and others. The last sub paragraph in their  Executive Summary is relevant in relation to the SEC fraud charge with three key points made: 

1:’Goldman Sachs never created mortgage-related products that were designed to fail.’

2  ‘It is critical to remember that the decline in the value of mortgage-related securities occured as a result of the broader collapse of the housing market.’ and

3:  It (the decline in the value of mortgage-related securities) was not because there were any deficiencies in the underlying instruments. The instruments performed as would have been expected in those unexpected circumstances.’

No pig? The housing market collapsed:

Readers of the Goldwatcher will have read on page 147:

1: ‘You had to be blind not to see the bubble in the US Housing market;’ and

2:’Banks were heavily implicated in the development of the housing market bubble and the crash.’  

Can  banks now seriously claim they were  unaware that their Triple A Rated mortgage backed securities were suspect? Were they blind?   Or innocent bystanders?  Or just naive victims of a wholly unexpected housing market collapse that came out of the blue? Banks were anything but naive and can’t make any of these claims. The securities they created on the back of a bubble they helped inflate were pigs. The only question is who put the lipstick on them.

No Lipstick? The securities performed as expected :

Addressing the key contentious issue in the SEC fraud charge Goldman claim they ’never created mortgage-related products that were designed to fail.’  However there is a more general issue. The relationship between banks and the credit rating agencies they paid to rate their mortgage backed securities. Agencies  who share responsibility for the lipstick on the pig.

Commenting on the absurd Triple A Ratings banks secured for dodgy securities Senator Carl Levin has been scathing. He likens the bank - rating agency relationship to one of the litigants in a case paying the Judge. Or one sporting team paying the referee. The relationship may not have been that corrupt. But neither were banks naive. They can’t protest the housing bust came out of the blue, took them by surprise and their securities performed ‘as expected’ in ‘unexpected circumstances.’ 

A can of worms is open. Integridy of key financial institutions and key underpinnings of our credit based economies are suspect. There are no silver bullets to magic the mess away.

Gold Stateless  Money Franchise:

In a recent comment Weakness Begets Weakness the gold fund and money manager Eric Sprott references ‘the subprime mortgages rated AAA now worth pennies on the dollar.’  He tracks  both the Greek Soveriegn and Mortgage Backed Securities debacles and argues:  ’…as they relate to sovereign debt, the ratings provided by the agencies are highly suspect…there appears to be very little forward-looking information actually factored into their credit models. In some cases, the agency ratings end up looking absurdly optimistic.’

Sprott finds the Triple A rating accorded to the US Government out of touch with reality and, after citing recent analysis by the US Government Accounting Office (GAO) he  concludes ‘The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold.’ 

On Pages 116 and 117 The Goldwatcher addreses the bottom line as seen by the GAO : ‘Federal Fiscal Policy is unsustainable.’ That was written over two years ago. It was true and menacing then an is even more menacing now.  And it’s why people are seeking the protection afforded by gold’s stateless money franchise now.

Sprott makes a strong case for gold as the enduring Triple A Security that will survive sovereign ratings downgrades.  

# Note added 27th January: 

Yesterday Senator Carl Levin published a confrontational listing of the issues and findings of fact  on which Goldman Executives will be challenged today.  Depending on the legal advice witnesses have they may not all testify.  Levin’s summary reads:

The bipartisan Subcommittee investigation has resulted in the following findings of fact regarding the role of investment banks in the financial crisis:

Opinions and advice:

Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice

Riversimple Open Source Technology Fuel Cell Prototype: London June 2009

The Goldwatcher Chapter  ‘The End of Cheap Oil, Chindia and other Tipping Points to Instability‘ associates with the question ‘Will alternative energy come to the rescue?’  The Chapter ends with the comment: ‘..The balance of global economic power is slipping away from the US and other western consuming economies. Conservation could improve the economic balance but unfortunately it is not being taken seriously. Discussion on this subject will be continued on The Goldwatcher blog.’

Through last year The Goldwatcher agenda was hijacked by the global financial crisis , near global financial meltdown  and subsequent G20 salvage initiatives following the  collapse of the Casino Capitalism House of Cards.  These developments are  reviewed in the two part comment prepared for Stock Research Portal.   Part One addresses  pre April 2009  events and Part Two comments on developments after the April 2009 G20 leaders summit. The Economic Jihad being waged against the US and western economies is covered in the previous blog.

The ‘Riversimple’ hydrogen fuel cell car and open source technology:

Claiming fuel consumption equivalent to 360 miles per gallon  Riversimple, a fledgling British company, last week unveiled their prototype two-seater hydrogen fuel cell car.  They claim to be ’dedicated to making highly energy efficient vehicles using a radical new approach to personal mobility.’ Information on the development of the Riversimple prototype  in collaboration with Oxford University, Cranfield University  and a Shanghai company Horizon Fuel Cell Technologies. is accessible on the company website.  The British BOC Group PLC and the Piech family of Porsche founder Ferdinand Porsche  supported and funded research. 

Riversimple’s approach to open source technology has exciting potential.  Following the open source model they are inviting  ’the community’ to  develop vehicles and,  to manage cooperative relationships,  have established an Open Source Foundation.

Transition Towns:

Riversimple’s  open source approach fits well with the established and rapidly growing  Transition Towns community networks addressing the consequences of climate change and peak oil.  Their prototype is still only a tiny step on a formidably lengthy road.  But it’s a step in the right direction and, with community support following the open source model, progress could be rapid. 

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 Can the G20 save the world from global financial meltdown?

The question Can the IMF save the world from global financial meltdown? is raised in The Goldwatcher Chapter on Globalisation and Global Economic Re-balancing. After reviewing initiatives on adjusting global  imbalances I concluded all the IMF really achieved was to ‘convince China and America’s other creditors that the worst thing they could do with their money would be to leave it in low interest rate US Treasury Securities - ‘knowing that the dollar will continue falling.’  I was dead wrong on that call for a while. The dollar strengthened by the time the book was published. 

But the IMF appeared impotent when the casino capitalism house of cards was collapsing last November.  It was The G20 that met urgently in Washington and secured a consensus on joint emergency actions ‘to restore global growth and achieve needed reforms in the world’s financial systems.’ 

The April 2nd G20 Summit in London has recorded  wide ranging  understandings on the spectrum of  economic and financial challenges menacing the world, including beefing up the IMF financially and operationally.

If we read the official hype in the G20 communiques we get the impression that not only can they save the world but they have. If we read the views of the commentariat we find serious challenges to these claims.

The Goldwatcher approaches the G20 initiatives as both  essential and generally positive - but by no means enough to assure that global financial  crises are resolved. Ian Campbell, the founder of the indispensable web resource Stock Research Portal.com will be publishing  a Newsletter series on gold, currencies and associated economic issues. He has invited me to write the first contribution, a two part article on:

1) Gold and the Casino Capitalism House of Cards; and

2) Whether the G20 and the IMF can save the world from global financial meltdown.

This is the link to the articles on the Stock Research Portal website. Part One and Part Two are now also posted on this website.

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 Bernanke - The Printing Press Speech: Saying what he means:

Within a few months after his appointment as a Fed Governor Ben Bernanke made his  November 2002 ‘Printing Press’ speech :  ‘Deflation : Making Sure ‘it’ doesn’t happen here.’  Prior to the speech he was a distinguished academic recognised as a world authority on the Great Depression. Outside academia  he was relatively unknown. To his credit he said what he meant but , if he had made that speech when more removed from the collegiate atmospheres of Stanford and Princeton Universities,  he would have left out the  the sensationalist words I have italicised below:

‘Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.’

‘A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘Helicopter drop’ of money.’

Goldbugs world wide had their day in the sun when the speech was published. ‘Bernanke’s printing press’ has since been touted as absolute proof the dollar is on a slippery slope.  ‘Helicopter Ben’ became his unwelcome moniker.’ In the financial press and blogosphere the speech was met with shock and awe.

This  chart illustrates the relentless gold price climb for years after the speech - though not necessarily because of the speech:

Bernanke was also right. By engaging in what is now known as   ’quantitative easing’ the Fed can expand its balance sheet and provide liquidity even with interest rates zero bound. Bernanke did not anticipate the unholy financial mess that has erupted . He spelled out uncoventional ways the Fed could and would act to abort deflation.  The full speech is a must read for the insight it gives on current Fed actions

Will the G20 mean what they say?:

Now for the real shock and awe.  Committed to heading off of a deeper recession or depression printing presses have been turned on worldwide. Trillions have replaced hundered of billions  as measures of expansion.  The Fed is literally flooding the market with enough excess liquidity to support the banking system, the shadow banking establishment and even Zombie banks.   An ever widening alphabet soup of new facilities has led to credit extended by the Fed surging from under $900 billion six months ago to  over $3 trillion now. And there’s much more to come.  Other key central banks including The Bank of England have also  been engaged in similar though less extensive activities.

A statement declaring their intent to do whatever is necessary to restore economic growth followed  a meeting of  G20 Finance Ministers and central bankers last week.   On April 2nd the G20 Head of States summit follows.

Outcomes for the G20 Summit will be crucial for the Global Economy.  Will they say what they mean and mean what they say?

Perspective on current and previous bear markets: 

The above chart, best seen by clicking the chart at source on d.short.com, illustrates the severity of the current and previous bear markets. Thanks to Doug Short for persmission to reproduce the chart.

Additional insight on ’irrational exuberance’ from The Goldwatcher:

 Alan Greenspan made his famous ‘irrational exuberance’ remarks in December 1996:

‘Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? […] ‘

Pity he didn’t act on his better instincts and prick the dot.com and housing bubbles. Even a blind mad could  have seen them (see The Goldwtcher Pages 146/7)

Gold and the equity bear markets:

Gold is a financial asset with a different risk reward profile to equities and other financial assets.

CNBC’S interview with Frank Holmes, Goldwatcher co-author yesterday: 

Following dramatic rises in the gold price yesterday - and even more dramatic falls  in equity and commodity markets world wide -  CNBC interviewed Goldwatcher co-author Frank Holmes,  one of the world’s most authoritative and respected voices on gold.  

The CNBC interview covers key issues investors must keep in mind and is supported by comments from CNBC analysts. Frank Holmes’s headline advice is straightforward  ’Don’t buy gold to get rich - buy gold for protection.’

 You can  Access the CNBC interview through this link.

The Goldwatcher and this blog contributed by co-author John Katz:

My content in the Goldwatcher is unbiased. I am an independent analyst and neither a gold bull or bear. In a nutshell my contributions point to when owning gold makes sense and when it doesn’t and when gold prices make sense and when they don’t. The Chapters I contribute address the questions investors interested in gold must ask,  starting with their motivation, timing and strategy for making and managing their investments.  

The most recent update on gold price prospects in this blog was posted on 22nd January

The Goldwatcher book and the blog address the issues of the day affecting demand for gold,  other currencies and other assets. They include subjects ranging from  the wars in Iraq and Afghanistan to our once rock solid British Banks now going bust.

The Goldwatcher Book Chapters follow this sequence

 Foreward by Dr. Marc Faber - starting with this comment:

‘Years from now, the events of late 2007 and early 2008 will be remembered as a classic case of the flawed thinking by Governments that choose to use monetary policy to try and sustain an unsustainable economic bubble, and how that action broadens and deepens the pain when the bubble inevitably busts.’

Part 1 : Written byJohn Katz  ‘The Goldwatcher’ in this blog -  e-mail address : john@thegoldwatcher.com

1:  Introduction : Why Gold?

2: The Gold Mining Industry : What price gives producers a worthwhile profit?

3: Gold Supply and Demand : Do Central Banks still need gold, and does gold still need Central Banks?

4: The Rise and Fall of the Gold Standard : Did Gold Cause the Great Depression?

5: The Dollar Standard and the ‘Deficit without Tears’ : Is the dollar again America’s currency and everyone else’s problem?

6: The Economic Consequences of 9/11 and George W. Bush : For how long will Asians go on lending for Americans to go on spending?

7: The End of Cheap Oil, Chindia and other Tipping Points to Instability 

 Will alternative energy come to the rescue?

(The causes and evolution  of the present economic crisis including the housing boom and bust, the CDO racket, Alan Greenspan’s misguided views on regulation  etc are all covered in the above Chapter)

8: Globalisation and Global Economic Rebalancing

Can the IMF avoid global financial meltdown?

9: Gold Prices : Inflation,Deflation, Booms and Busts

Do trees grow to heaven?

10: Investing Choices . What Gold?

Part Two : Written by Frank Holmes:

11: Inside US Global Investors

12: Investing in Gold Equities

13: Gold Mining Opportunities and Threats.

PART THREE : THE FACT BOOK APPENDIX - includes detailed analysis of global gold mining production, fabrication, scrap recovery and central bank holdings, sales and intended sales;  a Chart Book, Chronology and Webliography.

The Goldwatcher is available from Amazon and all leading booksellers

Alistair Darling

Stealth socialism:

Following a further shock loss of 11 billion pounds announced by the Lloyds TSB Group Britain’s star crossed Chancellor Alistair Darling was reported by the BBC today revealing his latest visionary discovery. The key to sorting out the Lloyds TSB - Halifax Bank of Scotland (HBOS) fiasco, Mr. Darling says,  is ’getting banks to identify their bad assets so they could be removed from the system.’  Yes Virginia. This  statement was made today by the same Chancellor who was associated last autumn with orchestrating, sponsoring and, according to some reports even forcing the merger of solvent Lloyds TSB Bank with the insolvent Halifax Bank of Scotland Group (HBOS).

When the deal was done HBOS was bust and facing liquidation. But,  if shareholders in solvent Lloyds TSB  could be persuaded to throw their capital in to support HBOS, the bothersome HBOS liquidation could be avoided.  Now, in the comment quoted above, Mr. Darling implicitly acknowledges he allowed Lloyds Bank to do the deal before he knew, with absolute certainty,  that HBOS had come clean and identified to the last penny their bad assets and removed them from the system.  And, adding insult to injury, he has since staked billions of pounds of taxpayer’s money in the merged bank, again without adequate due diligence to confirm that all bad assets are out of the books.

Plundering Lloyds TSB Shareholders.

One year chart Lloyds TSB source Wall Street Journal

The BBC also report today  the blunt comments from  Conservative Front Bencher and former Chancellor Kenneth Clark on the Lloyds TSB - HBOS merger.  It was a disaster for Lloyds TSB shareholders that ’should never have been allowed to happen….  Lloyds TSB was a boring bank, it was a steady bank, it hadn’t done silly things.’  So, we can conclude, shareholders with their savings in Lloyds shares had also ‘not done silly things.’ Where does Mr. Darling go from here?

 Will he  call in the serious fraud office to investigate the circumstances that led to  Lloyds TSB shareholders being fleeced? Will he admit, as President Obama has following a misjudgement,  that ‘he screwed up?’ Perish the thought.

Britain at the cross road of credibility: Gold stays on the agenda

Britain’s political stability, effective legal system and traditions of fair play have, by and large, supported universal trust in her financial institutions. If this trust is lost  creditors will no longer  support  borrowings and investors won’t buy British shares.

Owning gold over  the last year protected investors from the sterling and London Stock Exchange crashes and returned a handsome profit.  Each of us have to decide for ourselves now whether prospects for  investors in British financial assets are better or worse than they were a year ago.  Present revelations tend to remove  doubts about the answer.

Gold remains on the agenda.

* Note added 15.02.09 :  Speaking at the G7 summit in Rome yesterday afternoon Chancellor Alistair Darling tried to quell speculation that the Lloyds Banking Group could be nationalised. He said banks are “best run in the commercial sector and privately owned.’

* Note added 16.02.09 : Accepting that the report read yesterday on nationalising the Llloyds TSB Group was not accurate the above blog has been modified.

Guardian Debate : Capitalism in crisis Part 1:

The Queen’s question: “Why did no one see it coming?” 

 2 February :19:00 : The Kings Place : 

 near Kings Cross Station,  London

A panel featuring:
Nouriel Roubini, Professor of Economics, NYI; Chairman, RGE
Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University
Ann Pettifor, Fellow, New Economics Foundation
Chaired by Larry Elliott, economics editor, the Guardian

It’s a small theater - if you want a seat book rightaway

 Troops massing on India Pakistan border:

The Ever Present Chaos of Being:

… every single event is the offspring not of one, but of all other events prior or contemporaneous, and will in its turn combine with all others to give birth to new: it is an ever-living, ever-working Chaos of Being, wherein shape after shape bodies itself forth from innumerable elements…Thomas Carlyle . 1795 to 1881 .  Essay on History

Carlyle’s often quoted essay addresses the ever present potential for chaos.But do any of us, other than Zimbabwians and others in similar unfortunate circumstances,  remember economic and geo-political times as near the threshold of chaos as we are now?  Yet we see almost everyday headlines on chaos in currency markets, insolvent banks and shadow banking establishments,  burst property and other financial bubbles,  fraudulent securities bankrupting organisations, soaring unemployment ravaging commuinities ,  unsustainable debt leverage,  the collapse of major industries, fragile energy stability,  reversion to pre cold war conflicts, nuclear proliferation and even a resurgance of piracy. 

A Bloomberg comment noted yesterday that typically  ’gold staged a strong rally (rising to $870)  following Palestinian militants launching their biggest rocket attack on southern Israel in at least six months after a truce expired Dec. 19,  at the same time as  Pakistani troops were being diverted from tribal areas near Afghanistan to the border with India.’

Roosevelt and Obama: 

With the Great Depression ravaging  the US and other economies President Franklin D Roosevelt faced a dire economic picture when he took office on 3rd March 1933 . In his inaugural address he spoke of dark realities- with ’the withered leaved of enterprise everywhere,’ industrial production slumping, banks failing, unemployed citizens facing the grim prospect of existence. ‘Only a foolish optimist,’ he declared ‘would ‘ deny the dark realities of the moment.’

Pages 62-66 of The Goldwatcher address Roosevelt’s key  2003/4 messages. These pages are, in my opinion, essential reading for everyone - except, of course, ‘foolish optimists!’ But it is debatable whether Roosevelt’s memorable assurance ‘we have nothing to fear but fear itself” is as true now as it was in 1933.

 The Goldwatcher’s Year end message:

The Goldwatcher shares the high hopes held for US President elect Obama’s success and anticipated the  formidable challenges he faces. They include global banking and shadow banking establishments in crisis, unprecedented debt leverage,  nuclear proliferation in unstable countries, failed military enterprises and unfunded social insurance obligations way beyond anything that menaced Roosevelt when he took office. 

GOOD LUCK FOR 2009 AND BEYOND - AND PLEASE RE-READ THE GOLDWATCHER PAGES 8 & 9

Gold is the UNIVERSAL aid to ‘having nothing to fear but fear itself’.' The one and only stateless money franchise that assures protection against chaos in currency and financial markets, social disorder and a range of the other financial and security risks we are exposed to.

Martin Wolf tracks the course to inflation:

Starting with a cartoon of Ben Bernanke piloting the money drop helicopter, similar to the cartoon you will see all over this blog, and commenting on the cut in the Fed’s target interest rate yesterday down to between 0% to 0.25%, the Financial Times’s authoritative Martin Wolf has this to say:

‘Central banks may soon resort to their most powerful weapons against deflation: the printing press and the “helicopter drop” of money. It is a time for which Ben Bernanke, chairman of the Federal Reserve, has long prepared. Will this weaponry work? Unquestionably, yes: used ruthlessly, it will eliminate deflation. But returning to normality thereafter will prove far more elusive….  .

A leaf out of Mr. Mugabe’s book: (see The Goldwatcher blog on The New Bretton Woodsand Dr. Marc Faber’s forward to The Goldwatcher.)

Martin Wolf’s comment continues: ‘As Robert Mugabe has shown, anybody can run a printing press successfully. Once the interest rate hits zero, the Fed can perform much further easing. Indeed, it can create money without limit…. Curing deflation is child’s play in a “fiat money” – a man-made money – system….Similar dangers now arise with the drastic measures that look ever more likely. This time, I suspect, the result will ultimately not be deflation but unexpectedly high inflation, though probably many years hence.

The Goldwatcher book and blog:

A reader interested in tracking the flight path of Helicopter Ben will find several references by searching for Bernanke on this blog. For a better understanding of the similarities between the conditions President elect Bernanke is facing and the conditions Franklin D. Roosevelt faced, and why the course embraces inflation, read The Goldwatcher:

Chapter 4 : The Rise and Fall of the Gold Standard : Did gold cause the Great Depression? 

Chapter 5: The Dollar Standard & the Deficit Without Tears : ‘Is the dollar again America’s currency and everyone else’s problem?’

Chapter 6: The Economic Consequences of 9/11 and George W. Bush : For how long will Asians go on lending for Americans to go on spending?

The Goldwatcher’s ideas on gold prices - and the dollar:

Chapter 9 : Gold Prices : Inflation, Deflation, Booms and Busts: Do Trees grow to Heaven?  And the Goldwatcher 15th December posting on Mattress Stuffers: The case for mattress stuffing never looked better -  particularly as the $ surge could be coming to an end.

Why gold will remain strong:

After the outcome of the proposed bail out of  Chrysler, General Motors and Ford - the CGF Group - the desperate automakers who CAN’T GET FINANCED - it will take a few days to draw the threads together for a year end Goldwatcher  conclusion. Indications are they may get some relief.  For now - back to Helicopter Ben’s epic flight: