[davefairtex]

skipbreakfast –

Thanks for the kind words! I really prefer talking things out to see where the truth really lies. Light vs heat and all that. But sometimes I can’t resist the snarky line too. Every now and then. I definitely understand the impulse. 🙂

Asimov had a character of his use a line I really liked: “violence is the last refuge of the incompetent.” I feel that is true for speech as well as actions. Like most such things, perhaps its not a rule to be slavishly followed, but an ideal to strive for.

[davefairtex]

illargi –

You make a great point – only a small fraction of deposits will be successfully withdrawn, the ATMs will be emptied, and then the bank holiday declared. All the people can’t really withdraw all their deposits. I stand corrected.

But by trying to withdraw their cash, “the people” through their action will cause to be revealed the system’s current condition. The bank holiday is usually the last step prior to some major change event occurring – currency devaluation, establishment of deposit insurance, gold seizure, financial repression, etc.

Until the bank run, the system can engage in “pretend” strategies centered around retaining popular confidence on all those “excess claims to real wealth” as long as nobody challenges it. However the bank holiday is the last refuge of the system. Reopening the banks absent major change will simply lead to a continuing bank run, because nothing has been done to restore confidence in the system.

That’s my sense anyway.

Hmm after re-reading what I wrote, I realize I’m NOT saying that the people have some magical power to fix everything. Just that they can, through their actions, expose the latent fraud in the system without the fuss of elections, investigations, and so on. After all, that’s how Madoff failed; withdrawls. Not the SEC, or the DOJ. It was normal people withdrawing money. Ponzi systems can’t handle too many withdrawls or else they implode.

Often just writing this stuff down helps clarify it in my own mind. That’s why I like the process.

[davefairtex]

illargi –

“I wouldn’t call that an ad hominem Dave, and I’m sorry you make it that.”

That’s great, I guess I made a mistake. I’m glad you weren’t intending on insulting me personally immediately prior to countering what I had to say. I was surprised you were apparently engaging in such tactics because you are a very articulate and intelligent person and appear fully capable of defending your point of view on its merits alone.

I did have a reason for my faulty assumption though. Google the phrase “get a life urban dictionary” and you will see why I assumed you were engaging in an ad hominem attack. Given what you just said, however, I know now that you didn’t mean it in the way its commonly used.

Here’s the top entry in the list.

https://www.urbandictionary.com/define.php?term=Get%20a%20Life

“It’s simply very much not true that the public have the ultimate choice, and we shouldn’t be suggesting that here.”

Perhaps we just have a misunderstanding here. For me this depends on the situation. If a popular run on the national banks of any of these countries occurs, I feel it is likely to be a decisive action forcing the hand of all the parties involved. This is the very thing the monetary authorities are the most frightened of. It is one of the founding principles of central banking – avoid bank runs.

When I was talking about the people having power, it was this to which I was referring – the power to withdraw their deposits from the system. If you disagree, I’d like to know more detail about why this is, since I often enjoy reading your perspective on these things.

[davefairtex]

stoneleigh –

Agree wholeheartedly with your article on capital controls. Tied together with the one about 21 trillion offshore, one can imagine all that paper sloshing around the globe trying desperately to find a safe place to hide before the gate comes down.

It was really good to re-read your article. I’m getting a more complete internal picture of a system of extreme financial repression put in place as a result of a massive loss of confidence. I should re-read it every month as events develop!

[davefairtex]

illargi –

Let’s try and get a life, shall we? As long as the public believes that sort of baloney, grand theft auto can continue.

Hmm, that’s the ever popular argumentum ad hominem. Because you claim I have no life, whatever you say next is therefore proven true. Hard to argue with that one. Futile even.

Well I stand by what I said. Your original post was awesome.

[davefairtex]

Awesome find. And totally believable. Mish picked up the story from here and went with it.

Armstrong’s upcoming big turning point date is labor day weekend.

If this is believed by the Greek public, a Greek bank run seems quite likely, which should force the hand of everyone involved. That’s the awesome thing about our banking system; at the end of the day, when confidence snaps, the public really does have the last word. No elections required.

Might there be capital controls in europe’s near term future?

[davefairtex]

I agree the whole picture seems to be brought into clearer focus now. A domino is poised to fall.

The Spanish 10 year bond yields breaking to new highs (7.25%), Santander and the euro dropping to new lows says the market confidence in all of these “solutions” is slowly ebbing away. People’s confidence is also dropping; what a picture, declaring new austerity at the exact same time 100B euros will be given to the bankers. (GDP equivalence-wise, that’s 1.5T dollars; twice the size of the US TARP!)

Just to make it through 2012, Spanish government will need from 50-75 billion – the specific amounts depend on the actual deficit from the central government and the regions. Spain has already issued enough bonds this year to cover redemptions (about 50B euros), so the size of the deficit for this year entirely drives remaining auctions. That’s probably why Rajoy is so enthusiastic about getting rid of it.

If this was just about funding the government deficit, a 6-month can kicking exercise wouldn’t be so expensive (35-50B). But then we add on the costs of the bank restructurings (currently 100B, sure to rise), and regional deficits and refundings (25-40B). They’ve raised 52B in the past six months – do we imagine Spain can raise 200B in the next 6 months?

This seems unlikely.

And costs are probably 125B per year after that, assuming 50B in refundings and 70B in deficits. And that assumes bank restructuring only costs 100B, which I think is off by a factor of 2 or 3.

I’m not sure Spanish debt restructuring fixes anything if they stay within the eurozone. They are still in primary deficit, and after a restructuring nobody will lend them a dime, and so they end up like Greece (and Illinois) – they just stop paying their bills, and that just spirals the economy down in an even bigger hurry.

I’m sure Germany doesn’t want to sign up for 200B + 125B per year. And the ECB likely already has enough Spanish debt. So the answer is?

Leave the eurozone, the regions and the central government default on everything, restructure the banks Sweden-style, and print to cover the deficit and the bank restructuring. Yet I don’t think europe is quite ready for that outcome – it would almost assuredly lead directly to a eurozone banking crisis from Spanish sovereign debt losses.

If they put off the bank restructuring, the price tag is maybe 20-30 billion euros to keep things going for 2-3 more months. Any bets on them selecting the cheap can-kicking option vs a eurozone-wide banking crisis?

[davefairtex]

skipbreakfast –

Thats a great perspective. Really what we’re talking about is essentially trying to assess the probability of a black swan. Well not a black swan per se, but the probability of a large step-change in the pricing of assets vs currency. In some sense, the market is in one of three states:
* around 100 SPX after a deflationary collapse
* in a “normal” range from 800-1400
* hyperinflationary, over 10,000

Stating the SPX level isn’t about predicting a particular price, but more about giving people a rough sense as to what the world will look like after such an event occurs. Of course if the event doesn’t occur, neither will the step-change in asset pricing.

Rubin is also talking about a step-change in asset pricing of oil, namely, a move from BAU to the global acknowledgement of a permanent decline in oil production and all the implications of that. To date, neither events have occurred, and so no step-changes in asset prices have happened yet, and so as a result everyone looks a little silly.

For those of us who aren’t as certain about the eventual outcome, its helpful in terms of reinforcing belief (and convincing our relatives to build those Arks) to understand the factors involved in assessing the near term chances of this happening – IOW measuring the current level of pressure on the system and which way things seem to be leaning.

Another way of looking at this is: you’ve decided to cross the Atlantic to New York in 1912 with your Mom. Do you take action (and alarm your Mom) when:
* you read in the papers that they think the Titanic is unsinkable
* once onboard, you realize there aren’t as many lifeboats as there are passengers
* you notice the ship is steaming into an ice field at 20 kts at nighttime
* you feel a bump at night and the ship stops
* the crew asserts that all is well and tells you to go back to your cabin
* you see a few lifeboats are launched “as a precaution” but only half-full because its COLD out there (and Mom really doesn’t like cold)
* you see people start seriously running for the lifeboats
* you notice the ship starting to settle
* you are swimming!

[davefairtex]

Viscount –

Prediction is a tough game. To be useful to someone attempting to place their savings in the right place, not only do you have to get the path right and the level (mostly) right, you also have to get the timing right as well.

Of course advising “cash” is usually safe in the near term – well unless you get a hyperinflationary outcome in the near term, and then of course its suicidal.

So I think instead of predicting dates & levels, its probably more useful to have if-then cases, which admits the possibility you could be wrong – wrong about timing, and even wrong about whether an event will take place. Along with that IF-THEN statement there should be a set of signposts to watch; indicators of how close that IF statement is to becoming true, as well as some trigger events to watch for.

For example:

IF the banking system collapses, THEN we should see SPX 400 relatively soon thereafter and cash would be the place to be.

Sample Directional Signposts:
* bank stock performance vs the overall market
* capital flight from peripheral economies to core economies
* interbank lending market freezing
* CDS spreads widening
* bank capital raises
* rising bank bond yield spreads vs sovereigns
* money + credit deflating
* manufacturing, consumer spending falling
* spreads between peripheral bonds & core bonds rising
* letter of credit availability shrinking
* deleveraging signs (commodity prices dropping, etc)
* likelihood of money printing (based on tea-leaf reading of the Fed/ECB statements)
* level of sovereign indebtedness

Confidence/Trigger Events to watch for:
* depositors losing money from bank failure
* unplanned sovereign currency devaluation or default

In this way it wouldn’t be about chest-thumping and saying how right we are and how this news article we found PROVES this, it would be more about really understanding in a more comprehensive way where we are today and how that compares with 2008, noting the current trajectory, and discussing the relative impacts of events on the model (and presumably also the real world).

Likewise, we could have a model for hyperinflation. An if-then statement, trigger events, directional signposts, etc.

If there was some way to take the ego out of it all, I’d certainly be happier. Ego definitely interferes with accurate assessment. Once you have determined how you think things will play out, confirmation bias rears its ugly head and down the rabbit hole you go.

[davefairtex]

If we anticipate a non-growing economy, we really need to change our debt-based money system that requires constant growth simply to survive. I wonder if that little nugget made it into the book.

[davefairtex]

alfbell –

Again, comparing apples and oranges. Argentina versus the US? The false super power of the USSR versus the US? Don’t think so.

You have selected the It Can’t Possibly Happen Here defense, similar to the also popular It’s Different This Time.

I don’t find them particularly compelling arguments. Reserve currency status will make it so the US defaults last, but it won’t let us ignore the laws of physics.

Printing vs Default is simply a choice of picking the losers. Printing means holders of dollars lose, debtors win, and imports become dramatically more expensive. Default means only the holders of treasurys lose.

That’s why nations default even when they could print if they wanted to. Its often better to stiff just the debtholders rather than making all those voters pay via massive inflation.

[davefairtex]

alfbell –

You originally stated “there can never be default as long as their are printing presses.”

2002 Argentina
1998 Russia

Look at this link and you will see many, many more cases of this:

https://en.wikipedia.org/wiki/Sovereign_default

[davefairtex]

I don’t think I’d predict fiat’s end. FOFOA suggests fiat as a medium of exchange and gold as a store of value can peacefully coexist. This makes sense to me. And you’re right – banks (and sovereigns) can most definitely go bust without fiat currency ending. Weimar Hyperinflation happened and clearly we still use paper money.

As I see it, gold will exhibit that ever-claimed-by-goldbugs safe haven attribute once governments take enough repressive steps to make fiat money less attractive to real people. Enough defaults, devaluations, capital controls, and ATM withdrawl limits and even J6P will wake up and start to look for an alternate store of value. Houses, boxes of whiskey, artwork, and gold bars will all qualify. And as you say, this too will be a process.

But I don’t think it will require any “hyperinflation” for this to happen. Just a lot of repression and various forms of default.

What will be the final straw breaking the USD’s confidence? Who can say. And even after that tipping point, people will still buy daily goods with dollars. Most likely using electronic transactions.

[davefairtex]

I believe the ECB has a printing press. And I also believe that Greece defaulted.

[davefairtex]

skipbreakfast –

we could similarly argue gold will always increase in value against SOMETHING TOTALLY WORTHLESS …. But if you have the choice to diversify into some other cash currency that is stable, I think gold will seriously under-perform in terms of these currencies…. there is a lot of recent history to show that US dollars serve as extremely effective black market currency in the face of capital controls.

I agree with you. As long as the US core economy retains global confidence, the USD will be the go-to place for the vast bulk of global capital. Gold, not so much, again as you say – because of its price volatility; it is riskier (over the short term) to hold than US dollars.

But note the “necessary” condition for this statement to be true. If and when confidence in the ability of the US to meet its debt obligations fades, there will be no place large enough for the international capital to flow. It certainly won’t run off to Vietnam, or Russia. If the US is doing poorly and confidence in its ability to repay snaps, the peripheral countries won’t be looking good – they’ll be even riskier by comparison. In other words, there will be no stable currency of any size that will accomodate the vast horde of money seeking a safe place to hide. The world’s money cannot all hide in the Swiss Franc.

When the USD is perceived as riskier to hold than gold because of the threat of a US sovereign default, it is at that moment that gold will become a true safe haven, by the actions of individual rich people looking to hide their wealth somewhere portable, not subject to government regulation or default.

Note: even paper currency can be “defaulted upon” by way of a “recall”. The US has never done it, but it happens in Europe more regularly. And it was proposed back in the 80s in order to remove all that “drug money” from the system. Old bills are required to be exchanged for new bills at a time certain, after which the old bills won’t be worth anything. And presumably with a cash recall, you’d have to prove to a skeptical IRS agent where your cash came from if the amounts were over a certain size.

So bottom line – I think your worldview is entirely accurate, right up until the confidence in the USD snaps. Likely, a bunch of other sovereign defaults will be needed to cause that break in confidence. But after that happens, gold wins.

[davefairtex]

skipbreakfast –

Just look at Greece as a crystal ball to our own future: the business that is booming there is CASH FOR GOLD not gold for cash–in other words, everyone is SELLING what gold they have to survive. Wedding rings, coins, nuggets, anything gold that can be sold is being sold. And then the Cash-For-Gold merchants sell that gold for a profit onto the rest of the world not yet in the same dire straits as the Greeks.

I’m a really big fan of this argument. I think as long as the Greeks stay within the eurozone, and the eurozone remains intact, your analysis is exactly right, and austerity in the zone will likely herald a drawdown in the price of gold as private deflation sucks the leverage out of the commodity complex. In addition, the fear of default will continue to encourage capital to flow from the defaulting periphery to the core economy – meaning German bonds and the US Dollar. And since gold is priced in USD, that will likely hammer the price of gold further.

But play forward the situation six months. Assume Greece leaves the eurozone and returns to the Drachma. Assume a certain amount of repression – say a Bundesbank desire to reduce its (extensive) Target2 liabilities cause it to reverse ex post facto all savings accounts transfers from Greece within the past 12 months. Greece slaps on capital controls, and perhaps even makes cash transactions in euros illegal. Then they default, and devalue by at least 50%. And Swiss banks in order to maintain exchange rates start charging money for deposits. Heck, the eurozone could even do a “cash recall”, forcing everyone to turn in their old bills for new ones, in order to attack the underground economy.

Given that scenario, what happens in Spain when they see this go down? German savings accounts are no longer a safe haven. Swiss accounts charge money. Cash is not a safe haven. Where do the rich Spaniards go to avoid the feared 50% devaluation and currency repression? Likely that will drive them to US dollar deposits and gold. But once the sovereign defaults burn out in europe and a form of stability returns, threat of a default will come to the US. And where does that leave rich people here?

I totally agree that in the upcoming difficulty, a citizen should focus first on “real things” and debt paydowns. That’s equivalent to the very sound advice – “before investing, pay off your credit card debt.” However for people who have savings over and above that, gold makes a savings vehicle that cannot be defaulted upon or devalued by a government, and more importantly, is mobile wealth unlike real estate or stocks, giving a rich person the option to leave WITH a portion of their wealth if they want to. Gold will likely be a part of the underground economy. Such economies always have an element of risk to them, but this was always so. And it is better to have a dangerous option than to have no option at all.

As default and repression drive capital into gold, that will likely drive the price higher – perhaps not to the heights FOFOA suggests, but certainly higher than it is today. Its just a supply and demand thing, and with the other alternatives closed out by repression and the core economy defaulting on its currency and sovereign debt, gold will be the only international/portable wealth storage vehicle left standing.

In the defaulting core economies, real estate will be taxed to death. Stocks too. Any traceable wealth within the system will be “mined” by the government desperate for revenue to avoid default. Even cash will be marked and traced electronically to fight “the war on drugs” or “the war on terror” (pick your excuse). I think you’re right, gold won’t be used by normal people for normal purchases, but if you want to flee the jurisdiction with some of your wealth intact, gold will be a handy vehicle to do this.

And ultimately, rich people’s actions drive the prices for the rest of us. Their desire to retain the option to flee will ensure there is a decent (underground) market price for the half-dozen gold coins that a regular guy has some of his savings in.

[davefairtex]

Armstrong has argument #7 for why to own gold: it’s a hedge against government repression during core-economy Sovereign Debt Crises.

As the sovereign debt crisis gets worse, governments will increasingly act to clamp down on the underground economy by restricting the use of cash in transactions. Additionally, in order to prevent capital flight, capital controls will be put in place. In this environment, gold will be the best portable, currency-independent store of wealth that will allow (wealthy) people to flee said repression.

This feature will cause the price of gold to rise. This will only happen when confidence in the existing system snaps, which it hasn’t yet. The fact that we have a global marketplace, no currency controls, and (more or less) free trade says we’re still engaging in business as usual.

He also largely agrees with many of the points made in the article you posted.

“So gold has been around a long time. It has been an object of desire. Beyond that, there are no special qualities that render it as money nor does it present any exception to the ups and downs in value as anything else in society. Gold is in plain and simple terms, a commodity. Why some people have to use it as a mystical object that would solve all the problems of the world, who knows. But gold will never change. It is a valuable commodity that should be part of any portfolio. Its advantage over real estate or equities is its movability – you can take it with you when it is time to flee.”

https://armstrongeconomics.com/693-2/2012-2/the-truth-about-gold-why-you-should-buy-it/

He makes the most sense of the people I read, even though he tends to ramble a bit.

[davefairtex]

rlmrdl – “I have tried hard to follow but it is so full of self congratulation that its giving me nausea.”

This isn’t just a condition found at FOFOA. It resides many places in the blogosphere. I think it is a side-effect of someone being so sure about something that nothing can possibly shake their faith in the eventual outcome. Out of that comes such a strong sense of “being right” it borders on the insufferable.

Thats one reason I like Chris Martenson. He states often that he reserves the right to change his mind if new facts appear – and THEN proceeds to give his current thoughts on how he thinks things are currently unfolding.

Humility in the face of the unknown future is a rare thing indeed.

[davefairtex]

Definitely the spanish bond market isn’t happy. I’m not going to freak until spanish bond yields top the previous high (7.25%), but the move today sure doesn’t look good. At 1.24 the euro is only a penny away from its previous low of $1.23. Those are my price levels to watch.

Martin Armstrong talked about this issue a week ago. He wrote:

“There must be a consolidated single debt for a single currency. Any fragmentation will result in the collapse of Europe being torn limb from limb. They are running out of time. Our models are pointing to August/September as the critical time period. Europe has its back against the wall. It is time to wake up before everything collapses into dust.”

https://armstrongeconomics.com/2012/06/27/europes-back-is-up-against-the-wall/

He also concurs with the outcome – only peripheral countries face hyperinflation; core economies go into default:

“We do not face hyperinflation in Europe or the USA. These are not peripheral economies. These will simply implode into a Sovereign Default. This is far more dangerous for this is what causes war and brings society to the brink of extinction. Hyperinflation is typically domestic in its impact for foreign capital fled long before. What we face is much more like a bank run ending in collapse. Then the finger-pointing follows and usually war.”

Hyperinflation

[davefairtex]

Wind power becomes a lot more useful if we can develop cheap hydrogen electrolyzers. Hasn’t happened yet.

[davefairtex]

I agree that in the short term markets today seem to be just a measure of where liquidity is running – there’s a lot of it out there, and it appears to slosh from bonds to stocks, from one country to another, with big distorting effects as it does so.

To understand what our effective constant oil supply might be from all the shale wells we’ve drilled, if we just were to eliminate the first few (deceptively rich) years of production, it would seem to be a simple matter of multiplying some lower average rate (50 bbl/day?) times the number of wells drilled to get a sense as to the steady state production without the distorting effect of the first few years.

20k wells x 50 bbl/day = 1 mbpd. So can we say, for each 20k wells, we get 1 mbpd steady state (more or less) for perhaps 10 years? At a cost of perhaps $6M per well, that’s $120B per 1 mbpd or about $30/bbl.

A 10B barrel resource produced @ 1 mbpd will last about 27 years, and require about 50k total wells drilled. So, we need about 180B barrels of resource to provide for US oil needs for the next 27 years. To produce such a resource, we’d need to drill 900k wells, costing $5.4 Trillion dollars, or $200B per year. Say 100k wells per year drilled at maximum – 20 days per well, so that would require 5k rigs I think we have 2k rigs right now, and some of them are working on gas.

My questions are – are the average numbers I used even close to being correct, and does that resource even exist?

If you have different numbers, I’d like to hear what they are.

I do realize you anticipate a crash that will likely prevent any of this investment from happening, but I’m curious just from an engineering standpoint to see what it might cost if we could actually execute on it, and where it might have problems in execution.

[davefairtex]

I concur, short covering – but the real short covering action was in oil & copper, not as much in the broad market.

Do we remember when the sanctions will hit Iran? Sunday July 1st. Oil’s $7 bounce on huge volume (an unnatural move if I’ve ever seen it, in the absence of outright invasion) made a lot of somebodies a lot of money. Oil had done nothing but go down for 2 straight months. Thursday it had made a new low and rebounded modestly. Coiled like a spring, waiting for … pretty much any trigger to cause a snap back.

Isn’t it interesting how oil fell right up to the start of sanctions? Who would have predicted that?

Often these violent short covering rallies don’t lead to any real trend change, but the Iran sanctions (and accompanying newsflow) might change that.

One oddity: the $IBEX is actually looking pretty strong, steadily moving off the lows of June 1, refusing to go down in spite of all the horrid news in Spain. I can’t explain it, but there it is. When prices move in opposition to the newsflow, its probably a good idea to at least take notice.

[davefairtex]

DQ – ” I also think that this is an example of the economic science of confusing stocks and flows. GDP is a flow, $/year, and debt should be a stock”

Wow you said it so much better than I did. Stocks vs flows. And I totally agree with your sentiments regarding math errors.

Something else this tells me. The system’s tepid growth response to such a massive debt injection during the 00s tells me that any attempt to pare the system back to a low level of debt growth will result in a massive collapse in GDP. That’s why “austerity” fails in europe. Its the right medicine, it is only about 40 years too late to apply it.

[davefairtex]

I thought the ECA corporate preso was interesting because it showed a declining cost per MBTU for shale gas from $6 in 2007 down to $3 in 2012. The whys behind the cost decline might be interesting to examine. Technology might be better, or experience might have improved performance. Or perhaps they’re just high-grading the resource. I think the EROEI of shale gas may have improved over what it was back in 2008. Improved enough? I have no idea. Halving of the cost certainly sounds good to me.

Issues of how big the resource is are of course unaddressed by this 50% cost reduction. Unless someone here is an insider at CHK, ECA, or XOM and they want to spill the story to us, we’ll just have to wait and see.

[davefairtex]

This is a really interesting topic for me. I took a quick look at the EIA; it would seem that the chart Wolf Richter used (from April) showing the downtick in production is already out of date. Data for May seems to have set another new high.

https://www.eia.gov/naturalgas/weekly/

Reminds me of the whole Peak Oil thing; predicting a top from one downtick is sometimes asking for trouble. For me it absolutely doesn’t invalidate the argument – it will be interesting to see how long it will take to happen. At $2.60/MBTU and with the rig counts dropping, a top is all but baked into the cake.

One reason some of the companies are doing better than you might expect is they’ve sold forward a decent-sized chunk of their production in the futures markets, so they’re getting more than $5 per MBTU rather than the spot price of $2.50. ECA, the second largest producer in NA has sold forward 60% of its production for 2012 at $5.85. Also, ECA thinks they can be modestly profitable at $3/MBTU, at least in 2012. There are probably a large number of caveats behind that number.

https://www.encana.com/pdf/investors/presentations-events/corporate-presentation.pdf

[davefairtex]

Turns out FRED (St Louis Fed economic data charting package) lets you play with the data. Here’s a chart that makes more sense.

https://research.stlouisfed.org/fred2/graph/?graph_id=79106

Here you can see the annual change in TCMDO vs the annual change in GDP charted alongside each other. They both track until the mid 70s when they start to diverge.

The 80s are a little bit nuts, the 90s more so, and the 2000s things just go crazy. 2-5T in debt added every YEAR, for a 600B annual increase in GDP.

[davefairtex]

I’m calling bullshit on that last chart from Blodget.

If we are trying to show what GDP would look like if we eliminated the contribution from debt, we don’t subtract the entire TOTAL credit market debt from each year’s GDP. We subtract only the NEW credit market debt added for that year from that year’s GDP.

Don’t get me wrong, I like all the charts leading up to it, I was nodding my head, I think there’s a pony in there somewhere – and I’d love to see what GDP with debt removed looks like. But Blodget’s last chart displays an appalling lack of numeracy.

Anyone who has taken basic physics knows what I’m talking about. The units have to match for the results to make sense.

[davefairtex]

sangell –

No I don’t think any bank stress tests have factored in defaults of their own sovereign. Its pretty clear a spanish sovereign default would cause another “event” for the spanish banking system.

As of January 2012, Spanish banks held 22% of Spanish sovereign debt. I don’t have any numbers on what they are today. The numbers suggest that the mortgage loan problem has the more serious long term impact on spanish bank balance sheets, but a sovereign default will happen all at once, and it is impossible to pretend that it didn’t happen, or that the values can be lied about – quite unlike millions of nonperforming home loans.

We shouldn’t forget about the impact of either spanish bank defaults or a spanish sovereign default on various default insurance policies written by US banks. A few more credit downgrades on US banks and we’ll find out soon enough who has been swimming naked from all that new collateral that will have to be posted. MS estimated they’d have to post an additional 7B in collateral from the downgrade they received on Friday.

Posting additional collateral was our first inkling things weren’t well at AIG back in 2008.

[davefairtex]

“…In Ireland, it eventually added up to 24% or so. Let’s be mild and put it at 15%. That puts the -unrecognized – losses at €450 billion. And counting, no doubt. And that’s still just one part of the problem.”

Your estimate of 450B euro losses assumes the 15% of bad loans are total writeoffs. In Ireland, the haircuts applied to loans transferred to NAMA ranged from 40-60%. So you need to cut your estimate in half to 225B, and you’re closer to the range of the other analyst’s estimates.

Likewise, the amount of mortgage debt is only a fraction of the total asset number. Spanish total mortgage debt was 76% of GDP (1T) back in 2009. So let’s say it is 760B euros. Apply the Irish failure rate to that: 24%, and the haircut to that (50%) and things aren’t so horrible: 91B.

Of course there’s developer debt, which no doubt will be much closer to a total writeoff. And perhaps the cajas (56% of mortage loans) loan book is significantly worse than in Ireland – I read that most of their debt qualified as “subprime.” And then of course there’s the sovereign debt, as you point out.

But in reading more sources, I’m not sure it comes to 450B euros. The mortgage market itself is only 750B. And in Spain you cannot just walk away. There are entire websites devoted to informing people from England they can’t just walk away from their Spanish vacation home loans…that should help the recovery rate a bit…some fun bullet points include:

* If you have traceable UK assets they can seize it with a freezing order.
* They WILL go after your UK home.
* They WILL try to freeze your bank accounts.
* They WILL try to get an injunction to take money out of your wages.
* They can take your car or any other assets worth €5000 or more.

Ouch!

https://spanishmortgagedebt.com/

Not affiliated, not a recommendation, just provided for reference.

[davefairtex]

otto matic –

You know, it seemed only hours after I posted my note, I saw that exact same news article! 🙂

[davefairtex]

This whole debate reminds me of a game a friend of mine used to play with me. His goal was to find the single two most unattractive people in a crowd, and then ask me, gun to my head, which one would I pick to have sex with.

Perhaps I could choose a third outcome? No, that wasn’t the game.

It is often the case that after any violent revolution, the moderates – and moderate policies – don’t end up in charge when all is said and done. Things quickly move from “a few broken eggs” of moderate collateral damage to “anyone who opposes The Orkin Man” and then finally “anyone who doesn’t enthusiastically SUPPORT the Orkin Man” get put up against the wall and shot. This makes logical sense to me; moderates on both sides end up shot or withdrawing in disgust, so much so that one particular group of crazies willing to kill (or die) for their cause ends up winning, eventually. The Taliban is just the latest version of this.

This doesn’t happen every time people start in with summary executions, but it happens often enough to give me pause, and suggest that instead of choosing between two really undesirable choices, we search hard for a third route and play a different game. Rewrite the No-Win-Scenario, as it were.

Otherwise, regardless of original intent, we will in all likelihood end up with a Christian version of Mullah Omar in charge; all the “right people” will be dead or in a camp along with a vast host of others, but neither you nor I will be defining who the “right people” are.

[davefairtex]

Great article, too many timely points to comment on.

One thing that struck me. I find it interesting that Switzerland is quite concerned about currency flows, but no mention is made of restricting the flow of gold into the country.

It would seem that the easy flow of international capital we’ve taken for granted for 30 years is likely coming to an end. And soon.

[davefairtex]

pipefit –

Protecting wealth with gold and silver, sure I can see that. Lots of ways gold & silver come up on top. FRNs might work out too, but government policy can change the game overnight (a currency recall) in a disagreeable way. Governments can’t “recall” gold. I’m completely in agreement with you that storing wealth in tangible assets is a good idea.

I thought you were suggesting hedging energy costs because your example talked about a mine preserving its purchasing power w/r/t energy costs by either storing fuel itself (if they had space), or by storing gold. You then had a few lines about how their prices move together, more or less. And you actually used the word “hedging”.

My only point was, and remains, gold & oil prices sometimes move for very different reasons. Its not about predicting twists and turns, its about understanding what moves prices. The same news item that drives gold up, may drive oil down. Usually they move in tandem, but sometimes they don’t – and this happens often enough, and violently enough, to be disagreeable for someone trying the strategy you propose. To reiterate, from a price perspective, gold and oil (fuel) are NOT always interchangeable.

If you want to hedge your energy costs, are staying put, and you have room for a big tank of diesel, I’d pick that over gold any day of the week. I can think of several scenarios where gold retains value, but fuel is simply unavailable – or its use highly controlled.

If you want the option to be able to bug out of the country and you want to store your wealth in something guaranteed to be accepted in a foreign country, I’d pick a combination of FRNs and gold – probably more gold than FRNs. At least to date, you can still buy tickets, food, and bribe border guards with FRNs.

[davefairtex]

pipefit –

I agree predicting each “little turn” is impossible. But these turns weren’t little. A close tracking might have a 10% differential. The ratio between these two instruments varied by 76% over a five month period. That’s not close, that’s absurdly far. Just look at the chart, you’ll see what I mean.

Perhaps our disagreement has to do with understanding how an effective hedge actually performs. A hedge should lessen volatility over every timeframe. Your hedge actually increased volatility, and it was over the very first timeframe I looked at.

I’m not trying to pick nits here. I like gold. Its just – your strategy as stated doesn’t work. Or did you already acknowledge that and I just missed it?

One addendum. A decent proxy for “silver + gold” is CEF. Check the CEF:$WTIC weekly chart. Its range is more volatile. In this case, from .16 up to .31, and then back down to .20 over the course of two years.

The problem is, both silver & gold move for different reasons than oil does. If you traded these items, you’d have seen this. And that takes me back to theory & practice.

[davefairtex]

pipefit – “…since they held on to the gold, they will still get about the same purchasing power. Not EXACTLY the same, because gold and oil don’t track each other PERFECTLY, but reasonably close.”

In practice, over a relatively short term, that does not appear to be true. If you chart the gold/oil ratio (stockcharts: $GOLD:$WTIC, select weekly timeframe) – a.k.a. barrels/ounce, you will see it go from 13 in March 2011 to 23 in August 2011. That’s a really big range. If gold & oil tracked each other “reasonably closely” that ratio should not be varying by that much.

What’s the old saying – in theory there is no difference between theory and practice, but in practice there is.

[davefairtex]

pipefit – “…since they held on to the gold, they will still get about the same purchasing power. Not EXACTLY the same, because gold and oil don’t track each other PERFECTLY, but reasonably close.”

In practice, over a relatively short term, that does not appear to be true. If you chart the gold/oil ratio (stockcharts: $GOLD:$WTIC, select weekly timeframe) – a.k.a. barrels/ounce, you will see it go from 13 in March 2011 to 23 in August 2011. That’s a really big range. If gold & oil tracked each other “reasonably closely” that ratio should not be varying that wildly. A 76% move over a five month period of time is a really massive move.

What’s the old saying – in theory there is no difference between theory and practice, but in practice there is.

[davefairtex]

RE – “Isofar as Daves argumet goes that many Asians hold personal gold, relative tot he population percentage I would dispute that one.”

Sure, relative to the population I’d agree. But that’s not what I said, nor is it the point. You asserted that “[gold] is mostly held in undergound Vaults controlled by a very few people.” I said that was not true, because a large amount of gold is held by relatively normal people in asia as an alternate means of storing wealth. And that unlike the US, it is a common thing to do.

Folks who are slightly above water behave differently in asia than those in the US. With no social security, they’re required to save. So, higher savings rates, gold being seen as a normal savings vehicle, and very large absolute populations means the percentage of their total population that can save, use gold to do so to a far greater degree than people in the west at their same income level, percentagewise their savings is larger, and so they vastly outnumber the number of normal westerners who save in gold in both absolute numbers of people, and in total tons of gold owned.

If India has 18k tons in private hands, and China has the same, and the rest of Southeast Asia maybe has another 10k tons – 46k tons is a good sized chunk of the 140k ton world gold holdings. It certainly outnumbers the 30k tons held by central banks.

RE also said: “Those who do have Gold Rings and Necklaces are quite likely going to be handing them over for Twinkies pretty soon.”

Any particular reason why they’d do such a thing? The people I know don’t seem predisposed to “quite likely” exchange their gold for Twinkies. Absent a compelling motivation that you haven’t presented yet, I’m going to file that under “not gonna happen.”

And what is “pretty soon” to you? 20 years? Or perhaps next month?

[davefairtex]

RE –

“Gold is relatively fixed in supply, and will be moreso as the energy becomes unavailable to mine it. Oil and Food on the other hand will become more scarce.”

Some conflicting points. No more gold supply should make gold relatively more scarce than it is now; say at 1.9% per year. (Above ground gold: 140k tons; annual mining supply: 2.7k tons). That should increase value.

However, if a population decline occurs, gold will become progressively less scarce, relative to population. Lets imagine if world population drops slowly from 7B down to 2B, its likely gold would drop pari passu. Housing too, actually, come to think of it.

Now gold RELATIVE to food & oil, well I think RE’s point here is a valid one. I’d say the gold/oil ratio will likely decline, as gold remains constant and the supply of oil drops.

Still, there’s one more detail we might be missing. Gold is currently just one mechanism for wealth storage out there. Most of the rest of the wealth storage is currently in paper. If there is a phase change in the near future – if that paper rushes into gold at some point, because of repression, devaluation, default, etc, gold might temporarily hyperinflate in price. (Oil isn’t a great wealth storage vehicle – it’s too bulky, etc).

I say hyperinflate temporarily because I think RE’s calculus is right. Over time, the gold/oil ratio should deflate as gold supply remains constant, population drops, and oil becomes more scarce.

But I think on the path between here, and RE’s suggested price trajectory (where gold eventually becomes … well lets just say “less valuable”), there will likely be a gold price spike. How high that spike goes, that’s the question.

RE also said: “Besides this is the vast Centralization problem Gold already has. It is mostly held in undergound Vaults controlled by a very few people and they are not going to chop it up into coinage to hand out to people to do commerce with.”

That’s actually not true. Official gold holdings are 30k tons. Household gold in India alone is 18k tons. This is out of an estimated 140k tons.

You assert the Illuminati control most of the gold in the world. I’m guessing your assertion is based on your own life experience. Well I’m going to assert there is a huge chunk of gold in private hands, in asia. I lived in asia for several years, and I know a fair number of upper middle class people that have decent amounts of gold sitting in their safes at home, or at the bank. This isn’t thought of as strange or paranoid, it’s quite normal. Sex trade workers ask their benefactors to buy gold chains for this very reason. They can wear the gold to show their friends and family they are successful, and if bad times hit, well its off to the gold shop to sell the necklace and the problem is solved. (Jewelry is treated less romantically and much more pragmatically – kind of like a wearable bank account).

After a big price spike up in gold, the upper middle class people run off to the gold shops to sell their little bars – there are literally hundreds of people waiting in line to execute their trades and walk away with purses and briefcases full of cash. After large spikes down, that same crowd runs to the gold shop to buy.

Is this normal activity where you live? I bet not. I have never known a westerner to do any of this outside the goldbug crowd, and those guys just buy and hold forever. The “spread” for buying/selling physical gold is quite low, less than 0.5% for bar gold, and perhaps 2% for reselling jewelry of the standard purity. Compare this to the spread for gold in the US – its not even close. That low spread should give you a sense as to the overall amount of traffic and the frequency with which it happens.

[davefairtex]

RE – “Gold is not valuable in itself, as Ashvin said it doesn’t exist in a Vacuum. Gold became a REPRESENTATION of wealth for many reasons, but always represented wealth in a world of relative surplus.”

Gold’s value is based on rarity, society, momentum, and trade. Since many societies have for thousands of years held gold to be valuable, this self-referential momentum linked to trade has effectively created that worldwide collective reality that gold is valuable.

Since gold is relatively rare, a small amount has relatively great value. This makes the value for gold transitive, kind of like a virus. Perhaps at one point in history, only one society valued gold. Other places didn’t care, until trade started to happen. At that point, any society connected by trade to that gold-valuing society started to notice a value for gold, because small amounts of gold could be traded for relatively larger amounts of less-rare portable goods that the gold-valuing society produced.

In that way, gold became valuable everywhere, communicated like a virus. Likely this was a very long time ago. When the conquistadors landed in Mexico, the natives there almost immediately started to appreciate that gold had value, at least to these guys in metal shirts on horses. At that moment they caught the virus if you will – well one of many anyway.

So in answer to your question about our hypothetical Saudi prince, if they remain connected by trade to a society that values gold and is willing to trade weapons for them, those Saudi princes can turn an large supply of gold into a large number of weapons. Seems useful to me. Because of gold’s relative rarity, there’s no diminishing utility. More gold = more weapons. Or more food. (back of the envelope: there’s about 1/2 an ounce of gold above ground for every person on earth)

As for the surplus issue, even if a society does not produce a surplus overall, if the society is relatively large (i.e. more than a couple hundred) there will be individuals within that society that most certainly DO have a surplus. Trade can exist with these members who have managed to extract a surplus (most likely from others, who have a deficit).

One thing to note: oil in and of itself is not useful either. In fact, its toxic by itself. Only after it is refined, and presented to a machine, and that machine is switched on, at that point it turns into a useful “energy slave.” Likewise, gold is not intrinsically useful either. It has to be presented to a society that values gold. At that moment – just like gasoline being burned in an ICE – it too turns into an energy slave, because of that willingness of that other society to accept gold in exchange for surplus. In that sense, the gold-valuing society is much like a machine fed by refined oil.

Let me repeat: even if a society that values gold has no net surplus, individuals within the society WILL have a surplus most of the time. Gold can be traded to them for their surplus. Thus, your gold will continue have value, but only as long as you are connected by trade to a society whose people believe it has value.

There are times when this doesn’t hold – like a siege, or a famine – when the surplus available to society is so minimal nobody has any surplus. But most of the time, gold will have value because some individuals will have a surplus.

My guess is, gold in some societies is a sign of surplus – a status symbol. It gets you respect (and a bigger selection of possible mates) by showing everyone that YOU have surplus. To oversimplify, gold gets you laid. These societies therefore value gold a great deal! This is why gold flowed from West to East, since those in the East valued gold (as a symbol of “surplus”) more than in the West. It had a higher exchange rate, in some sense. But that is not because they’re geniuses, it just had a higher societal status value there.

So gold. Valuable because of trade, surplus, scarcity, and after 6000 years, momentum. If we lose the machines that turn oil into work, oil loses all its value. If society decides one day that gold is no longer valuable – or if trade stops happening – gold too will lose its value.

Trade has been around for a very, very long time. My guess is trade will continue, and thus gold will retain at least some value, long after all the oil in the world disappears.

[davefairtex]

RE – “2 words for you to put into the Gold Bug vocabulary. MARGIN CALLS”

The countervailing force against margin calls may be government repression. Using Argentina as a model, the governments engaging in devaluation will slam the doors on currency flows with capital controls, freeze bank accounts, and then seize everything that’s around to be seized – private pensions, public pensions, you name it. Electronic bank transfers out of the country may even be reversed ex post facto, especially if such transfers end up causing the German Central Bank grief.

When that happens just once in just one country, gold – and by gold I mean the physical, untraceable stuff, accepted as having value internationally, concentrated, portable, and not tied to any government – will instantly gain in popularity everywhere.

And the more repression there is, the more border controls, limits on importation of foreign currency there are, physical gold will become progressively more in demand. And if they set the exchange rate for the Y-euro notes (printed in Greece) to be 1:1 for Drachma, look out. Then the physical gold market in other countries – Spain, Italy, Ireland, will REALLY go nuts.

Yes, margin calls will happen, and that will definitely be a powerful force to be reckoned with. Margin calls in other things will cause gold to be sold as well, simply because it is something that can be sold to meet a margin call.

Which force will win? I have no clue. Is there more scared deposit money out there looking for a place to hide than leveraged players in the marketplace that have gold to sell during a deflationary event? I don’t know. But I think we’re going to find out, and relatively soon too.

Because of its relatively concentrated value per unit of weight, gold acts a bit like a currency. In my opinion, defaults of all sorts make gold (an alternate currency) more popular, not less, because physical gold can’t be defaulted upon. And government repression is another form of a default – in this case, it’s a default on a promised and/or expected level of freedom.

As for oil vanishing (forever) from the pumps, that’s a ways out on the timeline. I feel we’ll find out about gold vs. currency, defaults, and margin calls long before the oil goes away. However I do think the Net Energy argument is definitely an important thing to consider. Gold doesn’t run society, energy does. I haven’t thought through those implications yet.

And as for a gold-backed one-world currency: why on earth would a debtor nation with the biggest military on the planet agree to a one-world currency, especially one that can’t be inflated? Voluntarily giving up the right to print money?

My God, 100% debt/GDP in an un-inflatable currency, with all those medicare & social security promises yet to be defaulted on. Might as well put on a strait jacket, attach some lead weights, and jump overboard.

Ha. Perhaps I just lack imagination. Can you tell me why we’d do such a thing?

[Author]

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