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Monday, March 26, 2012

Uncle Ben And The Temple Of Doom

Oh my.

You guys might be getting tired of old Financial Doom And Gloom Chief Instructor, but I've got to call them like I see them.

Remember this:  Watch what they do, not what they say.

Bernanke Bounce:  Wait a minute.  I thought the economy was peachy-keen, everyone who wants a job has got one, the gasoline problem will be fixed by making ethanol out of the Green Shoots and the Prez pinky-swears he won't use his newly enhanced powers to "disappear" your ass (I guess that's where the Consumer Confidence numbers come from).

Sounds like a super-heated economy that would require the Federal Reserve Bank to contract the money supply - we don't want inflation to come in and crash the party.

Instead, they do just the opposite.  If everything is so swell, why did Uncle Ben Bernanke feel the need to say he might just limber up his fingers and create more dollars out of thin air (he calls it, "Quantitative Easing")?

He belched this out, and all of the precious metals jumped big-time, as did most other commodities.  So did the stock market (which is absolutely unfathomable to me).

Rats Jumping Ship:  When this article (link) was sent to me on March 21st, the title of the article indicated that 358 senior executives had resigned from their banking positions in the last 7 months.  We're talking about folks with "Chief", "Director" or "Executive" in their job title.  One of my partners sent it to me asking if it was normal for this many senior executives from major banking organizations to all quit at basically the same time.

I told him I'd never seen anything like it in my 31 years of banking.

I clicked the link today, and they had updated the list on 3/25.  The number of banking executives grabbing their Financial Bug Out Bags is now 450!

Pay no attention to this folks.  Nuthin' to see here.  Oh, look over there!  Kittens!

From the German Spiegel Online on the Greek debt 86% haircut, and what's to come...
SPIEGEL ONLINE: Is the debt haircut enough to free Greece from its worst burdens?

Hau: No. The agreed-upon debt haircut is insufficient. No matter what, there will be a second, proper bankruptcy. It will probably take another nine months to three years, but then there will be a really big crisis, both economically and politically. The problem has only been deferred. The next time it will only affect the taxpayers, though.


Hau: The banks have been stalling for time over the last one and a half years. They wanted to take as many interest payments with them as possible. Now they realize that time is running out and have thus changed their strategy. They are just trying to pass on as many debts as possible to the public sector. From their perspective, this is a smart move. But it will be a catastrophe for taxpayers in the end.
Why care about Greece and their taxpayers?  Because it's a window into your future.  You invest $100 and get back $14.

No big deal, you say. You won't be buying any sovereign debt any time soon.  The problem is, your bank probably did.  Oh, and they also issued these little financial instruments called Credit Default Swaps (CDSs).  They're kind of like an insurance policy to make sure that if you buy sovereign debt, you get paid back in full.

The problem is, US banks sold these, took the profits from the premiums, but didn't put any reserves away - you know, just in case they have to pay the claims if another sovereign debt issue blows up.  Multi-trillions of dollars worth.  To pay these off, they'll either have to sell bank assets, or get bailed out.  Again.

You're a taxpayer, right?  Go read the last sentence of that snippet from above one more time.  Makes y'all warm and fuzzy inside, don't it?

Just thinking out loud here...

Let's say the dollar crashes (this is what I believe will happen).  Every dollar you have in bank accounts or in currency stuffed in the mattress becomes worth less.  Your purchasing power will have been diminished.  Your hedge or "insurance" for this happening is to have possession of a commodity which historically trends counter to the dollar.  That would be precious metals.

Let's say the dollar soars.  We've seen this happen periodically over the past few years when the dollar gets stronger against some foreign currency.  The euro, for instance.  We'll see a blip in the dollar and a drop in gold.

But this is a false comparison.  It ignores the underlying weakness of the dollar.  It's like saying that terminal liver cancer is better than terminal pancreatic cancer.  Both are going to kill you, but you might live a couple months longer with the liver cancer.

You see, the dollar is being systematically devalued.  Regardless of how it performs against other currencies, our current national policy is to continue devaluing the buck.  As I've stated before, this has to continue until our federal government either raises taxes to meet expenditures or cuts expenditures to meet tax receipts.

Obama has put out a long-term budget proposal that NEVER has a balanced budget.  Never.  The evil, baby-killing, old folks robbin' Ryan budget proposal doesn't have a balanced budget until 2040!

Talk about kicking the can down the road.  This tells me that neither party has any real intention of balancing our budget.  When these crooks won't even adhere to budgets they enacted the previous year, does anyone think that the Congress of 2040 is going to git 'er done?  Right.

Regardless of who's in power, it will continue to be borrow-and-spend.  And THAT will continue to devalue the dollar.

Very seriously, I'm not "married" to the idea of precious metals.  I just don't see any alternative.  Tell me where I'm wrong.  Give me another scenario.  Give me another option.

Tell me how to better preserve what I've worked for.

Copyright 2012 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Anonymous said...

"Tell me how to better preserve what I've worked for."

This is the same question I have been asking, the only option I see is productive land but you will never own it as the taxes will go on forever. Possibly guns and ammo but if they make it illegal to shoot other than on private property guns an ammo will become worth less than they are now and loose their ability to store wealth.

I will keep an eye on this thread as I too am interested in options on how to preserve what I have worked for.

Anonymous said...

A couple of points:
If the crash occurs the banks will be the first indicator when they close their doors. Most likely on a holiday weekend. An event like this must have secrecy and even suprise to be effective. If they signal their intent then everyone would take steps that will make their effort less effective.

Probably there will be some restrictions on withdrawing your own money from the bank after the banks open. A max amount per month, say $300.

It is likely that "new" money would be printed that would be worth 1/10th the value of the old dollar. You would be limited on how much you could convert so dollars you put in your mattress could end up worthless.

Personal, corporate and public retirement systems would be rolled up together and subsequent payments would depend on need not how much you invested. You could lose your IRA so that public service workers would not lose their retirement.

If these things happen make no mistake gold and probably silver will not be left alone. They would make it illegal to sell or trade it and require that you sell it to the government at a set price such as $48 an ounce for gold.

Hoarding will be penalized. Obviuosly we are talking about hard times and there will be shortages and sufferring. So if you have a years supply of food you be required to turn it in to the government. Hoarding will be demonized to the point that even friends and relatives will come to believe that indeed the shortages were caused by you so they will turn you in if they know what you have.

Adam said...

The stock market is being manipulated to "show" the economy is "improving." But it is contradictory that gold, silver, oil all go up and the market goes up above 13,000.

With the turmoil throughout the world, there is no reason the market should be above 11,000 right now. It will contract, the only question is when. A financial seminar that I attended had the speaker say that it looked to him that it will contract drastically. It is just a question of how much above 14,000 it'll happen. It could happen at 14,200 or it could be at 15,000. It just depends on when it happens and the steps you take before it does.

Either way, the market will contract and Greece WILL default. Again, it's all a question of when.

Chief Instructor said...

Anon 3:50, land is one of the places I'm thinking about, but the problem is it's public - the basis of your wealth is publicly known. Additionally, as you noted, you'll be taxed to death if the .gov wants to own all property.

Take a look at the 10 planks in the Commie Manifesto. No private property allowed. If you can't privately hold possession of an asset, you don't truly own it.

Anon 7:28 - I've got nothing to add. Everything you noted has either happened here or abroad. It's not like it's conjecture that a government could do such things, it's when/if they'll do it.

The "hoarding" of PMs may very well mean you don't get the benefit of the wealth preservation, but it is passed along to subsequent generations. From 1933 to 1974 the private possession of gold bullion was illegal.

If you buried it in the backyard and "found" it 40 years later...

Adam, I sold every mutual fund I owned back in 2007. It was a bubble then, it's a bubble now. There is no rational basis for the market valuation, especially when you look at the earnings statements of the individual companies. Banks don't make the lion's share of their money from interest income, but from trading income. Company after company show a profit, but it's from cost reductions, not revenue increases.

There's no there there...

Oblio13 said...

Chief, showed your post to a friend who is a VP at a large international bank, and he agreed with everything you said. I asked him where to put money now, and he said "tangible assets". I asked about gold, and he said that would have been good a few years ago, but we "missed the boat". Pressed him a little further, and he said "farmland".

I've been trying to "invest" in 'knowledge and soil". Learning things that may be useful, and improving the fertility of my land. Both are better than money in the bank in that they won't lose value, and can't be readily taxed any more than they already are.

If gold takes a dive, I'll stock up. Maybe I'll even make a pilgrimage to the west coast to buy from you, there's no one here I know well enough to trust.

In the meantime, I'm putting away "tangible assets" in the form of a few hundred pounds of wheat, salt and sugar, good homesteading tools, a couple years worth of firewood, etc.

Anonymous said...

The thing about raw land is it is hard to make any income from it but as already pointed out you will pay taxes every year. I think a good choice is a single family 3 bedroom home. Not a McMansion or a squalid shack but a simple clean home in a good location and in good condition. Rent it for a fair price and in today's market that will generally exceed the mortgage. Take advantage of the tax laws as written to decrease your overall tax bill. Then sometime in the future sell it for the profit or keep it as a rental for the income. I'm not advising to buy a lot of homes but rather to buy one or two and put down at least 20%. Learn the real estate market in areas you are interested in. Oddly some cities have very low rates of empty homes for rent while others are a difficult rental market.

Chief Instructor said...

Oblio, yeah, all of them abandoning ship is not a good sign. I've never heard of anything even approaching it.

PMs versus land is my current conundrum. PMs give you mobility with your money, land gives you a place to live and a way to at least partially feed yourself.

I think both are at risk. They give the individual freedom - the ability to act and live as you choose - and that's not looked upon kindly by TPTB.

Chief Instructor said...

Anon 7:23, you're spot on with regards to rent vs loan payment, at least here in my area of Northern California. Home values have crashed, and with 20% down and a 4% or so interest rate, total payment (prin, interest, tax and insur) is about 60% of going rental rates.

My concern is that this gap is too large - that rental rates are going to adjust downwards to more closely match PITI payments.

Of course, the gap could be closed by home values rising, and investing now would be a shrewd investment.

If you believe the economy is actually getting better, the latter scenario is likely. If it's in the tank and may be getting worse, the former scenario is likely.

Oblio13 said...

What do you think of water index funds?

Chief Instructor said...

Oblio, I must admit, I'd never heard of such a thing. I did some reading, and it seems like they are ETFs that invest in the "potable and wastewater" industry.

For me, at this point in time, they might as well be ETFs in tech, international or anything else. I'm not in ANY paper assets right now, other than greenbacks.

I am sure that there are sectors which will thrive in a SHTF America, I just haven't taken the time to look into it.

I'm a Tangibles kinda guy!

I AM doing research right now on businesses that thrived during and after the Depression. I want to have a pile of non-fiat cash available to buy up businesses that thrived after the Depression was over (at pennies on the dollar).

Oblio13 said...

Looking forward to reading your conclusions.

I think tangibles are the place to be, too. Just can't bring myself to pay the current price of gold. I'm wondering if commodities like wheat and water will keep up with inflation at least for a while.

Speaking of 'tangibles', I've been collecting some potentially useful things, but the problem becomes storage:

I have a couple years worth of dense, dry, cut-and-split firewood. No where to put any more under cover, though.

Our town has a scrap metal pile, and I could scavenge a tremendous amount of, say, stainless steel, and keep a pile at some remote property we own. But it wouldn't take long for some local redneck with a pickup truck to find it and haul it off.

I have a thing for Grumman square-stern freighter canoes. Rugged, maintenance-free, a 2 HP outboard moves them right along, and they can run right up on beaches. Just this morning a friend borrowed one to deliver machinery to an island with no dock. We live in a lakes region, and I figure when gas is $6+ a gallon and no one can afford to eat fish unless they catch their own, they'll be in demand. New ones cost $1,400 - $2,200, and I keep finding used ones at yard sales for a third of that. Friends keep talking me out of them, though, so I only have two at the moment.

Just found four auger braces (they're what "cordless drills" were before there were cordless drills) in a shed I helped clean out. Whenever I find old tools like that, built before the concept of planned obsolescence, I bring them home and clean them up. Most are given away but I suppose I'm stocking up on good will, if nothing else. I have enough 'homestead tools' to be able to build quite a lot without electricity if necessary.

I'm continually adding to the fertility of our soil. The town recycling center will load your pickup with compost for free, and I probably bring back a load a week. We have perhaps a quarter acre of chocolate-cake topsoil sown with easy-to-turn-under cover crops in addition to our small garden and orchard.

Chief Instructor said...


You're running a version of the millennium old problem of what to do with excess tangible property. It's the root of why money was "invented". A farmer had too much corn or wheat or whatever. There's only so much space with which to store the stuff, and if you need to be mobile, you're kinda screwed.

I hear what you're saying about the price of PMs. It is a very difficult decision especially if your gut tells you they're over priced.

All I can say is my gut says they're under-priced. Why? Because our official government policy is to deflate the currency. Either in big chunks via QE or via the slow steady bleeding off of our currency since we got the Federal Reserve. Two to three percent inflation is the PLAN, because that somehow shows the economy is vibrant. What a pile of crap!

There are of course a million things that could shoot my views all to hell. We know it's in the best interest of the .gov to keep PM prices low - they're a glaring reminder of their idiotic policies. They are VERY good at protecting their interests. A huge gold or silver deposit could be found that trashes the world markets. Our government could actually enact fiscal restraint and follow balanced budgets.

I don't hold out high hopes.

There has been some talk of late regarding the paper and physical markets splitting apart. Paper for speculators, physical for holders. I have no idea how that would work, but it's another thing on my long list of, "figure this crap out" projects.

Chief Instructor said...

BTW, my next move is towards more private land. California - again - is making my decision to leave this festering boil of a state much easier. I truly fear that they will first find work-around to Prop 13 (which keeps property taxes low). When folks can't pay the bill, they'll snatch up the land. I believe both of these will happen in my lifetime.

I've got an upcoming post on what these idiots are doing now in this regards.