Blogs on How to Invest, Gold & Silver, and Economics 101

Rating Agencies Scam the World

After the collapse of Lehman Brothers in late 2008, you would think we should have learned a lesson—that leverage is dangerous, that the banking system is fundamentally flawed, and that ratings agencies are useless. The latest news of the imminent demise and fire sale of broker-dealer MF Global shows that those lessons were truly lost.

ZeroHedge posted the current ratings from our favorite rating agencies:

“And the winners are.... Moody's Ba2-; S&P: BBB-; Fitch: BB+;”

And just to throw insult to injury, today Bloomberg released a video about an interesting study that confirms our worst suspicions—that ratings agencies are a pay to play operation—meaning the more a company pays, the higher the rating.  

Simply put, bonds are debt. Bonds basically say: "I owe you (IOU) X-amount of currency, plus X-amount of interest." —Michael Maloney, Guide to Investing In Gold & Silver. But, there is more to it than that. Bonds set the cost of borrowing, determine international currency flows, and play a huge role in determining the value of each nation’s currency. That means bonds have a direct effect on the dollars, euros, pesos or yuan in your wallet or bank account.

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Don’t Blame It On Capitalism

As we approach year-end, unemployment remains stuck at double-digit levels in many parts of the United States, and the Occupy Wall Street movement appears to be entering an uglier phase, characterized by rat-infested encampments, the mist of tear-gas hanging in the air and the occasional bloody outbreak of police-on-protester violence. A Newsweek gallery of protestor portraits reveals nearly all those marching to be either unemployed youths, students or retired folks. Whether it’s Occupy Wall Street, the Eurozone riots, or the freedom fighters of the Arab Spring, free time and frustration are the raw materials that fuel movements. People who want to work and can’t find a job have plenty of both.

But the reality is that the United States may not achieve what is considered to be full employment, or even a level within one or two percent of full employment, ever again.

The natural rate of unemployment, it is considered to be consistent with a level of unemployment that predominantly comprises voluntarily unemployed workers. In other words, those members of the labor force who really want a job have one.

The natural rate of unemployment, it is considered to be consistent with a level of unemployment that predominantly comprises voluntarily unemployed workers. In other words, those members of the labor force who really want a job have one.

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Occupy Wall Street and Wall Street’s Fleecing of America

The Occupy Wall Street movement has largely been aimed at Wall Street and the concentration of wealth in the United States. In our latest premium article Who Robbed The Middle Class, we wrote this:

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The Scramble Begins

As U.S. budget deficits begin another chart-topping fiscal year, the United States Treasury is increasingly being forced to look for new slick ways to issue debt without the alarm bells going off. Normally, Treasury issues bonds that pay the same fixed coupon amount for their entire lives; but Treasury’s new proposal includes floating-rate debt—which starts low at today’s rates, and moves up or down with other interest rate moves. Like resetting mortgages, this strategy could prove dangerous if interest rates rise suddenly, and U.S. taxpayers find themselves more and more burdened all of a sudden.

Right now, interest rates are near all-time lows—a reflection of the Fed’s loose monetary policy and global deleveraging that has slowed markets to a stall. Treasury can borrow at these low rates, but lenders want more than just a U.S. rubber stamp and a flimsy promise—returns drive borrowing and lending—and issuing debt that follows interest rates will likely attract more lenders. The Financial Times says this:

The natural rate of unemployment, it is considered to be consistent with a level of unemployment that predominantly comprises voluntarily unemployed workers. In other words, those members of the labor force who really want a job have one.

Simply put, bonds are debt. Bonds basically say: "I owe you (IOU) X-amount of currency, plus X-amount of interest." —Michael Maloney, Guide to Investing In Gold & Silver. But, there is more to it than that. Bonds set the cost of borrowing, determine international currency flows, and play a huge role in determining the value of each nation’s currency. That means bonds have a direct effect on the dollars, euros, pesos or yuan in your wallet or bank account.

Simply put, bonds are debt. Bonds basically say: "I owe you (IOU) X-amount of currency, plus X-amount of interest." —Michael Maloney, Guide to Investing In Gold & Silver. But, there is more to it than that. Bonds set the cost of borrowing, determine international currency flows, and play a huge role in determining the value of each nation’s currency. That means bonds have a direct effect on the dollars, euros, pesos or yuan in your wallet or bank account.

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Accounting Wizardry Boosts Bank Bottom Lines

Say what you want about the megabanks—they sure are masters at turning lemons into lemonade.

In the latest mutation of standard accounting practices, the big banks are now counting on the plus side of their balance sheets the fact that their solvency is so in doubt that, were they to be forced to buy back the debt they have issued, they would have to buy it back at a discount. The accounting trick, as reported by CNN Money’s Paul LaMonica, is called a debit value adjustment, or DVA.

Investment banks are financial institutions that underwrite new stock and bond offerings, advise clients on mergers and acquisitions, and make markets—or act as a middleman in stocks and bonds.

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Life After Debt

An NPR Planet Money report today uncovered a government report through the Freedom of Information Act that detailed the repercussions of a special what-if scenario: What if the U.S. government paid off its entire debt?

 

The amount or difference between the initial purchase price of your investment and what you received after selling your investment sometime in the future. 

 

Simply put, bonds are debt. Bonds basically say: "I owe you (IOU) X-amount of currency, plus X-amount of interest." —Michael Maloney, Guide to Investing In Gold & Silver. But, there is more to it than that. Bonds set the cost of borrowing, determine international currency flows, and play a huge role in determining the value of each nation’s currency. That means bonds have a direct effect on the dollars, euros, pesos or yuan in your wallet or bank account.

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Euro’s Demise Precedes Dollar’s Doom

While Europe’s crisis over a united currency continues to boil over, it is well worth re-examining the situation going on across the pond.

The basic problem that brewed over 10 years was that countries could borrow as they wanted—despite strict guidelines on debt limits delineated in the Maastricht Treaty, the treaty that eventually tied Europe together with the euro.

Yesterday’s Der Speigel pointed out that, absent France and Germany, the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) would have long ago declared insolvency. But the debt situation has escalated quickly, as France and Germany have cranked up their debt levels in order to help their less responsible neighbors.  

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Stifling the Future

As the United States continues its slide in well being and economic prosperity, many hinge their hopes on a deus ex machina-type miracle to revive American (and global) prosperity. For some, it's a stimulus currency-bomb to get people spending; for others, a resurgence of scientific discovery to rain new jobs and increase productivity. While we know that technological progress should improve economic conditions, we also know that there is no magic bullet.   

In his latest missive with National Review, entrepreneur Peter Thiel laments the slow-down of technological innovation:

Inflation is simply an increase in the supply of currency and credit. The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling is defined by the term "price inflation." Central Banks attempt to stop deflation, a natural phenomenon which occurs in order to correct the prior inflation.

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When Money Dies, Some Will Prosper

“When the currency system as we know it dies, some people will become very wealthy,” begins a special report from the Casey Research/Sprott Inc. Summit, When Money Dies. It’s an attention-getting lede sentence, and a sentiment that will sound quite familiar to readers of WealthCycles.com and the writings of Michael Maloney, who was a presenter at the Casey Research Summit held earlier this month in Phoenix.

The report transcribes a roundtable discussion between Rick Rule, founder and chairman of brokerage firm Global Resource Investments, and two Casey Research editors, Louis James and Marin Katusa.

Asked by the moderator “who killed money,” Rule replies:

A fiat currency is created by a government decree. The Latin word fiat means “let it be done.” And with the stroke of a pen, or the crank of a printing press, “money” is created. Fiat currency has no inherent value—the paper that a $100 dollar bill is printed on is surely not worth $100. It might have been worth a few cents before the government ruined its utility as scrap paper by printing green words and numbers all over it! Compare this with gold, which is a precious, rare metal that is, in many cases, the only substance on earth that can be used for certain human purposes, including science, medicine, and of course—adornment.

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Black Swans May Be Ugly Duckling Investments

All the gloom and doom around the global economy has given rise to some odd duck investment products—what are known as “black swan” and tail-risk hedge funds. Basically, when you invest in these products you are betting that things are going to go very, very wrong. Typically investors use black swan investments to hedge against losses their more traditional investments. For example, if you invest in an index fund that tracks the S&P 500, and the bottom drops out of the S&P 500, you would lose money. But if you also have invested in a “black swan” fund that pays off when the S&P 500, you have offset at least a portion of your losses. If it sounds like you are betting against yourself, well, you are.

A term coined by Nassim Nicholas Taleb, a philosophical essayist and mathematical economist, who wrote a 2007 book of the same title. The term refers to humans’ propensity to focus on high-probability, low-impact events while ignoring, or discounting the likelihood of, low-probability, high-impact events.

Futures are really nothing more than IOUs. Futures contracts are just standardized agreements to deliver a specific commodity, in an agreed quantity, at an agreed price, on an agreed date, someday in the future. They are traded like stocks on numerous commodities exchanges around the world. They differ from buying stocks in that you agree to a transaction at some point in the future.

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China’s Gold Hunger Likely to Keep Demand High

China overtook South Africa in 2007 as the world’s largest gold producer. At the same time China has increased its gold imports five-fold between October 2009 and October 2010, according to Bloomberg.

As we reported in our April 26 Market Commentary post, Chinese Know Real Value:

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Is High Unemployment A New Fact of Life?

Despite the Obama administration’s insistence that its new stimulus legislation is the answer to the nation’s unemployment problem, an objective look at the numbers tells a different tale.

“According to the St. Louis Federal Reserve, even if job creation were happening at pre-recession levels, it would take us 11 years to get back to an unemployment rate of 5 percent,” reports Propublica.com, citing a Fed-generated article, “Jobless Recoveries: Causes and Consequences.”

Likewise, ZeroHedge.com periodically publishes recalculations of how many jobs would have to be created between the present date and the end of Obama’s potential second term in 2016—and the number of jobs needed per month rises with every recalculation.

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The Housing Depression

We often say that sliding prices represent a sliding quality of life—increasing prices are simply the opposite side of the coin of decreased purchasing power. When the price of donuts and coffee goes up, we can purchase less, not more, of them.

Over the past year in the United States, prices increased 1.6% (according to the Bureau of Labor Statistics)—while individuals cut spending by 2.0%—according to the latest study on consumer spending (by the Bureau of Labor Statistics). Housing, by far the largest category that we spend on (34.4%), is still a mess, despite the best efforts of the Federal Reserve and U.S. Congress to paper over a depression in housing.

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The Delusion in Our Own Back Yard

Economies are moving masses—living organisms—that ebb and flow with the mood of the public and the whim of the market. But when we look at the aggregate, it’s easy to forget some of the joyous and the heartbreaking individual stories that make up an economy—even when they are right in your own backyard.  

Since 2009, Michael Lewis, author of The Blind Side, Moneyball, and The Big Short, has been writing long form articles on what he calls financial disaster tourism—a lighthearted term for his visits to countries that have gone through or are going through financial crises. He started with Iceland, but has since visited Greece, Germany, and Ireland. His latest piece on financial disaster tourism visits the home state of WealthCycles.com and GoldSilver.com—California—and even covers his visit with former Governor Arnold Schwarzenegger in our home city of Santa Monica.

From Wikipedia.org:

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.

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