Wednesday, December 30, 2009

Keynes Promoted the Destruction of Free Market Capitalism

This is part four of our discussion of John Maynard Keynes and his 1936 book The General Theory of Employment, Interest and Money.  So far, we have uncovered some very interesting ideas buried in the famous economist's most well known work.  Here is what we discussed in parts 1-3:
This will not be our last post on Keynes but it will probably be our most important.  All the way back in 1936, Keynes laid out the game plan that government officials and central bankers have followed until this very day.  Last post, we noted that Keynes was the source of Bernanke's economic stimulus game plan.  Today, we will show that Keynes's influence goes far beyond this.  His influence is the guiding policy for our entire economic and political system.  To put it bluntly, Keynes promoted the destruction of free market capitalism.  Skeptical?  We will provide the proof right here.  Let's get to the quotes and you can be the judge...

All quotes below can be verified for their accuracy by referencing the full text, which is available online for free here.

Chapter 22, Section III
In conditions of laissez-faire the avoidance of wide fluctuations in employment may, therefore, prove impossible without a far-reaching change in the psychology of investment markets such as there is no reason to expect. I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands.

Did you get that? Keynes declared that free markets must be removed of their role of allocating capital, which is the very backbone of capitalism.  Those promoting themselves as Keynesians are in favor of something that is very different from free market capitalism.

Chapter 24, Section III
The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment..

I suppose that since Keynes only wanted a "somewhat comprehensive socialisation of investment" that he was somewhat more in favor of free market capitalism than Karl Marx.  How wonderful.  You have to laugh at the ignorance or gall that it takes for someone to declare themselves both a Keynesian and a free market capitalist.

Chapter 24, Section III
It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society.

This is perhaps the most prescient quote of the entire 20th century.  Keynes is saying that the government can come to wrestle control from the free market, not by the forceful confiscation of private property as characterized by Communism, but by merely determining the rules behind who gets the property.  Today, we call one extreme form of this mechanism a government bailout.

Further, he noted that if the socialization is done gradually then there is no need for a violent and abrupt upheaval, as found via a Coup d'├ętat.  Does this not precisely describe what has taken place over the past century?  A slow, steady creep of socialization has conquered the western world.

Passages like those found above are why I do not believe in conspiracy theories.  Who needs them when the great stories of history are laid out for you in black and white?

I'll leave you with one final thought.  When economists speak of Keynesian economics, the above ideas are what they are promoting.  If they do things and promote ideas that seem antithetical with free market capitalism, now you know why.

Tuesday, December 22, 2009

Jim Rogers: Advice for Tiger Woods

Jim Rogers has a knack for making great sound bytes but his latest interview has maybe my favorite one to date:

Why are we listening to Mr. Geithner?  Why are we listening to any of those guys down there [in Washington]?  They said in writing that the solution to our problem is to spend more money, to spend our way out of this.  That's what got us into this problem - too much debt, too much consumption - and now we're going to solve it with more debt and more consumption?  That's like saying to Tiger Woods - if you get another girlfriend you'll solve your problems.  Five more girlfriends and you'll solve your problems.

Watch the full video of Jim Rogers on CNBC:

Monday, December 21, 2009

Stock Market Update

It's confessional time and we make no bones about it.  We missed the stock market rebound this year.  We did not think stocks would go down necessarily, we just decided to not take on any big stock trading positions either long or short this year.  Luckily, we caught the rebound in several commodities and also managed to time the rise in gold nearly perfectly so don't be fooled - we will indeed have a very merry Christmas.

With that disclaimer out of the way, I wanted to provide a quick stock market update in regards to two technical indicators that we watch.  On October 25th, we noted that the S&P 500 was rapidly approaching its 500 day moving average. We believe that this is an important technical level for the stock market because throughout the bull markets of the 1990s and 2003-2007, the S&P 500 stayed above this level. The market also stayed below this level during the bear markets of 2000-2002 and 2007-present.

Since that time, the S&P 500 has risen cleanly above its 500 day moving average:

On October 31, we noted that volatility skyrocketed as stocks sunk.  On that day, the volatility index (VIX) rose nearly 24% and broke out of its downtrend.  We stated that unless the VIX fell back down to the low 20s (from 30 at the time) that stocks were likely to continue falling.  Much to our chagrin, the VIX fell 5.49% today and closed at 20.49:

Taken together, both technical indicators point towards continued strength in stocks.  One can come up several indicators that present bearish stock cases (a breakout in dollar being a big one) but at the least, there is just not a convincing case to be made that stocks are going to crash any time soon.

Sunday, December 20, 2009

DuckTales of Hyperinflation

DuckTales is a Disney animated show that aired from 1987 to 1990.  The show is based on the Uncle Scrooge comic books and follows the adventures of Scrooge McDuck, the richest duck in Duckburg, and his three nephews Huey, Dewey and Louie.

I highlight DuckTales not because it was an excellent cartoon (it was) but because it has the distinction of having not one but two episodes about hyperinflation.

Episode 82, Dough Ray Me, first aired on November 3, 1989.  In this episode, the inventor Gyro creates the multiphonic duplicator, which is a device that is capable of making exact copies of any object.  Huey, Duey and Louie test out the device by duplicating a number of things, including money.  Things soon go awry when the duplicated money begins to spontaneously duplicate on its own.  Duckburg is quickly over run with duplicated money, causing prices to skyrocket.  In one scene, a child needs a red wagon full of coins to purchase an ice cream cone, reminiscent of Weimar Germany or modern day Zimbabwe.  Later on, money becomes so hated that it is considered trash.  Three bank robbers from the Beagle Boys family are cheered on by the customers and encouraged to take as much money as possible by the bank staff.  In the end, the duplicated money implodes and things return back to normal in Duckburg.

Episode 79, The Land of Tra-la-la, first aired on September 18, 1989.  In this episode, Scrooge McDuck has a nervous breakdown because of stress stemming from his finances.  His doctor recommends that he go on vacation to a place where the people have no concept of money, so Scrooge and the rest of the DuckTales crew head off to the remote land of Tra-la-la.  Once there, a native finds a bottle cap discarded by Scrooge.  Fenton, Scrooge's accountant, notes that it is just an old bottle cap but since nobody in Tra-la-la has ever seen one before, it is scarce and thus valuable.  Upon showing the bottle cap to others, the native is offered seven sheep for his rare, shiny metal.  Upon discovering that Scrooge McDuck has many bottle caps, he is soon badgered by inhabitants wanting to purchase them.  Scrooge tries to remedy the situation with a dose of socialism by handing out one bottle cap to each resident.  The plan is foiled when one man manages to acquire two bottle caps, making him twice as rich as any other man.  The inhabitants are outraged, so to pacify them Scrooge arranges for the delivery of millions of bottle caps.  At first, the natives are pleased with their newly acquired wealth.  After the delivery of more and more bottle caps, however, they quickly grow infuriated by the bottle caps, which they now deem as litter.  The locals even threaten to kill Huey, Dewey and Louie if the bottle cap deliveries do not cease.  In the end, the crew clean up all of the bottle caps and head home safe and sound.

After watching these episodes as a kid, I would not have been able to define economic terms such as supply, demand, scarcity or hyperinflation but I knew inherently what they all meant.  These episodes and others are littered with quality messages for children, such as the idea that you can never get something for nothing aka there ain't no such thing as a free lunch.  DuckTales managed to educate me despite my best wishes at the time so I salute the Disney corporation for their fine work.

Watch part 1 of the DuckTales episode Dough Ray Me:

Watch part 1 of the DuckTales episode The Land of Tra-la-la:

Saturday, December 19, 2009

Money as Debt II

A few years ago I stumbled upon a video on YouTube titled Money as Debt.  The short animated film discusses the problem with building a monetary system comprised primarily of debt issued by private banks.  It is perhaps the best concise explanation of why bad things seemingly keep happening to our economic system.

A few months ago a sequel, Money as Debt II: Promises Unleashed, was released. This new film goes into even more depth than the first and shows how the recent economic crisis is directly related to the structure of our monetary system.

Key points to think about after watching these videos:
  • Money supply is comprised primarily of debt issued by private banks and not newly issued bills by the government, as is commonly believed
  • Ever expanding levels of debt are required to keep the system intact.  A good analogy would be to think of certain sharks, such as Great Whites and Hammerheads, which need to continually swim to breathe.  Now think of our economy as a shark that needs to continue to swim at an ever increasing speed in order to breathe.
  • It is no accident that consumers and the government are encouraged to continually rack up ever increasing levels of debt.  Even a plateau in the debt levels would cause the economy to come crashing down.
  • Eventually, the debt payments will consume such a large part of the economy that it must collapse under its own weight.  Think of it as our shark reaching the point where it is swimming at the speed of light.
The great thing about these videos is that they can help a person who would never read a lengthy economics article understand how our monetary system works.  If you want to reach out to friends and family, this is a good starting point.

Watch part one of Money as Debt:

Watch part one of Money as Debt II: Promises Unleashed:

For better video quality, you can also purchase these videos on DVD from

Sunday, December 13, 2009

Food, Inc.

Food, Inc is a documentary film about the business of big agriculture in the United States. Down the winding road of the film you will begin to understand how a few large corporations have come to dominate food production in the United States all while implementing unsanitary and, depending on your viewpoint, immoral production practices.

In many scenes, we are shown the poor and often bizarre conditions in which animals are reared.  In one scene we watch chickens continuously waddling along for a few steps and then falling due to their purposely unnatural size.  There are also slaughterhouse scenes featuring chickens and cows which are mildly gruesome.  Thankfully the director decided to not skew too graphic in these scenes and so we feel most people will not have a problem making it through the movie.

The filmmakers argue that the unsanitary conditions in which animals are held and slaughtered has lead to outbreaks of E. Coli and Salmonella.  In one powerful segment of the film you meet Barbara Kowalcyk, a woman who lost her two year old son due to E. Coli poisoning.  This segment is sad but it is not done over the top like something found in your typical Michael Moore film.

A good portion of the film is spent discussing the company Monsanto.  In the last decade, Monsanto has come to dominate the seed industry with its genetically modified seeds.  Farmers who buy seeds from Monsanto are not legally allowed to plant seeds from the crops grown using Monsanto genetically modified seeds.  Based on this, a farmer who is not using genetically modified crops can have his crops infected by the genetically modified seeds spread from neighboring farms.  If this farmer tries to save his seeds, Monsanto can come after that farmer legally.  Monsanto uses its army of lawyers to harass small farmers and drive them out of business due to ever escalating legal bills.

Those that are well versed with how the financial industry has come to dominate Washington DC will be amazed at the striking levels that big agriculture  has also come to dominate DC in the same manner.  We now have a "self policing of industry" and a "revolving door between industry and regulation."  Also related to the financial industry, we are told of chicken farmers who are strapped with enormous debts from the costs of launching their businesses and keeping their facilities to code that they can never hope to repay them.   This should all sound familiar.

We give Food, Inc 3 stars out of 4.  You can pick up a copy from (whom we are no longer boycotting).  It is also currently available on demand through many cable and satellite services.

Monday, December 7, 2009

Keynes's Guinea Pigs

Back in January of this year we wrote a post titled The Fed Will Buy All Treasury Bonds in Existence if Necessary.  The aim of that post was to settle an argument over whether the Fed would actually follow through with its threat at the time to buy long dated treasury bonds.  We argued that Ben Bernanke gave a speech in 2002 that covered the topic, and he explicitly stated that he believed the Fed could control both short and long term interest rate by outright purchasing treasury bonds.  Sure enough, on March 28, 2009, the Fed announced its program to buy $300 billion in treasury bonds over the coming months.  Since that time, the Fed has become the largest purchaser of treasury and agency debt in the world.  We still aren't quite sure why so many were unwilling to believe that the Fed would do this.

Moving on, in August, President Obama nominated Bernanke for a second term as Fed Chairman.  The word used over and over to describe Bernanke was "creative."  See the following quotes...
How creative has Bernanke been really?  After reading John Maynard Keynes, it becomes obvious that at least one of Bernanke's so called creative ideas should properly be credited to Keynes.

First, let's examine briefly what Bernanke said in his now famous 2002 speech:

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero?

One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.

[One direct method] would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years).

The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.

If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

Bernanke held true to his words from 2002 and enacted these very programs in 2009.

John Maynard Keynes wrote similar thoughts all the way back in 1933, in his famous work The General Theory of Employment, Interest and Money:

Chapter 15, Section III
Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds [English government bonds] of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.

The monetary authority often tends in practice to concentrate upon short-term debts and to leave the price of long-term debts to be influenced by belated and imperfect reactions from the price of short-term debts; — though here again there is no reason why they need do so.

There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto. Indeed, owing to the unwillingness of most monetary authorities to deal boldly in debts of long term, there has not been much opportunity for a test. Moreover, if such a situation were to arise, it would mean that the public authority itself could borrow through the banking system on an unlimited scale at a nominal rate of interest.

I am sure Keynes would be thrilled to know that a test of his ideas would eventually be enacted, with us modern day folks being the guinea pigs of this experiment.  It only seems appropriate to describe the current situation we are faced with by using a quote from Keynes himself:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

Sunday, December 6, 2009

Gold Market Thoughts

Gold spot prices fell more than $50 on Friday, its largest decline in 20 months. This translated to a loss of $4.95 (-4.17%) to $113.75 on GLD, the SPDR Gold ETF. We have been trading GLD rather successfully since 2005 so we wanted to post an update on the five year price history of gold, how we are currently positioned and how we are looking to position ourselves going forward.

Let's start by taking a look at a current six month candlestick chart of GLD with Bollinger Bands.  Notice that GLD rode the top of the band for the entire month of November.  The big drop on Friday did not even bring the current price down to the middle of the band, a reasonable short term entry point (click on images for larger views):

Next let's look at the same chart with the 100 and 200 day moving averages.  Notice how far GLD moved above its trend lines and how far the current price still is from these lines:

The steepeness of this ascent is more apparent by examining a five year chart with the 200 day moving average.  Shaded in grey are two other periods where GLD extended far beyond its moving average:

From March 23 to May 11, 2006, GLD rose from $54.70 to $71.03, a rise of 29.85% in less than two months.  We remember this period fondly because we went long GLD for the first time in November of 2005 and promptly exited our position in the first week of May, an admitted stroke of luck since we knew very little about gold at the time.  From May 11 to June 14, GLD fell back to $56.62, a fall of 21.70%.  GLD fell below its 100 day moving average but stayed above its 200 day moving average.  It took four more months of choppy trading action for GLD to fall below its 200 day moving average and make its final bottom:

We rebuilt our position in GLD slowly throughout the rest of 2006.  GLD had a rather smooth if unspectacular rise though most of 2007 until it broke out in September.  After a brief correction in November and December, GLD rose from $78.67 on December 20, 2007 to $96.50 on March 17, 2008, a rise of 22.66% in less than 3 months.  Like the previous time GLD got so extended, we again exited or position and spent the rest of the year concentrating on the banking crisis and very little time watching gold.  This was fortunate because GLD fell back to $83.99 by May 1, a fall of 12.96% and below GLD's 100 day moving average but above its 200 day moving average.  Further collapses occurred in Autumn, where GLD finally made a bottom on October 24 at $70.65, a fall of 26.79% from its peak in March.  This time GLD fell below both its 100 and 200 day moving averages:

As the banking crisis began to wind down and GLD moved back above its moving averages, we rebuilt our position in GLD from March to June of 2009.

Over the last two weeks and before Friday's decline, we have closed out 80% of our position. Our reasoning was that this run up had quickly begun to resemble the peaks in 2006 and 2008, so a sell off was imminent. Friday turned out to be the day of reckoning and we think this is just the beginning of a much larger correction.

If previous peaks are any indication, this correction will last at least one to two months for the initial fall, where GLD will fall 15-20% and below its 100 day moving average but stay above its 200 day.  This should place GLD somewhere around $100, with a gold spot price of $1000.  GLD will then trade sideways to down for the next four to seven months, where it will reach its bottom below its 200 day moving average sometime in the spring or early summer.

We feel fairly confident about the first scenario playing out but only mildly confident about the second scenario.  We don't give investment advice but we will personally be buying back in full under $100 on GLD and $1000 on spot gold.  If gold falls even further, we will likely be buying even more, and could end up with an outsized portion of our net worth in the yellow metal.

We have shown how under $1000 is a good technical entry point but it is also an excellent area from a psychological perspective as well. Back in November, Marc Faber proclaimed that gold will never fall below $1000 again. Faber has been very astute since we have been following him so we don't dismiss his ideas lightly.  With that being said. we see no reason why $1000 should hold and in fact we feel that when gold does break this level, there will be final capitulation selling where gold will fall to $950-980 where we will have an excellent entry point.

Wednesday, December 2, 2009 Lifts Their Ban

Last week we noted that banned the documentary film The Secret of Oz from being sold on their website. This caused us to call for a boycott of Amazon and we asked readers to get proactive. We, along with many others in the financial blogger community, contacted Amazon to voice our displeasure and it seems to have worked. Today we received word that Amazon has since changed their stance and The Secret of Oz is again available for purchase.

I would like to thank Nathan Martin of Nathan's Economic Edge and Karl Denninger of The Market Ticker for helping to bring this issue to light.

Tuesday, December 1, 2009

My Approval Rating for the Federal Reserve is ...

... thumbs down
Picture taken at the Federal Reserve building in Washington, DC

Sunday, November 29, 2009

What Soviet Medicine Teaches Us

The health care debate now raging and the various bills now making their way through Congress and inevitably into law are far from new. In 1961, a pre-Governor of California Ronald Reagan released a record titled Ronald Reagan Speaks Out Against Socialized Medicine. You can listen to the audio from that record below:

Fast forwarding to today,What Soviet Medicine Teaches Us is a great article written by Yuri N. Maltsev. Mr. Maltsev is a Russian born economist who helped dismantle the USSR and thus offers us a much needed outside perspective on the health care debate.

It is incredible that Russian scholars are writing articles praising the virtues of what can best be described as former American values. Meanwhile, US economists and politicians are busy pushing Marxist ideology.

My favorite quote from the article is as follows:

My friend, a famous neurosurgeon in today's Russia, received a monthly salary of 150 rubles — one third of the average bus driver's salary.

When you reach the point described above, where looting is more profitable than working and certain groups are chosen favorites over the more deserving, the whole system is bound to cave in. The US has not reached the point where bus drivers are making more than doctors but with the rapidly collapsing middle class and the now en vogue "gouge the upper middle class" taxes being stuffed into every new bill, things have been headed that way for well over thirty years. A new health care bill, which will eventually make its way to the President's desk where it will be signed into law, will rob more regular people of wealth for the benefit of a chosen few.

I am not saying that I have all the answers, but I am fairly certain that a health care bill written by and for large multinational insurance and drug companies is not the cure for what ails us.

Wednesday, November 25, 2009


Updated December 2, 2009: has lifted their ban on The Secret of Oz so the boycott is now off.

Bill Still is a former newspaper editor, publisher, writer of 22 books and creator of two documentary films. His latest documentary film, The Secret of Oz, argues that our current economic problems are caused by the debt based monetary system found in the United States. The US cannot issue money directly but it has to issue debt, which it then must pay interest on. This debt has piled up to the point where the interest is crushing the economy.

With neither warning nor provocation, The Secret of Oz was banned from sale on after being featured on the site for only three days. has not responded to Mr. Still as to why the film has been banned, which can only lead us to believe that the film was banned for political reasons. Click here to view the page which now lists the video as unavailable. The reviews of the movie found on that page show that customers are quite upset that Amazon has decided to ban the movie. One person noted that "As a longtime customer of Amazon, I am deeply disappointed with them for this action. I'm afraid I'll have to reconsider how much of my money I spend on purchases through this website." We are ready to go one step further - an official boycott of

I first heard about the ban from Nathan Martin of Nathan's Economic Edge with his post The Secret of Oz Banned on Amazon . Karl Denninger of The Market Ticker is already on board with a call to boycott with his article The Secret of Oz.

Here is how the boycott will work. You must agree to not purchase any items from until the ban on The Secret of Oz is lifted. Most importantly, please send an email to Amazon letting them know about your boycott and the reason for it. If you are a regular customer and were planning on making holiday purchases through, let them know that they have lost your business. You can email them by clicking on the help link on the top right corner of their website and then selecting the Contact Us button in the middle right portion of the Help page.

The following letter is what I have just sent to Amazon:

Hello staff. I have been a regular customer of Amazon for over ten years where I have purchased everything from books, DVDs, CDs, MP3 downloads, video games and household items. I also regularly recommend to friends and family. is one of the great business success stories of the past twenty years and deservedly so.

That's why it is unfortunate for me to notify you that I am now boycotting and I am advocating that others do so as well. This includes canceling my yearly Christmas shopping with Amazon, which I planned to do in the next few weeks. The reason? It has come to my attention that the DVD The Secret of Oz, found at, has been banned from your website. Several attempts have been made by the seller, Bill Still, to find out why his account has been shut down. With no response after several days and multiple messages sent by Mr. Still, I can only assume that the decision was made for political reasons.

The financial blog community has been made aware of this situation and is not pleased. I have called for a boycott of Amazon on my financial blog: Karl Denninger of The Market Ticker has called for a boycott as well: Another popular financial blogger, Nathan Martin of Nathan's Economic Edge, has voiced his displeasure on this issue:

I have yet to watch this movie but if Michael Moore can freely distribute his films then The Secret of Oz deserves to be freely available as well. This is an issue of free speech and free markets.

If Mr. Still's account was closed by mistake, please rectify the situation so that I can offer a retraction of my boycott. If, however, the ban is not lifted within the next few days, I will begin to contact additional individuals in the financial community, certain political organizations and various media outlets about this issue.

Thanks and regards.

By boycotting you are sending them a powerful message - we will not stand for strong armed censorship and we are prepared to fight it by spending our hard earned money elsewhere.

Here is the trailer for the movie:

If you would like to buy The Secret of Oz directly from Bill Still you can purchase it here.

Tuesday, November 17, 2009

Chris Martenson: The Energy Cliff

Embedded below is a ten minute presentation on energy and the economy given by Chris Martenson, an independent economic analyst. His conclusion is that peak oil may or may not have arrived but cheap oil production, at least, has peaked, and thus cheap oil prices are now gone forever. He also talks about a very important concept called the energy cliff. I don't know where I stand on peak oil per se but Chris's logic in regards to an energy cliff and the end of cheap oil is tough to dispute.

Some highlighted quotes from the video:
  • The next 20 years are going to be completely different from the last 20 years
  • We have an economy that, by design, must grow
  • Economic growth cannot happen without growth in energy
  • US oil production peaked in 1970
  • Net energy is the ratio of energy extracted from any given source minus the energy required for extraction. Net energy has been decreasing for oil drilling over the last century and is quickly approaching an "energy cliff."
  • Prior to 1930, the net energy ratio was 100:1. In other words, 1 barrel of oil was required to extract 100 barrels. In 1970, this ratio fell to 25:1. In 1990 it hit somewhere around 18:1 and 10:1. We don't know where the ratio stands today.
  • We are past peak oil for conventional oil aka cheap oil
Watch the video:

I also highly recommend the Crash Course series of videos by Chris Martenson. You can view part one of the series here. Visit Chris Martenson's website here.

Sunday, November 15, 2009

Make Mine Freedom

Embedded below is a 10 minute video entitled "Make Mine Freedom." It was created in 1948 to stand as an advocate of free market capitalism and opposition to communism. My favorite quote from the video is the following. "Whenever someone preaches disunity, tries to pit one of us against another, through class warfare, race hatred or religious intolerance, you know that person seeks to rob us of our freedom and destroy our very lives."

Monday, November 9, 2009

Was John Maynard Keynes A Gold Bug?

Since gold has been busy making new all time highs, it seems like an appropriate time to discuss John Maynard Keynes and his thoughts on gold. Keynes is commonly known as one of history’s biggest gold critics, famously referring to it as a “barbarous relic.” How accurate is this commonly held view? You might be surprised by what Keynes actually wrote on the subject. Dare we ask...Was John Maynard Keynes A Gold Bug?

Let’s find out by quoting the man directly from his most famous work, the 1933 tome The General Theory of Employment, Interest and Money. You can read the full text online for free here.

Before we start, I feel a disclaimer is necessary. I am not an economist, though I have read many economics works. I do own some gold but I am not a gold bug conspiracy theorist nut awaiting the collapse of civilization. Who and what I am is someone that knows how to disseminate well thought out arguments from utter nonsense and I am tired of what passes for economic insight by supposed experts. I do not think a fully implemented gold standard is likely to be implemented but a partially gold backed currency used to settle trade between nations is a definite possibility. If gold served no purpose, central banks would have sold their entire stocks many years ago.

Now that that’s settled, let’s get to the quotes. Keynes's words are in bold...

Chapter 10, Section VI
It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly “wasteful” forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly “wasteful” forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict “business” principals. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

First of all, I have never heard even the most hardcore gold bug suggest that a solution to unemployment is gold mining. I have not read everything written by the popular economists of Keynes’s day, of course, so perhaps I am wrong, but this passage strikes me as the ultimate straw man argument.

Let’s move beyond the nonsensical argument to make one point. Gold mining does require a large commitment of labor, no doubt, but what of it? What are the alternatives? Fiat currency is certainly cheaper to produce but this is also its greatest weakness. The ease of production has ultimately been the undoing of all fiat currencies, while the difficultly of mining gold creates its scarcity and has led to its store of value for thousands of years.

As a working man myself, trading my labor for something that is difficult to produce (gold) makes a lot more sense than trading my labor for something that has nearly zero cost (fiat currency). If the treasury secretary can simply hand unlimited amounts of money to his friends who did not know how to run their businesses, why am I working so hard to obtain these same dollars? It is not a stupid question.

Chapter 10, Section VI
At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilisation. just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress-failing something better. To mention a detail, the tendency in slumps for the price of gold to rise in terms of labour and materials aids eventual recovery, because it increases the depth at which gold-digging pays and lowers the minimum grade of ore which is payable.

There is a lot to digest in this passage so let’s start again at the beginning…

At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline.

This can only be construed as a positive remark by Keynes on gold. The more gold there is, the greater the wealth. I own gold and yet I completely disagree with these sentiments. An increase in the supply of gold does not increase real wealth whatsoever. An increase in the supply of gold will cause an increase in prices relative to gold, and may kick start an inflationary cycle which raises prices, but real wealth is much the same as before. You would think an economist would know the difference. If we go back to his original quote in this post, Keynes actually said the exact opposite – "gold-mining, which not only adds nothing whatever to the real wealth…" Is this man playing a trick on us or is he just incapable of consistency?

Thus gold-mines are of the greatest value and importance to civilisation, just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress-failing something better.

Wow – there is a lot said in just this one passage. First, Keynes claims that gold mines are of great value to civilization. Does that sound like someone who detests gold? Certainly not. Next, Keynes equates gold mining to wars in that both have led to great progress. Perhaps for the victors, whom go the spoils, war is the road to prosperity. As a whole civilization, however, war is a net negative. Economics is defined as the social science that studies the production, distribution, and consumption of goods and services. If nothing else, the job of an economist is to argue the merits of peace and free trade, and show how it is a superior form of civilization compared to war and tyranny. I submit that an economist who espouses the progress of war is not an economist at all.

To mention a detail, the tendency in slumps for the price of gold to rise in terms of labour and materials aids eventual recovery, because it increases the depth at which gold-digging pays and lowers the minimum grade of ore which is payable.

Keynes overplays the importance of the new profitability of gold mining as a catalyst for economic recovery. After all, exactly how many people does he expect to become gold miners? At the same time, in general, he is right. Economic slumps naturally correct themselves because input costs decrease in relation to money (deflation) to the point where new production will be revived. This is in line with what most Austrian economists believe and this directly contradicts the need for government intervention in markets during economic slumps. This article is about gold so I will move on from here but I will discuss this subject more in my next Keynes article.

Chapter 10, Section VI
Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance.

As in the previously quotes passage, as Keynes praises gold I find myself shaking my head in disgust. Ancient Egypt had “fabled wealth?” Wealth for whom? The pharaohs certainly lived a life of abundance. Do you think the slaves who worked backbreaking labor building pyramids in the scolding desert heat felt the same way? To them, Ancient Egypt may have been fabled but it certainly was not wealthy. In Keynes's mind, however, gold and pyramids were the cause of Egypt’s wealth and certainly not just a byproduct of other wealth creating mechanisms. What nonsense.

Chapter 23, Section II
The economic history of Spain in the latter part of the fifteenth and in the sixteenth centuries provides an example of a country whose foreign trade was destroyed by the effect on the wage-unit of an excessive abundance of the precious metals.

This directly contradicts the Keynes quote we featured earlier. “At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline.” I think both explanations by Keynes are wrong so I will restate my stance. An increase in the supply of gold does not increase real wealth whatsoever. An increase in the supply of gold will cause an increase in prices relative to gold, and may kick start an inflationary cycle which raises prices, but real wealth is much the same as before. Such an extreme example of a rapid increase of gold supply is interesting but not that useful in the grand scheme of things, since the supply of gold has been fairly steady over long periods of time. Compare the supply of gold over any one hundred year period to any fiat currency over that same period and I do not suspect that the fiat maintained a more stable supply over any period in history. Imperfect, yes, but superior to the alternatives.

Chapter 23, Section II
The history of India at all times has provided an example of a country impoverished by a preference for liquidity amounting to so strong a passion that even an enormous and chronic influx of the precious metals has been insufficient to bring down the rate of interest to a level which was compatible with the growth of real wealth.

I think the example of India unfairly blames gold for the economic condition of that country. Gold has been historically hoarded by Indians because of their weak economy and financial institutions, and thus is a symptom of their plight and not the cause. As the Indian economy continues to grow and prosper over the foreseeable future, we are likely to see a decrease in the hoarding of gold as better investment alternatives continue to expand. It is certainly an interesting topic for discussion, however, and I would love to hear more arguments on this subject, perhaps from someone who understands the Indian culture better than I do.

So was John Maynard Keynes a gold bug? Hardly. What we have shown, however, was that Keynes did not have a total disdain for gold as is often claimed. His constant contradictions on the subject are undoubtedly a source of confusion, so it is not surprising that the general understanding of his views on the subject is low. The more I read Keynes, the more I tend to think that this man was playing a trick on the world. He surely must have noticed the massive contradictions he presented on many subjects, in this case gold but I have other examples, and yet he always espoused his views with the certainty of law. Are half of his passages what he actually believes while the other half are in simply made in jest? I will attempt to answer that question as part of my next post on John Maynard Keynes. Until next time.

For an earlier post I wrote on John Maynard Keynes's views on stock markets click here.

Saturday, October 31, 2009

Volatility Skyrockets As Stocks Sink

For our last post we noted that the S&P 500 was quickly nearing its 500 day moving average and posited that it was unlikely to rise above that level.

Today we have further technical evidence that the stock rally since March is likely over, at least for now. The VIX, or volatility index, broke out of its downtrend on Friday with a massive 23.95% rise on the day as the S&P 500 fell 2.81%. The breakout is obvious on the six month time scale as the VIX hit 30 to rise above the previous peaks hit over the last few months (click on images for larger views):

On a longer time scale, we can clearly see that the uptrend in volatility since the bear market began in late 2008 is still in tact:

If either the S&P500 breaks above its 500 day moving average or the VIX falls back down into the low 20s, we will re-evaluate our stance. For now, all signs point towards this stock correction continuing.

Sunday, October 25, 2009

S&P 500 Moves Towards Its 500 Day Moving Average

The S&P 500 is quickly approaching its 500 day moving average as seen below:

s&p500 approaching its 500 day moving averageIt is easy to see why this is an important technical level. Throughout the bull market of the 1990s and 2003-2007 bear, the market stayed above this level. The market also stayed below this level during the bear market of 2000-2002 and the current bear market. In the next month we should be able to tell if the market is able to break through its 500 day moving average, thus indicating a new bull market, or if it is rejected. A rejection could be harsh, with a drop below the 666 low reached in March a very real possibility.

Which way will it go? We think the markets have not hit their lows yet for this cycle so we expect the 500 day moving average to act as overhead resistance. Anything can happen, however, and with the massive government interventions taking place over the past year, technical and economic indicators that were reliable in the past need to be questioned. Market participants are watching these sort of momentum indicators so a breakthrough or rejection is likely to cause a big market move in either direction. We will keep a close eye on this indicator and post an update when a decisive move has been made.

Thursday, October 22, 2009

Commodity ETFs and ETNs III

Our first post on this blog was a Google docs spreadsheet containing a list of commodity Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). These funds seek to track the performance of specified commodities and not commodity based stocks. I excluded 2x and more levered funds because I think they are lousy investments and borderline scams.

I have updated the spreadsheet so you can check it out here. Updates include the following:
  1. New average daily volume numbers for all funds
  2. Removal of PMY, the ELEMENTS precious metals fund, because it has been delisted
  3. Removal of GOE, the ELEMENTS gold fund, because it has been delisted
  4. Removal of LSO, the ELEMENTS livestock fund, because it has been delisted

Monday, October 19, 2009

Dividend Reinvestment Plans (DRIPs)

This past weekend I posted an article on my other site, Online Broker Review, about Dividend Reinvestment Plans (DRIPs). If you are in the market for a broker that will automatically reinvest your dividends then you might find this guide useful. You can read the article here.

Sunday, October 4, 2009

The Marshmallow Test

What is the marshmallow test? First, watch this adorable short video:

Now for some background. The marshmallow experiment is a famous test conducted by Walter Mischel at Stanford University. In the 1960s, a group of four-year olds were given a marshmallow and promised another but only if they could wait 20 minutes before eating the first one. Some children could wait and others could not. The researchers then followed the progress of each child into adolescence, and demonstrated that those with the ability to wait were better adjusted and more dependable (determined via surveys of their parents and teachers), and scored an average of 210 points higher on the SATs.

Here is another video with some background information provided by psychologist Dr David Walsh:

Psychologists refer to the ability to wait for what one wants as deferred gratification while economists have a different but related term: time preference. Time preference pertains to how large a premium a consumer will place on enjoyment nearer in time over more remote enjoyment. Someone with a high time preference is focused substantially on his well-being in the present and the immediate future relative to the average person, while someone with low time preference places more emphasis than average on their well-being in the further future.

For example, a person with a high time preference will charge a plasma TV that they cannot currently pay for on their credit card charging them 20% interest. A different person with low time preference will wait until they have saved the money for the TV before purchase.

Deferred gratification and time preference are important concepts to understand within the context of the economic problems sweeping the United States. Briefly stated, it's all about debt. This chart provided by Karl Denninger of The Market Ticker should get the point across:

The rise in household, corporate and government indebtedness over the past thirty years points towards a people whom in aggregate have an ever increasing time preference. As the marshmallow experiment showed, a low time preference is desirable over a high time preference in almost all aspects of life. Even disregarding the experiment, anyone should have enough anecdotal evidence of their own by observing friends and family to see the connection.

The Federal Reserve, with their ever decreasing interest rates and relaxation in lending standards, are directly responsible for our problems. These Fed policies shift time preferences higher and plain promote irresponsible behavior. Worst of all, the problem is not only debt, which in most forms can be purged relatively easily by such vehicles as bankruptcy, but psychological, which is much harder to reverse. The United States will continue to fall further behind other nations in competitiveness and quality of life as long as these disastrous policies are maintained. America is failing the marshmallow test.

Sunday, September 27, 2009

Marc Faber on Bloomberg

Marc Faber of the Gloom, Boom & Doom Report did a fantastic interview on Bloomberg this past week. Some choice quotes...

"He [Bernanke] will print like never before in history."
"He [Bernanke] is a criminal."
"The next crisis will bring down the entire capitalistic system."
"The dollar weakness is a symptom of inflation in the system."

Part One:

Part Two:

Part Three:

Thursday, September 24, 2009

Media Begins to Take Notice of Intensifying Trade Wars

We have been talking about a brewing trade war between the US and China since the first posting in our series On Treasury Bonds and Trade Wars back in April. After the news broke two weeks ago that the US would raise tariffs on Chinese tires, The Economist has finally started to cover this issue in an article titled Economic Vandalism.

China is not sitting idly by, however, as they have taken the US to trade court over the tire tariffs:

Beijing announced last week that it will challenge American tariffs on imported Chinese tires at the World Trade Organization.

And now a new row is potentially developing over paper tariffs:

A U.S. labor union and three paper companies have filed a new trade complaint over imports of Chinese paper, possibly fueling tensions between Washington and Beijing amid disputes over tires and other goods.

Since the financial panic that started last fall mostly ended this past spring, global trade has remained quite weak. Stock markets seem convinced that a recovery is already here but the evidence for that is still quite questionable. If global trade does not pick up steadily from here, or if a second wave of panic ensues, trade tensions will continue to build and we could move from the petty trade skirmishes of today to full blown trade wars. If and when this happens, look for the mainstream media to be two steps behind as usual.

Monday, September 14, 2009

Another Gold Correction Imminent?

I received the following email this morning from one of my brokers, Zecco:

This mailing is interesting for two reasons. First, soliciting regular brokerage account holders for gold and silver futures trading shows how mainstream these investments have come over the last few years. When I first started investing in gold in 2005 I never encountered this sort of pitch. Second, the offer to trade at "up to 100:1 leverage" is simply incredible. At this level, a 1% move against an investor will wipe them out. What lunacy.

Zecco is not a bad service though. For my review of Zecco and other brokers please visit my other site Online Broker Review.

For the record, we think that gold still has a long way to go before its bull market ends. Until we see the kind of spectacular parabolic blow off that fits with a generational top, we see no reason to be bearish on gold.

Saturday, September 12, 2009

On Treasury Bonds and Trade Wars IV

We have been on a bit of a hiatus here but that does not mean there have been a lack of interesting developments in the world of economics, finance and geopolitics. Our first order of business is an update to our semi regular series On Treasury Bonds and Trade Wars (view parts I, II and III).

Since the last update in our series, what has happened? In the markets, stocks have been on a tear all around the world. The S&P500 has continued to go straight up since it bottomed in March:

Gold has again breached $1000 and is threatening to take out its all time high. The one year chart for GLD, the Gold tracking ETF, still looks more impressive than the S&P 500:

The US dollar is crumbling, with the dollar index down below 80 and threatening to take out its all time low:

If one were to guess, based on the above charts, in which direction US treasury bonds have moved over the same time frame, what would it be? Down, right? You would be thinking reasonably and logically. You would also be somewhat wrong. Ten year treasuries have consolidated some, for sure, but to the extent that one would expect given other market developments. The trend going back to late last year is still up:

For now, the connection between treasury bonds and trade wars has weakened. We don't think this will last much longer but no one knows for sure.

On the global trade front, as we have predicted, protectionism has continued to increase. In July the EU implemented tariffs on Chinese made steel pipe. And then today rumors were confirmed when the White House announced that tariffs on Chinese tires would be enacted. This is being labeled as the first major trade enforcement action implemented by the Obama administration. The Chinese are none too thrilled and have already responded:

The U.S. violated rules of the WTO and the tariff imposition is a breach of the commitments made by the U.S. at the Group of 20 summits, the [Chinese] ministry said in a statement posted on its Web site, citing spokesman Yao Jian. The move will harm both countries’ interests and produce a chain reaction of trade protectionism, slowing world economic recovery, it added.

This Chinese official fears the same thing that we do. Tariffs tend to work in a tit-for-tat fashion and China is now prepared to tat. One can debate the reason for it, but the global economy has picked up slightly over the last few months. If the recovery continues, increased pressure for tariffs will probably wane. If the recovery stalls or even fails, however, we will be seeing much more of this type of activity. Struggling industrial concerns will continue to pressure their elected officials to "save jobs" and implement tariffs.

We are of the opinion that the recovery is simply freshly issued government money flowing into all aspects of the global economy. The performance of stocks, for sure, has been impressive but global trade has still not picked up to levels one would associate with a real economic recovery. We will need to see trade growth of over 5% with government deficit spending under 5% of GDP before we can feel confident about things. That is not expected to happen by anybody for quite some time.

Thursday, August 27, 2009

White House Budget Projection

One piece of news that came out this week was that the White House is projecting a budget deficit of $9.05 trillion over the next ten years. What does this mean? First of all, let's look at where we are, how we got here, and where we are headed.

Using the information from we know historical US federal budget deficits going back to early 1993. On the day that Bill Clinton was inaugurated - January 20, 1993 - federal debt stood at $4.19 trillion. Next let's fast forward eights years to the day when George W. Bush entered the White House - January 20, 2001. On this day, federal debt stood at $5.73 trillion. This was an increase of 36% over 8 years - or 3.96% per year compounded. Next, let's fast forward to Barack Obama's first day in office - January 20, 2009. On this day, the federal debt was $10.63 trillion. This was an increase of 85.51% over 8 years - or 8.03% per year.

The budget projection for this year is $1.58, which, if accurate, will bring the total debt to $12.28 trillion by the end of this year. Now, the White House projects that the budget deficit will increase by $9.05 trillion from 2010-2019. This is an average yearly budget deficit of $905 million, or an increase of $7.92 trillion over the potential eight year Obama tenure. If accurate, this will leave the federal debt at $18.55 trillion when Obama leaves office. This would equate to an increase of 74.46% over 8 years - or 7.2% per year.

Of course we know that these numbers are equal parts guessing and wishful thinking, to put it kindly. They do not take into account the future costs of social security, the new health care reforms and other such programs. These numbers also do not take into account the many obligations that the treasury has taken on over the last year to bail out various financial institutions and backstop public and private debts. Throw in another "unexpected" recession or two during this time and you get the idea.

Bringing it all together, the federal debt increased by $1.53 under Clinton, $4.9 billion under Bush II, and at best will increase by $7.92 trillion under Obama. As government spending increases, it is comforting that tax receipts are growing as well. The only problem is that they are growing in the other direction, as in shrinking:

These trends are clearly unsustainable. If what cannot continue must stop, we know where this is headed. My guess is we do not even make it to the end of these government projections before something "interrupts" the cycle. We have a few theories as to what form this "interruption" takes but we will save that for another day.

Sunday, August 16, 2009

Daily Show Responds to Glenn Beck on Health Care

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Glenn Beck's Operation
Daily Show
Full Episodes
Political HumorSpinal Tap Performance

Last Wednesday, we posted a clip of Glenn Beck talking about health care. We posted that clip not because we necessarily thought Beck was an authority on the issue - we have not followed all of Beck's health care related views so we cannot speak about everything he has said on the subject. We simply found the particular segment in question to be very well done.

The Daily Show with Jon Stewart, however, did a little research and did their own segment on the evolution of Glenn Beck's health care views over time (see the above embedded video). Basically, Beck complained about the existing health care system while working for CNN Headline News a year ago but having since moved to Fox News, he seems to be its biggest defender.

Nice job Daily Show. I am continually amazed how the Daily Show is a better pundit watchdog than the "real" media on a regular basis. The best example of this is the now famous confrontation with Jim Cramer. One reason that CNN, MSNBC and Fox News probably do not do segments like that shown above is that they would soon be attacked by the other networks for using the same dishonest means and be labeled as hypocrites.

Wednesday, August 12, 2009

Glenn Beck on Health Care

If you are a regular of this blog you know that we are no fan of the mainstream media. Some of the worst offenders of this group are the cable news trio of MSNBC, CNN and Fox News. In fact, the last time we included a video from any of these three networks we expressed our disgust with an MSNBC segment featuring Keith Olberman and Janeane Garofalo. That's why it was so surprising to us to watch the above clip from the Glenn Beck show as seen on Fox News. It features what can only be described as containing real, actual shreds of analytical thought in regards to the history and ethics of health care. You don't have to agree with what Glenn Beck says to appreciate the narrative he is trying to weave here.

I am only casually familiar with Glenn Beck and the Glenn Beck show so I do not want to defend everything the man has ever said. Some of the audio and video clips I have seen of him are pretty nutty. He also has some pretty provactive thoughts from time to time as well. In the included video, he strung together quite a segment. Is there some fear mongering? Yeah. Is his brief moment of tears a bit much? Perhaps. Is it partisan? Yes, but he makes some very valid points. Please watch the included video as it is far above the typical level of analysis you will find from most forms of mainstream media.