Go, and tell this people, Hear ye indeed, but understand not; and see ye indeed, but perceive not. – Isaiah 6:9
For precept must be upon precept, precept upon precept; line upon line, line upon line; here a little, and there a little. – Isaiah 28:10
Whenever people ask me for investment advice, I brace myself and go stiff all over. The next words to fall from my lips usually shock so badly those used to conventional advice that they sometimes faint dead away. I’m sorry, but I’ve lived out on the edge of the bell-shaped curve so long my ears ring permanently. No diversification shibboleth, no paper profits goal, no stocks (with rare exceptions), no mutual funds or money market funds, no “safe” bank CDs or bonds, none of those mainstream recommendations, only extremist, hold-it-in-my- own-hands, wild-eyed, hard money ideas.
What hardens my recommendations even more? They’ve been dead accurate since 2001, and have consistently, year in and year out, made money for my customers, outperforming whether measured against themselves or against other investments.
Yet in all humility and with no surprise I meet astonishing resistance, almost as if people would rather lose money than adopt my radical method, even though it arises from a ruthlessly honest assessment of all circumstances.
It breaks my heart, not for my sake but for theirs, and all I can do is patiently, gently try to show and explain why my recommendations are, under the present circumstances, still correct and will continue to pay off until the primary trend changes.
Get one thing straight: No investment is forever. No recommendation works forever. Sooner or later, the primary trend (the 15 to 20 year long up or down trend) changes, and you must change with it. Therefore, a time will come when we must sell all our gold and silver and put the proceeds into something else, some productive assets.
Who knows? Maybe when the time comes to do that, we won’t have to “sell” them: they’ll already be “money,” the fiat having gone the way of all paper.
The environment is strongly negative
No investment is immune to the environment it lives in. In fact, environment pre-determines performance. What rules our environment? Inflation, intervention, and lawlessness.
First, monetary inflation. Since the Federal Reserve’s installation in 1913, the dollar has sunk from 20.6718 dollars to the ounce ($1.00 = 0.048375 oz) to $1,730/ounce ($1.00 = 0.000578, losing 98.8% of its purchasing power.
If you still believe that’s just bad luck, or that the Federal Reserve actually “fights” inflation, then there’s no point in our laboring through this conversation. All central banks are engines of inflations, created to inflate and to manage the inflation. Wherefore, as the dog eats meat and the hog eats carrion, central banks will inflate. Ignore this fact, and you can no more assess the value of your investments or their outlook than a man can shoot skeet off the back of a bass boat in a storm with a .22 rifle.
Why? The value of the measuring stick is always dropping. When adjusted for inflation, what appears a nominal profit becomes a real loss.
First rule of living under monetary inflation is ignore nominal value and attend only purchasing power value – real, inflation-adjusted value. Any other view is a snare and a deception, and guaranteed to cost you capital.
Second rule is, dollars tomorrow will be worth less than dollars tomorrow.
As long as the Federal Reserve System creates money out of thin air, the U.S. economy will languish. The more money it creates through QE-xyz, the more it jimmies with the interest rate structure, the longer it suppresses interest rates, the more the economy will suffer and the faster the dollar will sink. The more the Fed does, the worse things will get.
Second, government economic intervention. The Federal Reserve makes up only half the control formula; government intervention in the economy supplies the rest. The socialist presupposition underlying this says that a command economy is better than a free enterprise economy, and a few central bankers and politicians know better than the millions who make up the economy where money ought to be spent and invested. The silliness of that presupposition needs no comment, not even one of my acidly sarcastic ones. It’s too cheap a shot.
Government intervention takes the form of indirect subsidies through tax breaks, of direct subsidies, bail-outs, transfer payments (income redistribution & welfare), and regulation. Beside this is direct spending such as building roads, bridges, and parks, but most of all “defense” (war) spending.
Government intervention skews the economy by misdirecting spending, capital, and economic development where politicians, bureaucrats, and crony capitalists want it, not where the economy wants it. Government intervention wastes resources, no different from torching piles of $100 bills.
Worse still, government intervention has made the U.S. economy utterly addicted to continued government spending, which guarantees continued Federal Reserve inflating. Over half (50%) of US income arises from state and local and federal government spending. Cut that spending off tomorrow, & over half the households have no income.
The monster must be fed, or the economy will die and the people rise in rebellion.
As long as this belief prevails and government intervenes in the economy, the U.S. economy will languish. The more it intervenes, the worse it will suffer. Inflation and intervention are the twin engines driving silver & gold higher and higher, and there’s no sign yet they will stop soon.
Third, no rule of law. For every economy the indispensable pre-condition for success is the rule of law. If people cannot be sure their property is safe, they won’t risk it. The more the rule of law erodes, the more the law is shown to favor some over others, the more people pull back. The more the rule of law is flouted, the greater the people’s resentment, the worse society’s foundation is undermined.
Glass Steagall repealed
Several events have taken place in the last 20 years that weaken or evidence the rule of law’s weakening. In 1999 the Glass Steagall Act of 1933 was repealed. It separated banks from securities and other operations and forbade trading on their own accounts (proprietary trading). Once that was repealed, greed in proprietary trading took the banks about nine years to precipitate a crisis. Banks are either financial intermediaries or casinos. They don’t function well as both.
In 2005 the bankruptcy law was changed, mostly at the banks’ behest, to make bankruptcy much more difficult. Among those forbidden bankruptcy relief were student loan borrowers. As Orwell’s pig Napoleon said so precisely, “All animals are equal, but some animals are more equal than others.”
Then there were the MF Global bankruptcy in October 2011 & Peregrine Futures bankruptcy in 2012. These revealed to all the world the rule banks & stock and futures brokers operate by: what’s ours is ours, and what’s yours is ours, too. While clients thought that their funds were safely segregated from company funds, it turned out that they weren’t. Futures merchants and stock brokers were hypothecating those assets – pledging them as collateral or margin for trades of their own. This calls into question every investor’s claim against brokers, whether for stocks or funds, held in brokerage or futures accounts.
Add to that an obscure change made to the Uniform Commercial Code in 1994. I quote from an October 2012 Casey Research interview with Hedge Fund Manager David Webb:
“WEBB. Those stocks [in your brokerage account] are legally no longer defined as property. . . It took me some years to uncover the basis for how this has changed. It all arises from a revision of the Uniform Commercial Code, Article 8, in 1994. This article governs securities ‘ownership.’
“When they did this revision in 1994, they created a completely new legal concept called a ‘security entitlement,’ which means that a security is now a contractual claim rather than property. That’s the key, and it’s hugely important because a contractual claim in a bankruptcy proceeding has very little standing.
“So even though there are records that a particular security is your property, it’s really not. If your broker goes bankrupt, those securities, by law, become part of the bankruptcy estate. [Read that sentence again, twice.—FS] As a client, you cannot revindicate those securities in a bankruptcy.
“Of course, secured creditors [i.e., banks or other brokers – FS] have a higher priority to the assets of the bankruptcy estate than you do. So you’re left with an inferior claim to what you thought was your own property.”
“TCR. Aren’t brokers required to segregate client assets?
“WEBB. That’s a separate issue, and it varies by country. . . . but in the US, I like to cite an article and presentation about the MF Global bankruptcy by two securities law experts, one of which is a former commissioner of the FCC. They say point blank that there is no legal requirement to segregate client assets.”
So the laws have been changed to weaken the investment customer’s claim to ownership. We saw in the MF Global & Peregrine bankruptcies that this means the worst possible outcome: the customer has no protection and no segregated ownership interest either in margin deposits or securities. For the first time since the Chicago Board of Trade was founded in 1848, when a futures merchant went down, he took the customer’s money and positions with him.
To market risk add risk of market
What does that mean? That to all the market risk that an investment will fall or rise a new risk has been added, the risk that the market itself (the brokers) will default and take your money. The property you thought they were holding in trust they were double-pledging for collateral for their own investments. And adding a new dimension of instability, those houses to whom they yield the collateral for their own investments in turn re-pledge that collateral for their own investments, and so on in a hall of mirrors that ends in insanity.
To this uncertainty we must add the certain inequity of the law. If you or I get into financial trouble, we go under. If a big bank or corporation gets in trouble, the government bails them out, at your expense.
Doesn’t sound like “equality before the law” to me, but what do I know, I’m from Tennessee. And there’s no point mentioning because it is too obvious the unequal and partial enforcement of regulations between giant, politically connected corporations and smaller firms. No one is so naïve as to believe regulations are equally enforced. Besides, all regulation has only one purpose: to stifle competition. There is no level playing field. He who has the most expensive lawyer wins, and the law be damned.
Please return to Nooganomics.com for the second part of this essay.
From the November 2012 Moneychanger newsletter. Used by permission. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focus on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$99 a year. Franklin is an active trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. Subscribe to his daily price report and market commentary on the website. F. Sanders, The Moneychanger, P.O. Box 178, Westpoint, Tenn. 38486 Tel. 888-218-9226.