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  Jim Kingsland

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  The first thing I usually do most mornings when I wake up is to check the CNBC Driod app (at least the CNBC app is useful for a data update) to check the price of gold and get a quick read on S&P futures, Euro markets and what happened overnight in Asia. Futures are firm this Wednesday morning. The accompanying headline on the CNBC app: “Stocks to open higher on Facebook IPO cheer” made me laugh to myself. It’s natural for Wall Street to be happy about Facebook being potentially worth more than some of the best known blue chips like Exxon. Some Wall Street t.v. pundits think Facebook’s valuation could reach $130 billion. That’s delusional, it’s insane – and so CNBC is correct in its on going advocacy for those who benefit in selling things like FB shares to unsuspecting people; those sellers have much to be cheery about! Unfortunately, the CNBC presentation lacks the balance that would be beneficial to the average reader-investor. Wall Street is the place, as I have often stated, to embrace the delusion and the insanity. There’s something to be said for some practical and smart analysis, and I do know of some smart people who do their homework and do well with stocks, but for many companies with lofty valuations that turn “value” into a relic of a concept, there is a cadre of speculators who are attracted to companies with nutty valuations. With benchmarks like the S&P having been in the mode of running almost in place (on average) for 10 years, Wall Street has become a place where embracing insane valuation and following the momentum works for many.

  CNBC’s cheer headline also betrays the ignorance of CNBC. One could argue that Facebook eventually selling shares to the public (today is just the filing day) is a sign of a top, but that is a debatable subject. What isn’t so debatable is that a huge Facebook IPO, where an initial tranche of $5 bln worth of shares are sold to the public is that the $5 bln will be coming from somewhere. CNBC forgets, that the money to pay for Facebook shares will come from other areas of the stock market. Would that be bullish for the market as a whole? Even if the money comes from the “sidelines” cash, which is merely a transaction that switches money from the buyer to the seller, or put another way, one of the urban Wall Street legends (lies) that cash on the sidelines means something when it really doesn’t. Something to ponder this morning. Perhaps this Facebook cheer that CNBC is honking about is actually not so cheerful after all. Just a thought.

  Oh, I am not making an overall bearish call on the market of stocks. Stocks will do fine as long as the QE lasts and faith in the dollar doesn’t collapse. It’s just that FB is something to really not to get so excited about and is another one of those markers to make new ‘marks’, or bagholders in the market.  that’s all.

  What may be warming the hearts of investors this morning is China PMI managed to beat expectations, though was still below the best expectations. There are also the ongoing rumors that Greece may strike some sort of deal with its creditors. There is not going to be a disorderly default, for now, as the space discussed yesterday, though problems for Greece and the rest of Europe are far from over. Bet your bottom dollar that any losses the banking cartel will supposedly take from Greek paper, will be glossed over with more creation of funny money to shore up any bank that takes too big of a haircut.

  The ADP payroll numbers are out. I am not going to waste my time or yours. It’s meaningless. Somehow it reports the financial sector created 9,000 jobs in January. You’ve got to be kidding me.

  GOLD
  Gold has been playing around with the $1750 area which is proving to be a short term resistance area. No biggie.

  PIMCO, the worlds largest bond fund, is managed by Bill Gross. He says we are witnessing the death of abundance. Gross says Gold is the default “STORE OF VALUE”.

  His February Newsletter is out and it is a doozy. He pulls no punches with respect to schemes of the Fed:

  “when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street.”

  He further states:

  “Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.”

  And if that isn’t enough from Gross:

  “Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”

  Gross even has some icing left for his nightmare cake:

  “Where do we go when we die?
  We go back to where we came from
  And where was that?
  I don’t know, I can’t remember
  Virginia Woolf, “The Hours”

  “I don’t remember much of this life, and like Virginia Woolf, nothing of the herebefore. How then, could I expect to know of the hereafter? I know at least that we all exist at and of the moment and that we make up those moments as we go along. I became a grandfather for the first time a few months ago and proud son Jeff asked for some fatherly advice as to how to go about raising his baby daughter Caroline. “We all do it in our own way, Jeff, you’ll make it up as you go along,” I said. Parenting, and life itself, is one giant experiment. From those first infant steps, to adolescent peer testing, flying from and departing the parental nest, gene replication and family building of our own, maturity and acquiescence, aging, decay and inevitable death – we experiment as best we can and make it up as we go along.

  That death part though, oh where do we go after we have done all the making? There was another Jeff in our family, beloved brother-in-law Jeff Stubban who was as kind a man as there ever could be. Dying within three months of an initial diagnosis of pancreatic cancer, our family sobbed uncontrollably at his bedside as his breath, his spirit, his soul, departed almost on cue while a priest recited the rosary. Where had he gone, where is he now, what will become of him and all of us? Like many grieving families we look for signs of him and in turn for clues to our own destination. A lucky penny in the street, a random mention of his beloved New Orleans, an exterior resemblance of his shiny bald head in a mingling crowd. Where are you, Jeff? Tell us you are safe so that we might meet again.

  Having now matured to trust reason more than faith I offer not so much a resolution, but an alternative to the unanswerable question of Virginia Woolf and the departed souls of Jeff Stubban and billions of others. If we don’t meet again – up there – then perhaps we’ll meet once more – down here. After all, the one thing I know for sure is that we got here once – and because we did, we could do it again. Rest easy, dear Jeff, and welcome to this world, dear Caroline. We’ll all just have to make it up as we go along.
  The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter. A multitude of liability structures dependent on a certain level of nominal GDP growth require just that – nominal GDP growth with a little bit of inflation, a little bit of growth which in combination justify embedded costs of debt or liability structures that minimize the haircutting of or defaulting on prior debt commitments. Global central bank monetary policy – whether explicitly communicated or not – is now geared to keeping nominal GDP close to historical levels as is fiscal deficit spending that substitutes for a delevering private sector.
  Yet the imagination and management of the transition ushers forth a plethora of disparate policy solutions. Most observers, however, would agree that monetary and fiscal excesses carry with them explicit costs. Letting your pet retriever roam the woods might do wonders for his “animal spirits,” for instance, but he could come back infested with fleas, ticks, leeches or worse. Fed Chairman Ben Bernanke, dog-lover or not, preannounced an awareness of the deleterious side effects of quantitative easing several years ago in a significant speech at Jackson Hole. Ever since, he has been open and honest about the drawbacks of a zero interest rate policy, but has plowed ahead and unleashed his “QE bowser” into the wild with the understanding that the negative consequences of not doing so would be far worse. At his November 2011 post-FOMC news briefing, for instance, he noted that “we are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people” – savers, pension funds, insurance companies and finance-based institutions among them. He countered though that “there is a greater good here, which is the health and recovery of the U.S. economy, and for that purpose we’ve been keeping monetary policy conditions accommodative.”

  My goal in this Investment Outlook is not to pick a “doggie bone” with the Chairman. He is makin’ it up as he goes along in order to softly delever a credit-based financial system which became egregiously overlevered and assumed far too much risk long before his watch began. My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic. When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences. Much like the laws of physics change from the world of Newtonian large objects to the world of quantum Einsteinian dynamics, so too might low interest rates at the zero-bound reorient previously held models that justified the stimulative effects of lower and lower yields on asset prices and the real economy.

  It is instructive to mention that this is not necessarily PIMCO’s view alone. Chairman Bernanke and Fed staff members have been sniffin’ this trail like the good hound dogs they are for some time now. In addition, Credit Suisse, in their “2012 Global Outlook,” devoted considerable pages to specifics of zero-based money with commonsensical historical comparisons to Japan over the past decade or so. The following pages of this Outlook will do the same. At the heart of the theory, however, is that zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis. First of all, when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street.

  What perhaps is not so often recognized is that liquidity can be trapped by the “price” of credit, in addition to its “risk.” Capitalism depends on risk-taking in several forms. Developers, homeowners, entrepreneurs of all shapes and sizes epitomize the riskiness of business building via equity and credit risk extension. But modern capitalism is dependent as well on maturity extension in credit markets. No venture, aside from one financed with 100% owners’ capital, could survive on credit or loans that matured or were callable overnight. Buildings, utilities and homes require 20- and 30-year loan commitments to smooth and justify their returns. Because this is so, lenders require a yield premium, expressed as a positively sloped yield curve, to make the extended loan. A flat yield curve, in contrast, is a disincentive for lenders to lend unless there is sufficient downside room for yields to fall and provide bond market capital gains. This nominal or even real interest rate “margin” is why prior cyclical periods of curve flatness or even inversion have been successfully followed by economic expansions. Intermediate and long rates – even though flat and equal to a short-term policy rate – have had room to fall, and credit therefore has not been trapped by “price.”

  When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the U.S. and selected “clean dirty shirt” sovereigns, then the dynamics may change. Money can become less liquid and frozen by “price” in addition to the classic liquidity trap explained by “risk.”

  Even if nodding in agreement, an observer might immediately comment that today’s yield curve is anything but flat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit.

  Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.
  Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.”

  Jim again: WOW, Gross knows what’s up. I pay attention to the manager of the world’s largest bond fund.

  More On Gold
  This sort of thing will supportive for gold in 2012. The spreading of Contagion: The California state comptroller has told the legislature that Cally-fornia has a month’s worth of cash left. Isn’t Caly the world’s eighth largest economy? Not so good. Solution: Only one I can think of is either to sell the state to China, or just borrow, borrow, borrow. Yes, it will be more borrowing. Hmmm, let’s see would I lend to California buy bying bonds, or lend to a random stranger on the street. I’d go with the stranger.lol.
  Some other “GOLD” News of note:

  India increases base import price of gold, silver http://reut.rs/zpP67D
  #Gold back in vogue, posts biggest gain since August via @Reuters ow.ly/8MLPx

  The latest CBO Figures are out. The outlook for the economy and the Social Security Trust Fund are horrible. I will compose some thoughts and share more tomorrow. It’s pretty much the same old thing. The economic projections show weak GDP, higher unemployment and an increasingly rapid point if official insolvency for the Social Security Trust Fund.

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