Tito's Blog

GATA Appeals to CFTC on Concentrated Gold Shorts

Gold bugs rejoice! GATA (Gold Anti-Trust Action Committee) appeals to CFTC to act against manipulative shorts:

GATA has evidence that there are enormous physical short positions in the gold and silver markets that cannot be covered. Because of the decades-long interference with the gold market, we estimate that the free-market price of gold is multiples of the current price. Growing stress caused by burgeoning physical bullion demand is threatening to lead to a price explosion, which will restore to the market the balance that regulation has failed to maintain. In our view, the Comex paper market will become dysfunctional, with “force majeure” having to be declared as the concentrated shorts are unable to deliver on their obligations.

Private, Government, Foreign Financial Balance

The March 2010 Absolute Return Letter (pdf) picks up the national income accounting identity mentioned earlier:

( T - G ) + ( Y - T - C - I ) + ( M - X ) = 0

Where:
T Taxes
G Government Spending
Y GDP
C Private Consumption
I Private Investments
M Imports
X Exports

In other words, the sum of net inflows of money into the stock of capital of a country’s economy from the government, the private sector and foreign investors (that counterbalance the net imports) is always zero, unless there is creation of paper money within a country or a change in foreign reserves.

That entails that as the consumer spending retrenches (and private savings go up) during the ongoing balance sheet recession, government deficit must worsen and/or the country must reduce its current account deficit (i.e. reduce net foreign capital inflows). Another way to look at it is that every dollar saved flows back (as a mathematical identity) to finance additional government debt and foreign capital outflows.

Warren Buffett’s 2009 Letter To Shareholders Is Out

Warrent Buffett published his annual Berkshire Hathaway shareholder letter (pdf). A couple of quotes:

Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.

In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

There’s also a nice story about paying acquisition prices with undervalued or overvalued stock.

Berkshire Letter 2009

Profit Maximization vs Debt Minimization

Awesome inteview with Nomura’s Richard Koo (full text).

Maybe you didn’t know that:

• the value of land collapsed 83% in Japan since the top of the bubble in 1989
• total amount of wealth destruction since the bubble burst equals 3 years of GDP vs 1 year of GDP in the US during the Great Depression
• nevertheless, nominal and real GDP of Japan never went below its 1989 peak thanks to public borrowing, while US GDP was almost cut in half between 1929 and 1939

The whole interview is really worth reading. Two ideas I found most interesting. First, in a balance sheet recession, companies and individuals need to pay down debts that are worth more than their assets, no matter how low interest rates are. In other words, the strategy shifts from profit maximization to debt minimization.

Second, to keep GDP levels constant, the government simply has to borrow the same amount that is being saved by individuals and companies. In other words, fiscal deficits will be financed by those same savings, with no need of external borrowers. That would explain how long-term interest rates in Japan declined to 1.4% over the past twenty years even with growing public debt borrowing.

My fear is that the public debt buffer only represents a way to postpone the day of reckoning as the obvious political least resistance path. The tipping point could probably be reached as the debt rollover risk becomes sensitive to demographic trends (average population getting older and spending its lifetime savings in retirement, health care expenses or support to unemployed younger family members) or companies switching back to profit maximizing mode or the public sector getting accustomed to higher level of spending, waste and corruption or simply a bout of bond market panic. An interest rate shock at high public debt level would quickly trigger a devastating snowballing effect.