Best Quotes of October 2008

by John Rubino
11/3/2008

Ted Butler, Investment Rarities
Maybe one in a million of the world’s citizens realizes that there is much more gold in existence than there is silver. If sufficient numbers of people knew this fact, gold would not be 75 times the price of silver. In fact, gold might be a lot less than 16 times the price of silver. This isn’t complicated. When enough people come to learn that there is less silver than gold in the world, they will buy silver (and maybe sell gold) until the relative price of each reflects silver’s greater rarity.

While silver’s rarity to gold is the main factor assuring that silver will climb in value compared to gold, there are other reasons. For one, the price of silver is below the cost of its primary production for many miners, while the gold price is currently above the cost of production. This suggests a contraction in silver production compared to gold. And while silver is produced as a byproduct for the majority of its production, many of the base metals, like zinc, are below the cost of production, suggesting a curtailment of supply. We are currently positioned the best I have ever witnessed for risk and reward in silver. The downside looks extremely limited and the upside looks explosive. Yes, volatility is great, but everything is lined up perfectly.

A.E. Fekete, Gold Standard University
No commentator could explain why banks have all run out of capital at the same time, while making obscene profits. My explanation is simple. There have been no profits, obscene or otherwise. The banks were paying out phantom profits in the belief that their capital accounts were in good shape. They weren’t. The banks were unaware that the falling interest rate structure has been making inroads on their capital. Since all banks have been working with microscopic capital ratios as a result of 28 years of capital erosion, the failure of one single bank would trigger the ‘domino-effect’ on the rest.

This puts the role of gold into high relief. Had gold been retained as a component of bank capital, credit-default swaps would have never been invented. Gold is unique among financial assets in that it has no corresponding liability in the balance sheet of others. Gold is the only financial asset that will survive any consolidation of bank balance sheets, in contrast with paper assets that are subject to annihilation (e.g., when the bank is consolidated with its counterparty holding the liability side of that asset). Suppose we consolidate the balance sheets of the global banking system. Then all assets will be wiped out with the sole exception of gold. But since the global banking system as it is presently constituted has no gold assets, under any consolidation the banks will be denuded of assets while note and deposit liabilities to the public remain. This is why the regime of irredeemable currency is susceptible to collapse that could be violent, taking place with lightening speed. It can also be seen that trying to save banks from collapsing through consolidation, mergers, takeovers, and shotgun marriages is pouring oil on the fire: it accelerates the meltdown of bank capital, rather than retarding it.

Representative Barney Frank
We made a mistake as a society in promoting homeownership as a universal achievable goal.

Francis Fukuyama, Newsweek
Ideas are one of our most important exports, and two fundamentally American ideas have dominated global thinking since the early 1980s, when Ronald Reagan was elected president. The first was a certain vision of capitalism—one that argued low taxes, light regulation and a pared-back government would be the engine for economic growth. Reaganism reversed a century-long trend toward ever-larger government. Deregulation became the order of the day not just in the United States but around the world.

The second big idea was America as a promoter of liberal democracy around the world, which was seen as the best path to a more prosperous and open international order. America's power and influence rested not just on our tanks and dollars, but on the fact that most people found the American form of self-government attractive and wanted to reshape their societies along the same lines—what political scientist Joseph Nye has labeled our "soft power."

It's hard to fathom just how badly these signature features of the American brand have been discredited.

Eric Janszen, iTulip
We generally advise against selling into a panicky market, but these are unusual times. A very large domino is still to fall: credit default swaps.

Four trillion in OTC credit default swap gross market replacement value (the notional value is just silly) of credit debt default insurance that can never be paid has been taken out against trillions in mortgage and corporate debt that can never be repaid. The CDS are thousands of hand written contracts sans clearing house, settlement based on novation, the weakest form of contract settlement. A huge disaster waiting to happen.

Karen Kwiatkowski, LewRockwell.com
The nature of empire is to expand until it becomes unsustainable and intolerable. The American empire’s collapse – something we should fervently hope to witness in our lifetimes – will occur through the actions of millions of people, who first recognize the absurdity and injustice of government coercion abroad and at home, then reject that coercion – and ultimately proceed, each day, at their own lead, and by their own consent.

Andrew Lahde, former hedge fund manager
The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

Doug Noland, Prudent Bear
Here at home, our maladjusted economic system will only be sustained by somewhere in the neighborhood of $2.0 TN of new Credit. It’s simply not going to happen. And while $700bn from Washington would seem like an enormous amount of support – in reality it’s nowhere close to the amount necessary for systemic stabilization. To the $2.0 TN or so of new Credit required add perhaps as much as several Trillion more necessary to accommodate speculative de-leveraging. The Bust in Wall Street Finance has ensured that insufficient liquidity will be forthcoming to maintain inflated asset prices and sustain the Bubble economy – creating catastrophe for the leveraged speculating community.

The “Freidmanites” thought they understood the policy mistakes that led to The Great Depression. They believed the “Roaring Twenties” was the “Golden Age of Capitalism.” The great bust could have been avoided with a simple ($5bn) banking system recapitalization. As we are witnessing today, the issue is not a manageable amount of new “capital” to replenish banking system losses, but instead the massive and unmanageable amount of new Credit necessary to, on the one hand, sustain a mal-adjusted Bubble Economy and, on the other, accommodate a gigantic speculative de-leveraging. I have a very difficult time seeing a way out of this terrible mess.

Gary North, LewRockwell.com
The dreams of easy retirement are disappearing. So are the dreams of automatic wealth. Americans, more than any other people, bought into the dream of automatic wealth. "Just buy a larger home with 5% down and wait. You will get rich." The dream of leveraged money trapped homeowners. It also trapped hedge fund investors.

This dream has yet to play itself out in a wave of bankruptcies. It will. Hedge funds, leveraged 30 to 1, have few reserves apart from stocks in their portfolios. When the stock market falls, they receive margin calls. They must sell more stocks. This depresses the stock market, which triggers more margin calls.

Getting rich looked easy when stocks were rising. Going bankrupt looks easy now. Leverage is a two-way street.

Texas Representative Ron Paul
The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.

Julian Phillips, Gold Forecaster
The gold market is about to enter the final stage of its evolution. This stage springs from failing confidence in paper money, currently as bad as any pre-war situation. If governments can accede to the disciplines that gold imposes on them, they will also start to buy gold. But this is the hardest leap for them because they have been fighting gold off from being relevant to the money world [and promoting paper money] for nearly 40 years [since Nixon closed the gold window in 1971]. Once they endorse gold by buying it, there will be a flood of funds looking for it.

Richard Russell, Dow Theory Letter
The one area that no one touches, that no politician will mention, that no investigative journalist will dare discuss is the value and viability of fiat money. Yet, we know that throughout history, no fiat currency has ever survived. My thinking is that fiat money was expressly forbidden in the US Constitution. The Founding Fathers in their wisdom expressly stated that the US was not to resort to fiat money. Today, the US government can "print" Federal Reserve Notes and decree by law or fiat that what they are printing or creating by computer is legal for the payment of all debt. In other words, fiat money is indeed money by government proclamation. It's as if the US government proclaimed by fiat that "all cats are now dogs." It makes that much sense. Since money is wealth or payment for work done, the question is -- is fiat money really wealth? To ask that question today is almost treasonous.

Steve Saville, Speculative Investor
The bottom line is that "money velocity" is a redundant concept at best and a misleading one at worst. A pronounced and sustained increase in the rate of money-supply growth ALWAYS leads to substantially higher prices somewhere in the economy, but due to the time-lags involved it will often be difficult to see the link between money-supply changes and price changes. For example, the rapid rises in the prices of many everyday items over the past three years occurred while the money supply was growing slowly. These price rises were an effect of the rapid money-supply growth that occurred during the first few years of the decade. Also, the quickening in the rate of money-supply growth that has just begun and looks set to continue over the coming year will probably be accompanied by a slowing rate of increase in the general price level, thus setting the scene for a "deflation scare". The reason is that the prices of everyday items have yet to react to the slower money-supply growth of 2005-2007.

Peter Schiff, EuroPacific Capital
The latest "catalyst" noted for pushing up the dollar is the government's recent bailout of Freddie Mac and Fannie Mae. If the market were functioning rationally, the resulting transference of staggering new liabilities to the U.S. Treasury would have been immediately seen as a catastrophe for the dollar. Instead the dollar has rallied.

I believe this counterintuitive reaction results from two forces. First, by transforming trillions of dollars of suspect mortgage backed securities into seemingly bullet-proof Treasury bonds, the move has sparked a relief rally in the dollar as foreign investors no longer have to worry about defaults or markdowns. In fact, to holders of Fannie and Freddie debt, it no longer matters what happens to the housing market. Home prices can drop another 50%, every single homeowner can default on their mortgage, and bond holders will not lose one dime. This has emboldened foreign investors, and temporarily increased demand for both dollars and Freddie and Fannie debt.

The second force is related to leveraged players, particularly hedge funds, around the globe unwinding their trades. Those who have been short the dollar are now buying those dollars back. Those who have been long gold, oil, and other commodities, are liquidating their positions. This massive, though in my view misguided, rush to the exits is causing sharp counter-trend price movements. However once speculators have been flushed from the market, I expect the primary trends to return stronger than ever.

Mike Shedlock, Mish's Global Economic Trend Analysis
Here is the deal in even simpler terms. In order to prevent the "Great Depression II", the Fed and the Treasury have embarked on a series of measures similar in nature to those that caused the great depression. The root cause of the great depression was the unsound lending patterns leading up to it. Those same unsound lending practices, now carried to the very limits of legality via Bernanke's alphabet soup of facilities, cannot possibly be the cure.

James Turk, Freemarket Gold and Silver Report
The liquidity crisis and persistent de-leveraging that has been prevailing more or less for eighteen months is winding down, and is being supplanted by another growing and threatening monetary peril. The flight to safety has begun. We are at the beginning of one of those rare moments in time when return on capital becomes less important than the return of capital. We have entered an environment when everyone should be looking at ways to protect their wealth. The flight to safety means that avoiding counterparty risk will increasingly become the most important objective in managing one’s wealth. The way to avoid counterparty risk is to buy tangibles and near-tangibles, like equities. I call equities a “near-tangible” because they convey to the equity holder the ownership of the tangible assets owned by the company.

Not all equities of course meet this need for safety, because some – like banks and financial service companies – should be avoided in a currency collapse. But the shares of commodity producers and those of essential consumer goods should do well, regardless what happens to the currency because their products will likely remain in demand and the price of their products will rise as the currency inflates.

Chris Whalen, Institutional Risk Analyst
Who would think the day would come where blue chip stocks would have 30-day volatilities in the 180% range. That's a barn door so wide you can throw a pick-up truck through it blindfolded and still come up with a valid price guesstimate. No wonder the entire stock market is having an extended nervous breakdown. The key assumption of market efficiency theory, namely that price equals value, is so eroded that people no longer have a computational basis upon which to base portfolio strategies. The amazing thing is how many people continue to get up every morning and blindly pull the handles on the slot machines. There's something kooky going on when everyday folks set cell phone trading alerts to only make noise if the DJIA moves by at least 200 points.

Read our lips: price is not presently a valid surrogate for value - maybe never was. Efficient market theory has a place somewhere in the tactical tool kit, but right now it must wait until the 80/20 rule is again satisfied where 80% of stocks represent 20% of market volatility. For now, it's time for everyone to hunker down plugging numbers to compute valuations the hard way. In rough seas, clarity and cash flow wins.