Quote of the Day: Watch Asset Classes that are the Most Vulnerable to Wealth Taxes

When a government goes bust in a democracy (and most Western governments cannot possibly meet their unfunded liabilities) the majority of people who have no assets or just a few assets will always find it appealing to collect money from the evil “fat cats” (in the case of the US, the 1% who own 42.7% of financial wealth). It should be obvious that if 80% of the population owns just 7% of financial wealth, they will be tempted to transfer at some point in future, part of the wealth of the 5% or 10% richest Americans to the masses that have no savings.

The problems we face today are there because the people who work hard for a living are now vastly outnumbered by those who vote for a living.

Normally, we analyze various asset markets and individual investment opportunities according to their merits. But now, we also need to think which asset classes are the least and which ones are the most vulnerable to wealth taxes.

(bold mine)

This perspicacious insight is from Dr. March Faber from his latest market commentary. The point is one should think "out of the box". This isn’t your daddy’s markets. Other experts such as PIMCO’s Bill Gross has also echoed on this. 

In the recognition that financial markets are being explicitly and implicitly manipulated, looking at the effects of interventions would be the best approach rather than to just mimic or parrot what the mainstream says or thinks. 

The above also is a great description of today's mob rule politics.

Abenomics Fails at Stoking Price Inflation, CPI down for 5 straight months

So far Abenomics has flagrantly failed to attain the “inflation” policy goals.

From Reuters:

Japan's core consumer prices fell 0.5 percent in March from a year earlier, down for a fifth straight month, government data showed on Friday, suggesting the Bank of Japan faces a tough task to achieve its 2 percent inflation target.

The fall in the core consumer price index, which includes oil products but excludes volatile prices of fresh fruit, vegetables and seafood, compared with a median market forecast for a 0.4 percent annual fall. It followed a 0.3 percent decline in the year to February.

This is why I think that the Japan’s stock markets as seen by her major equity benchmark, the Nikkei 225, continues to surge.  This in spite of growing signs of the supply side dislocations in the real economy brought about by price instability from Abenomics.

The Nikkei has been up by 4.5% based on yesterday’s close relative to last Friday. The rallying Nikkei comes amidst what appears as a short term consolidation phase in the Japanese yen. (chart from stockcharts.com)

Also rallying stock markets in Japan has had modest impact on the yields of 2 and 5 year JGBs which remains above the one year levels. (chart from Bloomberg)

In other words, bond markets have remained skeptical of the persistence of consumer price disinflation while her stock markets continues to trek higher, out of higher inflation expectations from BoJ's steroids.

Meanwhile gold priced in the yen has shown modest signs of rebound even when Japan's retail or physical gold market has been very robust. (chart from gold.org). So we have a mixed picture.

Of course, given the brazen initial failure of Abenomics to stoke price inflation, this means that BoJ’s Haruhiko Kuroda and PM Shinzo Abe may consider applying more of the same. They could even think of tripling the monetary base.

Yet further expanding the already reckless Abenomics is like playing with fire,  which will push Japan into a debt or currency crisis sooner than later, and where everyone will get singed.

Central Banks Buy Stock Markets in Record Amounts!

I always try to point out of the parallel universe or the detachment between financial markets and the real economy.

I also kept pounding on the table that stock markets are being propped up by central banks via QE and zero bound rates and not by any conventional methodology.

Now many central banks admit to buying record amounts of equities.

From Bloomberg:

Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.

In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves…

Managers of banks’ assets are looking for alternatives to holding government bonds after efforts to stimulate growth from the Federal Reserve, the Bank of Japan and the Bank of England helped send yields near to record lows. Central banks’ foreign- exchange holdings have increased by about $8.5 trillion globally in the past decade, exceeding levels needed for day-to-day currency administration.

First, central banks put up a zero interest rate environment. Then they flood the system with cash via asset purchases principally directed to bonds.

Next, they use low interest rates (as a strawman) to justify supposed asset “reallocation” into equities.

Media projects yield chasing phenomenon to have seeped into the central bankers mentality. From the same article.

Central banks’ purchases of shares show how the “hunger for yield” is changing the behavior of even the most conservative investors, according to Matthew Beesley, head of equities at Henderson Global Investors Holding Ltd. in London, which oversees about $100 billion.

While part of equity purchases may indeed signify as yield chasing, a bigger segment has been politics.

Central bank investing in equity markets functions as subsidy or via redistribution of public money to stock market participants. That subsidy comes in support of the one of the biggest owners of stock markets whom are financial institutions e.g. investment trust, pension funds and insurance. Below chart from Bank of Japan’s flow of funds.

As I have long pointed out, central banks have imbued the Bernanke doctrine of propping up the economy via a supposed rekindling the “animal spirits” through stock market friendly policies.

As an academe Ben Bernanke wrote:

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.

Mr. Bernanke’s preference of supporting asset markets has been converted into policies. This has been expressed in his 2010 speech, the portfolio balance channel, which explicitly states that the Fed’s buying of long term securities had been designed to “affect financial conditions by changing the quantity and mix of financial assets held by the public”. He reiterated the same in his Q&A segment in February report to congress stating the need to boost “household wealth--for example, through higher home prices” in order to promote spending. 

We really don’t need conspiracy theories. Market manipulation via indirect and direct interventions have been made official. 

Central banks outside the US has only made interventions more direct.

Nonetheless all these propping up of asset markets via inciting of the speculative frenzy, has reduced the incentive for the public to invest in productive enterprises (see UK as example) and has been ballooning a global pandemic of bubbles which commensurately has been increasing fragility of the overall financial economic system.

Rising stocks has engendered a manic phase as manifested by the portrayal of central bankers as superheroes.

Yet when stock market bubbles go bust, taxpayer money will get vacuumed into the sinkhole. Otherwise if the currency will be destroyed, skyrocketing stocks like in Zimbabwe in 2008 may only buy 3 eggs.

Will Abenomics Lead to a Food Crisis in Japan?

I have been saying that inflationism/currency devaluation leads to economic calculation problems that yields the opposite effects from the intended.

We are getting reports on this.

From Reuters:

However, in Japan, something odd is happening as a result of Abenomics — a big shortage of squid.

Japan Squid Fisheries Association (JAFRA) decided to halt all fishing operations this Friday and Saturday because a weaker yen is pushing petrol prices higher, to the extent that going out to the sea will bring a guaranteed loss. The yen has lost more than 13 percent against the dollar since the start of the year.

Squid fishing is highly energy-intensive because fishers use light to lure squid at night. Fuel makes up around a third of the cost of fishing.

There is a government subsidy for fishermen when energy prices surge. But according to JAFRA, even with the subsidy, the average loss per boat can go up to as much as 200,000 yen ($2,009) per year at the current dollar/yen exchange level of around 100.

The temporary halt is only affecting squid fishing, but people are worried other fishermen may be forced to follow suit if the yen weakens further. The Federation of Japan Fisheries Cooperatives is planning an emergency meeting to ask the government for more financial help.

Supply side adjustments won’t be able to cope with demand side dynamics mainly due to asymmetric responses to the distortions brought by unstable price levels. 

The end result, shortages and higher prices from shrinking markets (due to supply side constraints and reduced demand from consumer), lesser investments, and social disorder.

Will a food crisis follow?

Cash Hoarding No Security Against Confiscation, UK’s Panic Buying of Physical Gold

A gold bear analyst recently commented that the confiscation of bank deposits particularly in Cyprus represents a bearish factor for gold. The reasoning goes that deposit confiscation will motivate people to pull money out of the banking system and hold onto cash by storing them in pillow mattresses rather than own gold, because gold is subject to seizures.

Well lucky for the bloke that gold prices fell in his direction.

But such logic doesn’t stand on firm grounds. While gold is also subject to confiscations, hoarding cash does not secure one’s savings or purchasing power from government's predation.

Governments around the world has embarked on the trend to ban cash or to limit cash transactions. Such has been the case of Russia, Mexico, Italy, Spain, Louisiana in the US,  Greece and elsewhere. Scotland proposes to restrict use of cash on scrap metal sales, while Sweden’s anti-cash programs promoted by banksters have been stonewalled by the public.  

A few years back, I had a personal nightmare with Philippine airport authorities, who initially threatened confiscation of my excess cash holdings due to arbitrary Anti Money regulations that I have not been aware of.

And this is partly why people have sought alternative currencies such as the use of Tide detergent (in the US) or of Bitcoins.

As a side note, bitcoins after the recent crash, which ironically had been coincidental with gold’s flash crash, has began to show signs of recovery also along with gold prices.

In addition, governments confiscation of people’s savings are being done directly (deposits) and indirectly (inflation), so cash holdings provide no better safehaven alternative to gold. Both are subject to legal forfeitures but at least gold can preserve the purchasing power from growing aggressiveness by central banks to resort to the paper money solution. Central bankers have now been revered by media as superheroes. Move aside Iron Man and the Avengers, here comes Bernanke, Draghi, Kuroda, Carney, Tetangco and their ilk to save the world.

Yet events in UK has also been proving the opposite of such theory as the UK's physical gold market reveals of the same panic buying spree as elsewhere.

From Bloomberg: (bold mine)

Britain’s Royal Mint, established in the 13th century, sold more than three times more gold coins this month than a year earlier as prices declined.

Sales are more than 150 percent higher than last month, according to Shane Bissett, director of bullion and commemorative coin at the Royal Mint. Gold is down 11 percent this month, heading for the biggest drop since September 2011.

Gold markets operates in a distinct market relative to other commodity markets. Demand is hardly driven by consumption but by demand due to gold’s quasi money properties (store of value) or as seen by mainstream as “investment” and or from speculative functions or particularly reservation price model or from reservation demand.

Hence when media reports that physical gold inventories have been strained, then this means that much of the current cumulative physical gold holders, which consist of all gold that had ever been mined since history (171,300 tonnes), simply have resisted selling, since they don’t see current price levels as adequate.

Alternatively this means that when the physical markets have seen tight inventory pressures, which means that the current mining output can’t service (close to 2,500 tonnes annual), aside from where most current gold owners have resisted the temptations to sell, then much of the selling may have come from elsewhere.  They may come from stealth central bank selling via bullion banks or from Wall Street’s paper gold. Central banks own 19% of all above ground gold

In short actions in the physical "non-political individual" markets have been exposing on the attempts to manipulate the gold markets via bear raids using "Wall Street-government" paper gold.

The physical markets also reveals that gold hasn’t lost its luster as insurance and as safehaven alternative in the quest for the preservation of the purchasing power by the non-political public.

Parallel Universe: Record US Stock Markets and Falling Estimates of Corporate Earnings

With many benchmarks of US stock markets at record highs, conventional wisdom tells us that this must have been about beating earnings, perhaps also at record levels.

The Dow Jones Industrials (top pane) has clearly passed the 2007 threshold, while the S&P 500 (lower pane) has marginally breached through same levels. (chart from Bigcharts.com)

But conventional wisdom seems out-of-place or has been rendered irrelevant in today’s era of central banking wizardry.

The percentage of companies beating earnings (top pane) and revenues (bottom pane) expectations continues to be in a downtrend (chart from Bespoke Invest).

And such dynamics hasn’t been a short term anomaly, rather these has been THE trend since 2006 (green lines). The decline in the % of companies beating earnings and revenue estimates has been worsening since 2010 (red lines).

This deterioration in earnings and revenues can even be seen from a different perspective, or relative to the historical averages.

They show the same results.

The % of companies that missed estimates have jumped (left window top). Average earnings surprises has materially declined (top right window) as average revenue surprises turned negative (bottom window). All charts above from Zero Hedge

So it seems that a speculative frenzy has been in motion in US equity markets. The above also reveals of the parallel universe or of the flagrant disconnect between fundamentals and market prices.

This suggests that the orthodox wisdom where “corporate fundamentals” drive market prices seems to have been falsified by the actions of central bankers.

I mentioned above that the % of companies beating earnings and revenue estimates has been worsening since 2010, this seems to coincide with the re-acceleration of the Fed’s QE program from QE 2.0 in 2010 (chart from the Cleveland Federal Reserve).

And again this exhibits the substantial influence of central bankers or the US Federal Reserve in determining the direction of stock markets.

This also reminds me of the stock markets of two Latin American nations, Argentina (Merval-left) and Venezuela (IBVC-right), where both economies have been experiencing hyperinflation but in different degrees.

Skyrocketing stock markets for these countries are signs of monetary disorder or a blossoming of a currency crises rather than an economic boom or a credit bubble. (charts from Bloomberg). 

I am not suggesting that US markets have been suffering from the same bout of hyperinflation, rather I am saying that the record rise in US stock markets are most likely symptoms of monetary distress.

It pays to recognize the difference.

This Time is Different: Central Bankers as Superheroes

Gee. We really have reached the manic phase with more signs of fatal conceit from monetary authorities.

The mania in psychological context. This time is different. New Paradigm. New order. Boom emanates from my good policies. I am smart, infallible, and invincible. The salvation of social order is on my palms.

From Reuters

In other ages, we have called on shamans or saints in times of crisis when the usual remedies have not worked.

In the stagnant world economy today, we have designated central bankers as our superheroes, and we are relying on their magical monetary powers to restart global growth.

As the European Central Bank president, Mario Draghi, whom some have nicknamed Super Mario, said this month: "There was a time, not too long ago, when central banking was considered to be a rather boring and unexciting occupation."

Not anymore. No one embodies this new glamour more than Mark Carney, the 48-year-old governor of the Bank of Canada, who has been tapped to lead the Bank of England, making him the first foreign governor in the institution's 319-year history.

The bar for Carney could not be higher. A cartoon in the British papers made the point. It showed a Bethlehem inn with Joseph leading Mary on a donkey. The caption above the innkeeper's head declares: "Unless you're Mark Carney, you'll have to make do with the stable."

Wow. What deification for central bankers!

This is why we should expect central bankers to indulge in more inflationism or that for central bankers to push inflationism to the limits.

And media’s worship of central bankers means that the weight of policy making has shifted from the elected executive branch of government to the unelected monetary bureaucrats. In short, politicians have implicitly become subordinate to monetary authorities.

This also shows that central bankers are indirectly being pressured by well financed and political influential interest groups via such embellished reports.

Veneration of central bankers, the Bangko Sentral ng Pilipinas edition. From the BSP

The Bangko Sentral ng Pilipinas has been chosen as the 2013 Best Macroeconomic Regulator in the Asia Pacific Region by The Asian Banker, one of Asia’s leading financial services consultancies. The award was given during The Asian Banker Leadership Achievement Awards in Jakarta, Indonesia on 23 April 2013.

Ooh my. This resonates with the pre-crisis 9 awards the Bank of Cyprus received in 2011-2012. One of Cyprus major banks, the Bank of Cyprus then thought that they had reached some state of policy making nirvana, when they first eluded the Euro crisis, which was exposed in March 2013 as the emperor with no clothes,  as discussed last Sunday.

Adam Smith warns of the consequences from the conceit by “the man of the system” in his classic Theory of Moral Sentiments (bold mine)

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

All these are really signs to worry about.

 

Central banking hubris will inevitably lead to the "highest degree of disorder". Yet this is not a question of “if”, but a when.  

And I would say pretty much soon.

Why Bank of England’s Small Business Loans Program May Fail

Talk about central banking wizardry. 

The Bank of England (BoE) will extend lending programs to small and business enterprises for another year even if such measure has initially failed.

From Bloomberg:

The Bank of England will extend by one year its plan to provide cheap loans to companies and consumers and make credit available for small companies, enhancing a nine-month-old program to aid the economy.

The Funding for Lending Scheme will now last until January 2015, and will make lending to small companies more attractive and open to non-bank lenders, the BOE and the Treasury said in London today. The government says its program has lowered borrowing costs by about 100 basis points and provided 13.8 billion pounds ($21 billion) between its creation and December

“This is a big boost for the small and medium sized businesses that are at the heart of the British economy,” Chancellor of the Exchequer George Osborne said in an e-mailed statement. “This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.”

Osborne is expanding the program on the eve of economic statistics that may show Britain’s economy was close to an unprecedented triple dip in the first quarter. The announcement also precedes an audit of the U.K. by the International Monetary Fund, whose delegation visits London next month after the fund said Osborne should ease his austerity plan to aid growth.

Today’s extension to the FLS will allow banks to borrow 10 pounds next year for every 1 pound they lend to small companies in 2013, the Treasury said. If they wait to extend the loan until next year, the amount they can borrow under the plan is halved to 5 pounds for every pound loaned. Banks can borrow 1 pound for every pound loaned with the rest of the program.

The premise here is that access to finance has been the key barrier besetting the Small and Medium scale businesses.

While it has been true that UK’s overleveraged economy has forced households and firms to pay down debts, that’s only part of the story.

The main obstacle to small and medium scale businesses has been the domestic economy and domestic demand, this is according to the latest survey by the Federation of Small Businesses (FSB).

John Walker, National Chairman of FSB says another factor influencing the weak economy and demand has been inflation

Though our members are feeling more optimistic, the outlook remains challenging with domestic demand weak. Consumer spending has been subdued by inflation, eroding disposable incomes, with inflation expected to remain above the target level in 2013. In this quarter, members report that three cost elements – fuel costs, input prices and utility bills – are increasing their overheads and while down from 12 months ago, the last three quarters of 2012 showed these cost pressures persisting.

So this should be a great example of how inflationism distorts the economic calculation that leads to a stagnating economy amidst elevated inflation or stagflation

The Bank of England has basically increased their balance sheet by almost three times since 2008. 

Over the same period, UK’s statistical consumer price inflation rate remains lofty despite the deleveraging by households and firms. 

Yet as pointed out by the article, UK’s economy is facing the risks of a triple dip recession. (charts from tradingeconomics.com)

In short, all money printing by the BoE has failed to deliver what has been promised—a recovery.

Instead what all the money printing has done has been to keep the bubble in the property sector afloat. 

While UK’s average housing prices have been down from 2007, they remain above the pre-bubble bust levels. This goes the same with housing pe ratios (chart from Nationwide.co.uk)

Another area which BoE’s QE has positively influenced has been the stock market.

UK’s FTSE 100 has been on the rise since 2011 (blue trend line), even as the economy fumbled from one recession to another. Another wonderful example of a parallel universe. The FTSE has been up 8.6% year to date as of yesterday’s close. (chart from Bloomberg)

In other words, all cheap credit and money has done has been to incentivize speculation (asset bubbles) at the expense of the productive sector of the economy. 

Why invest in businesses when the costs of operating one have been unpredictable and when financial markets, especially backed by an implicit Bank of England Put, would give a better yield?

Since the inception of the FLS, the BoE’s recourse to cheap credit has also failed to boost lending to the SMEs.

What this means is that the BoE’s FLS credit program hardly addresses the roots of the problems, which hasn’t been about credit. The BoE fails to see that her inflationist policies has functioned as one of the principal obstacles to economic recovery.

Yet like typical political authorities, who wants to be seen as “doing something”, the expedient action has been to do the same thing over and over again and expecting different results. Unfortunately, the outcome will likely go against their wishful expectations. 

Tourism Unlikely to Save Abenomics

This article attempts to cheerlead on the supposed benefits of the weak Japanese currency the yen.

From Bloomberg:

The Thai baht’s biggest quarterly gain against the yen since 1998 was enough reason for Kornkarun Cheewatrakoolpong, a 32-year-old economics lecturer in Bangkok, to change her honeymoon destination to Japan from Italy.

“It’s more affordable,” Kornkarun said in an interview from her home in the capital on April 17, after returning from a business trip to Japan. “I don’t feel it’s that expensive like in the past. I still expect that when I go for my honeymoon in November, the yen will remain weak.”

Kornkarun followed 36,000 Thai tourists who headed to Japan in the first two months of the year, 31 percent more than the same period of 2012 and the largest increase among five major Southeast Asian countries, according to data from the Japan National Tourist Organization. The baht, Asia’s best-performing currency in 2013, strengthened 14 percent versus the yen in the three months through March before rising a further 7.1 percent in April, making costs for accommodation, shopping and food cheaper for visitors from Thailand.

The rise in tourists caused a shortage of yen banknotes in Thailand, central bank Governor Prasarn Trairatvorakul told reporters in Bangkok on April 9, before the nation’s markets closed for the four-day New Year holiday, known as Songkran. The Bank of Japan’s monetary easing, coupled with increasing investment, helped drive the baht to its strongest against the yen in five years on April 22. Japan’s currency may weaken to 100 per dollar for the first time since 2009 by year-end, according to 54 analysts surveyed by Bloomberg.

For now the weak yen may boost tourism. This represents one of the short term effects of inflationist policies. Yet such a boom will be temporary.  When the inflation genie pops out of the proverbial lamp, which has been the expressed goal of 'Abenomics', and runs berserk, the risks of a crisis and social unrest will be magnified. 

Political and economic instability reduces the incentives of foreigners to travel. Thus, if price inflation turns for the worst or if a crisis emerges, tourism will take a hit.

Japan’s tourism (direct and indirect) constitutes only 6.7% of the GDP, according to World Travel and Tourism Council. 

This means that whatever benefits the tourism sector will reap are relatively puny, and will be more than offset or neutralized by economic losses in the broader economy due to the distortions of economic calculation, which reduces incentives for people to invest but nonetheless encourages speculation and capital flight. Also inflationism will constrict on the purchasing power of the consumers.

As the Austrian economist great Ludwig von Mises wrote,

The much-talked-about advantages which devaluation secures in foreign trade and tourism are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.

So enjoy the boom while it last.

As for the strong baht, that’s the result of Thailand’s credit bubble.

Video: Ron Paul on the Gold Crash and Bitcoins

Former US Congressman and presidential aspirant Ron Paul eloquently handles objections on gold posed by Bloomberg newscasters.

Some excerpt of the interview, courtesy of Zero Hedge (bold original)

Paul on whether he's concerned about the drop in gold:

"I am concerned about the erraticness of the dollar. The dollar is up, the dollar is down. We print a lot of dollars. The dollar gets devalued. That is really the concern. If people think the gold price up and down is a reflection of something wrong with gold, no, I say it is something wrong with the dollar. People have been expressing concerns over the past couple of months about gold, but compared to what?

Compared to where gold went from when the Fed took over where it was $20 per ounce compared to what has happened in the past?...

I remember in the 1970's when they finally allow people to own gold and it went from $35 to $200 rather rapidly, and then it lost 50%. Then it went up to $800.

To compare a couple of months or a couple of weeks and forget about a bull market in gold price in relationship to the dollar for 12 years. I would say the comparison is not an authentic comparison. What you have to look at is the inflation. Inflation is an increased supply of money.

Since 2008 they have quadrupled the supply of Federal Reserve credit and are buying $85 billion per month of treasury bills. At the same time last week they bought $60 billion. That is the inflation. That is the distortion of the market and that's why we're not getting economic growth."

On whether we're seeing the opposite of inflation right now:

"It depends on how you define it. Inflation is when you increase the supply of money. Bond prices go up. Stocks are going up. Housing prices are starting to go back up again. Education costs are going up, but the gross distortion is the effect that the inflation of the money does on the price of money and interest rates and how it causes economic problems and why you don't get economic growth.

You have to look at the malinvestment and destruction that occurs when you mess around with the price of money. It's not just the CPI because the CPI is not reliable. The government fudges that as well. They change the way they measure it. Free-market economists say it is going up about 8%. A lot of deception going on out there. I was just talking to someone on getting social security, they're not happy with the purchasing power of the dollar and you can't tell me there is no inflation."

On what the real value of gold is:

"No one knows it other than what is happening at that moment. The Supply and demand of gold is very important. That is why it is money, because gold is used elsewhere and it is commodity. The supply and money of paper is the culprit. That is the one that is causing all the trouble. People ignore the supply and demand of paper. Yes, paper goes up and goes down, but look at the long term purchasing power of the dollar. It has been devastating. At the rate they are printing the money, you will see a continual devastation of the value of the dollar.

You will not see economic growth until you liquidate the debt and liquidate the malinvestment out there. Sure, you will see housing go up again, but you will see more bubble formation because prices go up does not mean there is economic growth. We are a long way from the correction, mainly because they ignore the definition of inflation and ignore the need to liquidate debt and the need to liquidate and get rid of all the malinvestment.

One good comparison is look at the price of stocks and gold. Although in the past couple of weeks it has changed a bit. The price of the stock market has crashed, because you used to be able to buy the Dow with 44 ounces of gold. Now it is under 10 ounces of gold. It will probably go a lot lower."

"I think the way gold is acting it acts like a market does. You get ahead of itself, there has to be a correction. The amazing thing is not the correction, the amazing thing is the biggest bull market of the century when one commodity went up for 12 years straight. You cannot ignore that. To say, well there has to be an adjustment because prices are subjectively decided by many factors so you cannot predict exactly where the money will go. Unfortunately right now the money that the Fed creates goes into reserves, further distorting the markets and pumping up prices of bonds, further building a bubble that will burst because our economic growth is not there and we are in every bit as much trouble of Europe and Greece.

Someday there will be a lack of confidence in our dollar and you will see the correction in the paper a lot more severe than you see the correction in the dollar-gold ratio."

On Bitcoin:

"To tell you the truth, it's little bit too complicated. If I can't put it in my pocket, I have some reservations about that. But it has been designed in the free market. If it is a means of exchange, it would not ever be illegal. You shouldn't regulate it in the free market, but I do not think it fits the definition of money, which has been around for 6000 years.

People want to see something they can know what it is, they can define it, touch it and put in their pocket. If you do not have a computer and someone running the computer and calculations, you don't have it. I am not a big supporter of that, but I am not opposed to it. I admit, I do not fully understand what is going on with it."

On whether the Boston marathon tragedy is an opportunity to fix immigration:

"There is always an opportunity because there is a need for it, but I do not think they will solve any problems at all because they are too big and complicated and very much involved with economics. I don't think you can deal with immigration unless you deal with the welfare state. It is an incentive for people not to work. It is an incentive for others to come and get free services. Also, I think it is more important that we look at our work permit, letting people come in and work, and put aside the idea of how we will give automatic citizenship.

That becomes a political football because everyone is lining up. Who is going to get the vote? One side says that we are going to get all the votes -- we want them all to be legalized. I think you have to deal with the economic policy and really open up the opportunities for people to come back and forth and to work, but not to insist everyone will become a citizen because I do not think that will work under these circumstances."

On how Republicans will win the next election if there is no solidarity:

"I think the solidarity is the same problem in Republican and Democratic parties. It's ongoing. There's always factions. Of course, I want to unify everyone in the belief and the cause of liberty. Sound money, balanced budget, the constitution. So yes, there's a good way to unify them, but unity for the sake of unity makes no sense whatever. The old guard are losing their way. The party is getting smaller. It is splintered. They will have to face up to the fact that if they talk about limited government and personal liberties, they have to believe in it and do something about it because the young people will not be fooled. If this continues, the party will become smaller."

On whether Rand Paul will run for president in 2016:

"You'll have to ask him. I have no idea what he wants to do."

S&P on Abenomics: More than one third chance of downgrade

Here’s an example why one shouldn’t trust the judgement of credit ratings agencies.

From Reuters:

Rating agency Standard & Poor's said on Tuesday it saw more than a one-third chance that it would downgrade Japan's sovereign ratings because of uncertainty about whether the government's push to revive growth and end deflation will succeed.

Only more than a third chance of a downgrade???

Given Kuroda’s reckless grand experiment with inflationism, Japan’s debts should have already been downgraded. Yet the S&P can’t seem to go beyond figuring out on the magnified risks from the incorrigible economic logic contradictions from such policies; particularly the goal to ignite price inflation while hoping that the bond markets remain perpetually tranquil at zero bound rates.

Japan’s "Abenomics" epitomizes the proverbial “castles in the air”

The S&P seems to be tentatively alarmed (hence the more than 33% chance), but still maintains the wishful thinking that “Abenomics” may strike gold.

Or possibly, there might have been implied political pressure on the credit rating agency from the Japanese government, in the same way the US government has. The US government recently sued the S&P which many suspects as retaliatory move following the latter’s downgrade of the former’s debt.

Of course, the big three US credit rating agencies had not only missed predicting the occurrence of the US mortgage crisis of 2007-2008, they had been party to crisis; they were part of the blowing of the real estate bubble by giving mortgage securities blessings which many turned out to be junk. 

Ironically, the US government lawsuit against the S&P has been based on this.