 | | The Daily Reckoning | Wednesday, May 18, 2011 |
- Your bill for Strauss-Kahn's hotel suite...and the bailouts of nations,
- Got bullion yet? A look at silver's precarious supply-side fundamentals,
- Plus, Bill Bonner with some advice to ignore at your peril and thoughts on depleting energy...
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|  | | | An End to Debauchery | | Dominique Strauss-Kahn and the Future of the IMF | |  | | Eric Fry |
Reporting from Laguna Beach, California...
"Qu'ils mangent de la brioche!"
English readers will recognize this infamous phrase as, "Let them eat cake." Marie Antoinette supposedly uttered it. Two centuries later, another member of French royalty comes along to express the phrase in 3-D.
Dominique Strauss-Kahn, the putative "public servant" overseeing the IMF, has been conducting himself in the classic tradition of lecherous, narcissistic, self-indulgent 18th century monarchs. And in the grand tradition of serfdom, we American taxpayers, along with working stiffs from 186 other "member countries," transport the fruits of our labors inside the castle walls of the IMF. We are the ones who provide the capital that puts the "fund" in International Monetary Fund.
For what reason? So that the IMF can give some of our capital back to us if we get into financial difficulty. At least that's the stated rationale for this large-scale larceny.
Officially, the IMF functions to:
- Promote international monetary cooperation.
- Facilitate the expansion and balanced growth of international trade.
- Promote exchange rate stability.
- Assist in maintaining a multilateral system of payments.
- Provide resources to members experiencing balance of payments difficulties.
Unofficially, the IMF operates to fund the debauchery of lechers, while also bailing out profligate nations who may or may not repay the bailouts. Under the IMF's existing quota, the US is the largest member, representing 17.75% of the pie. In exchange for this membership, the US has provided the IMF with about $58 billion. Furthermore, this allocation will nearly double, thanks to the IMF's "Fourteenth General Quota Review."
Armed with its hundreds of billions of dollars, the IMF scatters bailouts around the globe like pixie dust. But as it turns out, the Chief Pixie, Monsieur Straus-Kahn, has been inhaling unhealthy volumes of this dust, himself. (Let's call it an occupational hazard).
Not only did he receive a $441,980 salary last year as Managing Director, he also received a supplemental allowance of $79,120 to cover "expenses." Presumably, such expenses did not include items like $3,000-a-night suites at the Midtown Manhattan Sofitel - an outlay which would probably fall on the IMF's travel expense line item.
But however one wishes to account for this pixie dust, the source of it is no mystery. US taxpayers contributed about $532.50 toward Strauss- Kahn's hotel suite, not including incidentals like Evian water from the mini-bar or in-room adult entertainment.
Strauss-Kahn's self-indulgent extravagance might seem almost tolerable, were it not for the fact that the IMF is, itself, a financial deadbeat. In 2008, the IMF proposed selling its gold holdings to close a projected $400 million budget deficit. This proposal also included spending cuts of $100 million over three years and the elimination of as many as 100 jobs.
At the time, Dominique Strauss-Kahn heralded the proposal as "a landmark agreement that will put the institution on a solid financial footing and modernize the IMF's structure and operations. We have made difficult but necessary choices to close the projected income shortfall and put the fund's finances on a sustainable basis," said Strauss-Kahn, "but in the end it will make the fund more focused, efficient and cost- effective in serving our members."
Wasting little time, the IMF unloaded 200 metric tonnes of its gold hoard to India in late 2009, raising $6.7 billion in the process...and clearing the way for Strauss-Kahn to violate whatever stood in his path, be it a hotel maid or a taxpayer from 187 countries around the globe.
Here are a few final questions: Will we taxpayers also be financing Strauss-Kahn's legal defense? And will we be absorbing his future medical expenses?
"Dominique Strauss-Kahn may have more to worry about than a possible prison sentence,"The New York Post reports this morning. "The IMF chief's alleged sex-assault victim lives in a Bronx apartment rented exclusively for adults with HIV or AIDS, The Post has learned. The hotel maid, a West African immigrant, has occupied the fourth-floor High Bridge pad with her 15-year-old daughter since January - and before that, lived in another Bronx apartment set aside by Harlem Community AIDS United strictly for adults with the virus and their families."
This is a tragic story, dear readers...on many levels. But at least one part of this tragedy could have a happy ending: Abolish the IMF.
The lessons of the post-2008 crisis are becoming as homogenous as they are numerous: The big helpful hands of financial bureaucracies are no help at all. These hands are usually wrapped around your throat. Abolish the IMF; abolish the Federal Reserve.
Let the free markets dispense credit based on credit-worthiness, period. And let the free markets price credit based on real-world risks, period. Then let the lechers who guide us, or the academics who misguide us, earn money in the private sector to finance their peculiar interests.
If the next time you walked into Starbucks, Dominique Strauss-Kahn or Ben Bernanke or Timothy Geithner were handing you your double latte, would the world be any worse off?
| | | | Why It's NOT the End of America... |
This is actually the greatest moment to be alive - and to grow incredibly wealthy.
Warning: What you're about to see is controversial. It will offend the "Gloom & Doom Crowd". Watch this urgent presentation now.
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| | The Daily Reckoning Presents | | Don’t Worry About Silver | |  | | Jeff Clark |
An interview with Andy Schectman of Miles Franklin
I heard some disturbing reports about silver supply last month that I felt every investor should know. And while precious metals are currently in correction mode, the long-term concerns with supply won't disappear anytime soon. In attempt to get a handle on the bullion market, I spoke to Andy Schectman of Miles Franklin, who has contacts that run deep in the industry. What he sees every day might just compel you to count how many ounces you own...
Jeff: You made some interesting comments to me about silver supply. Tell us what you're hearing and seeing in the bullion market right now.
Andy: There is a major supply deficit issue, and it's getting worse.
Take the US Mint, for example. Right now, as we talk, you can barely get silver Eagles. We're seeing delivery delays of three to four weeks, and premium hikes of a dollar or more in the last three weeks. Most of the suppliers in the country are reluctant to take large orders on silver Eagles because they don't know (a) when they'll get them, and (b) what the premiums will be when they arrive.
I was talking to the head of Prudential Bache and asked him about silver Eagles. He said, "You know, as soon as the allocations come in, they're sold out. We can't keep them in." This is coming from one of the largest distributors of US Mint products in the country.
And this is all occurring in an environment that has only minimal participation by the masses. Few people in this country have ever even held a gold or silver coin. So, if it's this difficult to get bullion now, what's it going to be like when it becomes evident to the masses they need to buy?
Jeff: Some analysts say it's a bottleneck issue, that the mints have enough stock, but just need more time or more workers to fabricate the metal into the bars and coins customers want.
Andy: No, I don't believe that. What business do you know that if they had that much profit potential wouldn't increase production and hire more workers to meet demand? To me, the "inefficient model" argument is an excuse.
Look at what the US Mint alone has done: they haven't made the platinum Eagle since 2008. They make maybe one-tenth as many gold Buffalos as they do gold Eagles. They've made hardly any fractional-ounce gold Eagles. Heck, they can't even keep up with the demand for the products they do offer. Does that sound like a bottleneck to you? Or is it because there is far more demand than there is available supply? It's pretty clear to me it's the latter.
Jeff: What are you seeing in the secondary market; are investors selling bullion?
Andy: There is no secondary market. Absolutely none. Nobody is selling back anything, at least not to us. Think about that: if this was a traditional investment and your portfolio went up 100% in the last year, like silver has, you'd think some investors would take some profits and ride the rest out - but nobody's selling anything.
This is why I think the lack of supply is the single biggest issue in this market. And in time, I think it will become much more obvious. [Ed. Note: We're using the term "secondary market" in this instance to mean sellers of bullion and not the scrap market.]
There are only five major mints - US, Canada, South Africa, Austria and Australia. Yes, there is a Chinese Mint and a couple Swiss Mints and some private refiners, but they amount to very little in the overall scheme of things. We're in a situation where the mints are limiting the selection and raising the premiums, and this is occurring at a time when most people own no bullion. As it becomes more apparent that people want bullion instead of paper dollars, I think you'll see premiums go parabolic and supply get even tighter.
Jeff: Are you getting a lot of new buyers to the bullion market?
Andy: More than ever. One of the interesting things we're seeing is a lot of younger people dipping a toe in the water, buying little bits of silver here and there. We're also seeing bigger orders, as well as more frequent phone calls from financial advisers asking us if we can help their clients. So yes, the base is broadening.
Jeff: That's very interesting. So are you seeing more demand for gold or silver right now?
Andy: 90% of the new business is in silver. And I think that's indicative of the state of the economy. People are trying to get into precious metals, but they think gold is too high. I think they're buying silver because they realize the fundamentals for owning gold also apply to silver. They think the profit potential is better in silver, too. This has actually made the supply for gold better than it is for silver right now, and a lot of that has to do with price.
Jeff: Why are premiums fluctuating so frequently?
Andy: Premiums are almost impossible to gauge right now. Because the availability of product is getting smaller and smaller and the demand is getting stronger and stronger, premiums are changing literally overnight. And it doesn't take many large investors around the country to force premiums higher.
The net of this is that it's really hard for us to be able to say what the premium for a specific product will be two weeks out.
Jeff: You mentioned increased interest from fund managers. Tell us the kind of comments you're hearing and why they're buying bullion.
Andy: I think it's coming from their clients. It's my impression that people are taking it upon themselves to study a little bit more, to be more accountable for their assets, and I think they're telling their financial advisors to buy gold. And in some cases it's because they don't want a paper derivative.
It's no secret that financial advisors don't like gold and silver. Once money goes to a bullion dealer, it's not coming back to a stock portfolio anytime soon, so they discredit it. But now it's my impression they're being asked by their clients to buy it... So clients are increasingly demanding bullion, regardless of what their financial advisers say.
Jeff: Hearing about all this new buying might make some think we're near a top in the market. Could that be the case?
Andy: No, no [chuckles]. I think Richard Russell says it best: "Bull markets die of exhaustion and over-participation." Well, we're nowhere near that point when so few people in this country own gold and silver. Heck, I'm a bullion dealer, and most of my peers don't own any gold and silver! Yes, you're seeing more commercials, but there are just as many commercials to buy gold as there are to sell it. I think that's an indication this market is not exhausted.
Remember that in the year 2000 everyone and his brother had some NASDAQ shares. That's an example of an exhausted or over-participated market. We're nowhere near that.
Jeff: Where are the best premiums for silver?
Andy: The very best buy in silver right now is junk silver. And by the way, I think the term "junk" is unfair. It isn't junk anymore. It used to be junk in the '90s when silver was 3 or 4 bucks an ounce and it was sold basically at melt value and carried no premium. So I'd call it "90% dimes and quarters." Anyway, junk silver has the lowest premium right now and, in my opinion, offers the best upside potential.
Next would be 10- and 100-ounce silver bars. And then one-ounce silver coins - but the Eagles are very expensive at the moment, if you can get them. The Austrian Philharmonic has the best value in a one-ounce silver coin right now, and they're available. But again, premiums for all silver coins are escalating.
Jeff: What about gold?
Andy: Gold is not as bad. In fact, I would say that gold availability is decent right now for one-ounce coins and bars. There isn't much available in fractionals. And Buffalos are still kind of hard to get. Other than that, the one-ounce coins with decent availability are Canadian Maple Leafs, Australian Kangaroos, and Krugerrands. And they all have decent premiums.
Jeff: So the take-away message is what?
Andy: First, I think you said it best with your recommendation to "accumulate." Not only will it smooth out the volatility in price and premiums you pay, it will also give you a bird in the hand. If I'm right about this market, and I really believe I am, it will be defined by lack of availability of refined product. To combat that, just accumulate month-in and month-out, and be thankful when you're able to get what you want.
Second, it's about the number of ounces you own. You want to get as many ounces as you can without being penny-wise and pound-foolish. Stick with the most recognized products - don't buy 1,000-ounce bars, for example, because they're illiquid. You want to maximize your liquidity, and you do that by buying the most common forms of bullion - one-ounce coins, bars, and rounds; 10- and 100-ounce products; and junk silver.
Last, keep in mind that premium and commission are two different animals. Commission is what the dealers make on top of the premium. Premium is what the industry bears. So if the US Mint is selling silver Eagles for $3 over spot to the distributors, that's before they're marked up to the public. So even though the "premium" is high, you're actually going to get most of that back when you sell. [Ed Note: It's not uncommon for the buyer to recapture most of the premium when they sell, particularly during periods of high demand.]
So, buy gold and silver while it's available, because if I'm right, getting it at all could soon be your biggest challenge.
Jeff: Thanks for your insights, Andy.
We just concluded our spring Casey Summit, "The Next Few Years," a truly blockbuster event that included detailed investment recommendations from 35 of the most successful experts. We covered all facets of precious metals, energy, interest rates, the economy, real estate, and more. It's the single best way to prepare both your finances and family for what's ahead. You can catch every minute of the entire Summit with a full 20-hour audio CD set, available here.
Regards,
Jeff Clark,
for The Daily Reckoning
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| | | | Bill Bonner | | Cheap Energy: Vital Fuel for the Economic Growth Engine | |  | | Bill Bonner |
Reckoning from Normandy, France...
In our travels around the world, somewhere...somehow...we lost the re- charger to our laptop.
So...this will have to be short...we're running out of juice!
Yesterday, the Dow fell again. Oil is still below $100. And gold is sinking.
In other words, everything is happening as it should. It's too early to draw a conclusion or spot a near-term trend. We'll have to wait to see.
But we have a strong suspicion that if you're betting on making money from the stock market, it's high time you became a seller rather than a buyer. Yes, we know. You did all right so far, by ignoring our advice since the dark days of 2009. The stock market is up. This year, it's up even more than gold.
But this time, ignore our advice at your peril.
Buy gold on dips; sell stocks on rallies. That has been our advice for over ten years. It hasn't been the best thing you could do every year - far from it. But it's been the best thing you could have done over the whole period. If you'd stuck to the formula from the beginning (we wish we had!) you'd have 5 times as much money.
What about the years ahead?
Still guessing...but it looks like the whole commodity complex, energy, and gold are about to take a breather. We wouldn't be surprised to see gold go down from here...and stay down for months, or even years. Major trends take time. This one has been remarkably consistent - so far. It's given us profits every year from our gold. There's no guarantee that will continue. But odds are good that the real payoff for gold is still ahead - perhaps far ahead.
Remember, a bet on gold is a bet against Ben Bernanke and the geniuses at the Fed and the Treasury. That's a bet we're happy to make. And we don't mind suffering the slings and arrows of contrary fortune for a few years before the bet comes good.
But we don't have much time this morning...so let's change the subject. Something has been on our mind...just a stray thought, really, probably with not worth mentioning...
In the vast pre-history of mankind, those dim beasts that were our ancestors lived on only what they could catch or gather up. Humans spread out, exterminated the easy prey...and probably the competing hominids...and populated the livable earth. Then, mankind increased his range by harnessing fire. It gave him more energy to work with - warmth, that would allow him to move to colder, more marginal climates. Next, he figured out that he could tame wild animals...and plant wild seeds. This gave him even more energy - calories - to support larger numbers of humans. Populations increased - up to the limit of what their energy-capturing technology would allow, and no further.
Man's rate of progress was painfully slow - with incremental improvements taking place over centuries or millennia. And then, each time he discovered a breakthrough - fire, domesticated animals, agriculture - he took a big leap forward...to where he had completely played out the advantage.
Arguably, the biggest leap forward of all came in the 18th century, when Europeans found that they could get a lot more energy - first out of coal...and then from oil. This new, condensed energy allowed them to make steel...and build ships and factories. It also permitted agriculture on an industrial scale.
What we've seen in the West - and Japan - over the last three hundred years has been nothing more than the adoption of this new breakthrough technology...and the expansion of living standards with it. And now, what we are seeing in China and much of the developing world is just the continuation of the trend - using oil and coal to power a modern, fully built-out economy. A simple way to look at it is just to look at energy use per person. Rich people use a lot of energy. That's what it means to be 'rich' - to have the things you make, deliver and service out of steel, plastic and other energy-intensive products. It means living in a house that consumes a lot of energy too - in appliances, heating and air-conditioning. And it means traveling - in energy- swilling trains, planes and automobiles.
Looked at this way, it is easy to understand what is going on in China, for example. People are merely catching up in their use of energy.
But wait. What will happen as 3 billion people try to use as much energy as we do? This is the question that aggravates worriers all over the planet. But we're going to ignore it and ask a different, but related question:
What happens when these 18th and 19th century energy breakthroughs are fully realized?
It is essentially the same question, but from a different angle. Yes, as more and more people increase their use of energy, we should see energy prices rise. Energy will be rationed by price - like everything else. People who use it efficiently and effectively will get more mileage out of it. They will go a little further.
In this respect, the USA is lucky. It is one of the more wasteful users of energy. People live far from one another. They live in big houses and drive cars about twice as big as they need to be. They put on the AC rather than open a window.
Besides, America - unlike most other countries - is rich in energy. Coal, wood, wind, sun - it's got it all. Americans can use substitutes...they can improvise. They can make do.
But the point we're reaching for is this: yes, you can stretch out energy...yes, you can use a lot less of it and still maintain your standard of living...and yes, you can probably increase your quality of life extensively - simply by getting some energy-related garbage out of your life.
But can you expect a big increase in your standard of living, when the real source of it - cheap energy - is exhausted?
US wages stopped growing at about the time of the first oil shock in the early '70s. Since then, US standards of living have improved...but only by stealing time. More people spent more time working. And much of what they consumed was borrowed or stolen from the future.
Even those additions of 'phony growth' largely came to an end after the NASDAQ crash of 2000. In terms of real, private sector growth, the US has been flat for a decade.
And look at what happened in Europe and Japan. Almost all developed, mature economies enjoyed a big growth spurt in the '50s, '60s, and '70s. The "thirty glorious years," they call it. And then what? Growth rates slowed down. Japan goosed its economy with lower interest rates, after the Plaza Accords of the mid-'80s; its bubble economy blew up in '89. Since then, Japan has made almost no progress economically. France is locked in its own social welfare delusions; it seems to think it can make people better off by adding labor law protections. England grew in the '90s and '00s largely by offering the world 'financial services' whose real effect was mainly to increase debt levels. Only Germany seems to have come up with a formula for sustained growth - by selling capital goods to the growing economies. Almost half the rolling stock of China seems to have a German mark on it - either Audi, Volkswagen or Mercedes.
And now America's manufacturers are stirring once again too. The falling dollar has lowered real US wages. As long as the developing nations continue to use more energy, exporting energy-rich products will almost surely be a good business for those who can do it.
But what about the rest of the economy? What about the economies of the mature, energy-satiated nations? Are the days of real, rapid growth over? Are we just trying to become more efficient...and hope for small increments of growth? Are we merely hoping to hold onto our standards of living, while reducing the inputs of energy and raw materials?
Are we all retired now...counting our pennies and our btus until we finally adjourn?
Are the glorious years over?
Regards,
Bill Bonner
for The Daily Reckoning |
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