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Wednesday August 1, 2007 - 10:56:06 GMT
Black Swan Capital -

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Key News

Key Reports Due (WSJ):
7:00a.m. MBA Mortgage Refinancing Index. Previous: -1.4%.
7:30a.m. July Challenger Layoffs. Previous: -21.6%.
8:15a.m. Non-Farm Payrolls Forecast. Expected: +100K. Previous: +132K.
9:00a.m. Tsy Refunding Announcement.
10:00a.m. June Pending Home Sales. Previous: -3.5%.
10:00a.m. July ISM Manufacturing Business Index. Expected: 55.5. Previous: 56.0.


“Mankind is condemned to repeat history, the first time as tragedy, the second time as farce.”

    Karl Marx

FX Trading –!

I attended an investment conference last week.  One of the stars of the show, the key guy, is a very bright and nice man.  He gave a very interesting and entertaining opening speech.  In it, he properly warned about the incredible excesses of credit in the system and the potential for a “crack up boom,” as defined by the late great Austrian School economist Ludwig von Mises.  And in order to hide from said “crack up boom” the speaker went on to extol the virtues of gold.  This love of gold has always been odd to us. 

Granted, gold may reflect global purchasing power.  Thus, overtime may ebb and flow as the world’s money—the dollar—rolls from cycle to cycle.  But to us, gold in this cycle is the equivalent during the Nasdaq era.  It seems just another liquidity-driven asset class that offers no yield. 

von Mises on the “crackup boom” [our emphasis]:
"The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.
"The credit expansion boom is built on the sands of banknotes and deposits. It must collapse." He stated that, "If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders. Continuous inflation (credit expansion) must finally end in the crack-up boom and the complete breakdown of the currency system."
We think von Mises has it correct—he usually does.  But I guess the difference between gold bugs and us is that we don’t think we are anywhere near a complete breakdown of the currency system.  Sure the dollar could go lower—but we don’t think is “Banana Republic” time for the US as many commentators would have you believe.  We also don’t think inflation is the big problem.  Granted the relative asset bubble-ology can be considered inflation—but we don’t buy the term “asset bubble” in and of itself is a reliable terminology.  What portion of said “asset bubble” is driven by real reasons i.e. real wealth creation, and what part is just speculative premium—hard to tell.  All in the brain of the beholder we guess. 

Anyway, we wonder why in the heck inflation is so LOW!  If someone ten years ago ever conceived of derivatives representing over 7 times the level of total global gross domestic product, besides first telling them they are nuts, you would probably have said that much money in the system would push global inflation to, well, “crackup boom” levels. 

But here we are, Aug 2007, and with all the hand ringing about inflation (i.e. common government variety measured inflation not the conspiracy theory stuff which is much higher we know) one has to wonder why its not much higher given the vast pool of liquidity.  Those deflationary pumps in the background (billions of new workers unleashed and massive amounts of capacity built and being added to) must have been running 24/7 to counter the 24/7 central bank printing presses and derivates manufacturing. 

So if you are predicting your gold buying on inflation, it may be time for a premise check.  For if the credit problem morphs into hedge fund contagion, we will see a lot of credit default.  And that’s usually a deflationary process. 

We think as this deflationary process naturally plays itself out, investors over time will realize gold is just another liquidity-driven asset, little different in the end than the liquidity-driven assets of the Nasdaq we used to call  In the era we knew deep down someone would end up holding the bag on paper assets that threw off no cash flow and produced little or no real wealth.  We just didn’t know when.  But as holders of paper in this scheme, we hoped we could find buyers to take the stuff off our hands.  Is gold really any different?  We keep hearing about these virtues of gold being a safe haven.  But it seems gold fades every time a whiff of risk fills the air—just as stocks and other risky assets do. 


And another interesting belief flows from the “poor Chinese and Indian mindset.”  It may have no basis in the way real people operating in vibrant financial system, but let’s not let the facts get in the way of a good story that goes something like this:

As the Chinese become increasing wealthy they will buy more gold.  And if just one Chinese bought one additional ounce of gold…blah, blah, blah…you know the rest of that story.  Well we have another take on that.  What if the Chinese do become increasingly wealthy but instead of buying one additional ounce of gold, they dig up about 10 ounces from their hiding places (where it was a real life safe haven) and throw that gold onto the marketplace to generate additional purchasing power when their faith in their government and financial system improve? 

So, too much credit in the system? No doubt! But as a hiding place, we remain skeptics.

Jack Crooks
Black Swan Capital


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