Gold World News Flash |
- Fiscal Policy: A Picky Historical Correction
- Forex Weekly Outlook: October 4-8
- Ready for Rampant Inflation?
- Gold's Rise to Become Disorderly: Ben Davies
- Daily Dispatch: Weekend Edition - Oct 02, 2010
- Junior Gold Producers
- huffpost covers pm manipulation, andrew maguire
- Golden Secrets (II) The Nazi Gold
- Redefining The "Art Of The (Im)Possible" As The Last Gasp Of A Failed Politico-Economic Regime
- Competing Currency War in View: Jim Willie
- How to Make Real Money in Real Estate and Other Investments
- Contest Announcements: Prizes and a final list for “Miners’ Challenge”
- U.S. Mortgage-Title Fraud A National Catastrophe
- Researching Gold/Silver Mining Companies II
- LBMA 2010: Part II
- Buying Gold Before the “Blow Off Phase”
- Tocqueville Gold Fund manager Hathaway talks to King World News
- Haynes, Norcini, Arensberg wrap up metals’ week at King World News
- Julian Phillips: Have central banks lost control of the gold market?
- Gold Bulls Rule the Day
- Scientists, Secrets and Wall Street's Lost $4 Trillion
| Fiscal Policy: A Picky Historical Correction Posted: 02 Oct 2010 07:32 PM PDT Brad DeLong submits: Paul Krugman writes (How The Other Half Thinks - NYTimes.com):
Complete Story »
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| Forex Weekly Outlook: October 4-8 Posted: 02 Oct 2010 07:27 PM PDT A very busy week awaits forex traders, with rate decisions in the UK, Europe, Japan and Australia, and many employment figures. The American Non-Farm Payrolls closes the week in the monthly circus. The theme in the past week continued to be a weaker dollar. Not all currencies enjoyed this equally – the Aussie and the Euro are the big winners, while the British Pound and the loonie are only enjoying small gains. This week, it’ll be around the NFP. Let’s start: Complete Story »
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| Posted: 02 Oct 2010 07:00 PM PDT Michael T. Snyder submits: Are you ready for rampant inflation? Well, unfortunately it looks like it might be headed our way. The U.S. monetary base has absolutely exploded over the last couple of years, and all that money is starting to filter through into the hands of consumers. Commodity prices are absolutely skyrocketing, and it is inevitable that those price increases will show up in our stores at some point soon. The U.S. dollar has already been slipping substantially, and now there is every indication that the Fed is hungry to start printing even more money. All of these things are going to cause a rise in inflation. Not that we aren't already seeing inflation in many sectors of the economy. Airline fares for the holiday season are up 20 to 30 percent above last year's rates. Double-digit increases in health insurance premiums are being reported from coast to coast. The price of food has been quietly sneaking up even at places like Wal-Mart (WMT). Meanwhile the U.S. government insists that the rate of inflation is close to zero. Anyone who actually believes the government inflation numbers is living in a fantasy world. The U.S. government has been openly manipulating official inflation numbers for several decades now. But we really haven't seen anything yet. As increasingly larger amounts of paper money are dumped into the economy, we are eventually going to see the worst inflation in American history. The only real question is how far down the road are we going to get before it happens. Complete Story »
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| Gold's Rise to Become Disorderly: Ben Davies Posted: 02 Oct 2010 06:25 PM PDT Yesterday In Gold And Silver The gold price didn't do a lot on Friday until London opened for trading at 8:00 a.m. local time... which is 3:00 a.m. in New York. From that moment, gold began working its way slowly higher... with a sudden spike to its high of the day [$1,321.80 spot] the moment after the London p.m. gold fix was in at 10:00 a.m. Eastern time. That spike was capped... and the gold price traded sideways for the rest of the day. Silver's price path took a more circuitous route to it high of the day... $22.17 spot... which appeared to come at the close of London trading at 11:00 a.m. Eastern time. From that point, silver also traded sideways for the rest of the New York session. The world's reserve currency had another bad day, with most of the losses coming during Far East and early London trading... and long before New York opened for business. The dollar fell about 83 basis points and is holding onto the 78 cent mark by its fingernails. ...
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| Daily Dispatch: Weekend Edition - Oct 02, 2010 Posted: 02 Oct 2010 06:25 PM PDT October 02, 2010 | www.CaseyResearch.com Weekend Edition Dear Reader, Welcome to the weekend edition of Casey's Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers. Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com. Welcome to the Mania By Jeff Clark, Senior Editor, Casey's Gold & Resource Report With gold punching the $1,300 mark, thoughts of what a gold mania will be like crossed my mind. If we're right about the future of precious metals, a gold rush of historic proportions lies ahead of us. Have you thought about how a mania might affect you? Not like this, you haven't… You log on to your brokerage account for the third time that day and see your precious metal portfolio has doubled from last week. Gold and silver stocks have been screaming upward for weeks. Everyone around you is panick...
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| Posted: 02 Oct 2010 06:24 PM PDT Scott Wright October 1, 2010 2431 Words Gold miners come in all shapes and sizes. From large mega-miners to small single-mine operators, these producers each play important roles in the global gold supply chain. Investors are most familiar with the mega-miners, an elite group of producers responsible for a large majority of overall mined supply. But for a variety of reasons investors should not overlook the smaller fish in the pond. Not only do the small gold miners level the balance of the economic scale, they offer investors incredible opportunities to leverage the fortunes of their underlying metal. This oft-unheralded group operates hundreds of mines that span the globe, many of which have excellent fundamentals. And based purely on their small size, any positive news can send their stocks flying. For this reason and more, at Zeal we decided to dedicate our latest ...
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| huffpost covers pm manipulation, andrew maguire Posted: 02 Oct 2010 06:02 PM PDT semi mainstream media does a long detailed piece on the scam, the attempted murder, gata, and the potential implications of the blowup http://www.huffingtonpost.com/tom-pa..._b_706594.html
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| Golden Secrets (II) The Nazi Gold Posted: 02 Oct 2010 06:00 PM PDT
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| Redefining The "Art Of The (Im)Possible" As The Last Gasp Of A Failed Politico-Economic Regime Posted: 02 Oct 2010 03:57 PM PDT
Many are quick (and correct) to blame Keynesianism for the current near pre-collapse state of the entire developed world. After all, the economy of the western world now functions strictly on an auction to auction basis (or, as is better known in layman's terms: "living paycheck to paycheck"): a state in which the US Federal Reserve and the global central banking cartel is responsible for making sure that not one hint of possible bond auction failure trickles down to the broader population. The fact that primary dealers, which are essentially the monetization vehicles of the New York Fed, account for taking down well over half of each auction is not lost on those who wonder what could happen in a world in which Ben Bernanke's organization were to lose its power, authority and market intervention capacity. Yet Keynesianism is merely an offshot of a far older thought experiment: that developed by Otto von Bismarck in the aftermath of the Franco-Prussian war 140 years ago. The "welfare state" regime created by Bismark is one that predates Keynesian economics, and serves as the nexus of today's rancid, nebulous and very much destructive intersection of economics and politics, at whose core, like a black hole which no wealth created through honest labor can escape, resides the "central bank" apparatus of status quo perpetuation. Luckily (for most), the welfare state experiment is ending. And as it departs one last time, it will expose the "depredations" of developed world governments for all to see, without the benefit of the cloak of the insurance provided by "welfare state" premises, which made the wealth transfer of 7 generations acceptable to those who knew they could extract at least something in exchange for the fruits of 140 years worth of labor. In his latest report, Bill Buckler, of the very highly recommended Privateer report, explains why and, more importantly, how this will happen. From the October 3 edition of The Privateer, authored by the inimitable Bill Buckler “The Art Of The Possible” That quote is attributed to German Chancellor Otto von Bismark, the man who is also responsible for the creation of the modern welfare state. The original “wherewithal” for Bismark’s welfare state came from reparations payments extracted from France in the aftermath of the Franco-Prussian war of 1870-71. Prussia, with Bismark as its Chancellor, was victorious in that war. The victory allowed Bismark to bring together the various German principalities into a German nation. The French reparations allowed him to buy the allegiance of the people by offering them “insurance” against unemployment and the infirmities of old age. This was the welfare state, and politicians all over the world have been following Bismark’s lead ever since. Otto talked about “the art of the possible”. He did not elaborate. He did not define what he meant. “The Possible?” - for whom? - by what means? - to what purpose? Taking It To The Limit: In all so-called “developed” nations, the welfare state is the mechanism which makes government depredations acceptable to the public. To establish and enhance the power of government, an ever larger portion of wages and salaries are sequestered through taxation and an avalanche of rules and regulations are enforced via government fees and charges. Some “compensation” must be found to make this bitter financial medicine go down without becoming dangerously unpalatable. This is where the welfare state comes in. The only way to ease a situation in which it is difficult, to the verge of being impossible, for an individual to take care of him or herself is to create a situation where the State takes over the role. Or at least the State promises to take over the role, should it become “necessary”. This mechanism can “work” - for a while - but the result is that there are more people dependent on the State than there are people who are able to create the wealth on which the State depends. This situation is inherent in all welfare states, approaching in most of them, and already here in one. That state is Japan. In Japan today, 23 percent of the population is over the age of 65. Forty years from now in 2050, given present Japanese birthrates, that will have blown out to 40 percent. At present, the ratio of retirees to working-age Japanese is 35.5 percent. In ten years that ratio will be 48 percent and in forty years (again given present Japanese birthrates), it will have blown out to the literally impossible ratio of 76.4 percent. Saving the worst for last, today, more than half (56 percent) of Japanese workers rely on financial support from their parents or other sources to cover their living expenses. These are the same people who will, in future, be expected to perpetuate the ever more bloated Japanese welfare state. This stark and obvious impossibility is the current situation in Japan. It will soon be the situation right across the developed world. The “solution” will be a rapidly increasing sell-off of rapidly diminishing “assets”. Most of these assets will be paper claims to wealth which does not exist and never did. Going Beyond The Possible - With Debt-Based Money: In rational economic thinking, economic “growth” is only taking place when REAL wealth is being produced faster than it is being consumed. There is not one “developed” nation in the world today where that is taking place. Every one of them is now and has for some time in the past been in the process of capital CONSUMPTION. This is true even in nations like China where massive construction has given an impression of whole new cities springing up from the ground over the past two decades. The real wealth used in this construction has been consumed, but the means to service, maintain, and eventually replace it has NOT been produced. The mechanism used in its creation is debt created out of thin air. A debt, any debt, is an UNFINISHED transaction to be completed when and ONLY when all capital and interest has been repaid in full. The repayment has been deferred indefinitely. Take a look at any political program of “stimulus” undertaken anywhere in the world. What do you find? You find a government acquiring the required economic goods and services by issuing IOUs, known in more polite circles as government bonds. You find these governments selling these bonds for “money”. This money, in all cases, must be accepted in “payment” for all debts, public and private. The money is “legal tender”. It is money because the government says it is and forbids the use of anything else. The bonds and the “money” in which they are redeemable are DEBT-BASED. Since that is true, the activities governments “finance” with this paper are also debt-based. They cannot be anything else. Government produces NOTHING in the form of REAL wealth. The point has long since been reached right around the world where the servicing of all this debt-based government activity has been eating up the existing store of real wealth. We are living in a global era of capital consumption on a massive scale. This guarantees that these debts will NEVER be repaid in the wealth which was consumed by them. Exploring The Possible - Sound Money: First things first. Money is a medium of exchange. That is ALL it is. The other attributes popularly associated with money are secondary effects of its efficacy as a medium of exchange. In modern economic textbooks, money is defined as having three (sometimes four) “separate” functions. Besides being a medium of exchange, it is also said to be a unit of account, a store of value, and a standard of deferred payment. But two of these “functions” are inherent in money’s basic facility of being a medium by which goods and services can be exchanged. The other, the idea of a store of value, is true of any unconsumed economic good, not just money. For almost all of recorded history, economies have worked by means of indirect exchange with money as the one item common to all exchanges. Without money, economic calculation is impossible. Indirect exchange in which units (defined by weight) of money are exchanged for goods and services brings forth prices expressed in terms of units of money. These prices are the raw material of economic calculation. Most economic goods, especially raw resources, can perform many different services or be a component in many different kinds of production. But how can we find the most economical use of the good in question? That is the role of economic calculation. It is not infallible, the future is uncertain. But as long as the money employed is SOUND, the prices formed by exchanges in the market give the means by which economic calculation can be made. Tamper with the money and all prices are falsified. Exploring The Impossible - Debt Used As Money: A sound money is a defined unit (gram, ounce, pound, kilogram, tonne) of the economic good which has proven (in exchanges between individuals) to be the most easily tradeable good. A government never has and never will CREATE a sound money. What they can and have done is to arrogate to themselves, by law, the ability to decree what will be used as money - or else! When a government does that (and sooner or later all governments in history have done it), the path to an UNSOUND money is assured. There are two ways to acquire wealth. One can produce it or one can take it from those who have produced it. The first method has often been called the economic method. The second method has many names. It has been called stealing, or usurpation, or expropriation, or “eminent domain”. Whatever, the description, there is one constant. It has always been called the political method. A government cannot produce but must consume in order to function. It must extract the means from the people it governs. That is true even of a government pared back to its essential services of the protection of life and property. But when government IS pared back to those limits, its costs are minute by modern standards and the burden of paying for it is easily bourne. A government which protects against criminal acts is cheap at twice the price. A government which indulges in them becomes, over time, impossible to afford. And because it is impossible to afford, a new method must be found to “pay” for it. When taxes and charges prove insufficient, government can no longer live off the wealth its subjects have already created. It must live today off the wealth they are expected to create tomorrow. It must BORROW. “Money” created in the act of incurring a debt is UNSOUND by definition. It cannot function as a medium of exchange because no exchange has taken place. It cannot cancel a debt because it is itself a debt. It is said to be based on the “full faith and credit” of the nation which issues it. But neither faith nor credit has ever brought an atom of REAL economic wealth into the world. What unsound money literally does is to put the future “in hock” to the present. Sooner or later, the present catches up. That is what is happening all over the world today. And it is unsound money which has done it. Nobody would accept a promise of indentured servitude for themselves and their progeny in return for something of no value. Yet that is what unsound money promises, and nobody has any choice in the matter of taking it in exchange for their goods. That is bad enough in itself, but when prices become increasingly distorted as the amount of debt “money” increases, the “art of the possible” falls on its face. An Illustration - What Is REALLY “Growing” Today?: When contemplating the antics of modern central bankers in general and the US Fed and Mr Bernanke in particular, it is best to keep some things in mind. First of all, there were historical periods of high renown when such practices as alchemy and phrenology (the claimed relationship between character and the shape of the skull) were taken seriously and practiced by honoured “professionals”. Secondly, the practice of providing “bread and circuses” for the masses has a long history. And perhaps most important of all, the vital motive force in human history is ideas. The more outlandish the idea, the more justification is required to “sell” it and the more exalted become those who do the selling. The problem is that the message of those doing the selling is getting so garbled that it doesn’t seem to be working anymore. On the one hand, you have the IMF recently doubling its global “growth forecast” for this year. On the other hand, you have central bankers everywhere, led by the Fed, talking in public about the likely need for further “stimulus” by means of monetising their government’s debt paper. The polite term for this is “quantitative easing”. The accurate term is inflation. How can an economy be “growing” in an era of capital consumption? The answer is that it can’t. When modern economists and central bankers measure economic “growth”, what they are doing is adding up prices. That is how GDP is derived. What they are actually measuring is not an increase in production, it is a decrease in the purchasing power of money which has resulted in higher prices. The purchasing power of money is being depleted because it is being created out of thin air. The Fed’s “Mandate”: Like all central banks, the Fed has a “mandate”. The original idea was to provide an “elastic currency to meet the needs of business”. That has grown to encompass all economic activity. This was inevitable given the fact that control over money DOES encompass all economic activity. In its most recent legislative version, passed in 1977 and amended in 1978, 1988 and 2000, here is the Fed’s “mandate”: “Federal Reserve Act” The emphasised part of the above quote is the meat of the matter. That task alone IS - and always has been - the Fed’s mandate. As the depreciation of the US Dollar worsened, that mandate became ever more important. Once the US Dollar became a purely fiat currency with no official link to sound money at all, it became crucial. This “modern” version was first legislated in 1977, six years after the US Dollar became a purely debt-based currency. It has been adhered to with religious fervour ever since. The problem for the Fed and all other central banks today is that they have used up all the means with which to “maintain long run growth of the monetary and credit aggregates”. That is the major reason why Mr Bernanke is so terrified of the spectre of what he calls “deflation”. When all prices and all economic calculation are based on money based on debt, the only way to keep the system functioning at all is to maintain the prospect of the soundness and eventual repayment of this debt. The only way to do that is to maintain the perceived value of the collateral which supposedly underpins this debt. But, as we pointed out in our last issue, most of this collateral is itself debt paper - notably government issued paper. The Fed is facing the end of the road for the “art of the possible”. In the US, another political hurdle is coming up on November 2. After that comes the countdown to print or perish time. The Cracks In the Facade Are Opening: A September 27 headline from the UK Telegraph newspaper reads as follows: “Savers told to stop moaning and start spending”. This referred to a TV interview given by the deputy governor of the Bank of England, Mr Charles Bean. Reportedly, Mr Bean said that savers could afford to suffer and should not expect to live off the interest on their savings. He went on to say that a big part of the strategy of lowering official interest rates to the vanishing point (0.50 percent in the UK) was to force savers to start depleting their capital because their returns on investment were insufficient to meet their living expenses. In short, the British central bank is doing everything it can to leave those who have managed to accumulate capital with no choice but to consume it. No clearer illustration of the desperate straits of the modern “money managers” could be imagined. While there is anything left to squander, the central bankers will NOT give up on their desperate efforts to grow the “monetary and credit aggregates”. Needless to say, those who HAVE managed to produce more than they consume in the UK were outraged by both the TV interview with Mr Bean and the Telegraph story which reported on it. As one man put it: “For years we have been told to put money aside for retirement only to find that interest rates have sunk and now we have to use our savings just to pay the bills.” That is indeed what Britons are finding, the latest statistics show that the amount they save has shrunk by 20 percent since the start of 2010. The idea of “perpetual bonds” goes back to the 18th century in the UK when they were issued as “consols”. Some of these still exist but the idea is even more tenacious. From the 1750s until the end of WW II - a span of two centuries - a “gentleman’s” income was measured by the annual interest payment spun off by his investments in “perpetuals” or “consols” or “gilts”. All were government bonds. All were expected to pay interest in perpetuity. That idea dies especially hard in Britain, where it was born. That is one major reason why Mr Bean’s outburst has been met with such outrage. Back To The Main Game - In The US: On September 27, the long end of the Treasury’s yield curve - for debt with maturities from five to thirty years - hit its lowest level since the near financial death days of December 2008. Back then, the Fed’s response was to lower its official interest rate to 0.00-0.25 percent, thus ending the ability of conventional “monetary policy” to resolve the situation. Three months later in March 2009, the Fed added “quantitative easing” to its repertoire. On August 10, 2010, it announced a second tranche of same. Ever since that August 10, announcement, the US financial markets have been holding a gun to the head of the members of the FOMC. The Dow has been rising steadily ever since it dipped briefly below the 10,000 level on August 26. The market for Treasury paper has also been going higher and higher. For both markets, the rationale is that the Fed cannot afford NOT to embark in a SERIOUS second tranche of “quantitative easing”, one far bigger than the tentative program announced on August 10. Americans in particular who are rushing into Treasuries as their ultimate form of financial safety should take a long and hard look at what has happened to the UK over their post WWII history. They should also contemplate the fact that a central bank literally monetising the government debt of the nation is the absolute last gasp of the “art of the possible” as far as the unholy alliance between politics and economics is concerned. It is the act of “saving” the system by destroying its foundation, the money. All that it is accomplishing is to put as “healthy” a facade as is possible on the US economy as the days and weeks wind down towards the US mid-term elections. Elsewhere in the world, almost every election which has taken place since the onset of the GFC has seen a change in government. In more recent times, the tendency has been towards “hung” parliaments or no party forming a government as voters abandon the major parties in quickly growing numbers. Otto von Bismark’s “art of the possible” is not possible when the promises which gave it life in the first place are no longer believed. That is the case everywhere today, not least in the US. What remains to be seen is what will rush in to fill the void. (And, as always, much more in the full Privateer Report)
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| Competing Currency War in View: Jim Willie Posted: 02 Oct 2010 01:07 PM PDT THE CURRENCY WAR HEATS UP The competing currency war is ramping up, with gross interventions, open disputes, notable desperation, friction among trade partners, and urgent need to take action. Nations are taking positions against each other increasingly. In defending their economies, they are pitting themselves against allies and foes alike. The number of bilateral squabbles has never been greater. The winner will be Gold, as all paper currencys will circle the toilet and lose. The Gold price acts as a meter; it will rise in spectacular fashion. It rises due to the profound debasement in a death process of the currency system. The undermine is being sanctioned by the major nations. This process follows inevitably after the grotesque insolvency of the US banking system, the UKbanking system, and much of the European banking system. Their economies are dying on the vine as a result of the dysfunctional credit systems.
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| How to Make Real Money in Real Estate and Other Investments Posted: 02 Oct 2010 10:05 AM PDT Dow…3 ounces! Our old friend Ronan McMahon has been keeping us up to date. Ireland is going broke, he says. The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money. And then the government foolishly said it would bail them out…even though the total exposure was four times Irish GDP. Yesterday, they foolishly took over Ireland's biggest bank, Anglo Irish. And now they're going broke. The losses are probably more than they can handle. But it's been worth it. What a ride the Irish have had! They were the poorest people in Western Europe…then, they became the richest people in Western Europe. And now they're back to being the poorest… It would have been better if they had had a better sense of architecture during the fat years… They wouldn't have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generations… Of course, the same could be said for the USA. All those wretched suburbs and condos… All those shopping malls… All those parking lots… Not to mention all that debt! Yes, we will live with the bubble rubbish and residue for many years. But Ronan said something interesting. We were discussing Irish property. There's a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain price…they snap it up. This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside. They haven't given up. They're still eager to buy – at the right price. But just wait. When the end comes…they won't be interested at any price. Some of the finest properties will go "no bid." Then, the players…the insiders…the smart money will all be convinced that property is a losing proposition…and that you will never make money by buying real estate – because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money. It's no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the "recovery" comes their stocks will go up. They think the bias of the stock market is still upwards. Certain well-known investors – for whom we have an enormous lack of respect – claim that stock prices always go up "in the long run." These super bulls are forever predicting "Dow 36,000" or "Dow 100,000." And they'll probably be right. Someday, the Dow will probably hit 100,000. And you'll be able to read about it in your $50 newspaper while you're drinking your $100 cup of coffee. This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 – a gain of about 5% per annum, without dividends. Maybe he'll be right too. But stocks don't really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does. As for the lot of them, remember that most of their profits and share price growth is an illusion. Let's say you "buy the market." You just get an ETF representing the index…or simply buy the Dow stocks. The companies make money. Their share prices go up. But wait. Where do their revenues come from? Where do their profits come from? Aren't they just taking money from each other…and from other businesses and consumers (who are also their employees…that is, a cost center)? How can they ALL go up? They can't really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in money…they can't really go up more than money itself. In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy). Gold is stable money. It's the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its "price" – in terms of how much you could exchange in for – has been more or less constant. If stocks were really becoming more valuable you'd expect that they would become more valuable against a fixed quantity of real money – gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. "A $20 gold piece" was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the '30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in '82 you could buy the Dow for less than 3 ounces. At one point, a single ounce would do it. Currently, it takes a bit more than 8 ounces to buy the Dow. Hmm… You could get the Dow for about 8 ounces of gold in the '10s…again in the '20s…the '30s…the '40s…the '50s…'70s…'80s…and now finally, once again, in 2010. And that number is probably going down. The bear market in stocks still hasn't reached its bottom. When it does, you'll almost certainly be able to buy the Dow for 3 ounces of gold. Stocks for the long run? Ha ha…. Bill Bonner How to Make Real Money in Real Estate and Other Investments originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day." More articles from The Daily Reckoning….
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| Contest Announcements: Prizes and a final list for “Miners’ Challenge” Posted: 02 Oct 2010 10:04 AM PDT By Jeff Nielson, Bullion Bulls Canada We are pleased to make several announcements today, regarding the two, new "contests" which we have established for our members. To begin with, we now have our first monthly winners for silver bullion (and "Bullion Bulls" shirts), based upon the "activity" of members on our site. The September winners:
First prize: SilverCaper (three 1-oz coins + BBC shirt) Second prize: HA65MPH (one 1-oz silver "round" + BBC shirt) Third prize: Clint009 (one 1-oz silver "round") Congratulations to all winners!
These prizes have been generously donated (except for our stylish shirts) by SilverGoldBull.com, and we are pleased to announce that SilverGoldBull has now become the "official sponsor" of Bullion Bulls Canada. A more complete description of those prizes is available with our original announcement. We are also ready to announce the final list of contestants for our "Miners' Challenge". To refresh peoples' memories, in this contest our members pick the North American-listed company which they believe will have the largest percentage gain in share price over the contest period (October 1, 2010 – March 31, 2011). Let me also address (in advance) a possible scenario, which could affect one or more contestants. Should your pick be involved in some form of merger or take-over, where the company ceases to exist under its current name, this will not automatically knock someone out of the competition. Instead, they will be credited with the percentage gain (or loss) which the company had made as of the last day in which it was publicly traded. I will also once again review the prizes:
First prize: One 1-oz gold coin Second prize: 1/2 –oz gold coin Third prize: 1/4-oz gold coin Halfway leader: ¼-oz gold coin
Note: No more than one prize shall be awarded per contestant. Should any entrant be in a position to win more than one prize, they shall only be awarded the larger of the two prizes, while the contestant next in line shall be awarded the smaller prize. Here are the usernames of the members who have entered, and the companies they have chosen:
More articles from Bullion Bulls Canada….
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| U.S. Mortgage-Title Fraud A National Catastrophe Posted: 02 Oct 2010 10:04 AM PDT By Jeff Nielson, Bullion Bulls Canada It is impossible to overstate the severity of the real estate crisis in the United States which has been caused entirely by the reckless fraud of the nation's largest banks – the Wall Street Oligarchs. We now have mortgage-fraud being openly acknowledged by the banksters, and on a scale never before seen in human history. We have a single individual with JP Morgan openly admitting that she "and her team" committed more than 18,000 acts of fraud per MONTH, while one Bank of America official admitted that she personally committed 7,000 to 8,000 acts of fraud monthly. Regular readers will recall that in a recent commentary I reported on two, separate anecdotes where the Bank of America attempted to "foreclose" on properties which did not even have mortgages. In that same commentary, there was also an anecdotal report from a Florida lawyer who specializes in foreclosure proceedings, who stated that he regularly encountered (so-called) "judges" who were rubber-stamping these foreclosures without even looking at the documents. The lawyer also reported that one particular judge had already written her judgments (confirming foreclosure) before the foreclosure trial started. We thus have the following chain of events, a Wall Street bank pushes a stack of 18,000 foreclosures in front of a small group of clerks (who make convenient patsies), and tells them they have to clear this many documents every month – knowing that it is impossible to process that volume and still follow mandatory legal procedures. Stacks of these foreclosures are then pushed before judges. In the case of Florida, they are being processed by judges called out of retirement. Many of these people are likely no longer allowed to operate motor vehicles. These past-their-prime judges then rubber-stamp these fraudulent foreclosure documents – without even looking at them – effectively stealing the home from the homeowner through the coordinated fraud being committed by Wall Street banks and the U.S. government. This is the sort of systemic horror-story which we would expect to hear coming out of some tiny, Third World country, with a 'two-bit' legal system – not from "the Leader of the Free World". The crime-waves being confessed to by JP Morgan and Bank of America follow similar (if not worse) admissions by Ally Financial (GMAC's mortgage subsidiary). Naturally, the U.S. propaganda-machine isn't reporting this mass-fraud as a crime-wave, but merely as "mistakes". Let me make things clear. Doing something once is a "mistake". Doing something 10 times is a pattern. Doing something 100 times is serial fraud. Doing something at least 7,000 times a month is a crime-wave. Obviously the banks themselves must have understood they were engaging in fraud. In the case of JP Morgan, we have the largest, and one of the oldest banks in the United States. It has been processing foreclosures in the U.S. for more than a century. It clearly has an intimate, administrative understanding of how long it takes to process a foreclosure. When its largest mortgage-processing unit started reporting (month after month) a rate of "productivity" which was utterly impossible (while following mandatory legal procedures), it obviously should have put a stop to these "mistakes" at a much, much earlier time. How much earlier? That is the unknown question. We already know that Ally Financial had already been sanctioned for such mortgage-fraud by a Florida judge as far back as 2006. But that was only the first time it was caught. With courts in many U.S. states severely clogged with enormous backlogs of foreclosures (more than 500,000 in Florida alone), we have no way of knowing how many foreclosure-judges are also rubber-stamping everything that is put before them. Tragically, as despicable and inexcusable as this bankster crime-wave has been, these past horrors pale into insignificance when stacked-up against the future problems which have been created by Wall Street greed. A Bloomberg article begins to explore this legal nightmare. "Defective documentation has created millions of blighted titles that will plague the nation for the next decade," said Richard Kessler, a Sarasota, Florida attorney. Kessler conducted a "study" which found defects in approximately 75% of all court filings. More articles from Bullion Bulls Canada….
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| Researching Gold/Silver Mining Companies II Posted: 02 Oct 2010 10:01 AM PDT By Jeff Nielson, Bullion Bulls Canada In the first installment of this tutorial on investing in precious metals mining companies, I provided investors with the "ABC's" of researching these companies: simple, basic information which would allow even novice investors to begin to distinguish between these miners. This was followed-up with a piece from our Mining Coordinator, Brian Boutilier – who explained how he used such basic data as part of his "screening process". Before getting into more in-depth research, Brian uses this first level of analysis to separate companies which are potentially worth investing in from those with much less likelihood of success. In this piece, I will introduce readers/investors to a more rigorous level of analysis, which will allow us to get a much clearer picture of exactly what these companies are working towards with their operations. There is much more to analyzing these companies than simply ascertaining whether they are already producing, or still "exploring". Once we categorize these companies in a more precise manner, we can zero-in on what specific pieces of data are of greatest importance. In this respect, analyzing the "producers" is more straightforward, so we will begin with this cross-section of the miners. For purposes of this commentary, I will assume that all producers are small producers (or "juniors"), as there really isn't any "mystery" as to what the larger producers are doing with their own businesses. Regarding the junior producers, the general question to be answered is can any particular miner boost total production, and/or improve efficiencies, and/or increase profits? Concerning the first issue, the first aspect to examine is whether they have the existing capacity to increase production. Can their crushers/ball mills process more ore than what is currently being fed through? Again, this is a question which can and should be easily answered by the investor relations department for these companies. If the answer to this question is "yes", then likely all it will take for the company to increase output is through adding some additional "feeder" equipment to get the ore to the crushers, or perhaps gaining access to additional ore through further drilling and/ore ramp construction. Introducing such changes into operations are relatively low-cost means of boosting production, and very likely would not require additional financing in order to increase production in that manner. For those miners already operating at capacity, the first issue is will this mine ever increase production? This is not strictly an issue of money. Depending on the size of the ore deposit and the nature of the ore deposit, it may never be practical to expand production. For mines with relatively small deposits, there is no point in investing enormous amounts of capital which will ultimately do nothing except cause the mine to close sooner (through using-up the ore at a faster rate). It's unlikely that cramming the production into a shorter time-frame would produce an acceptable rate of return for such a large capital investment. However, even companies with large ore deposits will sometimes find that it makes no sense to attempt to increase the scale of operations. An example of such a mine is the Topia Mine of Great Panther Silver. This mine has been a relatively small producer for over 400 years. Obviously there was plenty of ore to justify a larger operation, so why did none of the mine's owners (over a 400-year history) ever try to make this a much larger producer? The answer to that question is found by examining the nature of the ore deposit more closely. In the case of the Topia Mine, it has always located very high-grade ore, making it a very profitable producer. The "catch" is that this high-grade ore is contained in a multitude of very narrow "veins". It takes much more careful mining to efficiently mine such ore – which reduces the amount of ore which can be fed to the mill. Thus, despite the quantity of ore, increasing production would have never been a cost-effective choice for this mine. As investors, we can gain insight into what sort of mining might be done with any ore-body by referring back to a topic discussed in the first installment: drilling results. As I pointed out previously, there is a wealth of information to be obtained from these samples – starting with the width of the veins of ore which are encountered. More articles from Bullion Bulls Canada….
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| Posted: 02 Oct 2010 10:01 AM PDT Bullion Vault The bullish arguments you know already no doubt. Low-to-zero The Berlin conference had plenty more to say on those Well, all the gold ever produced in history came from a Further output gains look unlikely, Burton went on, thanks That other constant drip-drip of gold supply – the Even without the end of central-bank sales, however, or the Since 2005 alone, US scrap supply has more than doubled Since "investment buyers and scrap sellers are driven Cash-strapped households, remember, can only sell their "The current bull market has much deeper roots than the "I think people long gold should not be concerned "Investors should be positioning for 'tail "The answer has got to be yes. But quite what A handful of private investors have begun to make that India and Turkey, after all, have long been both top buyers All told today – and seeing the world's fastest-growing
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| Buying Gold Before the “Blow Off Phase” Posted: 02 Oct 2010 10:01 AM PDT An interesting graph of "a useful road map to any secular bull market" appeared in Casey's Daily Dispatch. It was a graph showing how investment interest in a developing bubble classically proceeds through four stages. First, there is the Stealth Phase where nobody is paying attention to the undervalued asset except for a few forward-thinkers who are buying, which I figure is probably because they are hip to the Austrian school of economics. Secondly, the market moves into the Awareness Phase as more and more people recognize the value, and the gently rising price, and they start buying, too, leading to higher and higher prices, proceeding to where things are then in the Mania Phase, where suddenly everybody is buying, buying, buying, the price is soaring, soaring, soaring, and fortunes, fortunes, fortunes are being made, the details of which blare from every news source – Gold! Gold! Gold! – causing further buying by the envious latecomers to the investment party, leading to that distant theoretical time when the market is saturated with investors and paper profits, which leads to, as it always seems to, the eventual collapse in the tragic "Blow Off Phase," where the price falls to "the mean." The interesting part was when the graph, created by Dr. Jean-Paul Rodrigue at Hofstra University, shows that the mean price of gold is always rising, and by the end of the graph, the mean price is almost twice as high as at the beginning, meaning that inflation is now an accepted part of life, even in gold! Yikes! We're freaking doomed! If you are like me, then you are already pretty numb about the horrors of inflation after the years and years of continual, relentlessly rising inflation, a vicious monster that rises slowly up out of the stinking miasma, gathering its strength from the foul Federal Reserve's creating too much money and credit, a terror made worse by the recently-renewed promise of the Federal Reserve to create more and more inflation because – absolutely unbelievably – they think that inflation is too low! Too low! The lying government says inflation is around 2%, which is, they say, unbelievably, too low! Too low! John Williams at shadowstats.com says inflation is running at more than 8%! Gaaahhh! We're freaking doomed! So, if you are, again like me, not only Completely Freaked Out (CFO) about inflation, but also a greedy, money-grubbing little lowlife who is interested only in getting as rich as possible, as soon as possible, without working, where are we on this "road map"? Fortunately, we do not have to rely on my stupid ideas on the subject, and Mr. Casey refers to a guy named David Rosenberg, "who has a large following among the institutions," as saying he thinks that "the Mania stage is still well off, and that gold won't really gain steam until it hits $3,000." "This," Mr. Casey adds, "despite his being a staunch deflationist." Of course, I look askance at anyone who is a deflationist when the Federal Reserve is promising to create more trillions of dollars to keep inflation high, and I look even more askance at anyone who is not buying gold as a result of such monetary madness! Dominic Frisby of the Money Morning newsletter seems to show that a lot of people agree with me, and says, "Gold, of course, has broken out to new highs. And it pushed still higher yesterday after the Federal Reserve's announcement that inflation is 'becoming undesirably low.'" The LA Times headline was, "Dollar Sinks and Gold Soars as Fed Signals It Wants to Stoke Inflation." They opined, "The markets' verdict was clear: They believe Fed Chairman Ben S. Bernanke is willing to debase the dollar to avoid the risk of the economy falling into deflation." They got that idea from the FOMC's post-meeting statement, where "policymakers signaled that they're worried that inflation has fallen too low, with the 'core' consumer price index rising year-over-year at a rate of less than 1.0% in recent months, a 44-year low." Yikes! 1% inflation (which is a lie) is a 44-year low? Inflation has been a fact of life for at least 44 years in a row! And inflation since 1966 has caused $1.00 of 1966 buying to now require spending $6.74! It looks like 574% inflation to me, but I always get these percentage things all wrong, but even if I do, even an idiot like me can see that this is a lot of inflation! Agora Financial's 5-Minute Forecast had the actual words from the FOMC release, which were horrifying. The committee said, "Measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability"! Inflation is too low to maintain "price stability" they say! I involuntarily let loose with a Mogambo Scream Of Outrage (MSOO) at such a stupid, stupid, stupid thing to say, and apparently I am not the only one, as these "two key sentences from the FOMC press release" were enough, says The 5, to get "gold traders all lathered up." See how easy this mindlessly investing in gold, silver and oil is when your government and your central bank collude to destroy you? Whee! This investing stuff is easy! The Mogambo Guru Buying Gold Before the "Blow Off Phase" originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."
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| Tocqueville Gold Fund manager Hathaway talks to King World News Posted: 02 Oct 2010 10:00 AM PDT 1:15p ET Saturday, October 2, 2010 Dear Friend of GATA and Gold: Tocqueville Gold Fund manager John Hathaway gives Eric King of King World News some encouraging words about investing in the precious metals during a 10-minute interview you can listen to here: http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/10/2_John_… CHRIS POWELL, Secretary/Treasurer * * * Help keep GATA going GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at: To contribute to GATA, please visit:
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| Haynes, Norcini, Arensberg wrap up metals’ week at King World News Posted: 02 Oct 2010 10:00 AM PDT 12:30p ET Saturday, October 2, 2010 Dear Friend of GATA and Gold (and Silver): The weekly precious metals wrapup at King World News finds CNI Gold & Silver's Bill Haynes remarking that there is no precedent for the monetary debasement under way among governments; Dan Norcini remarking that even very shallow dips are being bought; and the Got Gold Report's Gene Arensberg remarking that the big commercial traders still are not as short as would be expected amid record-high prices. You can listen to the interviews at King World News here: http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/10/2_KWN_W… CHRIS POWELL, Secretary/Treasurer * * * Help keep GATA going GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at: To contribute to GATA, please visit:
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| Julian Phillips: Have central banks lost control of the gold market? Posted: 02 Oct 2010 10:00 AM PDT 1:35p ET Friday, October 1, 2010 Dear Friend of GATA and Gold: In commentary posted today at GoldSeek, Gold Forecaster editor Julian D.W. Phillips asks, "Have Central Banks Lost Control of the Gold Market?" Of course the question presumes that have been rigging the gold market for a long time, and Phillips reviews some of that history. You can find his commentary at GoldSeek here: http://news.goldseek.com/GoldForecaster/1285981200.php CHRIS POWELL, Secretary/Treasurer * * * Help keep GATA going GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at: To contribute to GATA, please visit:
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| Posted: 02 Oct 2010 10:00 AM PDT Market Blog submits: The gold market is glittering again as the trading week comes to an end, with bullion prices striking fresh-all time highs above $1,320 (U.S.) an ounce in London. Traders remain positvely giddy over the precious metal amid further U.S. dollar weakness today following more disappointing economic data stateside. The Institute of Supply Management said its purchasing managers index on economic activity in the manufacturing sector rose to 54.4% in September, missing Street expectations of 55.0 per cent growth. Despite gold's unrelenting move north, many analysts remain upbeat and expect the momentum to continue. A snap poll of analysts conducted by Reuters this week found two of three expect prices above US $1,350 by year-end.
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| Scientists, Secrets and Wall Street's Lost $4 Trillion Posted: 02 Oct 2010 08:15 AM PDT
Scientists, Secrets and Wall Street's Lost $4 TrillionBy PAM MARTENS, orginally published at CounterPunch Thanks to an ever growing influx of Ph.D.s from the Ivies and an insatiable demand for an algorithmic trading edge by secretive hedge funds and proprietary trading desks at the largest firms, Wall Street has become part physics lab, part casino, part black hole. What Wall Street bears no relationship to any longer is its primary mission in the U.S. economy: to be a fair and efficient allocator of capital to worthy businesses and innovators to propel job growth while also providing a medium for allowing investors to buy or sell stocks and bonds of those businesses at a fair price. Stock brokers who previously scoured over annual reports and price to earnings multiples and bond prospectuses to build individualized portfolios for clients based on the client’s investment time horizon and comfort level with risk are so yesterday. The big firms lean on their brokers to turn their clients’ money over to impersonal “money managers” who use incomprehensible computerized risk modeling to manage the life savings of people they’ve never met. The business motivation for this was that the earnings of the big firms would not be dependent on the brokers’ inconsistent commission streams from trading by replacing them with a steady annual stream of money management fees. These huge pools of consolidated money have now joined the huge pools of hedge fund and proprietary trading monies, leaving small investors at the mercy of giant “pools,” the exact same word that dominated investigations after the 1929 crash. (Those intensive Senate investigations of the early 30s that turned up corruption at the highest echelons of Wall Street are also so yesterday.) Taking the human relationship, and human brain, out of investing for others and turning it over to computer formulas has produced stark results: a lost decade of retirement savings for most Americans; a multi-trillion dollar collapse of the financial system; a taxpayer bailout of the most incompetent and negligent firms in finance; the greatest wealth transfer to the top 1 percent in the history of the country -- which has contributed to 43.6 million people in America, including one in every five children, living below the poverty level. And despite all this, Wall Street’s top cop, the Securities and Exchange Commission (SEC), continues to treat Wall Street as an overly rambunctious adolescent that needs merely a little slap on the wrist from time to time. Consider the recent example of how Citigroup was punished by the SEC for willfully “scripting” announcements to investors to hide $39 billion of its exposure to subprime debt. According to the SEC’s order of July 29, 2010, only Gary Crittenden, CFO during the period of the order, and Arthur Tildesley, head of Investor Relations at the time, were singled out and given fines of $100,000 and $80,000 respectively. They were not barred from Wall Street; their collaborators in the debt deception, who were known to the SEC via emails obtained from the firm, were not named in the SEC order or fined. The following is from the SEC order:
There are systemic ramifications to secrets like the above which, still today, proliferate across Wall Street. The SEC has assigned a former rocket physicist, Gregg Berman, to lead the investigation into the Flash Crash of May 6, 2010. On that day the market lost a staggering 998 points intraday, sold off some blue chip stocks at 20 to 40 per cent below their opening price, knocked some S&P 500 stocks to a penny, then turned on a dime and shot upward in a bizarre financial bungee jump, with the Dow closing down 348 points. It apparently hasn’t occurred to the SEC that the American people do not want their life savings in a venue that requires a rocket scientist to explain how it works. (A CNBC/Associated Press poll conducted between August 26 and September 8 of this year found that 86 percent of survey respondents view the stock market as unfair to small investors. Half the respondents say they have little or no confidence in the ability of regulators to make the market fair for all investors.) Dr. Berman holds a B.S. in Physics from M.I.T. and a Ph.D. in Physics from Princeton. On September 24, 2009, the SEC announced that Dr. Berman had been named “a Senior Policy Advisor in its newly-established Division of Risk, Strategy, and Financial Innovation.” Queried last week, a spokesman for the SEC says Dr. Berman is now working for the Division of Trading and Markets. Prior to joining the SEC, Dr. Berman served in various executive positions over 11 years with RiskMetrics Group, a risk modeling firm incubated at JPMorgan in the early 90s, spun off as a separate firm in 1998, and became a publicly traded company on January 25, 2008, making a lot of instant multi millionaires among the ranks of senior executives. According to the company’s web site, RiskMetrics serves 72 of the 100 largest investment managers, 35 of the 50 largest hedge funds, 16 central banks. RiskMetrics is acknowledged as the firm that created a highly complex model called Value at Risk, or VaR, which attempts to express how much money a financial institution or trading desk can lose over a set period of time, such as the next 24 hours, week or month. As can be seen by the SEC order against Citigroup officials, if the risk modelers are not aware of an extra $39 billion of risk hiding in an offshore vehicle, the risk model is worse than useless because it’s actually creating a false sense of security. Or, as another example, you could run a computer calculation as to the probability of a $10 billion portfolio of AAA collateralized debt obligations blowing up over the next 3 months and find you had a 1 per cent probability of that happening. But if you ran the same calculation through your brain, it might go like this: what is the probability that you can bundle $10 billion of loans from high risk borrowers who have low credit scores and get a legitimate AAA rating on that paper. (Brain: probability zero.) What is the probability that if you go ahead and bundle junk bonds and get the credit rating agencies to rate them AAA, they will perform like a AAA bond . (Brain: probability zero.) Across Wall Street, human questioning was getting in the way of taking those oversized, insanely leveraged risks that would lead to fat bonuses. So the human brain was turned off and the VaR brain, or a proprietary clone of it, was turned on. According to insiders, those highly complex Collateralized Debt Obligations (CDOs) that consisted of subprime loans stacked in convoluted tranches were plugged into the risk model as a simple AAA bond. Garbage in, garbage out. The risk models used computer methodology; the corruption that was human-inspired could not be adequately translated to binary code. The risk models, for example, did not understand the ramifications of actions like the ones described by an Assistant Manager, Gail Kubiniec, at a unit of Citigroup, CitiFinancial:
A patent application pending at the U.S. Patent and Trademark Office naming Dr. Berman and two others as inventors, and RiskMetrics as the assignee, suggests where the idea of risk modeling is heading next. The patent, if approved, would enshrine a concept of allowing money managers such as hedge funds to keep the actual positions in their portfolio a secret while providing a risk analysis to investors. (According to a spokesman at the patent office, the application has been pending since 2008 because their examiners are swamped with backlog.) One of the most outspoken critics of the risk modeling technique known as VaR is Dr. Nassim Taleb, who holds impressive academic credentials himself: a Wharton M.B.A., a B.S., M.S. and Ph.D. in Management Science from the University of Paris. Dr. Taleb testified as follows on September 10, 2009 before the U.S. House Subcommittee on Investigations and Oversight of the Committee on Science and Technology. (Despite this testimony, fourteen days later, the SEC hired Dr. Berman.) “Thirteen years ago, I warned that ‘VaR encourages misdirected people to take risks with shareholders,’ and ultimately taxpayers’ money.’ I have since been begging for the suspension of these measurements of tail risks [fat tail or extreme events]. But this came a bit late. For the banking system has lost so far, according to the International Monetary Fund, in excess of 4 trillion dollars directly as a result of faulty risk management… My first encounter with the VaR was as a derivatives trader in the early 1990s when it was first introduced. I saw its underestimation of the risks of a portfolio by a factor of 100 --you set up your book to lose no more than $100,000 and you take a $10,000,000 hit. Worse, there was no way to get a handle on how much its underestimation could be. Using VaR after the crash of 1987 proved strangely gullible. But the fact that its use was not suspended after the many subsequent major events, such as the Long-Term Capital Management blowup in 1998, requires some explanation. [Long Term Capital Management was a hedge fund blown up by a group of Ph.D.s using massive leverage.] Furthermore, regulators started promoting VaR (Basel 2) just as evidence was mounting against it. VaR is ineffective and lacks in robustness…VaR encourages ‘low volatility, high blowup’ risk taking which can be gamed by the Wall Street bonus structure. I have shown that operators like to engage in a ‘blow-up’ strategy, (switching risks from visible to hidden), which consists in producing steady profits for a long time, collecting bonuses, then losing everything in a single blowup. Such trades pay extremely well for the trader –but not for society. For instance, a member of Citicorp’s executive committee (and former government official) [former Treasury Secretary Robert Rubin] collected $120 million of bonuses over the years of hidden risks before the blowup; regular taxpayers are financing him retrospectively.” The comments in [brackets] above are mine. I don’t know why Dr. Taleb is only picking on Mr. Rubin’s $120 million when Sanford Weill, former CEO of Citigroup, sucked $1 billion out of the firm in compensation under the same set of circumstances. Dr. Taleb goes on to chronicle in Appendix 1 of his testimony just how long he has been sounding the warning. His prior statements are as follows:
One certainly does have to wonder why, if the RiskMetrics risk model was so accurate and valuable for trading, JPMorgan effectively gave it away to the street by publishing the methodology publicly in 1994. Having read reams of lawsuits filed in Federal Court where Wall Street firms pound the table to keep their proprietary trading secrets under seal, this whole episode does raise a few eyebrows. To add to the curiosity, RiskMetrics, the firm created inside an incubator at JPMorgan was acquired on June 1 of this year by MSCI, a firm created inside an incubator at Morgan Stanley. In other words, two of the largest investment banks whose primary job is to allocate capital fairly to the marketplace frequently create their own finance-related firms, then proliferate the “science” masterminded by these firms by spinning them off to the marketplace. Within a few weeks, the SEC will be releasing its investigative report of the May 6, 2010 Flash Crash. Gregg Berman, a key executive of RiskMetrics just one year ago, whose clients at that time are the same firms engaged in the questionable events of May 6, will serve up the results of that investigation to the American people. In the book “How I Became a Quant: Insights from 25 of Wall Street’s Elite,” Dr. Berman shares this with us: “…I learned that once the billion-dollar spacecraft I had worked on finally reached Mars, it exploded.” Dr. Berman is now two for two. Is he the right man for unraveling the events of May 6? Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire.
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