Topic: Gold and Silver
Preparation Time is Running Out This morning in London the gold price hit an all-time high in non-inflation-adjusted dollars of $1047. While some who hold gold might be rejoicing, I do not view this as good news at all.by Jake Towne, the Champion of the Constitution
(libertarian)
Wednesday, October 7, 2009
This morning in London the gold price hit an all-time high in non-inflation-adjusted dollars of $1047.
While some who hold gold might be rejoicing, I do not view this as good news at all. The campaign still has plenty of people to reach in this district, and may run out of time since we certainly do not have the funds to launch a major ad campaign.
The all-time high in the gold price is a warning of dire times to come as it merely indicates that the dollar's purchasing power is at an all-time low. The next phase of the dollar crisis may be on the doorstep.
For those of you who would shout "au contraire!!" and are excited about the stock markets gains since the spring, please take a look at the following chart. Note that maximums in the P/E (price-to-earnings) ratio often precede market crashes, as the stock is overvalued as compared to its dividends/earnings. This S&P 500 chart is from 1935-present.
Notice anything strange? We are way out of historical means. I do not believe that such absurdly high P/E ratios are possible to maintain over the long-term.
The campaign is extremely busy and continuing to pick up steam, but we need your help to spread the word. The above should not be taken as investment advice, merely facts.
On October 15th, I will be presenting at Moravian College in Prosser Auditorium at 7 PM a talk on "Why the Stimulus Plan Won't Work". Details are here.
Jake Towne is running for U.S. Congress in Pennsylvania's 15th District in the 2010 election as a citizen unaffiliated with any political parties. Jake also writes at www.LibertyMaven.com and www.CampaignForLiberty.com. A novel campaign website where you can comment on articles and start discussions is available atTowneForCongress.com. [Reach the Author Here!]
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings of this article to your blog or anywhere else in order to promote the Restoration of our Republic.
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Jake I'm not sure whether to be dumfounded or to be suspicious of that graph. The Fidelity Spartan 500 Index Investor fund basically tracks the S&P 500. It had a PE of 14.62 as of the end of July. [link edited for length]
But if your graph is correct that really is unprecedented. It would make the dotcom stocks of the late 90's look like sound investments by comparison.
Sorry to get off topic. I know you're looking for campaign funds but that graph really startled me.
Posted By: Jake Towne, the Champion of the Constitution
Date: 2009-10-08 05:11:22
Dear David S -
I don't believe your source has updated its figures, or is just using a different way of calculating P/E that is non-standard. Typically one looks at the past year - trailing 4 quarters - of earnings. When the depression hit, earnings plummetted, which is the reason for an absurdly high figure. However, I do agree that perhaps this requires a bit more research.
While I have not personally checked the figures with chartoftheday, in the past I have (for other graphs). This Seeking Alpha goes a bit more into P/E ratios. Obviously P/E's are just one of many indicators.
Posted By: Jake Towne, the Champion of the Constitution
Date: 2009-10-08 05:21:38
Dear David S - One other thing. I am a politician (or so I am told :) so I do need to ask for funds (on my website, not here).
However, please believe me when I say I would have written a very similar article (probably more in-depth since I would have had more time) if I was still back in China with gold on the rise.
Please note my continued warnings over the past couple years, including this one from January 2009. Rereading it just now made me chuckle, sometimes I hate being proven correct. The Champion of the Constitution's Saver's Wish List for 2009 http://www.nolanchart.com/article5747.html
Posted By: Jahfre Fire Eater
Date: 2009-10-08 08:11:50
Hi Jake,
No sense in rejoicing when for most of us the only option is to trade any gold or sliver we may have for dollars. The dollar is toast but average Americans will be the last to know it because that is their only medium of exchange. The last place for US dollars to fail is in the local market.
Earlier this week Tim Geithner said Americans must save more while Japan and EU must increase local demand. At the same time, purchasing power is eroding rapidly and higher taxes are on horizon. So, just staying even requires pretty dramatic increases in earnings...but that isn't going to happen either. We're in a deflationary spiral that was inevitable on the heals of generations of unsustainable growth. Many of the jobs that have been lost are not lost, or paused, they are gone for good. Their existence in the first place was based on the fantasy of perpetual growth that Keynesian ecomonics paints for politicians and that politicians paint for voters in exchange for their support. Before a recovery can happen, new jobs must be created but the current status quo is an attempt to re-created the jobs that are no longer needed. More specifically, new jobs in productive endeavors must be created. New jobs create by government spending are not creating wealth or prosperity, they are just another channel for re-distributing the dwindling wealth of our nation; wealth that was created by productive jobs in the free market prior to the current, on-going implosion of our economy.
The government thinks the economy IS the numbers and that any means of creating those numbers is of equal value to the economy. What von Mises showed is that the economy, is the behavior of individuals in a market, the numbers reflect that activity. If the numbers are created by any other means, their relationship to the economy is a scam.
Keep up the good work Jake. It's never too late to do the right thing and spread the truth of sustainablility. Good news, bad news, too late, too early, etc. are merely judgements with regard to specific expectations. My paradigm is to do the right things with no expectations. I believe the productive activity will bear fruit regardless of expectations and that disappointment results from basing behavior on unrealistic expectations...and that ALL expectations that depend on the behavior of other people are unrealistic.
Posted By: Jake Towne, the Champion of the Constitution
Date: 2009-10-08 08:19:35
Dear Jahfre -
Thx for the comment. Was wondering if you have every read this short essay on deflation by Hulsmann? He taught a few classes I attended at Mises University this summer, very bright man, perhaps the smartest monetary economist at Mises alive today. [link edited for length]
Much enjoying my new hobby, though its more like a lifestyle,
Posted By: Jahfre Fire Eater
Date: 2009-10-08 11:26:14
Hi Jake,
Thanks for the reminder about Hulsmann. Yes, I have read this essay and I just skimmed it again. I apologize for being imprecise...well, incorrect, with my reference to a deflationary spiral. Deflation is, of course, a monetary phenomenon and that isn't what I was describing. "Depression" might be a better term but still not precise.
If you've read some of my recent articles you'll know I'm not hung up on the words; I'm far more interested in observations of real-world circumstances and consequences than I am about what they are called. Some day, there will be a label that is generally accepted as THE description of our current circumstance. The trouble in trying to use labels from past circumstances to describe events unfolding in the present is that the words become the focus of the discussion rather than the actual real-world events themselves. Just as trying to label Obama's administration as Socialist or Fascist or whatever, it doesn't quite fit the accepted terminology so I just refer to it as Obamunism...and I'll let the future apply a definition to it. To me, it just refers to what is actually happening.
What is happening in our economy is a contraction of demand. The antithesis of perpetual growth. Geithner's admonition for Japan and EU to stimulate local demand is ridiculous for that reason. What if the next generation decides to shun consumption to an extreme degree all around the globe? I think that is far more likely than any economy forging ahead with increased demand to cause the world to resume its past trajectory.
The spiral I intended to reference is that cyclical demand contraction on a scale never before experienced by mankind. I believe this grass roots contraction is a necessary step on the path towards sound money and a world where advancement in technology and productivity cause prices to decline over time and cause purchases that are made to be lifetime purchases. The future cannot proceed on the notion of planned obsolescence. The dream of sound currency affictionatos is that their vision will manifest out of whole cloth. I disagree. I believe a long, hopefully permanent reduction in demand is a necessary condition. I also believe this is the only hope for the future of mankind on earth. What I have no way of predicting is when and what path we will take to reach this necessary, fundamental change in the nature of human behavior. I'd like to believe this is the start and that it will continue from here in a logical, peaceful manner. Knowing the warmongers and the elite "world improvers" intentions, and the deeply ingrained destructive force or religions, I fear that they will have to go down fighting. That implies a long, bloody path for mankind. This is certainly not deflation as I stated earlier.
Posted By: Jake Towne, the Champion of the Constitution
Date: 2009-10-08 11:34:10
Yes, I agree with much of what you said. The prospects of a bloody future filled with more really senseless wars is a main motivator for my campaign as well.
Have you read the updated New Empire of Debt by Bonner? Great book, know exactly what you mean when you write "world improvers"
Posted By: Jahfre Fire Eater
Date: 2009-10-08 13:27:26
Hi Jake,
Nope, I haven't read the updated version. The original is only arms-length away here in my computing cockpit at Fire Eater central though. That book has been on the top of my recommendation list for 3 years.
Your graph caused me considerable concern so I did some more digging.
I started with Robert Shiller's website.
Robert Shiller, is a Yale economist who predicted the dotcom crash based on the high PE ratios. That site shows the current PE to be about 19. http://www.multpl.com/ Unfortunately it's based on average earnings from the last ten years.
This one (http://www.bullandbearwise.com/SPEarningsChart.asp) is similar to the one you showed.
Another source reports a PE of 723 http://www.gold-eagle.com/editorials_08/shepherd072809.html
Well I finally wised up and went to the horse's mouth; the Standard and Poors website. http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_500/2,3,2,2,0,0,0,0,0,1,11,0,0,0,0,0.html
They report a PE ratio as of Sept 30 of 140.76 !!!!
Yikes!!! It looks like I owe you an apology. Sorry I doubted you.
My last post was interrupted by dinner, so let me pick up where I left off. I'm still shellshocked by that PE ratio. I've been buying and selling stocks again for the last few months. When I'm buying I use a stock screener to narrow down the choices. One of my criteria is that the PE ratio must be less than 15, so obviously I haven't been encountering any stocks with astronomical PEs. I had no idea they were that high. I guess there's a lesson there for me.
It now seems to me like this is definitely the time to sell stocks. Even those with reasonable PEs will be dragged down when the market crashes.
That brings up the next issue; what to put the money in. I already have a portion of my portfolio in gold. Don't want to put all the eggs in one basket though and as Fire Eater points out, Americans are not accustomed to thinking of gold or silver as money so they may not think of it that way now. So let's keep some money in dollars. What to do with the rest? Storable food maybe, plus ammunition and maybe a new gun or two. You can never have too many guns. :-)
Another question is where to keep the dough. Storing large quantities of gold or dollars in the house seems like a security risk. Bank accounts are FDIC insured up to $250,000. But as we all know FDIC is nearly broke and does not have anywhere near enough assets to pay off in the even of mass bank failures. FDIC is backed by the government but the government is broke too .... more broke than anyone else actually. Safe deposit boxes might be ok but you would still be dependent on the banks to let you access it.
So many questions, so few answers! Well anyway thanks for opening my eyes to that shocking PE ratio
Posted By: Jake Towne, the Champion of the Constitution
Date: 2009-10-08 23:14:22
Dear Jahfre - Mobs, Messiahs, and Markets by Rajiva and Bonner is also fantastic. Rajiva is on facebook fyi.
Dear David S - No offense taken, very glad you dug up the research straight from the horse's mouth so to speak. Never trust what anyone says, but chartoftheday has been pretty good over the past 2 years.
Keep in mind I am no financial advisor, but check out the bottom of this article (and the disclaimer) as well as this read from Trace. FYI opening an acct with gold money takes awhile due to the verification process, but only costs postage to open. It took me several days to read through all the documentation and verify the safeguards. It is the only site that passed my pretty strenuous criteria. Owning physical metal at gold money has plus and minuses though. Diversification of the storage of metal is a decent strategy.
Posted By: Jahfre Fire Eater
Date: 2009-10-09 08:49:29
Hi Jake,
Yep, that one, Mobs, Messiahs and Markets, is on the shelf next to me also.
My interest in economics/politics and activism began with James Dale Davidson's newsletter, Strategic Investment, in the early 90's along with the books, Blood in the Streets and The Great Reckoning. Later, I found the Daily Reckoning online...a long time ago now; when gold was under $300 per oz. I have been a daily reader and sometimes subscriber to their various newsletters.
These books, along with dozens of others are part of our contribution to our local public ibrary, the "Fire Eater Bookshelf".
Interesting and fun articles as always. I would just note, lets be aware of the limitation of the use of "extrapolation" theory-methodology. Just because Gold is at an all time high- doesn't mean its going to stay there, gold prices go up and down. Second, the dollar purchasing power- etc. of course- how would the dollar NOT be affected by the current crisis and follow on effects of the liquidity poured into the market- which was essential in stabilizing our banking and financial system. So, it means, the dollar's purchasing power- also, like gold, goes up and down. Your article is written- as if you are assuming- according to extrapolation theory- that the "trend" (gold prices going up) and (dollar purchasing power) going down- will continue forever on that trajectory. I mean, in 1980- gold prices were almost as high as today, taking into account inflation, as today, and the dollars purchasing power was even lower during President Carter's stagflation years (stagnent economy and high inflation), and our overall debt to GNP ratio was much higher than it is today just after WWII (as we borrowed alot to pay for that war) - and America is still standing. So, I don't see any NEW extremes in gold prices, inflation, lack of purchasing power of the dollar, or debt that we haven't seen before and recovered from.
Posted By: Jake Towne, the Champion of the Constitution
Date: 2009-10-10 13:04:12
Thanks for your comment James!
The very idea of money - fiat, gold, or otherwise - with a "stable purchasing power" is a complete and utter fallacy. Though while every single fiat currency in history has gone to zero save the current crop of unsustainable currencies, gold/silver have never done so in past history.
Each person has to decide for themselves how many "votes" they place towards
A) gold/silver/returning the money power to the people
B) the fiat, counterfeited new currency of government
In your reference to 1980, I believe you are using gov't numbers - the high of $850 correlates to >$2000 now per shadowstats.com. Obviously, the price in 1980 was a bubble as well, but there has been A LOT of inflation since then.
The only difference is that I would not agree that "there has been A LOT of inflation since then [1980] ." In fact, I think since the time of Fed Chairman Paul Volker, the Fed has performed a fantastic job, in fact, since 1980 we've had the LOWEST contsistent rates of inflation in just about any time period of our history. That means, no matter what conspiracies we believe bankers, the Fed have to make their cohorts in business and corporations get rich, or whatever links to the bilderbergers, council on foreign relations, the Fed's policies since 1980 has created the BEST conditions of economic life for the ordinary American, offering the lowest rates of inflation- thereby preserving the value of my dollar and purchasing power and savings. The inflation results delivered by the Fed since 1980, for whomever else it may have benefited, was good for America and the ordinary working person. Low inflation produces stability, job growth, predictability in economic growth, predictable high rates of return from investments, preservation of wealth - for all of us, not just the CFR and Trilateral billionaires- it benefited the regular American as well.
But to give you an example of how actually, just the opposite happened to what you said about experiencing " A LOT " of inflation since 1980, the Feds have actually, since 1980, kept inflation BELOW 5% per year- which I and economists consider- moderate and just perfect for a stable, strong and growing economy, let's look at the numbers from the Bureau of Labor Statistics- CPI historical rates:
1998-2009 Inflation was: 1.55%-3.85 % every year BELOW 5%
1986-1997 1.91%-5.39 except for 1990- BELOW 5% each year
1974-1980 5.75%-13.58% every year ABOVE 5%
1962-1973 1.23%-6.16%
1938-1961 -1.28%-14.65% with most years ABOVE 5%
So, actually, since 1980- and Paul Volker- who I think is a genius, the Feds have delivered what ordinary Americans need, stable prices and preservation of their wealth- the dollar was protected and preserved by the Fed like no other time in U.S. history. Low inflation is good for America and Americans, that's what the Fed's gave us since 1980.
Thanks for the link and extra information. I take the point, I totally agree that "mere" statistics does not always tell the whole story. In this case, I would just say, that much wider indicators- of American living standards- prove to me that in general, my purchasing power in the middle class has grown enormously since whenever- 1950- to today, 1960 to today, 1970 to today, 1980 to today- whichever time period you wish to look at, living indicators show that - our material existence has grown much over the years, as our standards of living- for the middle class. I also agree, however, that it now takes "two" parents to support the average middle class family- however, that is because our "middle class" lifestyle has grown way beyond what middle class Americans experienced in the 1950's, 60's, etc. Bottom line- we live "bigger" in our middle class lives than we did before, so in order to support all the extra's- bigger house, more cars, big screen TV's, all the kids in college- yes- ofcourse, our definition of middle class has expanded- and therefore- it takes the husband and wife to support the family. However, if we were to live today- or reduce to, the standards we had in the 1950's, 1960's, only one person of the household could adequately support the family. So, this is comparing apples and oranges. But I will give some examples,
In 1950 people lived with an average of 960 sq ft of house
today its an average of 2,240 sq feet.
In 1950 people had an average of ONE car, today its 2 or 3 cars (hence more fuel, insurance, upkeep- etc)
In 1950 - most people did not have one or all of their kids in college- today they do- hence greater education costs
Home ownership rates (US Census Bureau - are these faked ?)
How could that be possible if we are losing our purchasing power ?
In 1950 minorities were hardly enjoying the American dream, now we have a black President !
In 1960 the official poverty level (as per the US govt parameters of poverty) in America was 20.1%, by 1990 it was reduced to 12.0% and today its 10.6% Again, from personal experience, I just don't think that those numbers are smoke and mirrors. People in poverty in 1960 were living in shacks, today, people in poverty have government programs, food stamps, free health care, education, etc. so even those 10.6% under the official poverty line are much better off than in 1960. How could this be possible if the BLS and shadowstats were correct even in the least ??
and there is more,
today fewer people drop out of high school, many more people are going to university, we live longer, we have computers, laptops, cell phones, more than one TV, cable, wine fridges- all as a matter of a normal middle class family- those were luxury items or things which only the rich had before in America- now they are normal middle class items. We work, on average, less hours and take more vacations.
So, when you add up those factors, which I experienced myself- growing up from the late 1960's until today, its quite clear that no matter what arguments are made, its clear that dozens of standard of living indicators show that, materially (I'm of course not speaking of quality of life) the middle class majority of America has improved their lot by leaps and bounds, which could not happen if we had 20% unemployment, real negative interest rates, and high inflation with a real loss of purchasing power, it couldn't have happened. So, I will have to side with what I've seen with my own eyes, easily verifiable if you take a walk down the street and see "how" we live today compared to 1950, 1960, etc.
Remember, that our periods of highest instability, economic crisis, depressions and bank failures happened during the time that we WERE ON the gold standard. Our most stable economic history has been SINCE we've gone to a fiat currency- that is because with a fiat currency we can be more responsive to economic changes. You can't do that under a gold standard, but again, as I point out above, anyone in their late 30's to 70's can tell you how different the middle class of today lived than in earlier time periods. If you look at middle class homes today- you see features which you can find only in older richer custom homes- but now they are normal features in an average home- the size, swimming pools, home bars, 3-car garage- all average things but not so 20, 30, 40, years ago. So, I don't know what to say in response to the BLS source links and shadowstats- they don't ring true with what we can all see- the majority of Americans are living large- they have a much improved standard of living (including not just material things like 3 TV's and 2 laptops- but they live longer, healthier, and are more educated and more American's work in high value jobs- we don't digg ditches and work in killer coal mines for the most part as we used to- nor toil on farms). So all in all, I think our modern economy for all its imperfections, have continued to improve the lives for the majority of American's.
Posted By: Jake Towne, the Champion of the Constitution
Date: 2009-10-11 10:45:43
Dear James -
Thanks for your reply. Rather than get detailed due to time constraints - and I am not going to say I disagree with what you wrote, in truth most of what you wrote is correct.
Material-wise, the United States has one of the highest living standards in the world, and, (this is in my opinion), the highest of any major nation. I just got into a long discussion the other day with a woman who claimed the US has "no manufacturing" - of course we do, but the sector is a lot smaller (13% or so of work force per BLS, which, yes, I DO trust - more or less :) and less prosperous than it would be in a free market economy without so many gov't workers (~23% of our work force per the BLS :)
However, you are confusing the economic gains made by the Ricardo's law of the division of labor. The technological gains of the past few decades are nothing to scoff at. The Industrial Revolution gave way to mass production for the masses for the first time in world history.
Rather the more relevant questions are -
1) how much would the living standards of America be increased if government interventions in Warfare, Welfare, and the Economy were removed? (Not to mention the counterfeiting of new money by the FED and banking system)
2) can the ascent of man continued under a more socialistic government - which where the current momentum is?
From your writing (also in prior articles), its very obvious to me you are a very intelligent person. Have you read Mises' Human Action and Rothbards What Has the Govt Done to Our Money? and Hazlitt's Economics in One Lesson?
These are the books (downloadable from mises.org or here) that cleared up so much for me. If you had read them (and Human Action takes awhile for sure), I would be interested in how you can ignore the economic theory presented therein. I always try to rip apart things and decide for myself whether I believe in them, but I dont argue with much in those books. http://www.nolanchart.com/article5069.html
I agree with your questions 1 & 2, I don't doubt for a second, that with changes and reforms that we can do better and despite my classification on the Nolan Chart, a centrist, my vote is behind Ron Paul. Our debate is healthy and if we only had more candidates such as yourself who are reaching into the depths of the issues at hand, we could achieve the reforms we need !
I will read up on the books you recommended., thanks.
I've been doing some more digging on that high PE ratio for the S&P 500. It seems the situation may not be as dire as I had originally thought. The main reason for the high P/E was that many companies in the S&P 500 sustained heavy losses in the 4th quarter of 2008. The P/E is calculated for the trailing 12 months so the losses for that quarter are influencing the current P/E. In the next quarter the earnings for the 4th quarter of 2008 will drop out of the equation and the P/E might return to a more normal number of about 27 assuming the S&Ps estimate of earnings is correct. 27 is still high but nearly not as bad as 140.
This chart illustrates the situation. (For next quarter that minus $23.25 from 12/31/2008 will drop out.)
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For those of you who would shout "au contraire!!" and are excited about the stock markets gains since the spring, please take a look at the following chart. Note that maximums in the P/E (price-to-earnings) ratio often precede market crashes, as the stock is overvalued as compared to its dividends/earnings. This