Obama’s (dumb) Line in the Sand




So both Boehner and Obama have done their post election photo ops. They have spelled out their positions on the looming fiscal cliff. No surprises at all. The Republicans are saying “No” to any increases in tax rates while Obama has said he will outright veto any bill that is presented to him that does not raise taxes on rich folks.


I was surprised by the reaction in the press to the positions set forth by these two. The headlines make it seem like B&O are ready to work together, and achieve the necessary compromises to avoid falling off a cliff. I think the press has it wrong. We’re headed into a bitter fight; in part, because the President has drawn a very dangerous line in the sand.



The President has said that the recent election has shown that the majority of American’s want the rich to pay more in taxes. What is the President insisting on? Is he pushing for something that would make a difference? I don’t think so. More importantly, the Congressional Budget Office does not agree with the President’s position.


The CBO put out a report on this topic last week. It spelled out the consequences of an increase in the tax rate for those making over $250,000 (versus reversing all of the Bush tax cuts). It does not add up to much.





The tax that Obama wants to increase will result in a lousy $42Bn in 2013 and $38Bn in 2014 according to the CBO. That’s peanuts to a government that spends $3.6T a year. The tax increase that Obama is insisting on comes to three days of spending.


No tax increase comes without a cost. The CBO evaluated the implications of raising the taxes on those making $250k and up. The consequences to both GDP and jobs:





Raising high end taxes will reduce GDP growth by .1% and will result in 200,000 less workers finding jobs. It will do these bad things by the 4th Q of 2013. Some context for these numbers:


The .1% drop in GDP translates to $16Bn less growth in 2013. On average, the government takes in about 20% of GDP, so the drop in GDP relating to the tax increase will translate into a shortfall in revenue of $3.2Bn.


The tax increase mandated by the President will translate into 200,000 less jobs for 2013. If the people who did not find work as a result were forced to stay on unemployment it would cost the government $4.6Bn.


So Obama’s “must have” tax increase will generate $42Bn in revenue, but it will cost ~$8Bn. The Obama's plan is to decrease the deficit by about $34Bn in 2012, and by less than that in future years. These numbers are beyond chump change. It comes to 0.9% of total spending and just 3.0% of the deficit. It does not move the needle at all.


My conclusion is that we are in for a fight. Talk of compromise and “coming together for the good of the country” is just noise. The President is insisting on a tax increase that will not achieve anything of substance. Obama has drawn a very visible line in the sand over this issue. I can’t imagine how the House Republicans will go along with it. The President’s opening position on how to work through the fiscal cliff is about politics, not economic substance.


Get ready for a failure in these negotiations. We are going to fall off of that cliff in 53 days!



Germany's Fear And Desperation Leak Out

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

A hullabaloo erupted between France and Germany that both governments are trying to silence to death. According to unnamed sources of Zeit Online and Reuters, German Finance Minister Wolfgang Schäuble broached an unprecedented topic with the members of Germany’s Council of Economic Experts on Wednesday when they presented their Annual Report. In its 49-year history of advising German governments, the Council has never delved into policy proposals for other countries. And yet, Schäuble asked them: Could they produce a reform concept for the troubled French economy?

The French, who are currently engaged in national soul-searching and navel-gazing to halt their declining “competitiveness,” were not amused. The office of President Francois Hollande wrapped itself in silence. Prime Minister Jean-Marc Ayrault brushed it off. The German Ministry of Finance declined to comment on “unofficial discussions.” Council Chairman Wolfgang Franz backpedalled: “That’s largely misinformation,” he said. “An order for a Special Report is not even in the most distant sight.” He figured that the French government “wouldn’t tolerate something like that.”

Nevertheless, he said, the government is highly interested in reform ideas that would make the monetary union more stable. And it is in this context that the Council would “think about France” in December. After which they would talk again with Schäuble, he said.

But the Council is already “increasingly worried” about the economic developments in France, admitted Council member Lars Feld when he presented the Annual Report to Schäuble. “The largest problem isn’t Greece anymore, or Spain or Italy, but France because France has done nothing to rebuild its competitiveness and is even heading in the opposite direction.” He didn’t mince words. “France needs labor market reforms,” he said. “It is the country among Eurozone countries that works the least each year; so how do you expect any results from that?”

The problems are piling up in France. While central government spending—56% of the economy!—is expected to remain relatively constant and provide some stability, the private sector is deteriorating with breathtaking speed. Every day, new evidence seeps out.

On Friday, it was an Insee poll of CEOs in the manufacturing sector. They’re cutting investments in plant and equipment in the second half. In 2013, they would reduce their investments by an additional 2%—though in the previous poll in July, they’d planned on increasing their investments by 5%. A harsh reversal [one that has been playing out for months; read… Worse than the Infamous Lehman September: France’s Private Sector Gets Kicked off a Cliff].

Then the Bank of France released an estimate for fourth quarter GDP: it would shrink by 0.1%. For the third quarter, it also estimated a decline of 0.1%. If these figures are confirmed, France entered a recession in July. Five quarters in a row of total stagnation, a first in France’s post-war history!

The Germans are concerned. France bought €101 billion of German goods in 2011, or 10% of total exports. But German exports fell 2.5% in September, and exports to the Eurozone crashed 9.1%. Germany has been through this before. Its economy lives and dies by its exports [The Noose Tightens on Germany’s “Success Recipe”].

Schäuble must feel the pressure. But fear of a dip in exports to France might not be enough for him to risk a diplomatic confrontation with his most important neighbor. He certainly wouldn’t want to stir up, without good reason, even more accusations of meddling and Teutonic arrogance. So why this unusual request?

Fear and desperation within the government about a much greater threat. The credit markets, which are currently sleeping through the French private-sector fiasco, might wake up someday—as Greece found out, it can happen suddenly—and demand much higher yields. Even if still digestible for France, it would likely throw Spain over the edge, and Italy would follow. Or the markets might walk away from France entirely.

France is too big to bail out. If the debt crisis suddenly arrived in Paris, only all-out, no-holds-barred, unrestricted bond-buying operations by the ECB could save the euro. But it would violate even the last pretense of treaty-based limitations, and would in the process debase the euro. While this might please some countries, including France, it would enrage German voters who might take out their anger on Chancellor Angela Merkel and her government. And that strikes terror into their hearts.

Alas, she still has big plans. On Wednesday, she addressed the European Parliament, the only democratically elected European institution—by design, an emasculated one. There, she laid out her ideas on how to bring European nations together to where their budgets and other national prerogatives would become part of her “domestic policy.” And she’d be on top of the heap. Read…. Merkel Has A Dream.

Gold And The Potential Dollar Endgame

Submitted by Joe Yasinski and Dan Flynn of GBI,

Part 1 of 3: What supply and demand? It’s all stock to flow these days.

Reading our title has us convinced that somewhere our college economics professors are hanging their heads in shame with all of those x and y graphs scribbled to no avail. Economists the world over can take comfort that the laws of supply and demand still largely rule the marketplace. However, we believe there is a noted exception for a yellow, largely useless metal. A metal that just happens to have shaped the world’s monetary systems for the last several thousand years. Gold’s “supply” traditionally defined as global mining production is virtually meaningless in determining its’ price. How can this be? Analysts pontificate that global supply dynamics are integral in forecasting future metal prices. We can only attribute this to the fact that these analysts still myopically cling to the view of gold as a commodity.

Gold, even when viewed as a commodity, is unique in that it is not consumed. As there is little cost effective industrial application for the yellow metal, little to no “natural” industrial demand exists. Virtually every ounce ever mined from the earth is still above ground, either in a vault or a safe or an earring. An estimated 170,000 metric tons sits above ground, hoarded and unambiguously owned. Given that the annual supply of mined gold is approximately 2,500 metric tons, how is it gold not priced close to zero? After all, there is a 65 year overhang in supply! Despite all that we know of supply and demand dynamics and economic ‘law’, gold’s price is within striking distance of its’ all-time-high – in every currency on the planet.

A major contributing factor to gold’s price is that the vast majority of the stock of physical gold is held in very strong hands. It is largely held privately by very wealthy families or by governments and their central banks. This gold lies very still, some of it not changing owners or locations for decades, if not centuries. These giant holders have little need to ever sell, holding gold as a long term store of wealth or as a central banking reserve asset. Gold naturally appeals to these super-savers because of gold’s history as the ultimate store of value and lack of counterparty. Sure you can buy real estate, art, or classic cars- and the extremely wealthy do. But beyond illiquidity and subjective risk, these assets can become cost centers in themselves with maintenance, storage, insurance, etc. Gold is universally recognized as a wealth asset but is also infinitely divisible, portable, and highly liquid. Gold’s value has been established over a millennia and is ultimately the asset that denominates or values all others.

Rather than supply in the traditional sense, what drives the gold price is the percentage of the existing stock (170,000 tons) that is available for sale on any given day. The percentage of available inventory for purchase is the “flow.” Divide the flow into the stock and you get the STF ratio. A low STF ratio indicates a very high percentage of the existing physical stock is available for sale and a very high number means owners prefer to hoard physical metal rather than exchange it for dollars. So for example, if every ounce of gold was put up for sale tomorrow, the STF ratio would go to one and the price would plummet, likely to near zero. But, what if instead of everyone selling their gold tomorrow, all existing physical owners of gold decided to keep it instead? Could this even happen? Doesn’t conventional wisdom and ‘economic law’ tell us that as the price of gold goes up, there are fewer buyers able to purchase and more sellers willing to dishoard?

In our opinion, conventional wisdom simply doesn’t apply here. Gold, in our opinion is what is often referred to as a Giffen good. A Giffen good is one that actually sees a spike in demand as its price rises. Conversely, demand drops along with price. While the concept of a Giffen good is well known, the number of examples in the real world are slim and usually limited to localized commodity markets in extremis. A golden, glaring exception is the massive example playing out before our very eyes. In typical Giffen behavior, gold was scorned and dishoarded by individuals as well as central banks as the price hovered in the low 100’s. Fast forward to today and gold demand is at to or close to all time highs, even as the price sets new records in currencies around the world.

Many prominent members of the gold community insist that gold is going to appreciate massively because of a huge flood of investment dollars will flow into the metal over the next several years. They may very well be right, and we at GBI certainly hope so. But we can see things developing differently as well. We believe that a massive revaluation of gold denominated in dollars can happen quite suddenly, almost overnight. But not because of any sustained long term demand for gold, but simply because owners of metal simply withdraw it from sale, sending the stock to flow ratio to infinity. This is why understanding gold’s stock to flow ratio is so vital.

Can you imagine a manufacturer of automobiles (or any producer of a good with a declining marginal utility) deciding to just sit on his newly manufactured automobiles and let them stock up in perpetuity or would he offer them for sale, for as many dollars as he can get? Of course he would sell for dollars because he must monetize his production. As with almost every commodity, widget, or car – the suppy/demand dynamics are fairly straight forward. The manufacturer needs to exchange those automobiles for cash or they’re worth nothing to him. For a holder of gold, there is no need to exchange his stock for dollars, especially if there is an avalanche of dollars pursuing that stock of metal.

If the dollar avalanche comes, can you imagine a massive owner of gold – perhaps a central bank in a surplus nation or billionaire family, preferring to stockpile gold as a reserve eschewing the current offer of dollars? Or do you see these savvy economic actors dishoarding their store of value in exchange for quickly devaluing dollars (like the auto manufacturer)? Once you can see why one makes sense and another doesn’t, you’re on your way to understanding how gold is priced and how major pricing moves can have almost nothing to do with traditional supply/demand dynamics. There never needs to be a massive flow of dollars into gold for it to go unimaginably higher. Existing owners need only remove their stock from sale. And tying it back to Giffen, when physical gold goes into “hiding” the demand of people bidding with their dollars will increase in proportion to the increasing price.

It’s useful to understand the concept that dollars bid for assets. When dollars bid to buy a stock over and over (high velocity) the price goes up. If all dollars stopped bidding for AAPL the price goes to zero. In reality, dollars value Apple stock. Gold is a unique asset in that it denominates, or values currencies. Dollars don’t bid for gold. Gold bids for dollars. If you’re having a hard time with this idea, think of an extreme, like Weimar Germany or Zimbabwe. A gold owner accepts or rejects a sum of dollars as a suitable trade for their metal. When they reject this bid, it drives the STF ratio higher and higher. Why would gold holders cease to bid for dollars? For the same reasons we all hoard gold, as protection of real purchasing power from a failing fiat currency. Where will the flow come from? Central banks certainly aren’t selling anytime soon, ditto for our fine Asian friends. On a micro-level, we have seen recently in places like Greece and Spain that there is a finite quantity of gold that flows into the market when times get tough. What happens when the citizens run out of gold bangles to sell and everyone else starts hoarding? On a macro-level, what happens when surplus nations no longer save in US dollars and instead save in gold? What happens if the “flow” of gold slows to a trickle, or even stops all together? We can easily paint a multitude of scenarios that don’t require all that much imagination. Will dollars frantically chase after gold? Perhaps, but will the holders of gold bid for those dollars? What will that imply about the dollars purchasing power relative to others goods and services?

It is up to the reader to decide which of the two following turn of events is more likely. Is it more likely that the human superorganism will come to the realization that their dollars are being debased and gradually steer more and more of their assets into gold or is it more likely that existing owners of gold, who long ago came to the same conclusion and likely purchased gold to hedge that very outcome, will first choose to remove theirs from sale?


The answer lies in this question, who values gold higher? The new incremental buyer, or the existing owner? Sure, we could get to astronomical gold prices through a flood of new buyers, but we could have an even more dramatic move overnight if existing gold owners cease bidding for dollars with their gold. Or, maybe, some combination of the two. The only problem for a new investor is one of those scenarios can play out over years while the other can happen virtually overnight.

What happens to the “price” of gold when it ceases bidding for dollars? Zero. Or infinity. Take your pick.

We have some ideas about why this hasn’t happened to date, and how you may be able to identify a S-T-F ratio to infinity unfolding before our very eyes.

Obama WANTS to drive over the cliff

Obama wants to drive over the cliff.

Courtesy of Dr. Paul Price of Beating Buffett 

America is awash with hope that our newly re-crowned King will come towards the center and avoid the dreaded ‘Sequestration.’

That term is spoken of as if it is toxic. People seem to forget that it was deemed the solution to the debt ceiling negotiations during the summer of 2011. Those opposing its imposition now are the same ones who passed it in the first place.


clip image002 Obama wants to drive over the cliff


But I digress. Here is why our leader has no desire to settle this affair before it gets put into effect.

  • It will impose tax hikes on everyone who pays federal income taxes (not just the 2%)
  • It will cut entitlements without his having to support the actions
  • It will reduce defense spending without him ‘looking soft’ as Commander-in-Chief
  • It will end the ‘Bush Tax Cuts’ automatically 
  • It will probably slow economic growth (GDP)

Why would our President want these things to take place?

  • He would get the extra tax revenues to use without being blamed
  • He could not be held accountable for breaking his ubiquitous pledge to never raise taxes on the bottom 98%
  • He would not be the one cutting entitlements, it would be ‘out of his hands’
  • He prefers to cut defense spending rather than social programs
  • He can later ‘give back’ tax cuts to the Middle Class
  • He can then call them the ‘Obama Tax Cuts’
  • He can blame those damn ‘Obstructionist Republicans’ for the next recession

For B-Rock the Sequestration is a ‘Dream Act’ to accomplish many of his goals and dreams without any accountability. Every negative can be blamed on the Republicans even as he allows his stated preferences to be overridden by the forced actions imposed on him.

We haven’t seen political agility this devious since Bill Clinton asked everyone what the meaning of ‘is’ is.


Dr. Paul Price Nov. 8, 2012

Paul is a new contributor to our newsletter Market Shadows.  

Dr. Paul Price – Biography. Dr. Price is a featured columnist on business days on TheStreet’s Real Money Pro web site. His work can be found at his blog, Beating Buffett, Seeking Alpha and Phil’s Stock World

The Most Important Chart To Consider For The Weekend (Or Tom Lee's Nightmare)

Sometimes, it just pays to keep it simple stupid. At some point, the dismal economic reality of our post-credit-creation-miracle boom world will reassert itself in asset prices. The catalyst may not be obvious (like a close-election reminding a nation of sheep just how divided we are as a people and implicitly as a political class – and what that means for our future fiscal probity); but it is coming. ‘Cycles’ cycle; the Fed has fired its bazooka; and OMT omnipotence is in doubt;and the only way we get ‘moar money’ from our central planners is if their hand is forced by a reversion to reality…



US economic data may be surprising to the upside (of economist’s expectations – weighted by what is clearly now the most bullshit pre-election datasets we have seen) but as we have said before – there is no decoupling, it is lagging and leading behavior (combined with the normal pre-election upward bias of hopium in sentiment). The chart above makes it clear that while some have seen positive moves by US-specific macro data surprises, the rest of the core international economies are doing decidedly badly – and US equities remain ignorant (for now).


(h/t @Not_Jim_Cramer)

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