After reading the article, we concluded that Mr. Davidoff is the most creative financial writer around. As such, Mr. Davidoff may be the perfect apologist for today’s dysfunctional monetary “system.” Certainly, he possesses the cerebral alacrity to dodge whatever cold, hard facts may be standing in the way of a good story.

“I call the Fed a hedge fund,” Davidoff cheerily explains, “because it is operating like one, leveraging its balance sheet to earn huge profits.”

We might have been able to embrace Davidoff’s analysis were it not for one nettlesome fact: the Fed is absolutely nothing like a hedge fund. The Fed is, instead, more like a crime syndicate — a racketeer that relies on coercion, deception and outright larceny.

But before explaining The Daily Reckoning’s official metaphor for the Fed, let’s return to Davidoff’s metaphor and “analysis.” Says Davidoff:

Last year, the central bank turned over $76.9 billion in profit to the federal government, slightly down from $79.3 billion it provided in 2010.

The Fed made this money in interest on a nearly $3 trillion portfolio of securities. This enormous holding was built up largely in the wake of the financial crisis as the Fed bought these securities through two rounds of quantitative easing.

I call the Fed a hedge fund because it is operating like one, leveraging its balance sheet to earn huge profits. The main difference between a hedge fund and the Fed is that the Fed effectively creates its own money, so it doesn’t have any borrowing costs, meaning yet more profits.

Remarkably, the Fed’s profits are also an afterthought. The Fed is trying to stabilize and increase the United States economy in the wake of the financial crisis, and its profits are a nice byproduct.

Still, these earnings blow away any other hedge fund profits.

Hmmm… where to begin our autopsy of this fatally flawed analysis?

Let’s begin at the end with those earnings that “blow away any other hedge fund profits.”

If Davidoff is referring only to the Fed’s $79.3 billion “earnings,” without any regard for the denominator that produced those earnings, he is absolutely correct. No other hedge fund in the world came close to earning $79.3 billion in 2011, primarily because no other hedge fund in the world runs a $3 trillion portfolio. But obviously, the absolute number tells us nothing about the genius — or lack thereof — behind the Fed’s investment activities.

To get a feel for that, let’s now insert a denominator and calculate a return. Based on the $3 trillion portfolio that Davidoff cites in his column, the Fed produced a 2.6% return. That kind of number would not pop any year-end champagne corks in any hedge fund office in the land. [Editor’s note: In reality, the Fed’s balance sheet averaged about $2.75 trillion during 2011, not $3 trillion. But since $3 trillion is the number Davidoff uses, we’ll use it also].

But maybe Davidoff had a different return calculation in mind when he dubbed the Fed “the most successful hedge fund around.” Maybe he was thinking the denominator ought to be zero instead of $3 trillion, since, as he observes, the Fed “effectively creates its own money.” In this scenario the Fed’s investment activities would have produced a mind-boggling return of “infinity percent.”

Davidoff is absolutely right; no hedge fund can do that.

Or maybe Davidoff was thinking of a denominator somewhere between zero and $3 trillion. Maybe he had $676 million in mind, which is the actual amount of money the Fed spent last year printing new dollar bills. In this scenario, the Fed’s result would have been a spectacular 117.3%. That’s not quite infinity percent, but it’s not bad.

Unfortunately, there’s another problem with Davidoff’s analysis; the numerator is as much a mystery as the denominator. In other words, the Fed’s theoretical $79.3 billion return is a bogus Beardstown Ladies kind of number since it does not account for marking all the Fed’s securities to market. Without marking its vast $3 trillion portfolio to market, the actual results of the Fed’s investment activities are unknowable.

Perhaps the Fed’s hodgepodge of Treasury bonds, mortgage-backed securities, currency swaps and other financial jetsam increased in value during 2011, in which case the total return would have been higher than 2.6%. Or perhaps these holdings decreased in value, in which case the total return would have been lower than 2.6% — maybe even negative.

No one knows. (Or if they know, they aren’t saying).

Net-net, Davidoff’s analysis, expressed as a mathematical equation, would be greater than or equal to idiotic. That said, as a fellow journalist, we sympathize with Mr. Davidoff. We, too, have written things that should never have survived the copy-editing process. But when we have, we have heard about it from readers…just as Mr. Davidoff heard about it from many of the bloggers on Yahoo! Finance who responded to his column:

Kaos from Plainfield, Connecticut wrote:

Anything done by the NY Times is fire starter material.

Greg from Indianapolis wrote:

“The main difference between a hedge fund and the Fed is that the Fed effectively creates its own money, so it doesn’t have any borrowing costs”

Yeah…that is kind of an advantage…

RJ Wrote:

So the Fed made $76.9 billion from interest on US government debt, then turned that over to the Treasury Department?

Wait, what???

JR wrote:

Maybe this year [the Fed] will print a trillion dollars, turn it over to the Treasury, and this writer can say, “Look, a government operation made a trillion dollars while the idiots in the private sector flounder.” The New York Times is a disgrace.

Mark from Tulsa, Oklahoma wrote:

My 6-year old could make money if he could print dollar bills at will.

While we are sympathetic with these critiques, we can’t really be upset with Mr. Davidoff for producing his obsequious homage to the Federal Reserve, anymore than we can be upset with a puppy for peeing on the side of a brand-new flat-screen TV. To the puppy, the TV looks just like a fire hydrant. And to Davidoff, by his own admission, the Fed looks just like a hedge fund.

But it isn’t. The Fed is a crime syndicate that relies on deception, coercion and grand larceny. It is a racketeer.

“Several forms of racket exist,” Wikipedia explains. “The best-known is the protection racket, in which criminals demand money from businesses in exchange for the service of ‘protection’ against crimes that the racketeers themselves instigate. Traditionally, the word racket is used to describe a business (or syndicate)…that it is engaged in the sale of a solution to a problem that the institution itself creates or perpetuates, with the specific intent to engender continual patronage.”

’Nuff said!

Regards,

Eric J. Fry
for The Daily Reckoning

The Federal Reserve and Other Crimes Against Capitalism originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Okay, so the insiders didn’t exactly say their stock is a “sell,” but they didn’t need to. Their feet did all the talking. Last week, nine Goldman insiders scurried away from their stock as fast as the law would let them.

They cashed out $20 million worth of stock at an average price of $107.44. This is the very same stock (NYSE:GS) that Goldman — on behalf of its shareholders — spent $21 billion buying over the last five years. The average price of those purchases was about $171 per share.

Here’s our question: Why is Goldman’s stock a “Buy” for shareholders at $171 a share, but a “Sell” for insiders at $107 per share?

Something’s wrong with this picture. Or, to change metaphors, something’s rotten with this onion. Let’s peel it back until we find the source of the stench.

First data point: Goldman’s revenues and earnings are falling even faster than its reputation. Two weeks ago, the company reported a whopping 58% drop in fourth quarter earnings, compared to 2010.

This latest quarterly report punctuates a troubling three-year trend. Goldman’s full-year net income hit a record $13.4 billion in 2009, then slipped to $8.4 billion in 2010 before tumbling to $4.4 billion last year.

Reflecting this downward earnings trend, Goldman’s share price has plummeted from its 2009 high of $192 to the current quote of $111. Perhaps the stock has now reached “deep value” territory. Then again, cheap stocks have a way of becoming even cheaper when a company’s core operations are in “deep trouble” territory. Goldman’s core operations may not yet be in deep trouble, but they seem to be wading into shallow trouble, at least.

Strangely, the worse Goldman’s operations perform, the more aggressively the company repurchases its own shares. During 2009 and 2010, Goldman spent 71% of its net income buying back its stock. But last year, the company spent a whopping 264% of net income buying its stock. Even after excluding the repurchase of preferred stock from Warren Buffet, Goldman still spent a hefty 140% of its net income buying its own shares last year — double the rate of 2009-10.

Furthermore, Goldman did not buy back its stock very opportunistically. In other words, Goldman did not “buy low.” The company paid an average of $128.33 for the shares it acquired in 2011, compared to a low tick for the year of $84.27 and a current quote of $111. Is it not a little strange that the same Wall Street firm that is supposed to be packed to the ceiling with genius traitors couldn’t trade its own stock any better than a raw amateur?

When stewards of the company are trying to build shareholder value through a share-repurchase strategy, they usually try to buy their stock on weakness…and only on weakness. By contrast, when the stewards are trying to build personal checking account value, they buy their stock aggressively, no matter the price.

Just maybe, Goldman’s “investment” in its own stock was executed so carelessly and unprofitably (so far) because it had nothing to do with investing, but everything to do with lifting the stock to levels that would reward Goldman’s stock-laden partners.

Last week, the top brass at Goldman cashed in $20 million worth of stock that had been “locked up” for the last three years. (The nine privileged recipients also received another $27 million in stock that they did not sell immediately). “Starting in 2009,” Reuters explains, “Wall Street banks began shifting more of their bonus awards into stock that executives are required to hold for multi-year periods in an effort to align incentives with long-term performance.”

But as it turns out, “aligning incentives” is trickier than it sounds, especially if management is repulsed by the idea of aligning its incentives with the common shareholder. Under the new and improved “aligned incentives” era at Goldman, for example, the top insiders still found a way to enrich themselves at the shareholders’ expense. The only shareholders to enjoy an alignment of incentives were the ones in the mirror.

As noted above, Goldman’s management spent $21 billion of the shareholders’ capital buying GS stock in the open market at an average price of $171 a share. Today, the stock sells for $111. On a mark-to-market basis, therefore, Goldman’s stock buy-back “investment” has produced a loss of about $7.3 billion for shareholders — or more than the company’s total net income during the last five quarters! That’s the bad news. The good news is that these share purchases helped support the share price so that the top nine guys at Goldman could sell their stock for $20 million.

I think we just found the source of that stench.

Just maybe, the company could have identified a better investment opportunity during the last three years than its own stock…like a Treasury bond or an S&P 500 Index fund — both of which have been rising while Goldman’s stock has been sinking.

Goldman’s CFO, David Viniar begs to differ. Two weeks ago, when discussing Goldman’s share re-purchases in 2011, he said he felt “relatively certain that at some point we’re going to wish we bought back more.”

No doubt! Viniar still holds more than one million shares of GS! CEO Blankfein holds more than two million shares. “Aha!” the Goldman apologists might say, “You see, their incentives are aligned with shareholders.”

“Think again,” we would reply, “If this particular crew of insiders did not hold so much Goldman stock, they probably would not be blowing so much of their shareholders’ capital buying it. But these particular insiders have demonstrated repeatedly that they will squander shareholder capital to pay almost any price for GS, while they, for their own accounts, will unload GS at almost any price.”

If incentives were truly aligned, you would never observe a gaping spread between what the shareholder pays for his stock and what the insider is willing to receive for his stock. If the stock is a “Buy” for shareholders at $171 a share, then it is also a “Buy” for Lloyd Blankfein and David Viniar at the same price, or any price below that level. But the last three times these guys unloaded large chunks of stock — August 11, 2010, January 25, 2011 and last week — they realized average prices per share of $150, $162 and $107.

On the other hand, if the stock is a “Sell” at $107 for insiders, why did the company spend $6 billion in 2011 to pay $128 per share for the stock?

One final curiosity about Goldman’s hefty share repurchases in 2012: They took place in the midst of a period of high market volatility and uncertainty — a period during which the Federal Reserve was mandating all banks to bolster their balance sheets.

“Under the Fed’s Comprehensive Capital Analysis and Review, or CCAR,” Bloomberg News explains, “US lenders must prove they have enough capital to withstand a ‘severe’ US recession before they can increase dividends or repurchase shares.”

Despite this mandate, however, Goldman continued churning through its precious capital to re-purchase its own shares. This process has contributed to a steady erosion of its Tier 1 Capital ratios since early 2010.

Although Goldman’s Tier 1 capital still remains relatively healthy, it is moving in the wrong direction. During the last two years, most major financial institutions have been ramping up their Tier 1 capital — i.e. strengthening their balance sheets. But not Goldman. In fact, as of year-end 2011, Goldman’s Tier 1 capital — at 13.8% — had dropped to within a whisker of Citigroup’s — at 13.6%.

A 13.8% capital ratio may be just fine in most market environments, but it is hardly disaster-proof. For perspective, Goldman’s Tier 1 ratio was 11.6% on the eve of the 2008 credit crisis. That “conservative” capital buffer would have sent Goldman into bankruptcy during the crisis, were it not for the infinite Tier 1 capital of the US Treasury.

“We put in what we want to do and the Fed tells us yes or no,” David Viniar, Goldman’s Chief Financial Officer, told analysts when asked how the bank was able to spend so much more on buybacks than it earned.

From all outward appearances, this process has always operated in reverse: The Fed tells Goldman what it wants to do and then Goldman says “yes” or “no”… but usually “yes”… as long as Goldman’s trading desk is properly positioned.

The US stock market may be a “Buy,” just as O’Neill predicts. But Goldman is a “Sell”…until the day it disappears completely.

Regards,

Eric J. Fry,
for The Daily Reckoning

Goldman Sachs is a “Sell” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The specific O’Neill that Taibbi mocks is Jim O’Neill, head of Goldman’s Asset Management department. “It seems,” Taibbi observes, “that O’Neill is predicting that the United States stock market may go up ‘15 to 20 percent [in 2012].’”

On its face, this prediction seems pretty tame…and harmless. But Taibbi — like many other cynical financial market observers — has learned to regard every pronouncement from Goldman Sachs with suspicion. Recent experience has demonstrated that “tame” and “harmless” are attributes that rarely operate within the Goldman Sachs business model. “Conniving” and “conspiratorial” seem much closer to the mark.

According to Goldman’s critics, the investment bank’s “recommendations” often advance a self-serving agenda. A “strong buy” recommendation from Goldman, for example, could mean the Goldman trading desk already owns the recommended security and is looking to unload its position into a rising market.

“The folks at Zero Hedge long ago caught on to Goldman’s pump-and-dump vibe,” Taibbi reports. “Here’s what they said when Goldman upgraded European bank stocks a few weeks ago:

Goldman has just started selling European bank stocks to its clients, whom it is telling to buy European bank stocks…Translation: run from European bank exposure.

Sure enough, Euro bank stocks plummeted a few days after that Zero Hedge post.

As a result of Goldman’s alleged — albeit unproven — “pump-and-dump vibe,” its recommendations often seem very poorly timed (from the standpoint of its clients), which, of course, would make them very well-timed from the perspective of Goldman’s trading desk.

“Goldman is building an impressive résumé of sweepingly bullish predictions that later on, in retrospect, look more like signals to investors that they should have run screaming in the opposite direction,” Taibbi remarks. “A good example might be May of 2008, when Goldman boldly predicted that oil would go to $200 a barrel; oil would go on to peak at $147 less than two months later and crash to the floor soon after… Anyway, every time I read one of these rah-rah predictions, I get this feeling that I’ve seen this movie before.”

Concerning Goldman’s bullish outlook on US stocks, Taibbi remarks, “O’Neill apparently believes Ben Bernanke and the Federal Reserve will resort to another round of money-printing, and finally green-light the long-awaited ‘QE3,’ or third round of ‘Quantitative Easing.’

“The QE programs,” Taibbi continues, “involve the Fed printing hundreds of billions of dollars and pumping them into the marketplace, where they ostensibly stimulate the economy (although recent experience tells us that the money mostly ends up being swallowed by the financial services industry — but that’s another subject for another time). Anyway, Bernanke declined to go ahead with a third QE program in late 2011, but O’Neill apparently thinks we’ll get it in 2012.”

O’Neill is hardly the only Wall Street bigwig to predict rising share prices in 2012. And a 15% to 20% gain for the S&P 500 is hardly an outrageous forecast. So why does Taibbi make a big deal out of it?

Probably because of that old expression, “Fool me once, shame on you. Fool me twice, shame on me.” Goldman’s high-stakes hijinks are infamous. Remember, this was the firm that continuously packaged and sold mortgage-backed securities (MBS) to its clients, while simultaneously building a meaningful short position in the identical (or very similar) mortgage-backed securities. This practice was perfectly legal, but it was also perfectly scummy.

It was a little like selling tickets for an ocean cruise, then buying a disaster insurance on that particular cruise because you had some knowledge that the ship was barely seaworthy. Hey, you didn’t force anyone to buy a ticket for the cruise; you simply designed the cruise, then marketed it and sold tickets.

So if Goldman devoted itself to a series of perfectly legal — but morally bankrupt — business practices during the go-go years of 2005 to 2008, would it not be tempted to do even more of the same during the grim conditions of 2011-12?

Likely…which is just one reason why Goldman Sachs is probably not a “Buy.” Tomorrow we’ll share one reason why it probably is a “Sell.”

Regards,

Eric J. Fry
for The Daily Reckoning

Goldman Sachs is Probably Not a “Buy” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Such a shame. He had been doing so well ever since he put that bottle of “Old Q.E.” back on the shelf last June… and got sober. But a few weeks back, he tripped up on his 12-step program and started nipping at the bottle again. Slowly at first… then to excess.

Yes, it’s true, dear reader, Federal Reserve Chairman Ben Bernanke, is printing money again. That’s bad enough. But this time, after he prints it, he sends it over to Europe. Crazy, but true. The chart below tells the tale. It shows the quantity of currency swaps on the Fed’s balance sheet.

What are these things?

Technically, they are an exchange of one currency for another currency. Functionally, they are a loan.

Typically, one side of the swap pays interest to the other side of the swap, depending on the prevailing interest rate differentials between the two currencies. [For more about swaps, click here.] During the crisis of 2008-9, the Fed supplied nearly $600 billion of this form of credit to various financial institutions. Eventually, as credit conditions improved, the borrowers unwound these swaps, causing them to disappear completely from the Fed’s balance sheet…until late last year.

The Fed is ramping up its swap activity again. As we noted in the January 6th edition of The Daily Reckoning:

Whenever a central bank cannot provide direct, overt assistance to a specific insolvent investment bank or government, not to worry, a central bank can still provide indirect, covert assistance.

The recently announced “backdoor bailout” of European financial institutions illustrates the point. The European Central Bank (ECB) cannot directly bail out the insolvent governments of Greece, Italy, Spain, Portugal, et al. Meanwhile, the US Federal Reserve cannot directly rescue Europe’s insolvent banks.

Enter the indirect bailouts… Here’s how they work:

The Fed extends unlimited lines of credit to the ECB under so-called swap agreements. The ECB, in turn, provides dirt-cheap capital to Europe’s struggling banks. Then, the banks — understanding an unspoken quid pro quo — use the dirt-cheap financing to buy the high-yielding bonds of Greece, Italy, Spain, et cetera.

So if you follow the money, the Fed is lending money to the Greek government… and all along the way, the insolvent European banks are making money they don’t deserve to make, while US taxpayers are losing money they don’t deserve to lose…

As recently as a few weeks ago, the amount of dollar swaps — i.e., loans — with the ECB was only $2.4 billion. “For the week ending December 14, however, the amount jumped to $54 billion,” the Journal reports… Thus far, the Fed’s indirect bailout of Europe is relatively small, at a mere $62 billion. But we should expect that number to grow…a lot. And as that number grows, the Federal Reserve will be providing yet one more reason to buy gold, silver and other hard assets…

Since we aired those remarks, the Fed has added another $41 billion (and counting) in currency swaps to its balance sheet — bringing the grand total to $103 billion, as of January 18th. That little green doodad at the upper right of the chart below represents $103 billion of currency swaps. (The fact a $103 billion increase on a chart of Fed assets is barely visible says something about how out-of-control the Fed’s activities have become).

Importantly, these currency swaps are not replacing some other asset on the Fed’s balance sheet. In other words, the Fed did not sell $103 billion worth of Treasury securities in order to provide $103 billion worth of currency swaps to the ECB. Instead, the Fed conjured this fresh cash into existence out of thin air. Since announcing the “emergency” swap lines on November 30, 2010, the Fed’s balance sheet has increased by $100.7 billion — a mere rounding error away from the $100.8 billion in currency swaps the Fed added to its balance sheet over the same timeframe.

The mainstream financial press has not seemed to notice — or care — that the Fed is printing dollars and sending them to Europe…even though this new Fed operation is a kind of “QE3” without any headlines or fanfare…and without any direct US-based beneficiaries.

What does interest the press, however, are the “improving credit conditions in Europe.” LIBOR rates have retreated a bit from their recent highs, for example, which means that European banks are finding it easier to obtain short-term credit.

Of course they are! The Fed is flooding the European financial markets with cheap credit, thereby lowering the demand for credit from traditional sources in the private sector. But unless the Fed intends to single-handedly bail out every insolvent bank and government in Europe, the short-term balm it is providing will achieve absolutely zero long-term benefit…except for the owners of precious metals.

This “Backdoor QE Operation” will merely kick the can down the stradas, rues and calles of Europe, while adding hundreds of billions of dollars to the Fed’s balance sheet. This new Fed operation is inflationary… and it will become more inflationary if/as/when the volume of currency swaps on the Fed’s balance sheet continues to grow.

If you’d like to keep tabs on the growth of this Fed asset, the Cleveland Fed’s website makes it very easy. Just click on this link.

While watching, remember to add a few precious metals to your portfolio.

Regards,

Eric J. Fry
for The Daily Reckoning

Gentlemen, Start Your Printing Presses! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

“AA+ is also not a bad rating,” reassured German Chancellor Angela Merkel. The French were not so eager to agree with Merkel’s patronizing assessment…and neither were any of the other nine Eurozone governments that received a rap across the knuckles from S&P.

Although Finland, the Netherlands and Luxembourg still hung onto their AAA ratings, S&P placed these three sovereign issuers on “negative watch.” They were the lucky ones. Austria lost its triple-A rating, while Cyprus, Italy, Portugal and Spain were all cut by two notches. The latest downgrades placed Portugal deep into “junk” territory and Italy to near-junk.

S&P dispersed enough “bad juju” to annoy almost every country on the European continent. No surprise that one influential European finance minister said he plans to huddle up with his fellow Eurozone members to create a European rating agency.

But the facts are what the facts are… and the facts are that many pupils in this class are receiving a failing grade. Eliminating “F’s” from the grading scale won’t improve their command of the subject matter. Many pupils would still be insolvent…and moving toward a default.

A few days ago, for example, Spain disclosed that its budget deficit would be a wee bit larger than expected — 8% of GDP, rather than the expected 6% of GDP. Apologizing on Spain’s behalf, European Commission Vice President Olli Rehn said he “regret[s] the sizable fiscal slippage.”

This comment bore an eerie resemblance to the comment Greek Finance Minister, Evangelos Venizelos, uttered three months ago to describe his nation’s downwardly revised budget deficit forecast. We are “adjusting for slippage,” the Greek money man explained. The deficit that was supposed to total a hefty 7.6% of GDP for the 2011-12 fiscal year “slipped” to an even heftier 8.5%.

“Adjusting for slippage” is the latest government fashion…and it is expensive. “Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year,” Bloomberg News reports, “with most facing a rise in borrowing costs.”

Japan and the United States account for the lion’s share of this $7.6 trillion refinancing tab, as the chart below shows. Within Europe, Italy has the most amount of debt coming due this year. The Italians have to scratch together nearly half a trillion dollars in 2012 to satisfy maturing bonds. After Italy, France has the most amount of debt coming due in Europe at $367 billion, followed by Germany at $285 billion.

But these numbers tell only part of the grim story. $7.6 trillion is only the amount required to repay maturing bonds, plus accrued interest. This tally does not include the new borrowing needed to plug massive government deficits. After adding new borrowing to the total of maturing bonds, the total financing required in 2012 will be more than $10 trillion.

That’s a lot of borrowing. But again, even these numbers don’t tell the entire story. Borrowing costs are soaring for the governments that can least afford it. The chart below shows the year-over-year percentage change in 10-year borrowing costs for various governments. The Italian government, for example, must pay 6.62% per year to borrow money for ten years — an interest rate that is nearly 40% higher than the 4.75% rate the Italians paid one year ago to borrow money for ten years.

“Sizable fiscal slippage” is not automatically expensive…as the falling interest rates on US Treasury securities attests. But it is very expensive for those countries that have lost the faith of investors.

Europe’s sovereign borrowers are finding themselves in one of two camps: the “haves” or the “have-nots.” Because Italy and Portugal, for example, “have not” the confidence of bond investors, these two governments also “have not” any buyers of their bonds at low interest rates. As a result, Italian and Portuguese bond yields are soaring, even while the bond yields of Germany, the US and other “flight-to-quality” issuers are falling. Amazingly, German and US 10-year yields are both down more than 40% year-over-year.

When the news of the S&P downgrades crossed the newswires Friday, most European stocks and bonds traded lower. One conspicuous exception was the German 10-year government bond, which traded higher on the news — pushing the yield all the way down to a record-low 1.76%.

As the last remaining “stable AAA” sovereign borrower in the Eurozone, German government bonds are attracting brisk “flight to safety” demand — a trend that has been under way for many months. But while Germany’s interest costs are plummeting, many European countries are struggling with rapidly rising interest costs…and for good reason.

Italian interest rates are rising because Italy is strapped for cash. And so are many other Western nations… including the United States. In fact, the US just made the wrong sort of headlines by announcing that its debt-to-GDP just topped a Greek-like 100%. America’s staggering $15 trillion debt load may not be fatal, but it is not the kind of headline you want to print in big block letters “above the fold” of The New York Times.

The US Treasury must be hoping that Oscar Wilde was right when he said, “The only thing worse than being talked about is not being talked about.”

More than likely, however, Irish writer, Brendan Behan’s adaptation of Wilde’s quote is closer to the mark when talking about America’s debt load or Treasury bonds: “There’s no such thing as bad publicity…except your own obituary.”

Eric Fry
for The Daily Reckoning

How “Adjusting for Slippage” Adds to Sovereign Debt Woes originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Some psychopaths occupy a prison cell. Others occupy a corner office. Both are dangerous.

Psychopaths possess a profound lack of empathy. They use other people callously and remorselessly for their own ends. Psychopathic CEOs are no different. By advancing their own interests, with little regard for the agony they might inflict on others, they jeopardize the welfare of employees and investors alike.

In short, psychopathy is bad business.

It’s true that heartless managers can achieve statistically heroic corporate triumphs. But it is also true that the garlands of such victories often contain the pink slips (and sufferings) of thousands of employees.

But before we proceed to condemn America’s self-serving CEOs, allow us to give credit where credit is due, both to Prof. Robert Hare for linking psychopathy to corporate behavior and to Alan Deutscheman for explaining the topic in a fascinating essay.

“One day in 2002,” Mr. Deutscheman begins, “a 71-year-old professor emeritus from the University of British Columbia, Robert Hare, gave a talk on psychopathy to about 150 police and law-enforcement officials. He was a legendary figure to that crowd. The FBI and the British justice system had long relied on his advice.

“According to the Canadian Press and Toronto Sun reporters who rescued the moment from obscurity, Hare began by talking about Mafia hit men and sex offenders, whose photos were projected on a large screen behind him. But then those images were replaced by pictures of top executives from WorldCom, which had just declared bankruptcy, and Enron, which imploded only months earlier.”

“These are callous, cold-blooded individuals,” Hare scowled. “They don’t care that you have thoughts and feelings. They have no sense of guilt or remorse… I always said that if I wasn’t studying psychopaths in prison, I’d do it at the stock exchange.”

Collectively, corporate psychopaths inflict pain on hundreds of thousands — if not millions — of employees and shareholders. The senseless sufferings include lost livelihoods, lost life savings and sometimes even broken families or suicides.

And all the while that these CEOs sow agony, they reap riches for themselves.

In 2004 the CEOs of 179 major companies were paid an average of $9.84 million, up 12 percent from 2003, according to a survey by Pearl Meyer & Partners. By contrast, average labor compensation rose only 4.5 percent. (Unless a guy can hit a baseball 400 feet, or create misogynistic rap lyrics, he doesn’t deserve that kind of money!)

But these highly compensated — and sometimes brutal — corporate executives, as implements of financial Darwinism, can produce a greater good, according to Robert J. Samuelson in a recent article for The Washington Post. “The obsessive drive to improve profits, though cold-blooded, also creates often-overlooked social benefits,” he asserts. “It’s not simply that growing profits bolster the stock market or finance new investment. The broader point is that advancing productivity — a fancy term for efficiency and a byproduct of the quest for profits — is the wellspring of higher living standards.”

Maybe so, or maybe we have simply baptized a social evil, in the process canonizing villains. There is a very fine line between “creative destruction” and creative annihilation. But morality is not our beat here at the Rude Awakening. We, too, pursue a profit motive that is morally ambiguous.

But even from a rabidly capitalistic perspective, investing in psychopathic management can be very bad business. Folks like Enron’s Andrew Fastow, Sunbeam’s “Chainsaw” Al Dunlap and Worldcom’s Bernie Ebbers have demonstrated the destructive capacity of corporate psychopathy.

When in doubt, therefore, the prudent investor might opt to invest in companies that do NOT promote psychopaths to positions of influence.

Given the power that CEOs wield, Prof. Hare suggests that we screen them for psychopathic behavior. “Why wouldn’t we want to screen them?” he asks. “We screen police officers, teachers. Why not people who are going to handle billions of dollars?”

The professor may have a point. Several big-name CEOs would score “mildly psychopathic” on Hare’s corporate Psychopathy Checklist, according to Deutschman.

“‘Chainsaw’ Al Dunlap [would] score impressively,” Deutschman relates. “What do you say about a guy who didn’t attend his own parents’ funerals? He allegedly threatened his first wife with guns and knives. She charged that he left her with no food and no access to their money while he was away for days. His divorce was granted on grounds of ‘extreme cruelty.’ That’s the characteristic that endeared him to Wall Street, which applauded when he fired 11,000 workers at Scott Paper, then another 6,000 (half the labor force) at Sunbeam… His plant closings kept up his reputation for ruthlessness but made no sense economically, and Sunbeam’s financial gains were really the result of Dunlap’s alleged book cooking.”

We would not be opposed to “CEO screening,” but we’d prefer to allow market forces to eradicate the scoundrels. Specifically, we’d prefer that the lessons of the past govern the investor behavior of the future. Now that we have observed the downside of corporate psychopathy, we individual investors should have learned to avoid buying into companies run by self-serving lunatics.

We cannot always know, of course, who is psychopathic and who is merely “tough.” But perhaps the time has come to attempt to discern the difference. For too long, we have revered executives who seemed charismatic, visionary, and tough…as long as they were lifting profits and share prices. We did not care about mass job layoffs, provided that they occurred as remotely and silently as a lethal injection.

“We were willing to overlook the fact that CEOs could also be callous, conning, manipulative, deceitful, verbally and psychologically abusive, remorseless, exploitative, self-delusional, irresponsible, and megalomaniacal,” Deutschman sums up. “So we colluded in the elevation of leaders who were sadly insensitive to hurting others and society at large.”

But we individual investors seem to be repenting of our complicity. In general, we no longer revere “tough CEOs,” and we no longer look the other way while psychopathic corporate managers abuse the companies they purport to lead. Morgan Stanley’s Philip Purcell was recently “shown the door,” mostly because he excelled at producing vitriol, rather than profitability. We will not miss Philip J. Purcell, and neither will Morgan Stanley Deane Witter’s shareholders.

Psychopathy is destructive, no matter whether it roams the back streets or roams on Wall Street.

Regards,

Eric J. Fry,
for The Daily Reckoning

Pinstriped Psychopaths originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

For the last several months, the sordid tales of greed and deception issuing from Wall Street have read like the story line from a riveting suspense thriller. But the most recent tales are so unbelievably gruesome that they resemble the story line from a documentary about Jeffrey Dahmer or John Wayne Gacy…or some other serial killer.

Each subsequent act is more grisly and disturbing than the one before it. Your editors are now afraid to open their Wall Street Journals at night, even with the doors locked and all the lights on.

The horrifying truth, dear investor, is that very few prison cells in America contain more psychopathy — pound for pound — than Wall Street’s corner offices and board rooms.

Late last week, for example, we learned that AIG, Citigroup and several other struggling financial institutions duped the US government out of billions of dollars, even as the government was in the process of tossing out lifelines to them. Yes, this story is revolting, but true.

The US Treasury overpaid by about $78 billion for toxic assets from American banks, according to a report from the Congressional Oversight Panel. “The report showed,” a Reuters news story reveals, “that the Treasury got the worst [of its many bad deals] on second-round investments in American International Group for $40 billion and Citigroup for $20 billion under special aid programs tailored for the two institutions.

“For each $100 spent on these two companies,” says Reuters, “the Treasury received securities worth $41.” In other words, for those readers who do not have an abacus handy, taxpayers lost $35.4 billion dollars the second they drove their toxic securities off the lot at AIG and Citigroup.

This is a very odd expression of gratitude — kind of like a drowning swimmer who, after being rescued from certain death, thanks the lifeguard by stealing his car.

Who do you suppose would have known best about the true value of the securities the government purchased from AIG? The government employees who purchased them or the sellers at AIG? We’ll go out on a limb here and guess that the folks at AIG knew better.

So if the sellers had an inkling that the assets were worth far less than the government was paying paid, didn’t the sellers also have an obligation to divulge that information to the government — the party that was saving them from their own recklessness and stupidity? This is not a trick question. Yes, is the answer.

But since the sellers at AIG did not divulge accurate values to the buyers at the government, didn’t the sellers commit a kind of fraud? And if they did, don’t they deserve a kind of prison sentence?

But let’s not rush to judgment. If AIG executives legitimately had no idea that the prices the government paid for their securities was light-years away from real-world prices, then they are not guilty of fraud. But if they are not guilty of fraud, they are nevertheless guilty of extreme incompetence…again.

Criminal or moron. It’s one or the other. Either way, they deserve dismissal.

The chilling storyline that is unfolding from Wall Street’s corner offices prompts an obvious question that never seems to produce the obvious answer? Why do the corrupt and/or inept individuals who were the architects of the current financial crisis remain in positions of well-compensated power? Why, in other words, do we taxpayers continue to throw good money after bad? And why does the government conduct bailouts from the top of America’s financial pyramid, where the perpetrators of the crisis reside, rather than from the bottom of the pyramid, where the victims reside?

Seems like that would have been a better way to squander taxpayer dollars.

Your editors understand the rationale for dispensing trillions of dollars to failing financial institutions rather than, say, failing individual homeowners. But we emphatically reject it. The government has managed to dispense trillions of dollars of bailouts and guarantees without producing any palpable benefit for the economy at large. Despite the deluge of bailouts and guarantees that has rained down upon American financial institutions, the economy continues to atrophy and the finance sector remains comatose. So why continue the ruse? Why not squander taxpayer money to help families stay in their homes, rather than help psychopaths stay in their Armani suits?

An alarming report by Mark Pittman and Bob Ivry of Bloomberg News emphasizes the point. “The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed,” the Bloomberg duo reveal… These enormous pledges, Pittman and Ivry point out, would almost be enough to “pay off every home mortgage loan in the US, calculated at $10.5 trillion by the Federal Reserve.”

But lest you think we are kicking America’s corporate chieftains while they are down — or as close to down as we have seen them in a long time, which is actually not very down at all — we would remind you that your editors also kicked the corporate chieftains (often) while they were riding high.

Nearly four years ago, we remarked:

“A corporate culture of well-mannered avarice restrains the mighty American economy. Many public companies labor under a Soviet-style central planning — the sort of planning that arranges things very nicely for the planners themselves, but much less well for the proletariat…

“‘In 2003, the ratio between CEO Pay and worker pay reached 301 to 1, up from 282 to 1 in 2002’ according to a report from United for a Fair Economy. ‘If the minimum wage had increased as quickly as CEO pay has since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour.’ [Editor’s update: United for a Fair Economy now reports that CEO pay has soared to 343 times that of hourly workers.]

“‘By any standard, many of today’s executive compensation packages are excessive,’ BusinessWeek asserts. ‘Too often, directors have awarded compensation packages that go well beyond what is required to attract and retain executives and have rewarded even poorly performing CEOs… Moreover, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company, its shareholders and employees.’”

Shortly after airing these remarks, we followed up with a column entitled “Pinstriped Psychopaths.” Regrettably, the observations within that column proved to be much more prescient and relevant than we could have ever imagined. In short, it pays to learn a little bit about the guys who are overseeing your capital…and to avoid the bad ones.

Eric Fry
for The Daily Reckoning

Greed and Deception on Wall Street originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Unfortunately, hiding the cracks does nothing to strengthen the underlying infrastructure. To the contrary, hiding the cracks dupes individuals into believing all is well, even as the monetary system is crumbling around them.

Many European governments, for example, are spending much more money than they can possibly confiscate through taxation. These guys are broke… plain and simple. But so is the United States, based on any intellectually honest assessment of the facts.

According to the US Treasury’s own data, the US ended 2011 with total debt of $15.2 trillion, which means the US debt-to-GDP is now more than 100%! Move over Greece! Make way for Uncle Sam.

Bankrupt governments usually default…at least they used to. In the modern era of faith-based currencies and Ivy League educated central bankers, bailouts and shell games are the cogs and wheels that drive the global monetary machinery. But this machinery does not actually power anything…other than a massive fraud. It merely sputters along, chugging out massive plumes of toxic theories and misguided manipulations.

And whenever a central bank cannot provide direct, overt assistance to a specific insolvent investment bank or government, not to worry, a central bank can still provide indirect, covert assistance.

The recently announced “backdoor bailout” of European financial institutions illustrates the point. The European Central Bank (ECB) cannot directly bail out the insolvent governments of Greece, Italy, Spain, Portugal, et al. Meanwhile, the US Federal Reserve cannot directly rescue Europe’s insolvent banks.

Enter the indirect bailouts… Here’s how they work:

The Fed extends unlimited lines of credit to the ECB under so-called swap agreements. The ECB, in turn, provides dirt-cheap capital to Europe’s struggling banks. Then, the banks — understanding an unspoken quid pro quo — use the dirt-cheap financing to buy the high-yielding bonds of Greece, Italy, Spain, et cetera.

So if you follow the money, the Fed is lending money to Greece… and all along the way, the insolvent European banks are making money they don’t deserve to make, while taxpayers lose money they don’t deserve to lose… and also stand first in line to lose even more money as these various coddled banks and governments eventually default anyway.

Does this characterization of the Fed’s activities sound like an exaggeration?

Consider this fact, courtesy of The Wall Street Journal: As recently as a few weeks ago, the amount of dollar swaps — i.e., loans — with the ECB was only $2.4 billion. “For the week ending December 14, however, the amount jumped to $54 billion,” the Journal reports. ”For the week ending December 21, the total went up by [another] $8 billion… No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.”

Thus far, the Fed’s indirect bailout of Europe is relatively small, at a mere $62 billion. But we should expect that number to grow…a lot. And as that number grows, the Federal Reserve will be providing yet one more reason to buy gold, silver and other hard assets.

No modern central banker can seem to resist the urge to “cure” insolvency with more credit — credit that comes not from a store of accumulated capital, but from the mouth of a printing press.

Gold is a buy, perhaps now more than ever.

“2011’s close for gold marks the 11th year for higher year-end gold closing,” observes Richard Russell. “To my knowledge, this is the longest bull market of any kind in history in which each year’s close was above the previous year. This fabulous bull market will not end with a whisper and a fizzle. I continue to believe that the upside gold crescendo of this bull market lies ahead. We are watching market history. Below are the last day of the year quotes for gold:

2000 — $273.60
2001 — $279.00
2002 — $348.20
2003 — $416.10
2004 — $438.40
2005 — $518.90
2006 — $638.00
2007 — $838.00
2008 — $889.00
2009 — $1096.50
2010 — $1421.40
2011 — $1566.80

“I note the frustration and anger of the anti-gold crowd,” Russell continues. “To miss twelve years of rising prices is enough to make any investor furious with himself. I would guess that 99 percent of Americans have never participated in the gold bull market. Thus, sour grapes is the sentiment of the gold-haters…”

But there’s no sense being “a hater” or to continue sucking sour grapes. If the gold bull market is merely resting, rather than dying, there will be plenty of opportunity to become a gold-lover.

“Jeff Clark, editor of the S&A Short Report, sees the best opportunity to trade gold stocks of the past three years,” the S&A Digest reports. “After the end-of-the-year rout in the sector, one of Jeff’s favorite indicators dropped to its lowest level since October 2008 — one of the most pessimistic times in history for gold stocks. But after the indicator flashed ‘buy’ (as it is doing today), the average gold stock doubled over the next 10 weeks.

“Take a look at this chart of the gold sector bullish percent index, which shows the past two times Jeff’s indicator flashed buy (in June and October of last year)… Gold stocks rallied 20% over the following month in both instances.”

Longer term, the precious metals seem even more compelling.

“Gold stocks will have a great year,” predicts Chris Mayer, editor of Mayer’s Special Situations. “The market hated gold stocks in 2011, especially the juniors. The MarketVectors Junior Gold Miners ETF (GDXJ) is made up of small mining stocks. It fell 38% in 2011. This, despite gold itself finishing the year modestly up.

“Brigus Gold (BRD), for example, is dirt-cheap,” Chris continues. “In 2012, it is still targeting 100,000 ounces of production from its Black Fox mine. In the meantime, during 2011, Brigus boosted the total resource at Black Fox by 50% with high-grade ore extensions. So, the stock is now very cheap on reserves and trades for about 4x prospective cash flow at 100,000 ounces… So even if it gets a peer multiple of 8x, the stock could double. And that’s if gold goes nowhere!

“The market is offering low multiples on gold stocks right now,” Chris winds up. “Price-to-cash-flow multiples, for instance, linger near generational lows. Gold doesn’t have to go up for these stocks to make a lot of money. However, I think gold will make another run at $2,000 an ounce in 2012 — and exceed it. All the factors that drove gold to new highs in 2011 are still in place. The world’s monetary system is still a mess. And its leading brand, the US dollar, is not well. Combine a rising gold price with low multiples and you have a kind of financial rocket fuel.”

Eric Fry
for The Daily Reckoning

How Central Bankers Attempt to “Cure” Insolvency originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

In short, the financial markets are reflecting what our friend, John Mauldin, calls a “muddle through” economy.

Notwithstanding this morning’s buoyant stock market action, the euro zone is still in crisis, the finances of most governments in the Western world are still in shambles… and Bank of America’s share price is still hovering around five dollars — just like it was in March of 2009, when then-Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke were busy patting each other on the back for “saving” the financial system.

Toward the end of yesterday’s trading session, Bank of America’s share price actually slipped below five dollars per share for the first time since mid-March 2009. That event may or may not be significant, depending upon which rumors one chooses to believe.

One of the juiciest rumors of the moment is that the Federal Reserve is desperately trying to prop up Bank of America, under the guise of helping to “save the euro.”

For example, the last time Bank of America’s share price flirted with five dollars was November 29. The stock hit $5.03 during that trading session before closing at $5.08. The following morning, at the crack of dawn, the Federal Reserve announced its latest “coordinated intervention” with the European Central Bank and a bevy of other central banks. Stock markets around the world skyrocketed on the news. Distressed financial stocks like Bank of America’s skyrocketed most of all.

Therefore, as we noted in the December 5th edition of The Daily Reckoning, “[The King Report] speculates that problems here at home may have also spurred the cavalry into action. ‘Fed concern about Bank of America was probably a prime factor in implementing the latest scheme,’ says King. ‘If BAC had fallen below $5, there could have been an avalanche of selling because some institutions cannot buy or hold a stock that is less than $5 per share. A cascading BAC could have generated an “Emperor has no clothes” moment for BAC. (Buffett would have been chagrined). So it was imperative that someone closed BAC above $5 on Tuesday and that some scheme had to be implemented to drive the price higher on Wednesday.’

“So just as expected/hoped,” the December 5th Daily Reckoning continued, “the markets rallied sharply on Wednesday, enabling BAC and a few other troubled financial institutions to live to fight another day. But the fight is far from over…and the troubled financial institutions are unlikely to emerge victorious, no matter how many times the central bank cavalry storms into battle.”

As predicted, the central bank intervention announcement on November 30 produced a very sharp, dramatic rally. Bank of America’s shares rallied as much as 16%, while the shares of many other banks and finance companies rallied even more. Nevertheless, by the end of yesterday’s trading session, those fleeting gains had more than disappeared… and there sat a forlorn Bank of America, priced at $4.98 a share

Then the cavalry charged in once again!

Is it not somewhat curious, that today’s 320 rally seemed to come out of nowhere, on no major news whatsoever? Is it not also somewhat curious that the stock market happened to the soar the very next morning after Bank of America fell below $5?

These kinds of coincidences are almost enough to make me believe crazy rumors.

Oh, wait a minute, there was some bullish news out of Europe this morning. The Spanish government managed to sell a few bonds to “the public.” This announcement sparked a rally in Europe that continued into the New York trading session. But once again, if you believe some of the crazy rumors going around, the “successful” Spanish bond auction had the Fed’s fingerprints all over it.

According to the scuttlebutt, European banks snapped up the Spanish debt — these very same European banks that are already choking on life-threatening quantities of Spanish, Italian, Portuguese and Greek debt. So why would they buy even more of this stuff?

Two reasons: 1) The banks have a large, vested interest in preventing the prices of the sovereign bonds they already hold from falling even more and; 2) Thanks to the Federal Reserve, these banks now have access to extremely cheap, unlimited funding through the swap lines the Fed announced on November 30th. (The banks also have access to very cheap 3-year credit lines from the ECB).

Let’s call this whole shebang, “Backdoor Quantitative Easing.”

Even if the details of this Backdoor QE theory are somewhat off base, the substance of the theory is certainly dead on. Somehow or other, you can be sure that the Fed and the ECB are busy “fixing things”…and utilizing clandestine tactics to do so.

But so far, the troubled banks of America and Europe are still as troubled today as they were three weeks ago, and many of them are more troubled than they were three years ago, when the Fed moved full-time into the bank-rescue business.

Of course, the Fed and the ECB have financial problems of their own.

“No matter how you slice it,” observes our friend Dan Denning, editor of the Australian Daily Reckoning, “many of the world’s governments need money. If the private markets don’t give it to them, their central banks will have to do the job. This will lead inevitably to money printing and currency devaluation. The amount of money these governments require is staggering.

“Industrialized Welfare State governments will have to borrow some $10.4 trillion next year, according to the Paris-based Organisation for Economic Cooperation and Development (OECD),” Dan continue. “That’s a lot of money. The countries doing the bulk of the borrowing are in Europe. Don’t forget America. The chart below shows that nearly 60% of total US Treasury debt outstanding — or $5.6 trillion — must be refinanced in the next four years.”

Where is that money going to come from?

It’s hard to say where the money will come from, but it’s easy to say where it will not come from. It will not come from private citizens who are looking to park their cash in safe and secure investments. There aren’t enough folks with actual money to invest who are willing to lend that money to a bankrupt government. So in order to fill this $10 trillion funding gap, we should expect a few more quantitative easing programs and other forms of money-printing.

Meanwhile, we should also expect a lot more attempts by government powers to repel the forces of economic nature: More “coordinated central bank intervention,” more “emergency landing facilities,” and more ad-hoc, too-big-to-fail remedies.

So at least we’ve got that going for us — a lot more of the stuff that hasn’t worked… and never will.

Buy gold…some more.

Eric Fry
for The Daily Reckoning

How Central Banks Attempt to Prop Up the Economy originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

But that’s exactly what’s happening.

What the heck is wrong with the precious metals?

Sure, gold has performed admirably over the last few years, but it has performed dismally over the last few weeks…and horribly over the last few days.

As the chart above shows, most major stock and commodity markets have already surrendered the huge gains they achieved after November 30th, when six central banks announced “coordinated intervention” to support distressed European banks. (Only US stocks still cling to a slight gain). But gold has been the biggest loser.

Despite the obvious inflationary implications of central bank intervention in the currency markets, gold can’t seem to get out of its own way. In the midst of a currency crisis that has seen the euro lose 9% of its value against the dollar in just three months, gold is down 17%, while US stocks are up.

Not surprisingly, gold’s numerous naysayers are wasting no time saying their “nays.”

“When it comes to investment safety, gold has near-mythical status,” writes James Mackintosh for The Financial Times. “Sadly, it has repeatedly turned out to be a myth that gold holds its value during periods of panic. Investors were reminded of that once again yesterday, when the precious metal plunged 4 per cent or $68…

“Gold is meant to be a haven, and in periods of mild fear it does rather well,” Mackintosh continues. “But just as in 2008, when times get really tough, investors prefer cash to gold — and dollar cash at that.”

The guy’s got an argument. But is it a good one?

Without a doubt, gold has delivered a disappointing performance of late. But even after yesterday’s shellacking, gold is still up 9% over the last 12 months, compared to a loss for the S&P 500 Index. Likewise, gold has greatly outpaced the S&P over the last one, three, five, ten and fifteen years! (The 20-year mark is a “dead heat.”)

Bottom line, gold has performed its job with meritorious distinction. But of course, that’s history. The future is what most of us care about. And we’d care to know if gold’s future will look anything like its illustrious past.

Over the short-term, the financial markets can fall hostage almost any form of groupthink, no matter whether that groupthink be intelligent or idiotic. But over the long-term, the markets usually escape their captors.

Free from the shackles of groupthink, good investments excel; bad investments don’t.

At the moment, gold is disappointing its fans, which begs the question: Is gold a good investment, temporarily held hostage by the groupthink that considers the dollar a safer “safe haven” asset? Or is gold genuinely a bad investment that deserves exactly what it is getting right now?

Your California editor cannot answer that question with certainty, but he can respond to it with conviction: Long-term, gold is a better safe haven than the dollar. Short-term, anything goes.

Having said that, unrequited affection is always painful. Those of us who have embraced gold as our “main squeeze,” financially speaking, are receiving nothing but backhands across the face.

No love whatsoever. In fact, the more we commit to the relationship, the greater our pain. So we’d like to know, will gold ever love us back?

Probably.

“The fragments of alarming news that fill the pages of The Wall Street Journal and The Financial Times are not unrelated,” observes James Grant, editor of Grant’s Interest Rate Observer. “They form a coherent design. The derangement of money and banking is the central organizing principle. Banks are teetering and currencies are churning because of the ideas we live by. Paper money and socialized risk-taking got us into this mess. More the same is how the central bankers seemingly intended to lead us out… The world over, governments have met, are meeting, or will soon meet financial and monetary troubles with the printing press or its digital equivalent.”

Unfortunately, Grant’s compelling long-term argument for owning gold is providing very little solace at the moment. Gold is falling…and it may continue falling, if we are to believe what the “charts are saying.” Gold fell through its 200-day moving average yesterday, which is very “bad voodoo,” according to those folks who divine future price trends from squiggles on a chart.

Furthermore, the precious metals are clearly suffering from one trend we can clearly see, and maybe one more that we can’t see.

The visible trend is the German non-response to euro crisis. So far, the Germans refuse to launch a rescue campaign that relies on printing euros. Instead, the Germans advocate a combination of austerity and tax hikes. However prudent this strategy may or may not be over the long term, near term it looks awfully deflationary, recessionary…and bearish for gold.

As for influences we can’t see, rumors are running rampant that the MF Global bankruptcy is triggering a series of forced liquidations. If true, such liquidations could easily produce steep price drops across the commodity complex — corn and wheat, as well as gold and silver. And clearly, the entire commodity complex has been in liquidation mode — a fact that lends credence to the rumors. On the other hand, it is also possible that MF Global’s bankruptcy has nothing at all to do with the selloffs.

Either way, the bull case for gold (and also for silver) has little to do with short-term noise and volatility. Rather, it is the long-term story that matters most — the story of the “derangement of money and banking.” And that’s the kind of story that could produce another spectacular run in the gold price!

Maybe the last 20 years were the “glory days” for gold, never to be seen again…at least not soon. And maybe, as Mr. Mackintosh asserts, gold is no longer a reliable “crisis asset.” Or maybe, as your editor suspects, the crisis is simply not bad enough to really terrify folks.

Eric Fry
for The Daily Reckoning

Looking Past Gold’s Poor Performance originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.