The Daily Reckoning PRESENTS: What would someone from another planet think of how we go about our business down here on Earth? What if you could travel 5,000 years into the future and only bring one kind of currency? Ed Bugos aims to answer these questions – and more – below…
Gold “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head” – by a well known investor
Why humans would guard something that has no utility must have escaped notice there.
I’d like to know what kind of society the Martians in this allegory had. I mean, under what system of social cooperation were they able to arrive at the far superior technology required to observe humans from way off in the distance? Do the individual members exchange ideas, or goods? If not, how were they able to economize on scarce resources in order to produce their technology, or is there no such thing as scarcity in outer space? What motivates them to act? Are they centrally organized like a simple ant colony or collectively motivated like the coercive Borg in Star Trek, or is their division of labor organized by a complex but voluntary system of the free exchange of property titles, which here on earth forms the basis of civilized societies?
If not, I wonder then why “anyone watching from Mars” would not also scratch their head about paying someone to guard this hoard, let alone of the concept of utility, especially to an “individual”? In fact, if such a system were so unfamiliar, what sense could a Martian make of any human action? Maybe the philosophy of exchange is not foreign to this observer.
If that were true, neither could a common medium be all that foreign. In fact, if our Martian observer knew anything of our history or of such a system of cooperation, the reasons for the puzzling activity would be no less clear to him than to any informed economist right here on earth. Corruption.
But let’s fast-forward the economic mumbo jumbo and cut straight to the chase. Since we’re in outer space already, amongst superior beings, we may be forgiven for our excursion into a little fantasy.
Imagine that we had the technological capability to travel through time, and you signed up for an expedition that would catapult you, say, 5,000 years into the future, what would you choose as money to bring with you… assuming that you were only allowed to choose one of the following prospects? Keep in mind that your decision could mean the difference between life and death!
3. Brazilian seashell necklaces
4. As much top grade Light Crude (Oil) as you can carry
7. Dutch tulips
8. Cattle (or a lamb?)
9. A bottle of 5,012 year old scotch
10. Federal Reserve Note (US dollars)
12. Government bonds / bills d’etat
13. Chinese Remnibi
14. 1923 German Reichesmark
15. Microsoft or Apple shares, or other kind of claim on asset
I know your answer.
You already know what the Martians apparently don’t. Aside from a few drunks and jailbirds debating the merits between the scotch and smokes, I’d bet that most ‘humans’ probably picked gold or silver.
The value of gold as the medium of exchange is a topic in itself but we don’t have to go there today – we don’t have to know why humans have preferred it to other goods to know that it has outlasted any of them. What other commodity, or currency, has survived as money for any similar length of time?
What has held its purchasing power better? Many of those above have been money at different times and different places, but scarcely any of them has been money as long as gold. Gold is one of the oldest, and it is still accepted where it isn’t restricted by a state protected legal tender monopoly.
It was first coined at least 2500 years ago; it adorned Egyptian kings as far back as 4500 years ago; yet suddenly, in only the last three decades, it has apparently lost all of its utility, as if history vanished, and barbarism with it… as if empire and dominion, conquest and plunder, or any of those activities usually associated with the history of gold no longer exist. Indeed, for our Martian observer to be scratching his head over this implies that he must have only begun his observation in the last thirty years, and is totally ignorant about the 4500 years of human history before 1975. I’d say that’s out of line with most Alien accounts, especially since widespread sightings of UFO’s date long before 1975.
Gold has a monetary value, which can only mean something that is attributed by a market.
The state can say something is money but the concept of value being attached to something implies the market has a say. Allow me to contend that what this Martian observer puzzles over as a waste of resources is not the “utility” of the metal, or the question of why we bother mining it. If he only started with this utility as a given, implied by the act of guarding it, and wrote it off to some human affinity or other, what would really puzzle him is the same thing that should puzzle you: that the state would go to so great an expense to withhold such a desired thing from freely circulating. Indeed, the costs do not end with the remuneration of the security guards at Fort Knox, or wherever. They only start there.
Truth may not need the support of government, but fiat and fractional reserve bank notes do.
It takes additional resources to force individuals to accept something as money which isn’t by choice; and if the integrity of this money is subject to the inflationary whims of a fractional reserve banking cartel, the costs can quickly pile up. Genuine savings are depleted, debased or frittered away… the control over the means of production compromised, inefficiencies burgeon, inhibiting progress and technological innovation, and instability reigns. Moreover, the policy undermines both the moral fabric of society and its adhesive force: the division of labor. Why would humans, as an observer who was not foreign to human history might astutely question, allow such self-defeating and costly institutions?
This, at least, is what puzzles me.
The answer is ignorance… induced by a misinformation campaign that is costly in itself.
The value of a sound money is that it prevents planners from redistributing the wealth and savings of the productive classes to the political classes in order to finance expensive unproductive agendas – or from depleting the savings of fixed income earners, or the wages of the poor… as Greenspan wrote many years before becoming a central banker:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation” (published by Ayn Rand in 1966).
Alas, the Martian observer can no longer be confused about either the utility of this metal or the reason that it is being guarded (rather than allowed to circulate). Its absence from circulation has been answered: it is part of a scheme to raid the savings of productive classes.
The utility of this metal should thus be clear: it restricts the coercive elements of society and protects savings; it is but an instrument of the sound money principle… and it is interchangeable with the idea of freedom.
There is no way to understand the utility of gold – or to make sense of the entire activity described in the quote – if one does not grasp history, or these ideas.
Comedian Jerry Seinfeld, who specializes in irony, perhaps reveals the fallacy best when lamenting that if Martians were watching (human) dog owners follow their pets around with a doggy bag, they’d probably think that the dogs were in charge. Just what you need… another head scratcher.
Edmond J Bugos
for The Daily Reckoning
Editor’s Note: We’ve commissioned Ed to head up our soon-to-be released newsletter, Gold Investor, dedicated solely to taking advantage of this historic gold bull market.
And we couldn’t have found a better guy to man the Gold Investor than Ed Bugos. Ed comes straight from the North American heart of the gold market – Vancouver’s Howe Street. During the nasty commodity bear market in the 90’s, Ed still guided his clients to gold profits in Argentina Gold and Arequipa, both of which became buyout bait for Barrick. He also founded the “Bugos Gold Stock Index” which included no more than 10 stocks at any time. From December 2001 to May 2006, his index gained 200%, averaging 30% compounded annual gains. And his index was composed solely of mid to large-cap producers, not the exploration of junior companies.
Today’s headlines run in two contrary directions – both illustrated in salmon color on the front page of the Financial Times.
At the top of the page “Investors flock to Blackstone.” At the bottom they flee Bear Stearns (NYSE:BSC). In between the two stories is the world economy as we have come to know it.
Blackstone is perhaps the world’s most famous private equity firm. The company has made the news lately because its founders and insiders have decided to sell. We have commented on how remarkable this is before. But we will do so again; the thing is remarkable enough to merit more than a few comments.
Blackstone’s modus operandi – and even its existence – argues that the common view of how modern markets function is a fraud. The market is supposed to know more than anyone. The price it decrees is supposed to take all known information into account. No individual or group is supposed to be able to beat it. Economists won Nobel Prizes for demonstrating this view. The U.S. Supreme Court ruled that it was correct. And the SEC puts you in jail if you tamper with it.
Nevertheless, Blackstone’s insiders and bigheads find companies that Mr. Market has misjudged or overlooked. Private equity, they call it, to distinguish it from the work of the public markets. They do their magic to their acquisitions (often borrowing money against the assets and paying it to themselves)…and then sell back to the same investing public that misjudged them in the first place. The Blackstone hotshots have been so successful at this that now other investors want a piece of the action; and so canny are they that they now offer to sell it to them.
On the surface, it makes no sense. Why would the smartest investors on the planet want to share their gains with the unwashed multitudes? If they can make so much money in private equity why would they want to go public? The only reasonable answer is the obvious one: The Masters of the Universe believe their own shares are overpriced.
Even more remarkable, here are the same schleps whom Blackstone commonly outsmarts lining up to be suckered again. Today’s FT tells us that the IPO is already six times oversubscribed, despite Senate action that threatens to double the firm’s tax bill beginning in 2012. The poor boobs think they are going to put one over on Blackstone. For isn’t that the real nature of this transaction? The world’s most successful insiders are on one side of the table; the world’s most naïve public market investors are on the other. Who’s going to get the better end of the bargain?
We will leave that question to your imagination, dear reader, and let our tired old eyes wander down to the bottom of the page, where we find a different storyline.
“Crisis at Bear Stearns…hits market for subprime securities,” begins the tale. While lower-middle class householders lose a grip on their houses, it is at least amusing to see that the people who funded subprime mortgages are taking losses too. But anyone who would buy into Bear’s “High-Grade Structured Credit Strategies Enhanced Leverage Fund,” deserves what he gets, in our opinion. An investor might as well put a sign on his back saying “I am carrying $500 in small bills,” and take a walk through a bad neighborhood. In the case at hand, the fund was begun only 10 months ago. In scarcely more time than it takes to bring a baby from conception to the baptismal font, its young quants managed to lose 20% of their investors’ money. And now, creditors are taking assets…and the fund faces collapse.
Not only that…Bear is being forced to unload positions at fire sale prices. Over $1 billion worth of mortgage-backed securities are being dumped onto a skittish market.
“The real fear has to do with just how many other funds…could be in trouble,” said a Wall Street portfolio manager.
The crisis at Bear is just another pin in a world of bubbles. There are plenty of others. Sooner or later (as we keep saying, and saying, and saying) bubbles and pins will come together in a dramatic display.
The Daily Reckoning
Thursday, June 21, 2007
Addison Wiggin, reporting from the land of beehives, Bohs and blue crabs…
“And the ‘fire sale’ at Bear Stearns continues. Yesterday, we told you about Merrill Lynch’s plan to auction $850 million of risky loans on Wednesday after rejecting a Bear Stearns offer to buy them directly. Now, Deutsche Bank and JPMorgan have joined the fray.
“Deutsche Bank plans to sell $350 million of Collateralized Debt Obligation (CDO) assets seized from the funds. JPMorgan began selling their share of seized assets on Tuesday, but halted its sale yesterday after some back door dealings with Bear Stearns helped them eliminate their exposure to the fund.
“This ‘fire sale’ is dampening the prices of CDOs and other mortage-backed bonds everywhere. Once prices are revealed in this wave of sell-offs, other holders will realize they own ‘junk in investment-grade clothing’ as one mortgage broker called it. Funds will start asking for more collateral, lenders and investors will want their money back… and so it goes.”
For the rest of this story, see today’s issue of The 5 Min. Forecast
And more views:
*** “Private equity is a force for good.”
Yesterday, in London, the Masters of the Universe confronted the Masters of Great Britain. A group of four representatives from the private equity industry appeared before a committee of the House of Commons to defend their business. What are they defending it against? A popular uprising. People are getting sick of hearing about all the money made by the financial industry. They are beginning to sharpen their guillotines and heat up the tar.
Meanwhile, the Masters of the USA – and by pretension, of the whole Empire – prepared their own version of The Terror. Max Baucus and Charles Grassley, both eminent defenders of the U.S. Constitution, Homeland Security and Efficient Market Hypothesis, proposed to increase taxes on private equity firms.
It was inevitable. People will only stand for so much liberty…and not a bit more. Right now, the hustlers are free to make as much as they want – thanks largely to the EZ cash and credit available to the financial industry. They are bidding for works of art…for baubles and trifles…for houses…for stocks and bonds…for just about everything. They have so much money that they are able to throw it around recklessly…which is galling to people who have much less.
Eventually, the have-nots begin to get a little sour on the whole system. And the politicians, rushing to get ahead of a trend and squeeze some money from people who are richer than they are, soon raise the banners of “fairness” and “equality.”
*** Once again, we look out our window to see what is going on. What we see from our office window is the Waterloo Bridge. And what we see in the news is that a painting of said bridge, done by Claude Monet, just sold at auction for an extraordinary amount (reported as 17.9 million pounds by one source and 18.5 million by another). Either way, we are talking serious money – about $36 million, which is twice what experts had expected…and a lot of money for a picture of a bridge.
Meanwhile, The Daily Telegraph came to succor the poor, offering to give its readers a glossy reproduction of said painting for free. This gave rise to a question. We didn’t know whether it was an existential question…an aesthetic question…or a financial one…but it haunted our sleep: What is the difference between a genuine Monet and copy of it?
The answer, of course, was established to the penny…at auction – the aforementioned $36 million. Mr. Market expressed himself in no uncertain terms. Still, we question his judgment. From a distance, you can barely tell the difference between a print and the painting. You have to get up close. The closer you get, the more apparent the difference is. As you approach the painting you see the texture…brush strokes…and subtle colors.
Paintings are visual things. Poke your eyes out and you will get no pleasure from a Monet at all, except perhaps a vicarious pleasure from letting your seeing-eye dog look at it. Even if you have eyes, the benefit you get diminishes with distance. Logically, at a certain range, the real thing must be equal in value to the print, which we now know, thanks to the Telegraph, has a value of zero. At what range, then, is the view of Waterloo Bridge worth $36 million? We, who see the bridge everyday, want to know.
Unlike so many contemporary “artists” Monet could turn out something that was not unpleasant to look at. As a painter, we have no quarrel with him. We are just wondering.
*** Housing was in trouble last year. It is still in trouble. And next year, it may be in even more trouble. Mortgage rates are rising. Unsold inventories are at a record 4.2 million units. There are fewer mortgage applicants. And fewer new housing starts. And now Bear Stearns is taking the stuffing out of the mortgage finance derivatives market. It’s a ‘bloodbath” says a Bloomberg article on the subject.
*** And poor Ms. Bearman. The Des Moines paper tells us that the 57-year-old grandmother is in big trouble. Taking a group of children to Disneyland, she left a bread-knife, used for making the kids’ sandwiches, in her carry-on bag. Now, she’s been branded a terrorist.
“What about my constitutional rights?” she wanted to know.
Lady, you don’t have rights, replied the security martinet, uncannily perceptive for an idiot. “Not at this point…you don’t have any.”
“This is not right!” she protests.
Dear readers will probably take up her cause. The bleeding hearts and Civil Liberties Union will probably try to keep her out of the pokie. “She didn’t do anything wrong,” they will whine. “She is no threat to the empire,” they will claim. “Free Cecilia Bearman,” they will chant.
We will take the other side. Send her to Guantanamo…put her in an orange jumpsuit…put the cuffs on her…and don’t forget the blinders and breathing mask…hold her there in the hot sun for a couple of years…until we’ve forgotten about her.
Better yet, send her overseas for interrogation. Force her to tell us what she knows…that SHE was really behind the 9/11 strike…and that SHE, not Osama bin Laden, is the real mastermind behind Al Qaeda.
“But she has done nothing wrong!” you will say. “She’s innocent.”
We’re not so sure. Besides, why take chances?