Robert Prechter on the falling monetary base:

“As a consequence of the lack of demand for loans, the unwillingness of banks to lend money, and subsequent response of U.S. monetary policy, effective U.S. monetary policy is one of tightening. That lack of growth in the U.S. money that followed from all this will ultimately have an impact on financial markets, the value of the U.S. dollar in the short-term, and the price of $Gold. Further, inflation is not likely to flow from this monetary policy, and deflation is again a risk. Importantly, the consequences of this situation may not be that of the broad consensus.

With no growth in the quantity of U.S. dollars since February, the dollar is becoming rarer relative to other currencies. Ultimately, unless corrected, the value of the U.S. dollar should rise in the short-term. Such an event might come as a surprise to those plunging into Gold and Silver on the back of margin debt.”

“By their deeds shall ye know them”

— St. Matthew’s Gospel, 7:16

A summation of the inflation-deflation debate, and some practical advice arising from it:

“The pair trade of being long gold and short equities that has worked since 2000, might have a few more years to go, especially if equities get more headwind from multiple-contraction and government interfering in the economy. But in the long-run, time is against that trade too, since equities have the income component. So, one might not short the lower-multiple or certain consumer-staples and commodity-related stocks. Without shorting, being long the latter stocks, being long gold, and having some cash (1/3 each) is probably the common-sense approach, and with a little luck, one can deploy the cash in the next “deflationary” wave should it occur.”

My Comment:

One third-gold looks awfully high to me, but only if you’re buying now. If you’ve been holding for years, take your bow. I’m assuming this division doesn’t include people’s homes. Otherwise, surely, paid-up real estate is a secure asset and a potentially income producing one as well.

I’d rewrite this: One third in your paid up house, a farm or income property of some kind. Another third in diversified currencies or in your currency of choice, either as cash or perhaps even in some select funds – though I’ve never held funds and wonder if they perform like the currency itself. My sense is they don’t. The last third in precious metals, commodities, water, and energy ETF’s, or if you’re knowledgeable enough, stocks. Here too, the funds don’t perform like the underlying commodity at all, USO being a case in point.

Correction: (October 27): Rereading this, it sound like I am recommending ETF’s for all the last part. I don’t. I recommend ETF’s for water and energy, because for the average person it’s easiest to buy that way. You should get physical gold for the long haul, and maybe an ETF to trade – which, is the question.

From The New York Times:

“The Congressional Budget Office said the bill would cost $829 billion over 10 years. The costs include $345 billion for the expansion of Medicaid and $461 billion for subsidies to help lower-income people buy insurance.

The budget office said the costs would be completely offset by new fees and taxes and by cutbacks in Medicare, so federal budget deficits in the next 10 years would be $81 billion lower than now projected.”

My Comment:

Again, this adds more detail to my continual drum-beat on this blog that insurance is the heart of the problem. From AIG, to the reinsurance industry, to the WTC attacks, to health insurance, to securities risk insurance, to the new “impact-of-financial-crises-on-poor-people-in-the-third-world- insurance ” (bet you hadn’t heard of that one, but it’s in the works) that pretends to help people by taking the risk out of life.

That’s like drugging yourself to take the pain out of burning, and then cozying up next to a fire. It’s no more than cushioning the downside of bad economic or personal behavior. Which inevitably means – surprise – more bad economic or personal behavior. And then finally when the majority turn into bad actors, even the good actors have to go bad to keep up…..

We don’t need more government intervention in insurance. We need less of it. We need small, voluntary insurance pools. Pared down. Local. Community-based and private. As many and as various as possible, competing against each other. With strict safe-guards to prevent them becoming a racket for lobbyists, drug companies, doctors, and lawyers. Take away the cookie-jar and you’ll get rid of the sticky fingers.

Indian gold demand has perked up with the fall, looking forward to the Hindu light festival, Diwali, that takes place around now. But experts say that demand is down this year overall.

From The Singapore Business Times:

“India is the world’s largest consumer of gold, importing 400-800 tonnes of gold a year, according to various trade body estimates. But this year, high prices and the global economic meltdown have taken a toll on demand.

Ms Bhat [a top official of HDFC Bank] said that total imports at the end of this year could be half that of last year. World Gold Council’s (WGC) data shows that India imported 712.6 tonnes of gold last year.

HDFC is one of the 23 banks licensed to import gold and sell to traders and jewellers. Trade sources put it neck-and-neck with ICICI Bank for top position in the retail bullion segment, and one of the top 10 in the wholesale segment.”

— “India Awash In Foreign Investment” (October 15, 2009)

My Comment:

Note: ICICI Bank is the same bank that uses Penson Financial Services, as I blogged before. That’s the Penson that denies that its software is shown in the video posted by Matt Taibbi last week. The video supposedly shows software that enables naked shorting.

From John Pilger:

“Obama’s “showdown” with Iran has another agenda. On both sides of the Atlantic the media have been tasked with preparing the public for endless war. The US/Nato commander General Stanley McChrystal says 500,000 troops will be required in Afghanistan over five years, according to America’s NBC. The goal is control of the “strategic prize” of the gas and oilfields of the Caspian Sea, central Asia, the Gulf and Iran – in other words, Eurasia. But the war is opposed by 69 per cent of the British public, 57 per cent of the US public and almost every other human being. Convincing “us” that Iran is the new demon will not be easy. McChrystal’s spurious claim that Iran “is reportedly training fighters for certain Taliban groups” is as desperate as Brown’s pathetic echo of “a line in the sand”.

During the Bush years, according to the great whistleblower Daniel Ellsberg, a military coup took place in the US, and the Pentagon is now ascendant in every area of American foreign policy. A measure of its control is the number of wars of aggression being waged simultaneously and the adoption of a “first-strike” doctrine that has lowered the threshold on nuclear weapons, together with the blurring of the distinction between nuclear and conventional weapons.All this mocks Obama’s media rhetoric about “a world without nuclear weapons”. In fact, he is the Pentagon’s most important acquisition. His acquiescence with its demand that he keep on Bush’s secretary of “defence” and arch war-maker, Robert Gates, is unique in US history. He has proved his worth with escalated wars from south Asia to the Horn of Africa. Like Bush’s America, Obama’s America is run by some very dangerous people. We have a right to be warned. When will those paid to keep the record straight do their job?”

My Comment:

When? When they’ve done taken care of the truly dangerous folk. You know, Sarah Palin, Alex Jones, Lyndon LaRouche, assorted tea-partiers, home-schooling anti-vaccination moms, and anyone else who doesn’t snap their heels together and shoot off a stiff-armed salute fast enough to suit the oligarchs.

And then people wonder why, for a large part of the public, the media is the enemy.

Peace is that brief glorious moment in history when everybody stands around reloading.

–Source Unknown

Convincing.

Maybe it’s because the market is making me queasy, I didn’t watch the action today.

I know gold has broken out, to all appearances, but over the last several years, appearances have been knocked out of the ring more than once.

Walking Montevideo’s streets – even in the rain (and it’s been raining the past day or so) – takes my mind off all the feverish commentary from gold bugs and bashers – the sum total of which spells WE DON’T KNOW.

In the next few weeks, the break-out will either be confirmed or dispelled and then the lucky soothsayers will pat themselves on the back (and why not?), declare their genius, and make the rounds of the talking shows as the new Merlins of the Market. Reporters will get to shoot off snappy little missives about equities “plunging” or “soaring” or “sliding.” Each time the reason will be different. In between, we will have the entertainment of trying to pin the tail on the billion dollar donkey – Goldman Sachs. The donkey will kick occasionally and poor Matt Taibbi will get custard in his face for trying to educate the masses. And so it goes on.

Gold was said to be following the equity market and moving against the dollar. But then today the markets went to 10,000 and gold stumbled a bit, while the dollar index stayed low (mid 75’s).  If gold is the new money, that makes sense. It stayed down, like the dollar. What drives it? I’d say speculation, right now. When equities look solid, gold slips, along with money. At least, that’s my five minutes worth of tea-leaf reading. Tomorrow, gold will move against money, and then we can all go back to the old refrain about inflation expectations driving gold.

Onto other things.

Who said Montevideo was cheap? It’s not, though I hear Brazil is more expensive. A young pharmacist, struggling alone on the street with his three month year old daughter and my bad Spanish, gave me the lowdown. His electric bill was around $US200/mth. That’s for a man, his wife and two children. His food bill runs to about $US200/mth. His gas bill was around $US50. That’s the same or a bit more than many families in the US. And in Uruguay, $US500-$1000/mth is a good salary. So food is really about three times more expensive than in the US.

People are careful with the lights. Which I’m used to, from India.  Last night, my landlady Gabriela was groaning about the German woman who lived in my room last year. She ran a hot shower three times a day and used the hair dryer incessantly.  Gaby said she was going to switch to gas to heat the water. Gas is cheaper here.  She goes through 2-3 cans of gas a month for her space heaters and it comes to about a thousand pesos a month.

Montevideo has enough of a gay culture that someone can run a hotel catering to male couples, impeccably maintained and done up. Exposed brick, walls with stenciled designs, ikebana, polished wood, a flower garden, a kennel, and a tub on the terrace. It charges $50 a day for a couple, breakfast included. A good business.

Revitalize the inner cities? Just drop a squadron of gays into them.

And over at the Washington Times, Jeffrey Kuhner asks an incredible question (October 4, 2009):

“Mr. Ahmadinejad insists Tehran only wants atomic energy for “peaceful purposes.” Yet, he cannot answer one simple question: Why does a country with the world’s second-largest natural gas reserves and third-largest oil supply need domestic nuclear power?

The answer, Mr. Kuhner, is to avoid the fate of Iraq.