Quotes of the day

The tendency is to fit all facts into the format of a story, usually with a memorable protagonist, even when the reality is more complex.--Tyler Cowen

Let’s review how the real world works. In the real world, jobs are not magically “created” when some central planner in the Politburo decides everyone needs new shoes, windmills, solar panels, tiny electric cars, fluorescent light bulbs, recycled paper underwear, Rahm Emanuel action figures, or whatever. Jobs are created when consumers decide they want to spend money to buy stuff. That means that a) consumers have to have money to spend, and b) they have to be confident enough in the future of the economy to be willing to spend their money, and c) they have to be able to afford the stuff for sale.--Kenneth Green

What you need to understand about investing in gold is that you’re not really investing in gold. You’re investing against the U.S. dollar. It’s not that gold goes up, it’s that the value of a dollar goes down. Actually, it’s even more subtle than that. What you’re doing is you’re betting against the interest rate on the dollar. I know this sounds odd, but any currency you carry around in your wallet has an interest tied to it. That’s essentially what the currency is—that rate—and it’s the reason why anyone would want to use it. Gold can be seen as the way to keep all those currencies honest. ... Once Ben [Bernanke] and his pals at the Fed raise rates, gold is in for a world of hurt. The history of the price of gold is long boring periods with sharp dramatic spikes. The up part of the spike is fun. The downside, less fun. What’s tricky about gold is that it’s also impacted by geo-politics. Gold peaked in 1980 shortly after the Soviets invaded Afghanistan. It reached a low point not long before we did the same. ... This is a major difference between investing in equities and investing in commodities. Stocks are companies, filled with people aiming to make a profit. Gold is just a rock. It just sits there. In 10,000 years, it will still be a rock. My view is that the Federal Reserve will raise interest rates earlier than expected. I don't know exactly when that will be but it will put gold on a dangerous path. For now, my advice is to stay away from gold, either long or short.--Eddy Elfenbein

For the first time in recorded history, the moving 12-month sum of $227.6 billion of U.S. merchandise exports to Asia’s emerging market countries surpassed the… $223.7 billion of such exports to the European Union.--John Lonski

Until today, the rating agencies were holding their breath, hoping they might escape Congress' financial reform effort virtually unscathed -- until Sen. Al Franken (D-MN) made them gasp. His aggressive reform measure, which targets the ratings industry, passed today in the Senate by a vote of 64 to 35. One of the most substantial amendments to the reform effort to date, it will change the financial industry's process for obtaining ratings on asset-backed securities (ABS). The new legislation calls for every new ABS bond issue to have a rating by one agency assigned by a new board, instead of being chosen by the investment bank creating the security. The board will consist of mostly investors along with a few other industry participants. Although the underwriter can solicit additional ratings, it cannot escape the verdict of the assigned agency, so it cannot shop around for whichever agency has the most favorable view.--Daniel Indiviglio

The statistics are bleak: Twenty percent of Americans are frequent [lottery] players, spending about $60 billion a year. The spending is also starkly regressive, with lower income households being much more likely to play. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, or about 9 percent of all income.--Jonah Lehrer

Public sector unions ... are not going to let you hire a bunch of cheap workers and run crews without civil service protections. There's something ironic in the fact that the legacy of the New Deal is the inability to reproduce it. On the other hand, it's not so necessary, either. People are richer now, and though it isn't perfect, our financial regulation is better. We're not at much risk of people starving to death. So there's no urgent need to create low-skilled jobs for them to fill.--Megan McArdle

A course at Artillery School at Fort Sill in Oklahoma was shut down because the students, back from Iraq, knew more than the instructors.--David Brooks

You don't even have to be a lawyer to be on the Supreme Court, which I think is hilarious.--Shannon Bream

Technically, it is not illegal to be illegal in Massachusetts.--Martha Coakley

It used to be that whoever was elected as your president, even if he wasn’t the one you voted for, he was still your president. That doesn’t seem to be the case any longer.--Tim Keller

... in his sixteen months in office, Obama has overseen three times as many [umanned drone] killings as President Bush oversaw in his entire second term.--Tim Heffernan

Left-wing academics and student groups, who claim only to care about human rights, do not want to admit that they are in political bed with rabidly anti-Semitic Islamists, so they look the other way and pretend. What the leftists do not understand is that they are next. Don't believe me? Ask all the Iranian leftists who helped overthrow the Shah, if you can find their graves.--William Jacobson

In a series of studies using surveys that measure psychological entitlement and narcissism, University of New Hampshire management professor Paul Harvey found that Gen Y respondents scored 25 percent higher than respondents ages 40 to 60 and a whopping 50 percent higher than those over 61. In addition, Gen Y’s were twice as likely to rank in the top 20 percent in their level of entitlement — the “highly entitled range” — as someone between 40 and 60, and four times more likely than a golden-ager.--Brian Moore

A forthcoming study from Duke University has found that to match the dating success of a man one inch taller, a 5'9" man would have to make $30,000 a year more.--Jon Sobel

... the best choice for a woman is to marry a man of exactly the same age; an older husband shortens her life, and a younger one even more so.--Eric Barker

... an erection is like capitalism. We all know this in our hearts. The profit motive is pure. It schwings at profit and nothing else. It is the uncomplicated alternative to the murky motives of artists who paint for pennies, musicians who perform for love, teachers who work from dawn to dinner for a glimpse of the spark of learning, government bureaucrats with modest tortoise dreams of incremental social improvement, writers who — ... But let's not get into that. Here's the real mystery: If deficit spending and stimulus packages are such a threat to the economy's holy erection, why do the markets — which never lie, mind you — keep celebrating stimulus packages?--John Richardson

The big picture here is that risk, in Europe, is being replaced by uncertainty. The difference is that risk can be priced, while uncertainty can’t, and a market dominated by uncertainty is always going to be jittery and dangerous.--Felix Salmon

All that is gold does not glitter

From James Hamilton:

A 1991 research paper by Ben Bernanke and Harold James noted the very strong correlation between when a country abandoned the gold standard and when it began to recover from the Great Depression. The top panel above [Cav: not shown here] shows their calculations of the average annual growth of industrial production for the 14 countries that decided to abandon their currencies' gold parity in 1931-- they experienced positive growth in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.

As I pointed out in an article published in 1988, gold-standard advocates think in terms of an institution whose continued operation, once adopted, would never again be doubted. But the problem is, if you can go on a gold standard, then you can go off a gold standard. And uncertainty about if and when the latter will occur can make the system itself a very destabilizing force.

The flip sides of gold

Ambrose Evans-Pritchard writes:

Gold has no such limits. It hit $1300 an ounce last week, still well shy of the $2,200-2,400 range reached in the late Medieval era of the 14th and 15th Centuries.

This is not to say that gold has any particular "intrinsic value"’. It is subject to supply and demand like everything else. It crashed after the gold discoveries of Spain’s Conquistadores in the New World, and slid further after finds in Australia and South Africa. It ultimately lost 90pc of its value – hitting rock-bottom a decade ago when central banks succumbed to fiat hubris and began to sell their bullion. Gold hit a millennium-low on the day that Gordon Brown auctioned the first tranche of Britain’s gold. It has risen five-fold since then.

We have a new world order where China and India are buying gold on every dip, where the West faces an aging crisis, and where the sovereign states of the US, Japan, and most of Western Europe have public debt trajectories near or beyond the point of no return.

The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed never to do just months ago; and the Bank of Japan has just carried out two trillion yen of “unsterilized” intervention.

Of course, gold can go higher.

DISCLOSURE: I am short some GLD in the personal account. As stated above, gold has no intrinsic value. I am long PALL as a short term hedge (months), and SPY as a longer term inflation-outperformance hedge (years). I sold the GLD around 118, so its underwater, but the PALL and SPY have more than held their own so far.

Quotes of the day

Real eyes
Realize
Real lies.--Anonymous

... the insatiable love of riches is a desire that brings far more torment to the soul than their enjoyment brings refreshment.--Bernard of Clairvaux

If you think health care is saving your life, then it doesn't seeem outrageous for it to cost as much as your rent, or your car payment. But because the cost is disguised for so many people--hidden in employer accounts or taxes--people don't understand that it actually is quite costly. Especially in the individual market, where both adverse selection and very high administrative costs take their toll. So it may be that the people who we expected to be covered by the high risk pools either can't afford it, or won't afford it--simply won't pay what they think are outrageous prices. And yet neither of these explanations is very satisfying. People with disabling chronic conditions are indeed often too poor to afford health insurance, but they're also disproportionately likely to end up on disability and thus Medicaid. Certainly, I wouldn't be surprised to hear that uptake had been depressed by the pricetag of insurance in the individual market. But I don't think this explains why 98% of the potentially insurable population is missing.--Megan McArdle

How, then, does the Affordable Care Act magically convert $1 trillion in new spending into painless deficit reduction? It's all about budget gimmicks, deceptive accounting, and implausible assumptions used to create the false impression of fiscal discipline.--Douglas Holtz-Eakin, Joseph Antos and James Capretta

... most Americans don’t actually disagree strongly about whether we should have a stronger safety net or a more limited government. They think, in a vague and none-too-consistent fashion, that we should have both at once — low taxes and expensive entitlements, subsidies for me but not for thee, a go-go free market when G.D.P. is rising but a protective government ready to save us from our foolishness when the economy goes bad, and so on. ... The shouters are sincere, but they’re also strategic: Framing the choice in stark, apocalyptic terms can feel like the only way to persuade the vast American middle to sit up and pay attention.--Ross Douthat

I liken being a conservative at the NY Times to being chief rabbi at Mecca.--David Brooks

I am not sure how much the portraits of researchers are intended as positive, but overall I take away from [A History of Autism: Conversations with the Pioneers] the message that many of them are arrogant and also partially incompetent.--Tyler Cowen

The New England Journal of Medicine and 13 other research publications may force scientists who submit studies to disclose payments from hedge funds in the wake of insider-trading probes involving a drugmaker and technology companies.--Alex Nussbaum

... lawyers themselves prevent bankers from saying anything. Bankers' public disclosure documents and courtroom testimony read like Vogon VCR manuals for the simple reason that all substance, spirit, and fact has been thoroughly and religiously bleached out of them prior to their release by an army of lawyers: bankers' in-house lawyers, client counsel, and even attorneys on the other side of the deal. ... If the world were not populated with flesh-eating securities litigators chomping at the bit to prove malfeasance because a banker was caught on record alleging the sun is hot, we bankers wouldn't have to wrap our every public utterance in 50 pounds of cotton wool. Physician, heal thyself.--Epicurean Dealmaker

The reason Hu Jintao decided to visit the U.S. this month is that the Chinese leader wants to know when the U.S. economy and its currency will be stable and strong again. It’s good the Chinese are known for patience because Hu may have to wait a while. At least that’s the view according to John Taylor, a Stanford University economist who has influenced Federal Reserve policies in the past. Fed officials often refer to the Taylor Rule, a formula devised by Taylor that shows how a central bank should manage interest rates in response to inflation and other data. At a recent joint lunch of the American Economics Association and the American Finance Association, Taylor, a Treasury undersecretary in President George W. Bush’s administration, delivered a second, equally interesting, rule. Taylor Rule II doesn’t have math. And it doesn’t say what the Fed should do. It predicts what the central bank will do. Taylor says a period of less Fed intervention and stable strong growth will come, along with a strengthening dollar. But by the time this happens, Hu, now 68, might be approaching 80.--Amity Shlaes

There has been a recent upswing in conservative articles discussing the idea of going back to some sort of gold standard. I don’t think people realize how dangerous this idea is. You can’t just “give it a shot” and see how it works out. It’s like marrying the daughter of a Mafia chieftain–you need to be very sure you are willing to commit. A true gold standard (not Bretton Woods) allows Americans to buy or sell gold. If you are not 100% committed to staying on gold, but instead hint you might devalue the dollar at some point, people will dump dollars and buy gold. The increase in demand for gold will raise its value, or purchasing power. This is deflationary under a gold standard, where the nominal price of gold is fixed.--Scott Sumner

The Wilders trial has also inflamed feeling everywhere in Europe about the place of Islam in European society. In France, the burqa has been banned; in Switzerland, the prohibition of new minarets was passed by referendum; in Sweden, the results of the elections last September were called a “catastrophe” by Muslim leaders because of the gains of the Swedish Democrats, an anti-Islamic party; in Germany, a party officially “inspired” by Wilders’s Freedom Party has been organized. Almost certainly, then, the Wilders trial backfired, and not just in Holland. Yet this may only be the beginning. Now that new trial judges will be appointed, it is possible that new witnesses—such as Mohamed Bouyeri, the murderer of van Gogh—will testify, verifying Wilders’s claim that Islam is a fascist political ideology rather than a religion. Not only Wilders but Islam itself may thus stand trial in Holland. Opponents of Islamism have long said that the trial should never have been held in the first place; but apologists for Islamism may come to regret that they ever pressed for it.--Thierry Baudet

... a student who entered college in the 50th percentile of students in his or her cohort would move up to the 68th percentile four years later -- but that's the 68th percentile of a new group of freshmen who haven't experienced any college learning.--Scott Jaschik

I started a garden last summer. It went to weeds, and then the weeds grew parched under the relentless Kansas sun, and then they withered and died. I traveled more than I’d anticipated, and when I was home other things competed for my time, if only fatigue. I think on that garden and I fear it will be my fatherhood — ground broken with good intentions, but scorched and barren all the same. All we parents begin with dreams of what our lives will mean. We dream that our children will be healthy and safe, that they will learn good things from us, that our God will be their God. We dream that when they are older they will be people we like, and that they will in turn want to be near us. Lately I have wrestled with bouts of panic. I fear I am too far behind, already, in this father’s race.--Tony Woodlief

... find the simplest title not yet taken for your papers. One word titles are the best. Second, before you get started on a paper, think about the title. If you can’t come up with a short title for it then its probably not worth writing.--Jeff Ely

Why aren't there more gold shorts out there?

I'm the only one that I've talked to that is short. Everyone else that I've talked to is either long, or neutral and trying to talk me out of the short.

Although my short is a hesistant one: I'm longer PALL than I am short GLD.

Don't want to be short metal right now. If I'm going to be long a metal, than I guess it should have some industrial use and intrinsic value (which gold does not).

Megan says:

In the event that the US economy melts down so far that buying gold was a good alternative to holding US dollars, then buying canned goods, ammunition, and medical supplies was an even better alternative to gold. The only scenario I can think of in which it makes sense to stockpile a lot of gold is one where you and your household goods are unexpectedly teleported into the sixteenth century. If you worry a lot about this, then by all means, stockpile gold. But you should also probably take the precaution of stockpiling antibiotics and how-to books on dentistry.

Scarcity of gold bears

I am slightly bearish on gold, and am constantly looking for less lukewarm sellers.

Eddy Elfenbein notes that Roubini is a gold bear, and Schiff is a super bull.

I think that the "smart money" is:

1. seeing dollar devaluation and projecting significant future inflation in dollar denominated assets
2. finding gold to be the best pitstop to exchange dollars
3. hoping that gold does not crash as fast as inflation explodes

It feels too risky for me to jump on the bandwagon. Plus, I just found out today that some gold ETFs are taxed as collectibles (28% long term cap gains) vs. 15% on financial assets.

Quotes of the day

Celebrity is what a democratic society has instead of aristocrats.--John Leonard

I knew there were only two choices available for preacher’s daughters: the ingenue or the femme fatale. Extreme ends of the spectrum to be sure, but in my experience, when it comes to stereotypes, Christians don’t do halfway.--Janna Barber

First, you decide what you want specifically; and second, you decide if you're willing to pay the price to make it happen, and then pay that price.--Nelson Bunker Hunt

[My father] worked because he came from nothing and took pride in the Something he’d built, and to this day when he gets behind the wheel of one of his enormous trucks and drives it hither, drives it yon, it all surely goes back to being a 14-year-old kid who was sent to a farm miles away to work for the summer for no money, just food and a cot, to take the pressure off the rest of the family.--James Lileks

Ineffective sanctions, effective job destruction. An unaccountable branch of the US government hurts poor people far away who have no voice in US politics. Deeply saddened…we don’t know what more to say.--William Easterly and Laura Freschi

The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.--Winston Churchill

Truthfully, my career aspiration is to prove that a drug with more than a billion dollars in annual sales is actually killing Americans and citizens across the globe, that in the clinical trials the dangers of this drug were revealed, and that the executives knew about the dangers and went ahead and marketed it anyway.--Harry Markopolos

... he has some amount of Asperger's, which means he has trouble seeing things from other's perspectives. Thus, everyone who disagrees with him is 1) an idiot or 2) evil. He can't imagine it otherwise.--Eric Falkenstein

It's very strange to hear gold standard advocates criticize President Hoover for imposing steep tax increases in 1932, the Depression's worst year. Yet the gold standard they champion was the reason for the tax increases they deplore. ... The punch line to one of my favorite anecdotes goes, "Son, your answers are so old, I have forgotten the questions." Has the Depression receded so far into history that the answers that once plunged the nation into misery can possibly look credible again?--David Frum

I think those people who say they believe in a gold standard are fundamentally being very anti-libertarian because what they mean by a gold standard is a governmentally fixed price for gold.--Milton Friedman

"Fixing the system" in reality means acknowledging with distaste the durability of this culture and insulating its systemic impact. The casino is not going away and the Volcker rule tacitly acknowledges this: prop trading and other supposedly nefarious activities are not to be castrated, just rehoused. The Goldmans of the world may be broken up but their vampire calamari offspring will still suck your face off somehow if you are inclined to engage them. Your call. As long as there is a strong enough narrow banking system, let the casino keep its doors open. Caveat emptor. --Andrew Clavell

It's worth adding that government policies like community rating and mandated benefits exacerbate adverse selection, and government-provided care and insurance exacerbate moral hazard. We should also cast a skeptical eye on the Samaritan's Dilemma -- that is, the willingness of the citizenry to provide care for people who can't or won't provide for themselves, which encourages free-riding. While this is a real issue (as are the other three cited inefficiencies), what is its magnitude? The Report says uncompensated care for the uninsured was $56 billion in 2008. That sounds like a lot. But the Report also says (elsewhere) total expenditures on healthcare in 2009 were $2.5 trillion. Assuming the 2008 and 2009 numbers are relatively close, we can do the math and conclude that uncompensated care for the uninsured is less than 3% of all health expenditures.--Glen Whitman

Rep. Alan Grayson (D-Fla.), who made his substantial fortune by suing military contractors and later lambasted them as a lawmmaker, was indeed evacuated from Niger by personnel working for Xe Services (the private security empire formerly known as Blackwater), his spokesman confirms.--David Schulman

Sartre, perhaps the most omnivorous and omnipresent of the 20th-century philosophers, is the subject of Roudinesco’s second chapter, ‘Psychoanalysis on the Shadowy Banks of the Danube’, which details Sartre’s foray into film-making: his abortive collaboration with John Huston on a screenplay about Freud. Roudinesco begins by situating Huston’s choice of Sartre as screenwriter within the context of America’s hygienisation, medicalisation and corruption of psychoanalysis. Apparently, the one oasis in America where ‘emigrants from old Europe’ sustained the ‘high tradition’ of Freudian analysis was Hollywood, which Roudinesco represents as a European-operated machine for ‘criticising the ideals of the American way of life’. Huston, although an American – or ‘American born’, as Roudinesco charitably puts it – decided to make a movie about this Freud: the European, anti-American one. Another way of looking at it would be to say that Huston, following the great American biopic tradition, wanted to make a movie about how Freud became Freud. But in either case Sartre, the pre-eminent and ultra-European philosopher of becoming, was an ideal choice. He completed a 95-page screen treatment in 1958. The protagonist of Sartre’s script was Freud the young neurologist, who had reached a ‘desperate impasse’ in his treatment of Anna O. and in his theory of the sexual etiology of hysterical neurosis. For the part of Anna O., incidentally, Sartre had his eye on Marilyn Monroe, who was discouraged from taking the role by Anna Freud and by Monroe’s own psychoanalyst, Marianne Kris, whose father had been Freud’s tarot partner.--Elif Batuman

Call of Duty: Modern Warfare II is perhaps the most financially successful package of entertainment ever. Developed by Infinity Ward, the game did $310 million worth of sales in its very first day. By comparison, the current movie blockbuster Avatar did a measly $27 million on day one. But another comparison might be even more appropriate illustration of the phenomenon of militainment and how the American public’s interface with war is changing. Roughly 70,000 young Americans chose to join the U.S. Army in 2009. By contrast, 4.7 million chose to spend Nov. 11, 2009, playing this video game version of war at home, most of them not even realizing it was Veteran’s Day. --P.W. Singer

It’s hard to argue that George Bush looking up your library records is more of an infringement on personal rights than the Obama administration having full access to your cell phone records.--Dennis Shiraev

The Economist is surprised that Barack Obama’s administration has gotten so little done in its first year. It has no major achievements — not one. I am not surprised at all. That is what I expected to happen. In the past the American public have had the wisdom to not elect serving members of congress. Kennedy was the only other serving member of Congress elected to the Presidency in the 20th century. The US public has always valued experience in executive roles. They usually elect vice presidents (Bush, Johnson, Trueman, Coolidge, Theodore Roosevelt, etc.) or Governors (Bush, Clinton, Carter, Nixon, Franklin Roosevelt, Wilson, McKinley, etc.) or military leaders (Eisenhower, Grant, Taylor, Jackson, Washington, etc.). This is important because vice-presidents, governors and five star generals have an established leadership team. They arrive in Washington ready to rule. They have the team and they have the experience in wielding executive power needed to put their agenda into action. Barack Obama arrived in Washington with his campaign team. He had no executive experience (none) and no leadership team. All he had was his campaign. That explains why he has never stopped campaigning and fully focused on ruling. That explains why he handed over key legislation to Congressional Democrats; in particular the health reform and the stimulus package, instead of proposing and championing his own plans.--Sam Wylie

Barack Obama may not realize it, but I may have just helped save his presidency. How? By winning a drawn-out fight to protect his powers as commander in chief to wage war and keep Americans safe. He sure didn't make it easy. When Mr. Obama took office a year ago, receiving help from one of the lawyers involved in the development of George W. Bush's counterterrorism policies was the furthest thing from his mind. Having won a great electoral victory, the new president promised a quick about-face. ... Why bother fighting off an administration hell-bent on finding scapegoats for its policy disagreements with the last president? I could have easily decided to hide out, as others have. Instead, I wrote numerous articles (several published in this newspaper) and three books explaining and defending presidential control of national security policy. I gave dozens of speeches and media appearances, where I confronted critics of the administration's terrorism policies. And, most importantly, I was lucky to receive the outstanding legal counsel of Miguel Estrada, one of the nation's finest defense attorneys, to attack head-on and without reservation, each and every one of OPR's mistakes, misdeeds and acts of malfeasance. I did not do this to win any popularity contests, least of all those held in the faculty lounge. I did it to help our president—President Obama, not Bush. Mr. Obama is fighting three wars simultaneously in Iraq, Afghanistan, and against al Qaeda. He will call upon the men and women serving under his command to make choices as hard as the ones we faced. They cannot meet those challenges with clear minds if they believe that a bevy of prosecutors, congressional committees and media critics await them when they return from the battlefield. This is no idle worry. In 2005, a Navy Seal team dropped into Afghanistan encountered goat herders who clearly intended to inform the Taliban of their whereabouts. The team leader ordered them released, against his better military judgment, because of his worries about the media and political attacks that would follow. In less than an hour, more than 80 Taliban fighters attacked and killed all but one member of the Seal team and 16 Americans on a helicopter rescue mission. If a president cannot, or will not, protect the men and women who fight our nation's wars, they will follow the same risk-averse attitudes that invited the 9/11 attacks in the first place. Without a vigorous commander-in-chief power at his disposal, Mr. Obama will struggle to win any of these victories. But that is where OPR, playing a junior varsity CIA, wanted to lead us. Ending the Justice Department's ethics witch hunt not only brought an unjust persecution to an end, but it protects the president's constitutional ability to fight the enemies that threaten our nation today.--John Yoo

You should never spend that kind of money on car repairs for a 10 year old car. Just dump it and buy a new one or a newer one. It's a sunk cost. You own the Eddy Curry of cars right now.--Bill Simmons

PIMCO halves its gold holdings

I can tell you that we had an allocation of gold in our multi-asset products, and we've halved it recently. We still think it makes some sense to have an allocation to gold, but not as much as we used to. I would wait and see how the deleveraging process plays out. I think that if the world de-levers further, which is not immaterial, then gold will be hit.--Mohamed El-Erian

I leaned the same way, 4 weeks ago, and I am short some GLD in the personal account.

Gold Buying by Central Banks May Send Signal to Sell

Some of the biggest buyers of gold may be sending the strongest signal to sell it, if past performance is indicative of future results.

Central banks, holding about 18 percent of all gold ever mined, are expanding their reserves for the first time in a generation as a nine-year bull market drives prices to a record.

The banks will buy 13.8 million ounces (429 metric tons) this year, worth $15.5 billion, for the first net expansion in reserves since 1988, New York-based researcher CPM Group estimates. Gold fell 15 percent that year and took another 15 years to trade again at the same price as central banks from Switzerland to the U.K. cut their holdings.

Gold buyers beware

Via Joe Weisenthal, Matt Stiles talks about why gold may not be a great hedge against possible inflation. In sum:

1) Money and Credit are similar, but not the same thing
2) Central banks control only a portion of the money supply
3) Demand for US Dollars should continue to exceed demand for gold

Previous gold warning here.

UPDATE: Eddy Elfenbein sums it up in a picture:

The Gold Bubble

is popping.


I warned about the value of gold last year, as well as responding to the bears (who consume gold like salmon) in 2006.

UPDATE: Yay, Felix agrees, although he thinks it's a volatility thing. Me, I think it's a lack of real demand, save for folks in India.

Is gold money?

No, it is a precious metal.  At the 4:59 mark.



Shells were used in ancient China. Let's use shells, as its got a longer chart than gold, Representative Paul.

For a (relatively) light read on monetary shocks, the Depression and the gold standard, I like this piece by Scott Sumner.

Reasons why the gold standard is substandard

by Megan McArdle:

In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the government's ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it.

She goes onto the 7 Fisks of Ron Paul's speech; here are the first two:

1. The Federal Reserve destabilizes the economy with its "boom and bust" monetary policy. This is hard to square with the fact that the longer the Federal Reserve has been in existance, the more stable the economy has been. Dr. Paul's words strongly imply that he believes that there was no business cycle in the 19th century, which is untrue; as best we can tell, recessions were much longer and deeper before America had a central bank.

2. Americans don't save because they're afraid inflation will erode their savings. This is daft. Moderate inflationary expectations are built into the interest rates that banks offer. After thirty years of stable monetary policy, a good portion of the population doesn't even remember high inflation, and the ones that do are mostly retired and spending down their savings. Americans don't save because . . . well, have you tried the Wii? It's awesome.

Some of my previous posts on the subject.

Quotes of the day

The tramp is freer than president or king, but his freedom is his undoing. While he lives he remains socially sterile and when he dies he leaves behind him nothing to make the world glad he lived.--A.W. Tozer

... trying to invest like "Warren Buffett" is among the stupidest things anyone can do with their money. Buffett is a freakish outlier whose success no one can explain. Stock picking is a losing game for most people, whether over the long or short term. No amount of meticulous research will allow you to consistently outsmart the market. And that's the key to value investing. To invest like Warren you have to consistently outsmart the market, or at least outsmart the market to such a large degree that it overwhelms the times the market outsmarts you.--John Carney

What we witnessed was truly a perverse form of competition. [Visa] competed on the basis of raising prices. What other industry [besides debit cards] do you know that gets away with that?--Ronald Congemi

... we’d probably do better to isolate the worst kids in their own school or work hell; they’d be worse off but the gains to other students would more than compensate. At the other end of the status spectrum, the number of new businesses we get seems limited by the number of folks personally wealthy enough to start new businesses. So having more really rich folks benefits everyone via innovation.--Robin Hanson

I graduated law school in 2003, owing Harvard University just under $150,000. At the time, I had no idea what starting my professional career $150K in the hole would do to my life. I figured I’d work hard, make money, and I’d pay my loans out of my general non-disposable income funds — kind of like my cable bill. Seven years, two careers, numerous deferments and defaults, and one global economic meltdown later, I still owe a ton of money. Now, however, I pay it to various debt collection agencies and lawyers. When prospective landlords run a pro forma credit check on my application, they come back looking at me like I’ve been convicted of multiple war crimes. Every raise I’ll ever get will be eaten up by the collection agencies until sweet death allows me one everlasting and satisfying default. And, oh yeah, I don’t even want to practice law anymore — I quit my Biglaw job because, despite the debt, I really wanted to have a job that I enjoyed. So I essentially purchased a $150,000 disposable good. My time working in Biglaw was kind of like a very expensive vacation that I debt financed. ... Let me get this straight, you owe six figures and yet 32% of you “planned” to get a job paying in the low five figures? That was your plan all along? Wow. That sounds even worse than my retirement plan of winning the lottery.--Elie Mystal

I deliberately tried to write my post to avoid remarks directed at raising or lowering the relative status of the commentators, a good overall habit (which I don't always follow and which hardly any commentators on other blogs seem to follow). --Tyler Cowen

[Harry Reid] was wowed by Obama's oratorical gifts and believed that the country was ready to embrace a black presidential candidate, especially one such as Obama - a ‘light-skinned’ African American ‘with no Negro dialect, unless he wanted to have one,’ as he said privately. Reid was convinced, in fact, that Obama's race would help him more than hurt him in a bid for the Democratic nomination.--Mark Halperin and John Heilemann

I deeply regret using such a poor choice of words.--Harry Reid

Widely cited health-care economist Jonathan Gruber, a professor at MIT, accepted money from the federal government at the same time he advocated for reforms proposed by the Obama administration.--Aleksandra Kulczuga

Michael [Belongia] starts off with some interesting anecdotes about how Fed chairmen often abuse their powers. In one case he discusses how Greenspan used to do an end run around the FOMC, so that he could get his preferred fed funds target (and make it look almost unanimous), even if a number of FOMC members were initially opposed. Another example involves Volcker vetoing the choice of monetarists like Lee Hoskins and Jerry Jordan for the position of regional Federal Reserve Bank presidents. The view from the inside is not pretty. He then does a really nice job of explain why fed funds targeting often ends up being procyclical, pouring fuel on the fire.--Scott Sumner

So we ought to tax bank profits because . . . GM is losing money just like everyone said it would. I am all for regulation which prevents banks from taking on too much leverage--or encouraging others to do so by offering stupid loans. I would very much like to find a system of financial regulation which results in a financial structure that isn't so utterly dominant (and bloated) as it has been for the last two decades. But I'm failing to see why the banks in particular--or rather the customers of the banks who will enjoy higher fees and lower interest rates--ought to bear the financial cost of the Administration's ill-advised bailout of the UAW.--Megan McArdle

The United Nations is a pain in the butt. It pays no taxes and annoys hard-working New Yorkers with its sloth, pretensions and cavalier disregard for traffic laws. The place is a sinkhole dominated by anti-American, anti-Semitic and authoritarian fantasies. It is far from the elegant crown jewel that celebrated the U.S.'s global ascendancy after the Second World War.--Joel Kotkin and Robert J. Cristiano

[Edward Castronova] was stunned to discover that the EverQuest platinum piece was worth about one cent US—higher than the Japanese yen or the Italian lira. With that information, he could figure out how fast the EverQuest economy was growing. Since players were killing monsters or skinning bunnies every day, they were, in effect, creating wealth. Crunching more numbers, Castronova found that the average player was generating 319 platinum pieces each hour he or she was in the game—the equivalent of $3.42 (US) per hour. “That’s higher than the minimum wage in most countries,” he marvelled. Then he performed one final analysis: the Gross National Product of EverQuest, measured by how much wealth all the players together created in a single year inside the game. It turned out to be $2,266 per capita. By World Bank rankings, that made EverQuest richer than India, Bulgaria, or China, and nearly as wealthy as Russia. It was the seventy-seventh richest country in the world. And it didn’t even exist. Castronova sat back in his chair in his cramped home office, and the weird enormity of his findings dawned on him. Many economists define their careers by studying a country. He had discovered one. ... Barely a few months later, Castronova’s paper became the most downloaded paper in the [SSRN] entire database—beating out works by dozens of Nobel laureates. Today, it’s still in the top three. ... Ultima programmers soon fixed the [counterfeit gold] bug. But then they had a new problem: how do you drain all the excess gold out of the economy and bring prices back to normal? They hit upon the idea of creating a rare type of red hair dye and offering it for sale in small quantities. It had no real use but, because it was rare, it became instantly popular and commanded an enormous price—which leached so much gold out of the system that inflation subsided. But the programmers had to meditate for hours on what possible side effects their “fix” might have.--Clive Thompson

Quotes of the day

Pickup artists [are] the girliest of men.--Megan McArdle

The purpose of [pickup artist] strategies is to substitute a relatively standardized routine for wit, apathy for confidence, and then bugger off before the woman realizes your greatest accomplishment in life is a level 60 orc shaman. The Game, in other words, basically just tells you how to fake it. Which is fine when you're in college or just starting out and haven't had time to do anything yet. But as a schtick, it really wears thin as time passes. ... The Game is the mental/social equivalent of breast implants. Superficially appealing, especially to the less experienced, but ultimately inferior to the real thing.--DavidBN

... sexually unrestricted men and women, compared to sexually restricted individuals, were better able to discriminate between these actual and deceptive signals of receptivity for female targets.--Personality and Individual Differences, Volume 47, Issue 7, November 2009

... men's benevolent sexism was associated with greater relationship motivation and greater investment in romantic ideals and family.--Psychology of Men and Masculinity, Volume 10, Issue 1, January 2009

... gratitude, controlling for materialism, uniquely predicts all outcomes considered: higher grade point average, life satisfaction, social integration, and absorption, as well as lower envy and depression. In contrast, materialism, controlling for gratitude, uniquely predicts three of the six outcomes: lower grade point average, as well as higher envy and life satisfaction.--Journal of Happiness Studies (11 March 2010)

When it comes to part-time work, the gender wage gap goes the other way: Women generally out-earn men.--Catherine Rampell

Make sure you pay my taxes on time.--Genevieve Huebsch Gratz, Ken Griffin's grandmother

So why do we trust hospitals so much more than car drivers?--Robin Hanson

It takes a lot to spook the solid old gold market. But when it emerged last week that one or more banks had lent 380 tonnes of gold to the Bank of International Settlements in return for foreign currencies, there was widespread surprise and confusion.--Rowena Mason

The U.S. had a $4 billion trade surplus in agricultural products with China in the first four months of 2010, helping shave the total deficit to $71 billion in the period. The U.S. is the world’s largest exporter of soybeans and cotton, commodities for which China is the world’s top importer. Exports “exploded” after China’s 2001 accession to the World Trade Organization, says the US Department of Agriculture. Growing livestock and textile industries have stoked demand for animal feed and fiber.--Gregory Meyer and Leslie Hook

Acting as budget director during the economic boom of the late 1990s was a bit like handling a state-of-the-art yacht in still water. Managing a budget that's bursting at the seams to keep the economy on track while half of Congress screams about the deficit will be more like windsurfing a South Pacific typhoon.--Derek Thompson

Maybe [Robert] Reich is right, but he can only be right if economics is wrong. The marginal product of labor must be a fiction. George must prefer unemployment to working as a contractor. Allowing workers to choose higher pay instead of government mandated protections must be a dangerous illusion of liberty. And if he's right, then hundreds of millions of pages of paternalism actually are necessary to trump the free will of 300 million Americans. But don't kid yourself, cowboy, because regardless whether that story is right, it's the story that rules.--Tim Kane

By 1875 fully one-third of federal revenues came from the beer keg and the whiskey bottle, a proportion that would increase in the years ahead and that would come to be described by a temperance leader in 1913, not inaccurately, as "a bribe on the public conscience." ...it would be hard enough to fund the cost of government without the tariff and impossible without a liquor tax. Given that you wouldn't collect much revenue from a liquor tax in a nation where there was no liquor, this might have seemed like an insurmountable problem for the Prohibition movement. Unless, that is, you could weld the drive for Prohibition to the campaign for another reform, the creation of a tax on incomes.--Daniel Okrent

The first stage was for the Panel to determine that the [Climategate or Climatequiddick] e-mail enquiry was not really about the e-mails – it was about what the accused, in the event, achieved. The e-mails evidenced the “guilty mind” and prospective conduct of the conspirators. By moving away from the content of the emails they then suggest that the intent of the conspirators became irrelevant. This is a well recognised and rarely successful ploy. If you shoot at a man with malice and miss the consequence of your malice is mitigated, but not its criminality. The Panel, in the absence of any permitted challenge, have equated absence of success to absence of malice.--Bob Denton

I think [President Obama] should have been more firm with those on the other side of the aisle. He is a person who doesn't like confrontation. He's a peacemaker. And sometimes I think you have to be a little more forceful. And sometimes I don't think he is enough with the Republicans.--Harry Reid

Harry Reid, having voted for the war before he was against it, having claimed he was misled when in fact he was derelict in his duty to review available information, having called General Petraeus a liar and then declared the war lost and the surge a failure, and having clung to that position in the face of the obvious success of the surge, has not learned his lesson.--William Jacobson

Harvard historically has no problem with raging comsymps, though an actual deep-cover Russian agent may push the bounds of even Harvard’s famous tolerance for America-bashing.--Jules Crittenden

Since the early 1990s, both medievalists and electronic media theorists have pointed to the hypertexted quality of medieval illuminated manuscripts in making complementary claims: medievalists to continuing cultural relevancy and electronic media theorists in continuity to literary tradition. The medieval books we admire so much today are distinguished by the remarkable visual images, in the body of a text and in the margins, that scholars have frequently compared to hypertexted images on internet “pages.”--Elizabeth Drescher

Church is the child tasting bread, the man stooping low, the cloud of witnesses who for once are not weeping at what we have made of things, the sudden realization that all of it is true, the parts we yearn for and the parts we dread and the parts we ignore or twist to fit our tiny theologies — all of it is true, and it is true the way your fury and love and secret shames are true.--Tony Woodlief

Careful shorting that US Dollar

Goldman stops out of its short gold trade, and takes some significant losses. As awful as things are here, they are worsening faster elsewhere.

Here are a couple posts from November, one on value relative to gold, and another from China's perspective, both fretting over the possibility of short the USD.

Of course, Goldman struck first. We'll see who laughs last.

Personal finance wisdom

Great interview of financial advisor Less Antman (via David Henderson). Read the whole thing; here are a few tidbits:

Eventually, I found a sure-fire timing strategy involving naked option writing and reliance on the Elliott Wave, which made money like clockwork until October 19, 1987, on which day I managed to lose everything I had accumulated in my entire adult life except for my IRA.

Commodity futures have a strongly negative correlation to stocks over intermediate time frames, and are the only equity investments with such a relationship. ... I wasn’t that enamored of commodity futures initially, because I confused them with commodities, and didn’t realize the critical differences (gold futures and gold are not identical investments).

I think at least 80% of someone’s long-term assets belong in set-it-and-forget it lazy portfolios. For those who want to try and beat the market with timing or trading, put up to 20% in a trading account and have a blast, but only if you actually ENJOY doing it.

I started out a Graham and Dodd stock picker, became a market timer, and then a committed diversifier, all before starting to manage other people’s money for a fee. The main changes in my strategy have been tax-motivated, as I started developing individual stock strategies that actually produced higher after-tax returns than index funds, especially for clients with other gains needing offsets, and later I started using margin, but only to the level needed to offset investment income, so that expected returns stayed about the same but income taxes diminished further.

It takes patience to be a saver, patience to accept the uncertainties of equity investing, patience to diversify and give up the possibility of a quick killing, and patience to wait the several years it takes before equities become as close to a sure thing as you’re likely to find in the real world.

And here are Antman's top financial mistakes:

The most serious non-investing financial mistake, bar none, has involved the choice of living quarters. This is related to my difficulty in bringing down the spending of some clients, because they committed to houses that were too expensive, or bought when they should have rented, or rented luxury apartments in the best areas when they should have lived in a slum next to a pig farm. Many people now facing foreclosure will find out it was the best thing that ever happened to them.

Going without disability insurance is second on my list, since disability is the one event that can truly destroy a person’s life, and disability insurance is the one insurance that can become impossible to obtain after a single incident involving illness or injury, so delaying can mean never obtaining it.

Doing their own tax returns is third. While not a problem for the simplest situations, there are things I’ve learned from my client’s tax preparer that I never would have learned from them, and people constantly miss deadlines for filing, contributions, and estimated payments because they insisted on doing it themselves. By the way, I don’t prepare tax returns for clients anymore.

Carrying credit card balances, not maxing out on tax sheltered savings opportunities, not spending $40 and a few hours at the computer to prepare some basic legal documents, buying cash value life insurance and variable annuities when not appropriate, and buying an SUV just to have a bigger purse, have all cropped up from time to time.

Chart of the last 3 decades: Inflation adjusted Gold, S&P 500, and US Dollar

Source here.

A couple of takeaways: don't keep dollars in your mattress, and don't be a long term holder of gold.

Quotes of the day

The [European] Commission's Statement of Objections reveals a profound misunderstanding of both database competition and open source dynamics. It is well understood by those knowledgeable about open source software that because MySQL is open source, it cannot be controlled by anyone. That is the whole point of open source.--Oracle Corp

Several factors led the [Antitrust] Division to conclude that the proposed transaction is unlikely to be anticompetitive. There are many open-source and proprietary database competitors. The Division concluded, based on the specific facts at issue in the transaction, that consumer harm is unlikely because customers would continue to have choices from a variety of well established and widely accepted database products. The Department also concluded that there is a large community of developers and users of Sun’s open source database with significant expertise in maintaining and improving the software, and who could support a derivative version of it.--U.S. Department of Justice

Just because some of your investors and outside fund managers think you might be at least a little bit dirty, doesn't mean you are. And no one has ever produced any incriminating evidence or substantiated allegations against SAC. So we're inclined to side with Stevie Cohen here. For all we know, SAC is the cleanest hedge fund ever.--John Carney

The paper concludes that the probability of default by the GSEs [such as Fannie Mae] is extremely small.--Joseph Stiglitz, Peter Orszag, Jonathan Orszag

Larry, gatt schmatt!--Michael Dukakis, to Larry Summers, in 1988

Expected future NGDP is the most powerful force affecting nominal interest rates; both the inflation component and the real component. Under NGDP targeting both the money supply and nominal interest rates would probably be far more stable than under current policy. ... If we went back to pegging the price of gold (which I don’t recommend) both the nominal and real price of gold would become much more stable. When you target NGDP along a given trajectory, both real and NGDP will become more stable.--Scott Sumner

Increasingly when I bother to watch the news I come away feeling like the world is not en route to hell, but has already arrived at the bottom floor.--Tony Woodlief

But I'm as inclined to believe that presidents claim these magical powers [such as 'creating or saving jobs'] because voters demand them, as that the causality runs the other way.--Megan McArdle

The complexity of today's economy means that old-fashioned Keynesian policies will not restore full employment. Pump-priming and stimulus policies are a good fit for a manufacturing economy with homogeneous labor affected by temporary layoffs. They are not such a good fit for a post-industrial economy with an educated labor force facing permanent structural changes.--Arnold Kling

In 1950, 59% of U.S. corporate profits were from manufacturing; 9% from financial activities. During the past decade (2000 -2008), 18% of profits were from manufacturing and 34% from finance.--Frederick Sheehan

I am in the category--white men ages 25-44 with a college degree-- with almost the very lowest unemployment rate (3.9%). Just to compare, as pointed out in the comments, black males 15-24 without a high school degree have an unemployment rate of 48.5%.--Alex Tabarrok

I've always had a fear of financial insecurity, and for good reason. And I have never found fortune to favor me whether I was in my bravest moment or my darkest cowardice. Until now. Suffice to say, dude, I'm not paranoid anymore. I'm not fearful. It's interesting to be surfing this tremendous crisis of capitalism — and I know there's a coral reef under me and I don't want to hang ten, but I do think that when you're in the pole position, that's when you try to beat your best personal time. ... There's a plan. What do they say, though — if you want to make God laugh, tell him your plan.--Robert Downey Jr.

College attendance, in my view, is usually a drain on our economy and society. Encouraging talented people to spend many years in wasteful status contests deprives the economy of millions of man-years of output. If this were really an "investment," of course, it might be worth it. But I see little connection between the skills that students acquire in college and the skills they'll need later in life.--Bryan Caplan

Given the projected explosion in both Social Security/Medical costs, there really isn't an answer other than: more work, less retirement.--Joe Weisenthal

As long as doctors and hospitals are paid for each extra test and treatment, they will err on the side of more care and not always better care. No doctor or no single hospital can change that. It requires action by the government.--David Leonhard

Hogwash. To see why, change just a few words in the above quotation: “As long as sales people and clothing stores are paid for each extra necktie and nightie that they sell, they will err on the side of more selling and not always better customer service. No salesperson or single clothing store can change that. It requires action by the government.” Make sense? Of course not. The problem isn’t fee for service; it’s subsidized payments by third-parties. The result for medical treatments is no different than it would be for clothes if clothing retailers were paid not by each customer but instead by heavily subsidized third-parties.--Don Boudreaux

A key feature of the House and Senate health bills would prevent insurance companies from denying coverage to anyone with preexisting conditions. The new coverage would start immediately, and the premium could not reflect the individual's health condition. This well-intentioned feature would provide a strong incentive for someone who is healthy to drop his or her health insurance, saving the substantial premium costs. After all, if serious illness hit this person or a family member, he could immediately obtain coverage. As healthy individuals decline coverage in this way, insurance companies would come to have a sicker population. The higher cost of insuring that group would force insurers to raise their premiums. (Separate accident policies might develop to deal with the risk of high-cost care after accidents when there is insufficient time to buy insurance.) The higher premium level would cause others who are currently insured to drop coverage, pushing premiums even higher. The result would be a spiral of rising premiums and shrinking numbers of insured.--Martin Feldstein

In 2005, global warming worriers warned, as they tend to do after all adverse or anomalous environmental events, that Hurricane Katrina was caused by global warming and foreshadowed an increase in the number and destructiveness of hurricanes. As this year's Atlantic hurricane season ends, only three hurricanes have formed -- half the average of the past 50 years -- and none has hit the United States.--George Will

Most of China's growth this year has been unsustainable, driven by stimulus. China's money supply has risen 29% in the past year. At the government's behest, banks have increased their lending by nearly $1.4 trillion, or 32%, during that time. That flood of borrowed cash has been channeled into new infrastructure and production capacity. These investments will account for up to half of China's gross domestic product this year, according to some estimates. A key question is whether China needs all of this investment. Analysts at the London hedge fund Pivot Capital Management say that China already has enough idle steel-production capacity, for example, to match the steel output of Japan and South Korea combined.--Mark Gongloff

If China remains culturally closed, the Chinese Century will never come to pass. Instead, the United States--a country that has struggled with race and racism for centuries, and in the process has become more culturally open and resilient--will dominate this century as it did the last.--Reihan Salam

What’s powering your home appliances? For about 10 percent of electricity in the United States, it’s fuel from dismantled nuclear bombs, including Russian ones. --Andrew Kramer

[The ordinary person] blows hot and cold from day to day; he is kind and cruel, chaste and lustful, honest and deceitful, generous and covetous; he longs to be good and chooses to be evil, yearns to know God and turns his back upon Him, hopes for heaven and heads toward hell. He is morally loco.--A.W. Tozer

[A senior military commander] resigning (asking for retirement or reassignment) over advice not taken, policy disagreements, or moral or ethical qualms undermines the relationship between military officials and their civilian superiors and destroys the professionalism of the U.S. armed forces.--Richard Kohn

Gold vs. US Stocks

Eddy Elfenbein's nice chart of Gold vs. Wilshire Total Return. Surprising to me how correlated they are.