Crescat

Per Shadow Government Statistics:

“Continuing $5 Trillion GAAP-Based Federal Deficit Remains Unsustainable, Uncontainable and Unstable.  Against a headline, official quasi-cash-basis and gimmicked reporting of a $1.3 trillion federal budget deficit in 2011, GAAP-based accounting (using generally accepted accounting principles) indicates that the actual 2011 deficit ran somewhat in excess of $5 trillion for the year.  The largest difference between these estimates is that the GAAP-based number includes the widening shortfall of unfunded liabilities for social insurance programs, such as Social Security and Medicare.”

The GAAP gap is alarming.

Posted: January 5, 2012 by Kevin S. (Fixed Income Bubble, Global Fiat Currency Crisis)
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There is a good article just published in CFA Magazine entitled China: Unhedged Risk in Your Portfolio?  Joel Hirsh, CFA, reinforces many of the points we made about China in our latest Macroeconomic Update.  Some highlights:

• “Chinese government agency estimates suggest China has accumulated bad loans to local governments totaling more than 15 percent of GDP.”
• “Chinese central government statements, rating agency reports, as well as third-party analysis suggest China’s banking system is in a highly precarious position, with a reasonable probability of being insolvent.”
•  ”Fixed investment (such as construction spending funded by a bank loan) represents 60 percent of annual GDP. This level of investmentfueled growth has never been successfully sustained.”
•  ”The most effective way to hedge the threat of a Chinese slowdown is through the external link to China’s economy—imported commodities.”

With China’s predicament, short positions in commodities like copper, iron ore, and metallurgical coal and their miners provide a good hedge for long positions in gold and silver and related miners.  The latter are key to protecting against global money printing and debt devaluation.  There is potential for alpha generation on both sides.

See full article here: http://viewer.zmags.com/publication/761a93ac?page=12#/761a93ac/12

Posted: November 3, 2011 by Kevin S. (China Real Estate Bubble, Global Fiat Currency Crisis)
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Please check out Crescat’s latest macroeconomic research letter.  We discuss the implications of record high global debt levels, China’s unsustainable fixed asset investment binge, the European debt crisis, declinging real household income in the U.S., understated CPI, gargantuan off balance sheet derivatives.  Central banks have been behind an upward spiraling series of bubbles, busts, and bailouts.   The biggest busts and bailouts are likely still ahead of us, possibly the end game for fiat money itself.  Long and short opportunities abound.  Hard money, scarce resources, and equities of competitive and innovative companies offer ways to protect and grow capital amidst central bank money printing and debt devaluation.  Cash and government bonds are not the safe havens they appear – neither is China the export driven growth juggernaut it appears.

Posted: October 24, 2011 by Kevin S. (China Real Estate Bubble, Competitive Innovation, Consumer Squeeze, Fixed Income Bubble, Global Fiat Currency Crisis)
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Here is a thoughtful analysis by Chris Martenson, rebutting the argument that commodity prices are poised to fall. We agree with his contention that gold is increasingly viewed as a safe haven currency alternative to fiat currencies US$, Euro, etc. We see continued volatility but strong upside for precious metals and other commodities, and we agree with Martenson’s rebuttal of deflation. However, we think the picture is not so rosy in the short run for commodities tied to China’s unsustainably high infrastructure growth.

Click here for Martenson link.

Dan

Posted: September 19, 2011 by Dan H. (Commodity Supercycle, Global Fiat Currency Crisis)
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We have oft voiced our view that the growing U.S. debt position is unsustainable, including significant debt on the books ($13T) and unfunded liabilities ($56T and counting). Respected investment commentator Richard Russell espoused on the issue in his Friday commentary. We post some pertinent quotes from Russell’s newsletter below. He also describes his view of investment implications, which is aligned in many important ways with ours. Best regards,

Dan Hoskins

Partner

Crescat Capital LLC

“The US has a national debt of $13 trillion (that’s trillion, not billion). There’s no way in God’s name that the US can ever pay off that debt. Actually, if the US does nothing the interest on the debt will eat up the nation. Worse, aside from the national debt the US has over $50 trillion in unfunded liabilities.”

“To put it frankly, the US is facing a debt future that can not be solved by cutting back on expenses and raising taxes. Even if the US taxed away all the income and profits of individuals and all corporate profits, the government would still not be able pay off its debts.”

“In my opinion, the US MUST default on its debt. There are two ways to default. One is simply to renege on the debt. I don’t think the US would ever do that. If the US did that, nobody would ever deal with the US again. The other way to default on the debt is to inflate it away. I’m absolutely convinced that this is the path that the US will take. If the US inflates enough, then over time (many years) the devalued dollar will tend of reduce the power of the debts.”

“I guess optimists continue to believe that Treasuries are temporary save-haven items and that they are going to move higher. But if the bonds rally by say 5% and you lose 8% in the dollar, what good are the bonds? Some experts believe that deflation will drive interest rates well below zero. Ah, that’s why the smart guys are buying Treasuries. I knew there was a reason. But I’ll tell you something — I don’t trust the reason.”

“My guess is that gold has bottomed. Too many investors and too many cental banks are potential buyers of gold. And they are ‘bottom-fishing.”

“As far as I’m concerned, the “word” is out. The US will default on its monster debts. The US will default via systematic inflation. This will gradually “kill” the dollar. The protection against declining purchasing power of the dollar (brought on by Fed inflation) is gold.”

Posted: August 2, 2010 by Dan H. (Fixed Income Bubble, Global Fiat Currency Crisis)
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The latest FinReg incarnation gets a couple of things right, notably pushing some derivatives trading to clearinghouses and exchanges, requiring collateral to support derivatives trading, and creating a mechanism to facilitate wind-down of systemically important yet failing institutions. Sadly, however, the bill otherwise seems to deliver the worst of both worlds. It doesn’t address the fundamental causes of the 2008 subprime mortgage crisis, and it complicates an already complex regulatory structure. To wit:

• The restriction on proprietary trading is sufficiently loose that it will likely have no impact on the major banks, either because their prop trading – as defined in the new law – is less than the 3% threshold or because the banks will probably be able to set up offshore subsidiaries to do the trading within their bank holding company structure. It also seems that prop trading is defined in a way that it doesn’t include the massive off-balance-sheet derivatives trading being done by the banks. Chalk up a victory for the lobbyists.
• The limitations on the reach of the derivatives trading ban is so wide that most of the total derivatives exposure is exempted, especially interest rate and foreign currency swaps which comprise 92% of the $216.5 trillion in off-balance-sheet derivatives exposure held by U.S. banks. The legislation implies that these derivative exposures are not risky, which is absurd. Chalk up another victory for the lobbyists.
• Banks will still be allowed to choose ratings agencies, whose ratings – thanks to the reality of incentives – will inevitably continue be a factor in the banks’ selection of ratings agencies. Chalk up another victory for the lobbyists.
• The law does nothing to address the flawed nature of the government’s sponsorship of Fannie Mae and Freddie Mac, the largest players in the home mortgage market. The government’s sponsorship allows risk to be transferred from Fannie and Freddie shareholders to the U.S. taxpayer, thus implicitly encouraging those entities to take risks.
  
• The bill will create an $850 million Consumer Protection Agency. I know billion $ legislation seems so yesterday when our government now routinely passes trillion $ legislation. However, $850 million per year is a lot of dough. And for what purpose? I continue to struggle with how consumers were victims of the subprime mortgage crisis. In fact, it seems that most of the lower-credit borrowers made smart personal decisions when they saw a good deal: no money down to live in a house that they might not have otherwise afforded.
• The bill won’t dilute the Fed’s unconstitutional reach in any way and in fact gives it more authority. The easy money policies of the Fed are important drivers of our big bubbles over the last twenty years. The Fed has already failed miserably in its regulatory authority over banks. So why give it more authority?
• The bill won’t simplify the already complex regulatory structure in place for the financial services industry. Why not consolidate them into a single regulatory authority with a clear mission? Chalk up another victory for the lobbyists, this time the lobbyists of the regulatory agencies!
• The bill will create a new risk monitoring council comprising multiple agencies such as the Fed, the SEC, etc. Please! Why would a new layer of bureaucracy make an already jumbled regulatory structure better? And since the bill still leaves many of the regulations to be determined by these agencies in the future, the lobbyists will have plenty more influence still to come.

To protect against another crisis, Uncle Sam needs to make it clear that he will not bail out the banks in future crises (thus discouraging excessive risk taking) or Uncle Sam needs to restrict the banks from the excessive risk taking. This new legislation doesn’t do either very well.

The banks are clear near-term winners of the latest rounds of negotiations for FinReg. And unfortunately the rest of us lose. We can expect continued excessive risk-taking by the financial sector due to moral hazards of crony capitalism, regulators bought and paid for by the banks themselves. This legislation has done little to prevent the next banking crisis and in fact probably  makes it more inevitable. While the bill does protect taxpayers from being called upon to bail out a large failed bank, the Fed still has extraordinary money printing powers to mop up such crises.  In the end, we are only assured of more of the same: money printing, crony capitalism, and regulatory incompetence, the same issues that created the mess in the first place.

Posted: June 28, 2010 by Dan H. (Financial Sector Bust, Uncategorized)
Comments: 2 Comments

Rob McEwen, founder and former chairman and CEO of Goldcorp, who grew the company from $50 million to over $10 billion in market cap, identifies pre-conditions today for hyperinflation:

http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=106057&sn=Detail&pid=92730

Posted: June 11, 2010 by Kevin S. (Global Fiat Currency Crisis)
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Matthew Simmons claims the size of the gulf oil spill and its implications are substantially larger than acknowledged.  As the “peak oil” experts have been saying for some time, the reason that worldwide oil production is soon to peak is not that vast amounts of marginal oil are not out there (e.g. in deepwater and in the oil sands), it is that these non-conventional sources are simply too costly to produce.  The cost of this blowout and its cleanup, and its effect on deepwater exploration and production in general, may prove that in spades.

http://money.cnn.com/2010/06/09/news/companies/simmons_gulf_oil_spill.fortune/index.htm

Posted: June 10, 2010 by Kevin S. (Scarce Energy Resources)
Comments: 2 Comments

Jim Rogers warns about inflation, money printing, highlights strong value in silver at today’s prices.

http://www.heraresearch.com/images/HRN_20100603_Part_03_Interview.pdf

Posted: June 8, 2010 by Kevin S. (Commodity Supercycle, Fixed Income Bubble, Global Fiat Currency Crisis)
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http://www.youtube.com/watch?v=H0sS6a9RW2E
It’s an hour long but a must view in my opinion.   Almost all Crescat themes reinforced with some important new angles.  Faber really seems to pull it all together this time.

Posted: June 4, 2010 by Kevin S. (Commodity Supercycle, Emerging Markets, Fixed Income Bubble, Global Fiat Currency Crisis)
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