JP Morgan Chase Stock Chart

• JP Morgan Second-Quarter Profit Fell 8.7%
• JPMorgan’s Botched Trades May Generate $7.5 Billion Loss
• JPMorgan’s trade losses soar in second quarter
• JPMorgan loses $5.8 billion on trades; traders may have hidden losses

How in the world is a company that is posting these kinds of losses, with this kind of press, pushing out a stock gain of nearly 6% since the day’s open? I would love to know what would happen to Microsoft or Apple or Oracle stock if they put out a press release headlining: “Second quarter profit dropped 8%, and one of our factories burned to the ground”.

For any “normal” company posting numbers like that, the stock price would be tanking. Who on earth is buying this?

Market Close, June 29 2012

Market Close, July 6 2012

Continuing with the same story, you might want to figure out where to buy some gold or silver, and store some of your assets outside the financial system if you want any hope of preserving your wealth in a market that is anything but “free”.

From the current news:

The Globe and Mail: Amid flames, Greek parliament approves crucial austerity bill.

Reuters: Athens mayhem raises fears of Greek social explosion.

Bloomberg: Rioters Burn Buildings as Greek Parliament Votes on Cuts.

I wish I had more time to write today.

Several weeks ago I was listening to the morning radio, and the hosts were both trying to get an answer as to what the Occupy movement was actually about. They hosted the organizer of the Vancouver Occupy movement to ask him some questions. He couldn’t articulate anything about the movement at all, mentioning that he was part of Zeitgeist, and nothing that he said left anyone with any clarity at all. The radio hosts at that point, asked if someone would please phone the station to explain it.

After listening a little longer and hearing them plea a few more times, I finally called the station and talked to one of the hosts for about 15 minutes, explaining what the Occupy movement was, but more importantly explaining why no one seemed to have the ability to actually explain it. At the end of our conversation she thanked me and let me know that I’d explained it better than anyone else had.

The reason why no one seems to be able to explain the occupy movement is quite simple: they have no idea what it’s about, they just know that something is wrong.

What makes things even more complicated is that the Occupy movement is about things that most people either don’t understand, or can’t be bothered to learn about.

So here it is:

1) The Occupy movement is about inflation.
2) Inflation is the result of debt.
3) Debt is the result of greed.

This is where the problem starts, because here is where the great divide between the rich and poor begins. The wealthy and the upper class are far better able to weather periods of high inflation because not only do they typically have more money, they’ve also structured their investments, their tax burdens and other financial affairs in such a way as to minimize the effect that inflation will have on them. The poor and the middle class generally don’t concern themselves with these types of things, simply choosing to rely on the financial advisor at their banking institution of choice to make sure that they’re mutual funds are performing admirably. This is where even the simplest understanding of inflation might help you make smarter financial decisions. I will digress for one moment…

The current advertised rate of inflation in Canada is 2.8961% (in reality it’s much higher, but let’s amuse ourselves by using the government’s official numbers). The current interest being paid on a savings account from ING Direct is 1.5%. Therefore, if you currently have savings in an ING Direct savings account, you are losing money. Your purchasing power is being eroded. Unless you find an investment vehicle or savings account that is going to pay you more than 2.8961% after taxes, the purchasing power of money in this account will eventually become zero. OK, back to the topic at hand…

The divide between the 1% and the 99%. James turk was recently quoted as saying that the current economic situation “is a crisis not of capitalism but of socialism, unaffordable entitlements”.

That’s only half true.

This worldwide economic crisis is a tale of two greeds. It is the greed of the wealthy and powerful, and it is the greed of the poor, middle class and non-powerful. Until you realize that the fault lies with both groups, you don’t have the ability to comment reliably on the situation.

The problem lies with greedy capitalists who pay their employees so little that a working couple can barely keep food on the table for their family.

The problem lies with lazy socialists who believe that simply because they have a degree, the world owes them $100K salary and all the benefits and entitlements one can imagine.

The problem lies with a corrupt banking system that educates and cajoles people to believe that investing in mutual funds, the stock market, RRSPs and 401Ks is just “the way you save for retirement”.

The problem lies with lazy, financially illiterate masses who are foolish enough to not educate themselves around the ideas of money, finances and investing, and gullibly throw their life’s savings into a stock market that is manipulated by the elite to further their own agendas.

The problem lies with over-regulated bureaucratic governments, lobbyists that have far too much power, and things like military spending and entitlement programs that are out of control.

This is a tale of TWO greeds, not ONE. I don’t believe that people are entitled to huge salaries and benefits without contributing anything to society, and I don’t believe that people are entitled to take advantage of and exploit the poor and middle class simply because they’re wealthy and powerful enough to do so. There has to be a middle ground.

The Occupy movement should, in fact, be about finding that middle ground. Unfortunately, in the case of Vancouver, it seemed to become more of a place for homeless to congregate, people to shoot up with heroin and push the agenda of Zeitgeist, orphan kittens and why we should all be vegans.

So I ask you, before you start contributing your agenda and opinions about the Occupy movement, please get educated. Read something about currency, inflation, the history of money, government bond auctions. Get educated. Learn about mutual funds and investing and make some decisions about whether investing in the stock market is really the best way to save for your retirement. Get educated. Turn off your television, stop paying for cable and read some books about economics. Get educated. Stop whining about what the world owes you. Get educated. Stop yelling at people out your car window telling them to get a job. Get educated.

If you read this as a capitalist and want to call me socialist-loving scum, don’t bother. I’ve started several businesses, some successful and some not. I’m striving to be on the upper edge of the middle class, and maybe one day the upper class because I love building businesses. I love employing people and I love contributing to the community. What I don’t love is the greed and the corruption that comes from the stereotypical desire for more at the expense of someone else, the pandering to shareholders who desire profit above all else.

If you read this as a socialist and want to call me capitalist-loving scum, don’t bother. I probably grew up poorer than you. I grew up in the woods without heat or a toilet in our house, and a piece of plywood with hinges on it as our front door. I’ve lived in a trailer park watching heroin addicts pawn their 13-year old daughter off as a prostitute so they could buy more drugs, all the while sucking away entitlements and manipulating the system so that taxpayers paid for their habits. I’ve watched several people milk the welfare system all the while dealing drugs and earning tons of cash under the table. Unfortunately, the attitudes of most of the socialists I know come across as supportive of this type of a system.

Don’t forget, this economic crisis is a tale of two greeds. Figure out which side you’ve been hanging out on, and figure out what changes you need to make in your life to meet in the middle.

Got questions? Want to rant? email hidden; JavaScript is required.

They acknowledge the fact that at some future date, gold could become overvalued. Turk goes on to ask Sprott – “what would make you sell?”

Sprott’s response is that he would sell under three conditions:

1. If he sees a mania in the market (e.g. Nasdaq circa 2000)
2. If governments and central banks become responsible (fat chance)
3. If it becomes the reserve currency.

Sprott goes on to note that the probability of a mania in gold is very high. Interest in the metal is building all around the world. But we’re not there yet.

For the silver lovers out there, Sprott does not disappoint – going on to claim that, in his opinion, silver today is what he would consider a very safe investment.

I still believe that an investment in silver is a very safe investment today. When we look at the data points, they scream at us that it’s undervalued. -Eric Sprott

Enjoy the interview.

[Unemployment insurance benefits are] one of the most direct ways to infuse money directly into the economy because people who are unemployed and obviously aren’t running a paycheck are going to spend the money that they get. They’re not going to save it, they’re going to spend it. And with unemployment insurance, that way, the money goes directly back into the economy, dollar for dollar virtually.

I don’t know where the “1 million” number comes from (I didn’t see it on the video, or in a quote anywhere) – but all the sites I’ve seen carrying the article have stated something along the lines of:

Carney estimates that unemployment benefits could create up to one million jobs.

Personally, I don’t know that there are even words to describe the absurdity of the above two statements. Essentially the reasoning is this:

1. Give unemployed people some money
2. Unemployed people will spend the money (probably trying to pay off their credit cards before they go bankrupt, or buying double cheeseburgers from McDonald’s because they can’t afford fresh fruits and vegetables)
3. Businesses, overwhelmed by the huge increase in sales, can’t keep up with demand and are forced to hire 1 million new workers.

Gold Up

Silver Down

US Indexes Dying

Happy to not be long US equities, but sad that Canadian mining equities also seem to be tanking.

The very notion that this ‘deal’ has somehow done anything, other than than, well, nothing – is laughable, despite what folks at Reuters would have you believe with headlines that look like this:

The United States is poised to step back from the brink of economic disaster on Tuesday when a bitterly fought deal to cut the budget deficit is expected to clear its final hurdles.

Maybe someone should clue them in that there hasn’t been a “step back” from anything. The U.S. is still bankrupt. None of the so-called budget cuts and fat-trimming can or will do anything to ultimately save the fattened whale from $100-odd-trillion in unfunded liabilities. Maybe they were able to quickly hang up another sheet to keep the naked king hidden a little longer, but other than that, this deal means exactly one thing: nothing.

A friend down South referred to the whole ordeal as “nothing more than nauseating political theatre” – and I would tend to agree.

Following the so called deal, one could’ve expected soaring (or at least recovering) stock markets and a drop in the gold price, and yet here we are on Tuesday morning with gold eclipsing another all-time high (denominated in $USD) surpassing $1640 / oz. I imagine we’ll see a bit of a correction sometime today, but I doubt it’ll come from the real investors.

In the mean-time, those in the know (also known as “those who don’t have their head crammed in the sand”) can continue to wait for whatever is coming, chuckling with the incredulous disbelief that the charade continues.

The super-rich, whose gains reflect little social value creation, have gotten richer — and are hyperconsuming the stuff of idle, yawning luxury with an appetite that makes Caligula look like a blushing bride.

Aptly said. The super-rich, adding near-zero value to society, consume with an insatiable appetite, as the middle class slowly dwindle into a relic of the past. Change is coming…

It’s been hard to try to whittle down this post into something shorter than an entire volume (I’ve got a lot to say, and a lot of opinions on the subject). For reference, I’m not a teacher. My wife was a teacher before starting her own business. My best friend is a teacher. One of my mentor’s taught for almost 40 years. I know a lot of teachers.

There’s been a lot of flak floating around lately after Bill Gross of Pimco wrote an article that opened with this:

A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college? All of us who have been there know an undergraduate education is primarily a four year vacation interrupted by periodic bouts of cramming or Google plagiarizing…

A couple days after Bill’s article was released, Business Insider tossed up an article with some fancy charts ‘proving’ that not going to college is a really dumb thing to do. They cited that among folk who only have a high school education, the unemployment rate is much higher and salaries are much lower.

I’m of the opinion that the Business Insider article is inaccurate for a number of reasons, none the least of which are:

• The data they analyzed came from the U.S. Bureau of Labor and Center for Education, a party that arguably has a vested interest in bogging fresh high-school grads down with debt, all the while ensuring that college continues to teach them what high-school started: how to be an obedient cog
• Their calculations don’t take into account the often $100K-$200K worth of student loan debt that people need to repay
• The fact that a lot of people who don’t attend college are simply lazy deadbeats who think that the world owes them something, and going to college can’t help people with an attitude like that anyway.

Don’t hear what I’m not saying. I think that education is one of the most important things that we have, and that we can do for ourselves. I just think that “formal” education is by and large the wrong way (in today’s age) to go about it.

In terms of understanding education and the world today, you must, must, MUST read, contemplate, digest, ponder and analyze the following two points, and start to make decisions based on the belief that they are true:

1. The most important skill you can possibly know in the world today, is the ability to learn, and following that the ability to think critically for yourself
2. The primary purpose of our formal education system (elementary, middle, high school and post-secondary) is to strip you of the skills in my previous point.

Schools teach exactly what they are intended to teach and they do it well: how to be a good Egyptian and remain in your place in the pyramid.

This book is so chock full of poignant truth that I urge you to find a copy and read it.

Some people might ask “did you go to college?” – wondering if I’m a hypocrite. Here’s my story, short as I can make it.

1. Went to public school from K-5
2. Was home-schooled for grades 6-10 – I basically taught myself, because my mom had a grade 8 education (but she has crazy people skills, and knows how to run a business)
3. Went to high school for grades 11-12, and pretty much slept through all of it getting A’s (in Math, Physics, Calculus, and Computer Science, but not English. In English, I refused to jump through the hoops of answering questions based on what my teacher interpreted as the correct answer, when the correct answer should be determined by the individual, based on what the writing speaks to them)
4. Decided that going to university would aggravate me, I didn’t want to waste my money and life studying basket-weaving while waiting to take interesting courses in years 3 and 4
5. Opted for a 2-year program at BCIT instead, which along with a bursary and scholarship ended up costing me a grand total of ~$10,000 in student loan debt which I paid off within 2 years
6. In the past 11 years I’ve started several companies, and I’ve invested in education by reading books, following smart people, networking, succeeding, failing, earning money, losing money and re-creating my ‘career’ several times over.

I’ve never stopped learning, and I never will. You shouldn’t, either.

While financial advisors are telling you to diversify, Warren Buffett has this to say:

Diversity is protection against ignorance. It makes very little sense for those who know what they’re doing.

One of the common problems in the current financial and investment paradigm is that the socially accepted method to investing is to hand your money to your banker or financial advisor and let them invest the money for you. We could talk all day and night about why (in my opinion) this is downright insane, but I’ll leave that for another post.

Today what we want to talk about is learning how to trade certain ETF’s that will earn you profits based on the direction (up or down) of a stock index. This is useful for people who read the news, follow events and have fairly strong conviction about the general direction of the stock market on any given day. So let’s talk about these leveraged ETF products.

In Canada, the best options are the Horizons BetaPro Bull (HXU) and the Horizons BetaPro Bear (HXD). These products are leveraged, which stated simply means:

1. When the TSX goes UP in value, the HXU will go UP approximately twice as much (percentage-wise) as the TSX.
2. When the TSX goes DOWN in value, the HXD will go UP approximately twice as much (percentage-wise) as the TSX goes DOWN.

Notice that. One of them goes UP when the TSX goes UP, and one of them goes UP when the TSX goes DOWN. This is an extremely easy way for an inexperienced investor to take advantage of short-selling, without having to know a lot of details about what short-selling actually is or how to do it.

Just to make it perfectly clear, take a look at the chart below. This is a day that the TSX (red line) increased in value. You can see the the HXU (the Bull) was up slightly more than the amount that the TSX was up. You can also see that the HXD (the Bear) was down substantially more (percentage-wise) than the TSX went up.

If you have a brokerage account (with Questrade or Qtrade or ETrade or whatever else you use), you can buy and sell HXU and HXD just like any other stock. So if you have a lot of confidence that the market is going to tank, then buy the HXD (Bear). If you have a lot of confidence that the market is going up, buy the HXU (Bull).

These particular ETFs are often used as short-term trading vehicles in market swings, so you’ll want to think carefully and plan ahead as to how you utilize these in your overall portfolio. Set goals. Don’t get greedy.

Also, Der Spiegel is reporting that Merkel and Sarkozy are having some disagreements, and it’s looking like only 1/2 of the next €12 billion Euro bailout to Greece is actually going to be paid.

When you see things like this (from the Guardian):

The closer you get to the Vouli, the parliament, the more raucous it becomes. Jammed up against the railings, a crowd is clapping and chanting: “Thieves! Thieves!”

It’s also interesting to see some of the signs that citizens are making. These people are not dumb and blind to what’s going on. If anything, I’m extremely surprised that American’s have not had protests to dwarf what’s happening in Greece, given what the investment banks have done to their country:

Papandreou’s face is plastered over placards that congratulate him in English for being “Goldman Sachs’ employee of the year”

One begins to wonder just what the last straw will be that breaks the back of the swarms of angry Greek citizens currently storming around in front of the Greek parliament. It’s going to be an interesting week in Greece, and I would suggest that you follow along closely to see how the situation unfolds. Keep reading, keep learning, keep taking steps to protect yourself and your family. Don’t believe that North American is immune to these types of financial crisis and protests. In the end, I think that the riots we will see in the coming months and years caused by inflation, food shortages and various financial crises will make the riots in Vancouver look like a picnic.

Canada and the United States are very different, culturally, but sooner or later the financial hens will come home to roost in Canada, just as they are in the US. When that happens, what does Canada look like?

At present, approximately 14% of the population of the United States survives on Food Stamps. That’s approximately 47 million people. Can you see the significance of that number? That’s substantially more than the entire Canadian population.

When you think of riots in countries like Egypt or Libya, they at least have a reason. With food costs at all-time highs, how far would you go to feed your family? Let’s say you lived on $5.00/day, and your food costs were $4.00/day. It’s a pretty crappy life, but at least you’re not starving. Now what happens when your food costs go to $6.00/day and your wage stays flat? How far would you go to feed your family? People in Egypt have a reason to riot. At the present moment, people in Vancouver do not.

When will that change? How much longer can the Federal Reserve try to print the US out of debt? How long can interest rates be held at all-time lows before inflation takes off like a rocket, sending food prices through the roof?

How long will it be before these people are rioting because they can’t feed their families, instead of their home team losing a hockey game?

I was really glad to see an article out of the Financial Post the other day by Jon Chevreau quoting William Robson of the C.D. Howe Institute that put in very plain terms what his thoughts on the Canada Pension Plan are:

The CPP is a gamble, not a guarantee: expanding the plan would raise the stakes on a bet most Canadians do not know they have made.

Have you ever thought to yourself that betting on the Canada Pension Plan being around to pay for your retirement is akin (in some respects) to taking a coin that says “retirement” and dropping it into a slot machine. It’s either going to pay out enough for you to get by on a somewhat meager existence, or it’s going to kick you to the curb and wish you good riddance. Neither of these sound like particularly tasty outcomes.

For the past three years, when I’ve told people that I do what I can to not contribute to the Canada Pension Plan (more on that in a moment) because I don’t have a lot of faith that it’s going to be around when I hit retirement age (~35 years from now), most of the time I get a few chuckles along with a “oh, you’re one of those people”. So it’s great to see some articles hitting the mainstream media indicating that I might not be off my rocker after all.

This is just one more great reason to start a business. Any business that you will love and could possibly make profitable. When you incorporate a business in Canada, you can opt to pay yourself in dividends instead of a salary. All salaried employees are required by law to contribute to the CPP (and the employer is required to contribute a portion as well). However, if you pay yourself a dividend from your company, you are not required to pay into the CPP for that money. In addition, money paid to yourself as a dividend is taxed far more favourably (on approximately the first $40,000) than a salary.

The disadvantage (if you consider it so), is that paying yourself in dividends as opposed to a salary will not increase your RRSP contribution room. Most accountants (that I’ve spoken to) recommend paying yourself in a blend of salary / dividends to create the optimal tax scenario while still allowing a person to take advantage of the tax-deferred growth that an RRSP offers. This is something that each person has to analyze carefully for themselves as to what their plan is for retirement savings.

Hopefully this has given you a bit to chew on. If you have questions, post them in the comments!

Real estate agents and mortgage brokers seem to be in endless supply screaming that “now is the time” and “don’t miss the low interest rates” and “don’t get priced out of the market”. I would argue that these statements are ludicrous, and if you don’t want to risk going bankrupt, I highly recommend you stop and think about your interest rate risk moving forward if you decide to pick up that $500,000 home you’ve been eying up.

The Globe and Mail recently had this to say:

Royal Bank of Canada’s economists took a look at affordability recently and found that the costs of owning a two-storey house (mortgage, property taxes and utilities) consumed 80.4 per cent of median pretax household income in the Vancouver market, 55.6 per cent in Toronto, 53.7 per cent in Montreal, 40.9 per cent in Ottawa and 36.8 per cent in Calgary. As alarming as those numbers look today, they’ll be worse when interest rates rise.

If you’re unaware, lenders typically allow a maximum of about 40% of pre-tax household income to go to housing costs, they figure that if you have to pay more than 40% of your income for housing, it’s only a matter of time (if, not when) before you get into financial trouble.

So with interest rates at all-time lows, what does a mortgage payment look like on that $500,000 place. Let’s assume you’ve got the necessary 20% down payment so you only have to borrow $400K. Let’s also assume a 25 year amortization period and a 3.0% interest rate. That’s going to look something like this:

So you know that you’re good to cough up $1,900 a month (plus about $150/month in property tax, plus whatever else goes wrong). The real question is this: How much is your mortgage payment going to be when interest rates go up to 6.25%? I only choose the 6.25% number because according to CanEquity that is the highest prime rate listed since 2001 (if I had time to look up average interest rates over the past 30 or 40 years, I’m willing to bet that on average, they were higher than 6.25%).

So let’s look at the same mortgage, but with a 6.25% interest rate:

Now ask yourself this: Can I afford a $2,600 per month mortgage payment (a 37% increase) without going bankrupt?

And please, whatever you do, don’t spout off that you’ll just sell your place in a few years if mortgage rates jump like that, because I’m willing to bet that as those interest rates climb, your property value is going to decrease.

Listening to Danielle Park of Juggling Dynamite at the World Resource Investment Conference this weekend, she claims that the real estate market in Canada is highly overvalued, and due for at least a 25% correction.

To me, buying a house in the Lower Mainland (among other places) right now seems like a crazy gamble, because the following scenario is not far-fetched:

1. Put $100,000 down on a $500,000 house for a $1600 / month mortgage
2. Interest rates rise to 6%
3. Housing bubble shows up in Vancouver, property prices drop 30% and your house is now worth only $350,000
4. Your $100,000 of equity completely destroyed
5. You refinance at the end of your 5-year term and still owe the bank about $360,000 (more than your house is worth)
6. At the time of refinancing, interest rates are up and your new mortgage payment is $2600 / month.

That purchase isn’t looking so smart after-all.

Note that I am not against owning a home, I am a mortgage-holder myself. What I am trying to point out (again), is that you need to think long and hard before following the herd and making a decision based on hype, or the fictitious ‘Canadian / American dream’.

While many people are in the midst of jumping into the real estate market frenzy and chaining themselves with debt to their eyeballs, you have to wonder how many folk are quietly and contemplatively deciding to do the exact opposite. Most of the time, in investing, contrarians win.

Canadians will have three options: Raise taxes, cut programs or increase debt.

Odd as it sounds, I saw this headline buried on page B2 of a copy of the Vancouver Sun¹ that I picked up somewhere. Odd because the newspaper isn’t exactly the media that I generally consume my news from.

Sheila Fraser, the departing auditor-general, has warned that there are some very stark choices ahead for Canadians. Despite being Canadian, I often write with a more US focus simply because the US has a much greater impact on the global financial markets and the global economy in general, but I find this article telling. What it says to me is that, in essence, Canada is on the same route of spending our way into becoming a destitute social welfare state as our Southern neigbour. Canada is also blessed with an unsustainable pension plan, increasing number of retirees, decreasing number of people entering the workforce, a healthcare system that is essentially a giant burning money-pit that no politician has the balls to reform, aging infrastructure and a bunch of citizens whining about wanting ever-increasing social programs, because somehow they feel it’s the governments responsibility to take care of them.

Fraser was quoted:

It could be a reduction in taxes. It could be a reduction in programs. But there’s only really two areas that you can work on to be able to balance the budget, unless we decide that we’re going to leave a debt to our children and grandchildren.

The reason why I found this statement so interesting is because it’s become obvious that Canada has reached a critical juncture: Do we choose to spend our way to destruction, following in the footsteps of the once renowned United States of America, or do we make serious changes to the way we run programs like healthcare, social services and the like.

As always, the problem in a democracy is that anyone who has the courage to make change is generally ousted from office the following term, as they’re the ones who have to make the unpopular cuts and decisions for the betterment of the country. It also goes without saying that there is always a socialist spender on their heels, happy to open up debt purse-strings to give the people what they want, to the overall detriment of the country, their children and their children’s children.

1. Article in the Vancouver Sun

Medium of Exchange

One of Mr. Roth’s statements is this:

Let’s say I’m a shopkeeper. I have a minimart and I have a shotgun to defend my stock from looters. If we’re in some sort of post-crisis world where dinosaurs roam the earth, I doubt I’ll want your gold. It’ll be just as worthless (or as valuable) as paper money. Why? Because in reality, gold too is fundamentally a fiat currency. That is, people have assigned it an arbitrary value. That value vanishes in a crisis, just as the value of paper money does.

If I’m a shop owner in this situation — or I’m your neighbor with a vegetable garden — I’m going to be want to be paid with something real, something like a carton of eggs or some shells for my shotgun.

Gold is most definitely not a fiat currency. It can not be manufactured or printed or fabricated. There is a finite supply. I do agree that it is assigned a value, but it is not arbitrary. It might seem arbitrary given that in today’s world it is traded as a commodity (like oil). In reality, the exchange rate for gold is what is agreed to between two individuals. You could say the same thing for dollars, except anyone can create dollars.

I don’t even disagree that the shop owner may prefer eggs to gold. Barter is a great system, but it’s also a very difficult one to manage. Let’s look at an example:

Let’s say someone  who owns sheep would like to make a trade with someone who owns wheat (Settlers of Catan fans, rejoice!). This situation requires that someone who has wheat to sell is actually interested in receiving sheep as payment. A barter system further requires that these people wish to exchange their items, and that the items are available for exchange, simultaneously.

So the problem with a barter system is that it does not use a common medium of exchange². This probably needs a bit of explanation. Let’s talk about money in the abstract for a moment. Forget whether it’s dollars or coins or sea-shells. In order for something to be considered “money”, it needs to fulfill three basic requirements³. One of those requirements is that it must act as a common medium of exchange.

If, instead of trading goods directly, you use some other intermediary item as the medium of exchange, you can alleviate many of these barter system problems. After all, I really don’t want to trade my tasty sheep for a bagful of hammers. I was never really good with hammers to begin with.

Gold as a Bubble

Mr. Roth goes on to discuss gold as a bubble:

As I write this, gold is hovering at about $1500 per ounce, which is just off its April high of $1550 per ounce. But that’s not only its April high; that’s an all-time high for the stuff.

Let’s think for a moment. Have we seen any price bubbles before? Maybe even in recent history? Over the past fifteen years, we’ve seen three bubble economies:

• First, the boom in tech stocks in the late 1990s.
• Then the run-up of housing prices in the early 2000s.
• Finally, the second stock market bubble in the middle of the last decade.

While I don’t disagree that all of these bubbles happened, I think that we need to look at what was behind them. The first was a stupid and nonsensical mania that was spurred on by greedy bankers. The second was a stupid a nonsensical mania and pile of mortgage fraud spurred by greedy lending companies and bankers. The third was the result of disgusting, dishonest investments (derivatives, CDOs, etc.) assembled by and sold to unsuspecting countries and pension funds by, you guessed it, greedy bankers.

While it’s very possible that gold could enter a mania phase, we’re not there. We’re not even close. The public is barely aware of what gold is or how to buy it at this point. When you bump into your uncle Billy, who’s only ever invested in mutual funds, at your family reunion and he tells you that maybe you should buy some gold – that’s when you sell – and I’m telling you, we’re not even close.

It also doesn’t hurt to have an understanding about why the gold price tanked back in the early 1980s. I’ll spare you the long version – but basically the central bank in London started dumping gold onto the market in an attempt to suppress the price. Again, this is an article (or a book) in and of itself, but everyone knows that increased supply means a decrease in demand which means a decrease in price.

Mr. Roth talks a bit about some personal experience with gold, and no one can discount that. I’m sure that people who invested in Lehman brothers in August of 2008 aren’t likely to be purchasing much stock in investment banks for the foreseeable future, either.

Gold Fever

Another statement made by Mr. Roth is this:

You might think that the current gold fever is the first of its kind. Actually, it’s not. Gold fever seems to strike every 20-30 years, whenever there’s a run-up in prices.

Now, I would say that this statement is just flat out incorrect. Gold fever has been happening throughout the history of the world because gold is money. As for “run-up” in prices every 20-30 years… this is just silly. The gold standard basically fixed the price and the exchange rate of gold has only really mattered for our society since the Nixon Shock of 1971. So to say that gold fever strikes every 20-30 years when we’re only 40 years into this global currency experiment seems pretty erroneous.

Summary

There are many, many people who feel that gold is an old relic, that the bubble has come and gone, and generally that investing in gold is foolish.

There are many others who as students of history look at gold as the only successful ‘money’ that has ever existed. That, along with the undeniable fact that every fiat currency in the history of the world has failed (without exception). That, coupled with the colossal levels of ever-increasing US debt has led many people to choose to preserve their wealth by purchasing metals like gold & silver.

And what will you do?

1. http://www.getrichslowly.org/blog/2011/05/10/investing-in-gold/
2. http://en.wikipedia.org/wiki/Medium_of_exchange
3. http://en.wikipedia.org/wiki/Money#Functions

Debt is an enormous psychological burden that influences life’s major decisions. It’s why so many people stay committed to jobs that are unfulfilling in cities they detest under conditions they find disheartening.

-Simon Black

Chris Martenson² has a great audio interview with John Rubino posted on his site that’s definitely worth a listen (transcript). I’ll paste some of my favourite quotes from the interview below.

Nobody in their rational right mind would buy US stocks, buy US dollars, or hold US Treasury bonds under these circumstances.

This is something that I’ve felt for quite some time. I exited all US dollar positions and all US stocks in late 2008 (post-Lehman implosion), and since then my only stock market holdings are Canadian mining companies that trade on the TSX or the TSX-V. Other than that, it’s gold, silver, real estate, and other investments that don’t trade in any public markets.

Depending on your industry, there are a lot of margin squeezes beginning to happen out there. If you are a restaurant chain, okay? Wheat is up by forty percent, tomatoes are up by seventy percent, and everything else is way up: you have got to raise your prices. Or you have got to raise your prices by half as much as your costs are going up and then eat the extra costs. That hurts your earnings. That is happening in a whole range of industries right now.

Yeah, welcome inflation, it was nice you could join us. See this post about why inflation is going to destroy anyone who keeps cash in savings accounts.

We are not a healthy economy. We are grossly over-indebted. The only reason there is any growth at all is, well, two reasons. One is they are lying to us about the numbers. The other is that the government is basically printing money and handing it to people.

I think this is one that is really fascinating. We all conjure up pictures of Ben Bernanke tossing cash out of helicopters, and yet the only people that seem to be getting it are rich bankers, corporate executives and recipients of the trendily renamed food-stamp programs like “CalFresh“. Since when did the US government (California government) decide to take it upon itself to come up with some sort of marketing program that makes it sound cool to collect food stamps because you can’t afford to buy groceries for your family.

Here’s one that I really love:

…we are exporting our inflation to the rest of the world. We are forcing countries like Brazil and China to endure the pain that we should be enduring. Brazil’s interest rates are like twelve percent right now. China is doing something new every couple of days to scale back bank lending, spending domestically, and everything. They are countries where a big part of the population makes just a few dollars a day. Rising food and energy prices are devastating for these guys. They do not really control the global price of energy and food, yet they have to endure the pain of slowing their economies down and throwing people out of work. Have them have to spend more and more of their money on food and energy so we can keep on borrowing and growing.

Ah yes, and that’s what’s happening. Why should the people of the United States have to face the hole they’ve dug themselves when instead they can simply export their inflation problems overseas and force other people to suffer because of the fiscal irresponsibilities of the US government, banks and corporations. I’m afraid the day of reckoning is coming (read more about why these ‘currency wars’ matter to you). There will be a straw that breaks the camels back, and the Chinas, Brazils and Indias of the world will no longer tolerate watching their families starve so that the likes of investment bank CEO’s can relax in their $50 million villas and drive around in Ferrari’s.

1. James Turk is the founder of Gold Money
2. Chris Martenson developed The Crash Course, something everyone needs to watch