‘Warren Buffett does not practice what he preaches’

Satyajit Das is an internationally renowned derivatives expert. His works include the best-selling Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives. His latest book Extreme Money – Masters of the Universe and the Cult of Risk deals with the messy details of the 2008 financial crisis, the lessons from which have still not been learnt, feels Das. As he puts it, “We keep repeating the same mistakes over and over…The only lesson of history after all is that no one learns the lessons of history.” 
In this freewheeling interview with Vivek Kaul, he talks about how investing is never going to be the same again, why financial TV is pornography, and that Warren Buffett does not practice what he preaches. The interview will be published in two parts. This is the first part.
Why do you call “financial TV” pornography?
Pornography is formulaic, explicit subject matter is depicted to sexually excite the viewer. Financial TV shares the characteristics of pornography — sleaze, intrusiveness and a desire to titillate and shock. It is a 24/7 Joycean stream of consciousness, a financial noise machine with the inevitability and repetition of all sexual congress. No one seriously relies on financial TV for deep insight. If it is on TV, then it’s already happened. It’s entertainment. Attractive men and women cater to all possible proclivities in the audience. It’s like wall paper or eye candy – pleasant but not essential. In dealing rooms, generally you don’t even have the sound on, so it is like pornography in another sense – dialogue is superfluous. The only time financial TV is interesting is when I am invited on to offer my money making insights – buy low, sell high etc.

Whatever his record as an investor, there are differences between Buffett’s pronouncements about the standard of conduct he requires of others and that he follows. Getty Images
You say that investment genius was always little more than a short memory and a rising market? You write that the assumed sophistication of finance and financiers is overrated. Why do you say that?
Investing is like captaining a cricket side – 90 percent luck and 10 percent skill, in the words of former Australian Test captain Richie Benaud. But as he said, don’t try it without the 10 percent! The last 30 years were an exceptional period of investment history which provided high returns for reasons which are unique to that period. The best investment strategy would have been to buy stock or real estate and leverage it up. Then go to sleep or play golf for 25 years. You would have been a rich man.
When people make money, they theorise too much about it – hence all the books about trading success. The latest fad is about explaining the trader’s personality via his biology. Some research suggests that male traders perform better when they have elevated testosterone levels. As prices increase and decrease, traders experience chemical changes. Euphoria caused by boosted testosterone levels from successful trades drives higher risk taking. Losses or reversals increase levels of the defensive steroid cortisone leading to risk-aversion. The experimental data is thin.
Could you elaborate on that?
If correct, you could take steps on banks and fund managers to manage risk. You could artificially manipulate the biology of traders and investment managers to improve performance. It is not hard to imagine a future where traders will need to have their supplements –uppers and downers (in the old parlance) — at hand to improve trading, similar to the experience of competitive sports where drugs have become relatively commonplace to improve performance. It is also not hard to imagine internal risk mangers and regulators insisting on regular monitoring of hormone levels as part of the compliance regime, with attendant cheating.
Isn’t that far fetched?
This is not far-fetched. Already, organisations are adopting unusual initiatives to gain a critical edge. A trader at Steve Cohen’s SAC Capital was allegedly forced by his boss to take female hormones and wear articles of women’s clothing at work, leading to a sexual relationship between the men, one of whom was married. The bizarre behaviour was to eliminate the trader’s aggressive male attitude, making him a more obedient and detail-oriented trader. How can you take an industry which actually does this seriously!
Does Warren Buffett practice what he preaches?
Talking about Warren Buffett is like discussing the existence of God. He is either great or he is not (the minority view). I am an atheist. Whatever his record as an investor, there are differences between Buffett’s pronouncements about the standard of conduct he requires of others and that he follows. While he dispenses finely crafted criticism of derivatives as weapons of mass destruction, Berkshire Hathaway (Buffett’s holding company) makes extensive use of derivatives and invested in Salomon Brothers and General Reinsurance, both participants in derivative markets.
During the crisis, Buffett, a significant investor in Moody’s, was silent about the problems surrounding rating agencies. Having uncharacteristically declined an invitation to appear in June 2010, Buffett testified before the Financial Crisis Inquiry Commission under subpoena. Buffett emphasised that he knew little about the rating process other than its profit margins. He had never visited Moody’s offices, not even knowing where they were located. He also defended Moody’s not acknowledging any failure or complicity of the agencies in creating the bubble. When Goldman Sachs was indicted for alleged violations in structuring and selling CDOs (collateralised debt obligations, a kind of security backed by loans and bonds), Buffett, a major investor in Goldman, defended the firm, its actions and its CEO.

Satyajit Das.
Could you tell us a little more about this?
Critics have frequently pointed out anomalies in the firm’s corporate practices. Berkshire Hathaway’s dual-class share arrangement gives Buffett voting control whilst owning 34 percent of the equity. Until a decade ago, Berkshire Hathaway’s seven-person board of directors consisted of mainly insiders such as Buffett’s son. The new ‘independent’ directors include Bill Gates, a close friend of Buffett, and his regular bridge partner, as well as co-investor in the Gates Foundation. Critics also pointed to that fact Buffett’s partner Charlie Munger’s family owned a 3 percent stake in BYD, the Chinese electric battery maker, before Berkshire bought a stake in 2008.
As to his record as an investor, there are a number of interesting aspects. Firstly, what is the right benchmark to measure his performance against – it can’t be the broad market index. Secondly, the source of his investment success is not that complicated. His main source of investment capital is the premium income from his insurance businesses (cash received today against a promise to honour a future contingent claim). This provides him with effective economic leverage (at low interest cost) to buy low beta assets. The strategy worked well but whether it will continue to work is more difficult. The past, as they say, is “another country”.
In your book Extreme Money you write “Archimedes said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” You paraphrase it to write “give me enough debt and I shall make you all the money in the world”. Can you elaborate?
Borrowing amplifies economic growth. Debt allows society to borrow from the future. It accelerates consumption and investment spending, as borrowed money is used to purchase something today against the promise of paying back the borrowing in the future. Spending that would have taken place normally over a period of years is accelerated because of the availability of cheap borrowing. In this way, debt generates economic growth. In financial markets, debt and leverage amplify returns.
Could you explain this through an example?
Assume an investor uses $20 of its own money – equity – and borrows $80 (80 percent of the value) to purchase an asset for $100. If the asset increases in value by 10 percent to $110, then the investor’s equity increases on paper to $30 ($110 minus the fixed amount of debt of $80). If the investor maintains its leverage at 5 times then it can buy $150 of assets (funded by $30 of equity and $120 of debt). If the investor can now leverage 6 times then it can buy $180 of assets (funded by $30 of equity and $150 of debt). The investor still only has his original $20 investment in cash, unless he sells the asset to realise paper gains, which can vanish.
But now, this $20 supports even more debt, as much as $160 (the $180 of assets that the investor can buy if it leverages six times less its original investment). The real leverage is around nine times, which means an 11 percent fall in the value of the asset purchased can wipe out the investor’s wealth entirely. Where the supply of assets does not increase as quickly as the supply of debt, the price increases allow the process to continue. In the period to 2007, the use of leverage, in different ways, to make money was rampant. Unfortunately, it was never real money. Of course, when prices start to fall the entire process operates in reverse.
The interview was originally published on www.firstpost.com on October 2o, 2012. http://www.firstpost.com/economy/warren-buffet-does-not-practice-what-he-preaches-496581.html
Vivek Kaul is a writer. He can be reached at [email protected]

Why you should be nice to your mom – and buy some gold

 

Vivek Kaul
So let me start this piece by admitting Ben Bernanke, the Chairman of the Federal Reserve of United States (the American central bank) has proven me wrong.
I was wrong when I recently said that the Federal Reserve would not initiate a third round of quantitative easing (QE), before the November 6 presidential elections in the United States. (you can read about it here).
Bernanke announced late last night that the Federal Reserve would buy mortgage backed securities worth $40billion every month. This will continue till the job scenario in the United States improves substantially. The Federal Reserve will print money to buy the mortgage back securities.
I concluded that the Federal Reserve wouldn’t announce any QE till November 6, primarily on account of the fact that Mitt Romney, the Republican nominee for the Presidential elections, has been against any sort of QE to revive the economy.
“I don’t think QE-II was terribly effective. I think a QE-III and other Fed stimulus is not going to help this economy…I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation’s needs,” Romney told Fox News on 23 August. This had held back the Federal Reserve from initiating QE III.
But from the looks of it Bernanke doesn’t feel that Romney has a chance at winning and that he is more likely than not going to continue working with Barack Obama, the current American President.
This round of quantitative easing is going to help Obama and hurt Romney. Let me explain. The theory behind quantitative easing is that when the Federal Reserve buys mortgage backed securities (in this case) by printing dollars, it pumps in more money into the economy. With more money in the economy, banks and financial institutions it is felt will lend that money and businesses and consumers will borrow. This will mean that spending by both businesses and consumers will start to up. Once that happens the economic scenario will start improving, which will lead to more jobs being created.
But as I said this is the theoretical part. And theory and practice do not always go together. Both American businesses and consumers have been shying away from borrowing. Hence, all this money floating around has found its way into stock and commodity markets around the world.
As more money enters the stock market, stock prices go up and this creates the “wealth effect”. People who invest money in the market feel richer and then they tend to spend part of the accumulated wealth. This, in turn, helps economic growth.
As Gary Dorsch, an investment newsletter writer, said in a recent column, “Historical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top 20% of wealthiest Americans account for 40% of the spending in the US economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It’s the Fed’s version of “trickle down” economics, otherwise known as the “wealth effect.””
When this happens, the economy is likely to grow faster and hence, people are more likely to vote for the incumbent President. As Dorsch explains “Incumbent presidents are always hard to beat. The powers of the presidency go a long way…In the 1972 election year, when Nixon pressured Arthur Burns, then the Fed chairman, to expand the money supply with the aim of reducing unemployment, and boosting the economy in order to insure Nixon’s re-election.”
Bernanke is looking to do the same, even though he has denied it completely. “We have tried very, very hard, and I think we’ve been successful, at the Federal Reserve to be non-partisan and apolitical…We make our decisions based entirely on the state of the economy,” the Financial Times quoted Bernanke as saying. Given this, Romney has been a vocal critic of quantitative easing knowing that another round of money printing will clearly benefit Obama.
Other than Obama and the stock markets, the other big beneficiary of QE III will be gold. The yellow metal has gone up by around 2.2% to $1768 per ounce, since the announcement for QE III was made. In fact the expectation of QE III has been on since the beginning of September after Ben Bernanke dropped hints in a speech. Gold has risen by 7.3% since the beginning of this month.
This is primarily because any round of quantitative easing ensures that there are more dollars in the financial system than before. The threat is that the greater number of dollars will chase the same number of goods and services. This will lead to an increase in their prices. But this hasn’t happened till now. Nevertheless that hasn’t stopped investors from buying gold to protect themselves from this debasement of money. Gold cannot be debased. Unlike paper money it cannot be created out of thin air.
During earlier days, paper money was backed by gold or silver. When governments printed more paper money than the precious metals backing it, people simply turned up with their paper at the central bank and government mints, and demanded that paper money be converted into gold or silver. Now, whenever people see more and more of paper money being printed, the smarter ones simply go out and buy that gold. Hence, bad money (that is, paper money) is driving out good money (that is, gold) away from the market.
But that’s just one part of the story. The governments and central banks around the world, led by the Federal Reserve of United States and the European Central Bank, are likely to continue printing more money, in the hope that people spend this money and this revives economic growth. This in turn increases the threat of inflation which would mean that the price of gold is likely to keep going up. “Gold tends to benefit from easy-money policies as investors utilize the precious metal as a hedge against potential inflation that could ultimately result from the Fed’s policies,” Steven Russolillo, wrote on WSJ Blogs.
Market watchers have also started to believe that the Federal Reserve is now only bothered about economic growth and has abandoned the goal of keeping inflation under control. Growth and inflation control are typically the twin goals of any central bank.
“They are emphasizing the growth mandate, and that means they don’t care about inflation other than giving lip service to it,” Axel Merk, chief investment officer at Merk Funds, told Reuters. “The price of gold will do very well in the years to come,”he added.
Something that Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, agrees with. “The Fed’s inflationary behavior should be bearish for the dollar in the long run and drive investors to seek protection via the gold market,” he told Reuters.
Also unlike previous two rounds of money printing there are no upper limits on this QE, although at $40billion a month it’s much smaller in size. QE II, the second round of money printing, was $600billion in size.
Something that can bring down the returns on gold in rupee terms is the appreciation of the rupee against the dollar. Yesterday the rupee appreciated against the dollar by nearly 2%. This is happening primarily because the UPA government has suddenly turned reformist.  (To understand the complete relationship between rupee, dollar and gold, read this).
In the end let me quote William Bonner & Addison Wiggin, the authors of Empire of Debt — The Rise of an Epic Financial Crisis. As they say “There is never a good time to die. Nor is there a good time for a crash or a slump. Still, death happens. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.”
So be nice to your mother and buy gold.
Disclosure: This writer has investments in gold through the mutual fund route.
(The article originally appeared on www.firstpost.com on September 15,2012. http://www.firstpost.com/investing/why-you-should-be-nice-to-your-mom-and-buy-some-gold-456915.html)
(Vivek Kaul is a writer. He can be reached at [email protected])

The truth Obama didn’t tell his party: The US is broke


Vivek Kaul

When Manmohan Singh speaks he puts us to sleep.
When Barack Obama speaks the world listens. In his speech to accept the nomination to run for his second term as President, Obama touched all the right chords. The speech had the right amount of nostalgia, advise, self marketing and hope built into it.
His vision of future, as is the case with anyone asking for votes in a democracy, was optimistic, without getting into the specifics. The American dream is still on, despite the difficulties the country has faced over the last five years due to the financial crisis. That was the takeaway, one got from Obama’s speech.
“But as I stand here tonight, I have never been more hopeful about America. Not because I think I have all the answers. Not because I’m naïve about the magnitude of our challenges. I’m hopeful because of you,” said Obama
While hope is a good thing to have but then at times to hope we need to ignore the mess that we are in, in order to have some hope. And that precisely is my problem with Obama’s speech. There was a lot that he should have said, but did not.
The biggest problem in America today is not unemployment or slow economic growth but the unfunded liabilities like pensions, social security and medical care benefits that the government has promised to the citizens. .
As economist Laurence Kotlikoff wrote in a recent column “The 78 million-strong baby boom generation is starting to retire in droves. On average, each retiring boomer can expect to receive roughly $35,000, adjusted for inflation, in Social Security, Medicare, and Medicaid benefits. Multiply $35,000 by 78 million pairs of outstretched hands and you get close to $3 trillion per year in costs. This is not a partisan issue. The dirty little secret that neither President Obama nor Mitt Romney is telling you is that our kids, who are being stuck with the bill, can’t afford it.”
The three trillion dollars that Kotlikoff is talking about is a lot of money. The current American yearly GDP is $15trillion. Hence, the costs Kotlikoff is talking about amount to nearly 20% of the annual American GDP. And it is unfunded.
Before we go further let’s try and understand what unfunded liabilities are. Let us say I plan to retire 10 years from now. I feel that Rs 16 lakh per year should be enough for me to sail through the year. But to earn that Rs16 lakh I would need to build a corpus of Rs 2 crore in 10 years time, and assuming that I am able to earn an interest of 8% on this corpus, 10 years from now (8% of Rs 2crore works out to Rs 16 akh).
In order to build a corpus of Rs 2 crore in 10 years time I will have to start saving and investing money regularly from now. If I don’t I will be in trouble ten years from now. Either I won’t be able to retire or if I retire I will have to borrow to meet my expenses.
The same logic at a very basic level works for governments as well. The government gives a pension to people when they retire. If a certain number of people are expected to retire ten years from now, then they would have to be paid a certain amount of pension. While estimating the exact amount is difficult, estimates can be made. But what we know for sure is that money is to be saved now so that citizens can be paid pensions later.
If governments don’t invest the right amount from now on, which a lot of them don’t including the US government, they will have to pay these citizens by borrowing money later. And if pensions and other commitments made to the citizens cannot be funded through the investments already made, they are said to be ‘unfunded’.
Mitch Feierstein in his book Ponzi Power – How Politicians and Bankers Stole Your Future writes “Using proper accounting methods…the true value of the state and municipal pension liability is at $5.2trilion. When you deduct the $1.94trillion of pension assets that have already been set aside, you get a net liability of $3.26trillion.”
Other than this the US government already has an existing debt of around $15trillion. Feierstein also points out that the social security programme of the US government is underfunded to the extent of $18.8trillion. The underfunding in Medicare, the health insurance programme, amounts to around $38.5trillion. So if you add all of this up the number comes to greater than $75 trillion and that is what Feierstein feels the US government owes to other governments and its own citizens.
And that’s just one estimate and a very conservative one. Kotlikoff’s estimate is scarier. As he wrote in a recent column “I recently calculated the fiscal gap…The fiscal gap measures the present value difference between all projected future federal expenditures (including servicing official debt) and all projected future taxes. The fiscal gap is thus the true measure of our government’s total indebtedness and the true measure of fiscal sustainability. How big is the fiscal gap? Brace yourself. It’s $222 trillion large!… In short, our government is totally broke. And it’s not broke in 30 years or in 20 years or in 10 years. It’s broke today.”
So how large is $222trillion? The annual GDP of the whole world is around $60trillion. The GDP of the United States of America is around $15trillion.
So what is the way out of this? “Here’s one way to wrap your head around our $222 trillion fiscal hole: closing it via tax hikes would require an immediate and permanent 64 percent increase in all federal taxes. Alternatively, the government could cut all transfer payments, e.g., Social Security benefits, and discretionary federal expenditures, e.g., defense expenditures, by 40 percent. Waiting to raise taxes or cut spending makes these figures worse,” writes Kotlikoff.
Another way out for the American government is to print money to meet its expenses (something which is it is already doing). As Kotlikoff puts it another column “The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills. Most likely we will see combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.”
If America has to get out of this hole, the American way of life has to change. And that as Obama’s speech clearly points out is unlikely to happen.
(The article originally appeared on www.firstpost.com on September 8,2012. http://www.firstpost.com/world/the-truth-obama-didnt-tell-his-party-the-us-is-broke-448686.html)
(Vivek Kaul is a writer. He can be reached at [email protected])

Obama, Salman Khan, QE-3: Why we have to wait for 6 Nov


Vivek Kaul

Richard Nixon, who was the President of the United States between January 1969 and August 1974, appointed Arthur C Burns as the Chairman of the Federal Reserve of United States (the American central bank) on January 30,1970. “I respect his (i.e. Burns) independence. However, I hope that independently he will conclude that my views are the ones that should be followed,” Nixon said on the occasion.
Burns did not disappoint Nixon and when it was election time in 1972. Since the start of 1972, Burns ran an easy money policy and pumped more money into the financial system by simply printing it. The American money supply went by 10.6% in 1972.
The idea was that with the increased money in the financial system, interest rates would be low, and this would encourage consumers and businesses to borrow more. Consumers and businesses borrowing and spending more would lead to the economy doing well. And this would ensure the re-election of Nixon who was seeking a second term in 1972. That was the idea. And it worked. Nixon won the second term with some help from Burns.
As investment newsletter writer Gary Dorsch wrote in a column earlier this year “Incumbent presidents are always hard to beat. The powers of the presidency go a long way….Nixon pressured Arthur Burns, then the Fed chairman, to expand the money supply with the aim of reducing unemployment, and boosting the economy in order to insure Nixon’s re-election…Nixon imposed wage and price controls to constrain inflation, and won the election in a landslide.” (you can read the complete column here)
History is expected to repeat itself
Something similar has been expected from the current Federal Reserve Chairman Ben Bernanke. It has been widely expected that Bernanke will unleash the third round of money printing to revive the moribund American economy. Bernanke has already carried out two rounds of money printing before this to revive the American economy. This policy has been technically referred to as quantitative easing (QE), with the two earlier rounds of it being referred to as QE I and QE II.
The original idea was that with more money in the economy, banks will lend, and consumers and businesses will borrow and this in turn would revive the economy. But the American consumer had already borrowed too much in the run up to the financial crisis, which started in September 2008, when the investment bank Lehman Brothers went bust. The consumer credit outstanding peaked in 2008 and stood at $2.6trillion. The American consumer had already borrowed too much to buy homes and a lot of other stuff, and he was in no mood to borrow more.
The wealth effect
The other thing that happened because of the easy money policy of the American government was that it allowed the big institutional investors to borrow at very low interest rates and invest that money in the stock market. This pushed stock prices up leading to more investors coming into the market.
As Maggie Mahar puts it in Bull! : A History of the Boom, 1982-1999: What drove the Breakneck Market–and What Every Investor Needs to Know About Financial Cycles: “In the normal course of things, higher prices dampen desire. When lamb becomes too dear, consumers eat chicken; when the price of gasoline soars, people take fewer vacations. Conversely, lower prices usually whet our interest: colour TVs, VCRs, and cell phones became more popular as they became more affordable. But when a stock market soars, investors do not behave like consumers. They are consumed by stocks. Equities seem to appeal to the perversity of human desire. The more costly the prize, the greater the allure.”
As more money enters the stock market, stock prices go up. This leads to what economists call the “wealth effect”. The stock market investors feel richer because of the stock prices going up. And because they feel richer they tend to spend some of their accumulated wealth on buying goods and services. As more money is spent, businesses do well and so in turn does the economy.
As Gary Dorsch writes “Historical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top-20% of wealthiest Americans account for 40% of the spending in the US-economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It’s the Fed’s version of “trickle down” economics, otherwise known as the “wealth effect.”
Why Bernanke won’t launch QE III soon
Given these reasons it was widely expected that Ben Bernanke would start another round of money printing or QE III this year to help Obama’s reelection campaign. Bernanke has been resorting to what Dorsch calls “open mouth operations” i.e. dropping hints that QE III is on its way. In August he had said that the Federal Reserve “will provide additional policy accommodation as needed to promote a stronger economic recovery.” This was basically a complicated way of saying that if required the Federal Reserve wouldn’t back down from printing more money and pumping it into the economy.
But even though Bernanke has been hinting about QE III for a while he hasn’t gone around doing anything concrete about it. The reason for this is the fact that Mitt Romney, the Republican candidate against the incumbent President Barack Obama has gone to town criticizing the Fed’s past QE policies. He has also warned the Federal Reserve to stay neutral before the November 6 elections, says Dorsch. As Romney told Fox News on August 23 “I don’t think QE-2 was terribly effective. I think a QE-3 and other Fed stimulus is not going to help this economy…I think that is the wrong way to go. I think it also seeds the kind of potential for inflation down the road that would be harmful to the value of the dollar and harmful to the stability of our nation’s needs.”
Romney even indicated that he would prefer someone other than Bernanke as the Chairman of the Federal Reserve. “I would want to select someone new and someone who shared my economic views…I want someone to provide monetary stability that leads to a strong dollar and confidence that America is not going to go down the road that other nations have gone down, to their peril.” With more and more dollars being printed, the future of the dollar as an international currency is looking more and more bleak.
Romney’s running mate Paul Ryan also echoed his views when he said “Sound money… We want to pursue a sound-money strategy so that we can get back the King Dollar.”
Given this it is highly unlikely that Ben Bernanke will unleash QE III before November 6, the date of the Presidential elections. And whether he does it after that depends on who wins.
Of Obama and Salman Khan
As far as pollsters are concerned Obama seems to have the upper hand as of now. But at the same time the average American is not happy with the overall state of the American economy. “According to pollsters, two thirds of Americans think the US-economy is still stuck in the Great Recession, and is headed in the wrong direction. Only 31% say it is moving in the right direction – the lowest number since December 2011. The dire outlook is explained by a recent analysis by the US Census Bureau and Sentier Research LLC, indicating that US-household incomes actually declined more in the 3-year expansion that started in June 2009 than during the longest recession since the Great Depression,” writes Dorsch.
But despite this Americans don’t hold Obama responsible for the mess they are in. As Dorsch points out “Although, Americans are increasingly pessimistic about the future, many voters don’t seem to be holding it against Democrat Obama. Instead, the embattled president is getting some slack because he inherited a very tough situation. In fact, Obama’s strongest base supporters are among also suffering the highest jobless rates and highest poverty rates in the country.”
Obama’s support is similar to the support film actor Salman Khan receives in India. As Manoj
Manoj Desai, owner of G7 theatres in Mumbai, recently told The Indian Express “Even when the fans are disappointed with his film, they never blame him. You will often hear them say, bhai se galat karwaya iss picture main. (They made Bhai do the wrong things in this movie)”
What’s in it for us?
Indian stock market investors should thus be hoping that Barack Obama wins the November 6 elections. That is likely to lead to another round of quantitative easing. As had happened in previous cases a portion of that matter will be borrowed by big Wall Street firms and make its way into stock markets round the world including India.
(The article originally appeared on www.firstpost.com on September 5,2012. http://www.firstpost.com/world/obama-salman-khan-qe-3-why-we-have-to-wait-for-6-nov-444474.html)
(Vivek Kaul is a Mumbai based writer and can be reached at [email protected])

An interview with the mysterious, reclusive, FoFoA….


Half way through the interview, I ask him where does he see the price of gold reaching in the days to come. “Well, I don’t see gold’s trajectory being typical of what you’d expect to see in a bull market….And I expect that physical gold will be repriced somewhere around $55,000 per ounce in today’s purchasing power. I have to add that purchasing power part because it will likely be concurrent with currency devaluation,” he replies. Meet FOFOA, an anonymous blogger whose writings on fofoa.blogspot.com have taken the world by storm over the last few years. In a rare interview he talks to Vivek Kaul on paper money, the fall of the dollar, the coming hyperinflation and the rise of “physical” gold.
The world is printing a lot paper money to solve the economic problems. But that doesn’t seem to be happening. What are your views on that?
Paper money being printed to solve the problems… this was *always* on the cards. It doesn’t surprise me, nor does it anger me, because I understand that it was always to be expected. The monetary and financial system we’ve been living with—immersed in like fish in water—for the past 90 years uses the obligations of counterparties as its foundation. These obligations are noted on paper. In describing the specific obligations these papers represent, we use well-known words like dollars, euro, yen, rupees and yuan. But what do these purely symbolic words really mean? What are these paper obligations really worth in the physical world? Ultimately, after 90 years, we have arrived at our inevitable destination: the intractable problem of an unimaginably intertwined, interconnected Gordian knot of purely symbolic obligations. A Gordian knot is like an unsolvable puzzle. It cannot be untangled. The only solution comes from “thinking outside the box.” You’ve got to cut the knot to untangle it. So the endgame was always going to be debasing these purely symbolic units. Anyone who expected anything else simply fooled themselves into believing the rules wouldn’t be changed.
Do you see the paper money continuing in the days to come?
Yes, of course! Paper money, or today’s equivalent which is electronic currency, is the most efficient primary medium of exchange ever used in all of human history. To see this you only need to abandon the idea of accumulating these symbolic units for your future financial security. They aren’t meant for that! They are great for trading in the here-and-now, not for storing for the unknown future. To paraphrase Silvio Gesell, an economist in favor of symbolic currency almost a century ago, “All the physical assets of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!” In hindsight, this statement is true whether money is a hard commodity like gold or silver, or a symbolic word like dollar, euro or rupee. In both cases, saving in “money” leads to monetary tension between the debtors and the savers. When money was a hard commodity, this tension was sometimes even released through bloodshed, like the French Revolution. So no, I don’t think we’re swinging back to a hard currency this time.
Do you see the world going back to the gold standard?
No, of course not! “The gold standard” means different things depending on which period you are talking about. But in all cases it used gold to denominate credit, the economy’s primary medium of exchange. Today we have a really efficient and ultimately flexible currency. Bank runs like the 1930s are a thing of the past. But that’s not to say that gold will not play a central role in the future. It will! The signs of it already happening are everywhere! Gold is not going to replace our primary medium of exchange which is paper or electronic units with those names I mentioned above. Instead, physical gold will replace paper obligations as the reserves—or store of value—within the system. Physical gold in unambiguous ownership has no counterparty. This is a much more resilient foundation than the tangled web of obligations we have today.
Can you give an example?
If you’d like to see this change in action, go to the ECB (European Central Bank) website and look at the Eurosystem’s balance sheet. On the asset side gold is on line 1 and obligations from counterparties are below it. Additionally, they adjust all their assets to the market price every three months. I have a chart of these MTM (marked to market) adjustments on my blog. Over the last decade you can see gold rising from around 30% of total reserves to over 60% while paper obligations have fallen from 70% to less than 40%. I expect this to continue until gold is more than 90% of the reserves behind the euro.
Where do you see all this money printing heading to? Will the world see hyperinflation?
Yes, this will end. I am pretty well known for predicting dollar hyperinflation. As controversial as that prediction is, I think it is a fairly certain and obvious end. I don’t like to guess at the timing because there are so many factors to consider and I’m no supercomputer, but ever since I started following this stuff I’ve always said it is overdue in the same way an earthquake can be overdue. As for other currencies, I don’t know. Perhaps yes for the UK pound and the yen, but I don’t know about the rupee. The important things to watch are the balance of trade and the government’s control over the printing press. If you’re running a trade deficit and your government can (and will) print, then you are a candidate for hyperinflation.
In that context what price do you see gold going to?
Well, I don’t see gold’s trajectory being typical of what you’d expect to see in a bull market. Instead it will be a reset of sorts, kind of like an overnight revaluation of a currency. I’m sure some of your readers have experienced a bank holiday followed by a devaluation. This will be similar. And I expect that gold will be repriced somewhere around $55,000 per ounce in today’s purchasing power. I have to add that purchasing power part because it will likely be concurrent with currency devaluation. So, in rupee terms, I guess that’s about Rs3.2 million per ounce at today’s exchange rate.
The price of gold has been rather flat lately. What are the reasons for the same? Where do you see the price of gold going over the next couple of years?
“The price of gold” is an interesting turn of phrase because I use it often to express “all things goldish” in the gold market. In today’s market, “gold” is very loosely defined. What passes for “gold” in the financial market is mostly the paper obligations of counterparties. These include forward sales, futures contracts, swaps, options and unallocated accounts. I often use the abbreviation “$PoG” to refer to the going dollar price for this loose financial “gold”.
The LBMA (London Bullion Market Association) recently released a survey of the total daily trading volume of unallocated (paper) gold. That survey revealed a trading flow of such magnitude that it compares to every ounce of gold that has ever been mined in all of history changing hands in just three months, or about 250 times faster than gold miners are actually pulling metal out of the ground. Equally stunning were the net sales during the survey period. The rate at which the banking system created “paper gold” was 11 times faster than real gold was being mined.
What is the point you are trying to make?
The point is that gold is being used by the global money market as a hard currency. But it is being treated by the marketplace as both a commodity that gets consumed and also as a fiat currency that can be credited at will. It is neither, and gold’s global traders are in for a rude awakening when they find out that ounce-denominated credits will not be exchangeable for a price anywhere near a physical ounce of gold in extremis—ironically failing at the very stage where they were expected to perform.
So what are you predicting?
But don’t get me wrong. It is not a short squeeze that I am predicting. In a short squeeze, the paper price runs up until it draws out enough real supply to cover all of the paper. But this paper will not be covered by physical gold in the end. It will be cash settled, and it will be cash settled at a price much lower than the price of a real ounce of gold, like a check written by an overstretched counterparty. It is a tough job to make my case for the future of the $PoG in just a few paragraphs. The $PoG will fall and then some short time later we will find that the market has changed out of necessity into a physical-only market at a much higher price. If you were holding paper you will be sad. If you were holding the real thing you’ll be very happy
Why is the gold price so flat these days?
Today’s surprisingly stabilized $PoG tells me that someone is throwing money into the fire to delay the inevitable. Where do I see the $PoG going over the next couple of years? Maybe to $500 or less, but you won’t be able to get any physical at that price. I think that today’s price of $1,575 is still a fantastic bargain for physical gold.
Franklin Roosevelt had confiscated all the gold that Americans had in 1933. Do you see something similar happening in the days to come?
Not at all! The purpose of the confiscation was to stop the bank run epidemic at that time. There’s no need to do it again. The dollar is no longer defined as a fixed weight of gold, so the reason for the last confiscation—and subsequent devaluation—no longer exists. Gold that’s still in the ground is a different story, however. Gold mines will likely be considered strategically important national assets after the revaluation, and will therefore fall under tight government control.
The irony of the entire situation is that a currency like “dollar” which is being printed big time has become the safe haven. How safe do you think is the safe haven?
Indeed, everyone seems to be piling into the dollar. Especially on the short end of the curve, helping drive interest rates ridiculously low. The dollar is as safe as a bomb shelter that’s rigged to blow up once everyone is “safely” inside. You can go check it out if you want to (sure, from the outside it might look like shelter), but you don’t want to be in there when it blows up. You’ve got to realize that it is both economically and politically undesirable for any currency to appreciate against its peer currencies due to its use as a safe haven. Remember the Swiss franc? As soon as it started rising due to safe haven use they started printing it back down. The dollar is no different except that it’s got a whole world full of paper obligations denominated in it. So when it blows, the fireworks will be something to behold.
What will change the confidence that people have in the dollar? Will there be some catastrophic event?
That’s the $55,000 question. It is impossible to predict the exact pin that will pop the bubble in a world full of pins, but I have an idea that it will be one of two things. I think the two most likely proximate triggers to a catastrophic loss of confidence are a major failure in the London gold market, or the U.S. government’s response to an unexpected budget crisis due to consumer price inflation. Most people who expect a catastrophic loss of confidence in the dollar seem to think it will begin in the financial markets, like a stock market crash or a Treasury auction failure or something like that. But I think it is more likely to come from where, as I like to say, the rubber meets the road. And here I’m talking about what connects the monetary world to the physical world: prices. I think these “worlds” are connected in two ways. The first is the general price level of goods and services and the second is the price of gold. If one of these two connections is broken by a failure to deliver the real-world items at the financial-system prices, then we suddenly have a real problem with the monetary side. So I think it will be a relatively quick and catastrophic event, but maybe not as dramatic as a major stock market crash. It will be confusing to most of the pundits as to what it really means, so it will take a little while for reality to sink in.
The Romans debased the denarius by almost 100% over a period of 500 years. The dollar on the other hand has lost more than 95% of its purchasing power since the Federal Reserve of United States was established in 1913, nearly 100 years back. Do you think the Federal Reserve has been responsible for the dollar losing almost all of its purchasing power in hundred years?
Yes, inflation was a lot slower in Roman times because it entailed the physical melting and reissuing of coins of a certain face value with less metal content than previous issues. This was a physical process so it occurred on a much longer time scale. The dollar, on the other hand, has lost nearly 97% of its purchasing power in roughly a hundred years. Do I think the Federal Reserve is responsible for this? Well, given that the lending/borrowing dynamic causes expansion of the money supply, I think the government and the people of the world share in the responsibility. But just because the dollar has lost 97% of its purchasing power doesn’t mean that any individual lost that much. How many people do you think are still holding onto dollars today that they earned a hundred years ago? How long would you hold dollars today? As long as the prices of things you want to buy don’t change during the time you are holding the currency, what have you lost? So imagine that you simply use currency for earning, borrowing and spending, but not for saving. Will it matter how much it falls over a hundred years? Your earning and spending will happen within a month or so, and prices won’t change much in a month. Also, your borrowing will be made easier on you as your currency depreciates. And your gold savings will rise. So with the proper use of money, there is no need for alarm if the currency is slowly falling at, say, 2% or 3% per year.
Do you see America repaying all the debt that they have taken from the rest of the world? Or will they just inflate it away by printing more and more dollars?
The debts that exist today can never be repaid in real terms. And as I mentioned before, they are all denominated in symbolic words like dollars, euro, yen, yuan and rupees. The debt of the U.S. Treasury, most of all, will of course be inflated away.
What are your views about the crisis in Europe? Will the euro hold?
Contrary to most of what we read in the Anglo-American press, I don’t think the euro currency is at risk from the sovereign debt crisis in Europe. They are two different things, the debt crisis and the euro. The euro currency faces none of the usual devaluation risks. Trade between the Eurozone and the rest of the world is balanced and the ECB has plenty of reserves. So aside from devaluation risk, which the euro doesn’t face, the only other risk is if the people decide to abandon the euro. Procedurally this would be so difficult for any country to do on a whim that I can confidently say it is virtually impossible aside from the most extreme situations like a revolutionary war or something like that. And I don’t see that happening. I think the euro survives come what may.
What does FOFOA stand for?
I remain anonymous because my blog is not about me. It is a tribute to “Another” and “Friend of Another” or “FOA” who wrote about this subject from 1997 through 2001. So FOFOA could stand for Friend of FOA or Follower of FOA or Fan of FOA. I never really stated what it stands for, so you can decide for yourself. 😉 Sincerely, FOFOA.
(The interview was originally published in the Daily News and Analysis(DNA) on July 2,2012)
(Interviewer Kaul is a writer and can be reached at [email protected])