Thursday, October 04, 2007

Another week closer to meltdown

We had a great metals week followed by a bad metals week which is to be expected as profit taking and a U.S. dollar bounce back were bound to eat away some of the gains. Does this mean it’s over? Hell no it’s just normal market action and it’s doubtful we will see a massive correction of recent gains considering nothing has changed to make things suddenly better.

The end of last week was a momentous occasion a real bank Failure! We’ve seen many non bank lenders close doors, go bankrupt or get bought in the last year but an announcement that NetBank had filed for bankruptcy was the first failure of a real bank in several decades and definitely a sign that problems are progressing up the food chain.

There are claims that the failure the failure of NetBank is a sign of the instability of the Net banking format and that the “branchless” bank business model is a failure. Is it a good sign or a bad sign that ING another bank of the same model is buying some of NetBank’s assets? The article claims ING is not a good performer compared to its peers and the business model as a whole is not a good performer.

On the U.S. economic front, today’s unemployment report shows the biggest jump of new claims in 4 months signaling further employment weakness.

In other relevant news Vietnam will refrain from buying anymore U.S. dollars in their attempt to keep the greenback strong. They claim the practice has been fuelling local inflation but the haircut they've been taking on the dollars value is just as likely a cause, Qatar move to divested itself of 59% of its dollar holdings in it’s $50 billion sovereign fund is another hit against the dollar

These moves cannot be good for the dollar's value and risks pushing other large dollar holders to follow their lead. A dollar run looks more possible every week, so don’t be fooled by this weeks dollar strengthening, the trend is and will remain downward.
Metals trend continues upward as will energy’s.

In fact, in the time it took me to write this the U.S. dollar has turned back down likely on the employment stats and metals regained their early losses and a bit extra. Don't worry, nothings changed.

The gold sovereign picture signifies nothing other than I think they are pretty and I'd like a bag of them.

Monday, October 01, 2007

Picking up Pennies

I was at the park with my boys on the weekend and as I crossed the road I saw a scattering of pennies on the ground. Now many people would sneer or make a snide comment that I bothered to bend over and pick them up considering how little a penny is worth. I do this habitually not because I’m that frugal but rather to see what I will find. This time I was quite surprised to find a rather nice example of a 1929 Canadian penny much like the image shown. If not for a recent blemish probably caused by a car driving over the coin on the road it might have been worth grading.

I found it interesting to speculate on how this coin escaped someone’s personal collection or how it managed to survive in circulation. It was an easily leap to believe that some light fingered child took them from home and dropped them, satisfying my curiosity by blaming someone’s else’s kid my mind then sped (crawled more like it) to new speculations to the relative value of this penny.

A little research today showed me that in 1929 Bread was 10 cents/lb, a cabbage 2 cents, coffee 45 cents/lb, round stake 51 cents/lb.

This of course was the end of the 1920’s boom just before the Great Depression and the decade of stagnation that would follow it. Look ahead a few years from the minting date you find beef, eggs, bread, lard, etc usually less than ½ of the 1929 prices. Cash was king in the thirties as low consumer demand, low liquidity, innovation all drove prices down and down. Those who held jobs often did well, they saved and could even buy up the assets from the less fortunate who had suffered unemployment, foreclosures, and hopelessness. People who had debts soon found that the assets they secured their loans with, land, stocks, etc had become worth less than their obligations and they defaulted. Like today’s victims of the housing bust many lost everything.

So what is that penny worth today? Measured by the Bank of Canada’s inflation calculator, similar goods purchased by my penny in 1929 would cost 12 cents today, representing 1200% of inflation or a 3.25% annual reduction in purchasing power of who ever horded that penny.

My penny’s real is worth only 8% of its original buying power

However once you realize that no one has any savings today and when money is spent it's actually money leveraged over the life of a 25y mortgage it would make a 1929 penny's equivelant value 24 cents, making todays penny worth 4% of the origian. Even better over one of those new 40y mortgages it would be about 36 cents, less than 3% or its original buying power. I don’t even care to figure out what a penny on plastic would be with all those minimum monthly payments. So my penny has gone from a real value of 1 cent or ½ a cabbage to next to nothing

What does this all mean?

Inflation is steadily eating away at any fiat money you attempt to save or horde

Fiat money is a scam that does not maintain its value over time.

Credit gives you at temporary consumer purchase “fix’, but unless you are buying a real asset that appreciates over time you are paying far too much and are even lowering you purchasing power more through your own impatience.

The system is not sound and despite claims that it can’t happen, fiat currencies have failed through out history, depressions and hyperinflation have occurred, fiat money will always lose value over time.

Gold and Silver unlike paper assets have always had a value.

Having some silver and gold is only logical given the historical precedents.

Bending over for a penny is really not worth it!