Mark McHugh

Archive for the ‘Treasuries’ Category

What The Silver Vigilantes Understand That You Probably Don’t (Arithmetic, Human Nature and other Stuff)

In Open Thread, Silver, stocks finance, Treasuries on Wednesday, December 15, 2010 at 6:03 pm

Sorry about the insulting headline, but every last shred of evidence I can find suggests that the most people remain utterly clueless about silver, despite the efforts of the silver vigilantes, led by Max Keiser and Mike Kreiger.  Their brilliantly simple plan (go get some physical silver) promises to topple the criminally insane fraud that has become US economy.  It doesn’t require politicians or regulators to lift a finger either, you simply take advantage of what is undoubtedly an artificially low price.  I can completely understand anyone who is skeptical of that last statement; I’m sure you’ve been burned before, but that doesn’t mean you should stop seeking truth.  

Part 1. A little math.

I’m not sure when performing basic arithmetic made you a conspiracy theorist, but here we are.  

The 2009 World’s population was about 6.8 Billion.  According to the Silver Institute, total silver supply in 2009 was 889 million ounces.  That means there was .13 ounces of silver produced for every human being on the planet.  That looks like this:

Yep, your fair share of Worldwide silver production is a little less than the silver content of two pre-1965 dimes.  That’s all.  A bargain at about four bucks when you consider the amazing properties of this element.  FYI: World oil production per capita is 190 gallons. 

This….

 …represents more than ten years of  worldwide silver mining production divided by 2009 population.  Less than $35, and hell of lot easier to transport than 7,600 quarts of Quaker State.  Please note that so-called “World production” includes government sales and scrap.  Government sales and “scrap” have accounted for more than 25% of  “World Silver Production” from 2000 to 2009.  I’m not sure I believe that one out of every four ounces of silver gets recycled, but understand that without that bonus production, demand exceeds supply by 37%. 

Part 2. Who needs silver?

Just about everybody, it turns out.  Sadly, another way to get yourself labeled a conspiracy theorist is by reading government documents like the Constitution, or the Department of the Interior’s 2009 U.S. Geological Survey which states:

The physical properties of silver include ductility, electrical conductivity, malleability, and reflectivity. The demand for silver in industrial applications continues to increase and includes use of silver in bandages for wound care, batteries, brazing and soldering, in catalytic converters in automobiles, in cell phone covers to reduce the spread of bacteria, in clothing to minimize odor, electronics and circuit boards, electroplating, hardening bearings, inks, mirrors, solar cells, water purification, and wood treatment to resist mold. Silver was used for miniature antennas in Radio Frequency Identification Devices (RFIDs) that were used in casino chips, freeway toll transponders, gasoline speed purchase devices, passports, and on packages to keep track of inventory shipments. Mercury and silver, the main components of dental amalgam, are biocides and their use in amalgam inhibits recurrent decay.

 Yet you can actually find dunces out there claiming that digital cameras have made silver obsolete.  You should live so long…

Fun Fact:  Silver (not gold, copper or anything else) is the element with the highest electrical conductivity.

Part 3. People lie…..

“…I want to make it equally clear that this nation will maintain the dollar as good as gold, freely interchangeable with gold at $35 an ounce, the foundation-stone of the free world’s trade and payments system.”

John F. Kennedy, July 18, 1963 

“That we stand ready to use our gold to meet our international obligations–down to the last bar of gold, if that be necessary–should be crystal clear to all.”

William McChesney Martin, Jr. (Federal Reserve Chairman) December 9, 1963

And…..

Lesson:  When someone says you can exchange paper for precious metals – make the swap before they change the rules.

Since the invention of paper, people have been writing bogus notes, and if there are two time-tested methods to become wealthy beyond your wildest dreams, they are:  1)Selling stuff that doesn’t exist and 2) Selling stuff you don’t actually own.  Unless you believe there has been a sudden outbreak of integrity in the banking industry, there’s no reason to believe these dynamics are not still in play, is there?  As recently as 2007, Morgan Stanley settled a class-action lawsuit with 22,000 clients who bought and paid storage on “phantom” silver (check out the Ted Butler article Money for Nothing).

At today’s prices, a million dollars in gold weighs less than fifty pounds, but a million dollars in silver weighs more than 2,300 pounds!  So ask yourself, how many rich people are storing their own silver?  How many hedge funds hold physical silver in their own storage facility?  Or have they entrusted the storage to the big banks?

JP Morgan is the custodian of the ishares Silver Trust (SLV), which now holds over 350 million ounces of silver, provides  sovereign and corporate investors with precious metals solutions (JP’s website), and is the largest short seller of silver in the history of the world.  Berkshire Asset Management’s  Eric Fry writes:

Based on some of the latest conjecture, Morgan’s short position totals a whopping 3.3 billion ounces. If, therefore, the buzz about J.P. Morgan and silver is even half true, the prestigious investment bank could be cruisin’ for bruisin’.

For perspective, 3.3 billion ounces is roughly equal to:

1) One third of all the world’s known silver deposits;

2) Two times the world’s approximate stockpiles of silver bullion;

3) Four times the annual mined supply of silver;

4) 30 times the inventory of silver at the COMEX.

If you can, forget about the conflict of interest, and ponder the enormity of the explosion.

 

Part 4. A little more math. 

 Estimates of total silver production since the dawn of man range from 46 to 53 billion ounces (roughly 11x gold production), but unlike gold, we’ve used pretty much all of it (although squandered might be a better word).  It’s in our cemeteries (fillings) and scattered throughout our landfills.  There hasn’t been a significant surplus since 1990.  Ted Butler and others estimate that there is far less silver bullion in the world than gold bullion and they back up their case with numbers  that the paperbugs have never even bothered to refute.  So why does gold trade at more than 45 times the price of silver?  Because JP Morgan, the US government, and every other psuedo-capitalist parasite wants it that way.  But that’s a truth for another day.

Part 5. Other things you should know.

 The Treasury has sold 34 million one ounce American Eagles so far in 2010.  Those sales total less than one Billion dollars. Apple (AAPL) trades about that much every hour the market is open.  Meanwhile the Treasury has issued more than 1.5 Trillion in new debt (1,500 times more) in 2010.  Just for fun, let’s multiply 1500 by 34 million.  A transaction of that size would have equaled every last bit of silver ever discovered at $30 an ounce.    Yet you can actually find people who believe silver is the bubble.

Treasury doesn’t make it easy to buy silver.  They’ll sell you bills, bonds and notes directly online, but not precious metals at anything close to market price.   The mint only does business with  11 Authorized Purchasers (a list can be found here),  Why the lack of savvy?

China can blow up the COMEXs silver market in the blink of an eye, at any moment.  They can do it with their pocket change, as a goof.  And if we piss them off enough, they will.

Part 6. So what’s silver worth.

The short answer is: more.  If silver were priced based on its occurrence relative to gold, it would be over $125/oz.  If it were priced on its availability – somewhere around $2,000.  But if you are content to let the likes of Blythe Masters dictate the value based on truckloads of worthless paper promises, you can expect ultra-low prices until the whole thing blows up.  Of course at that point, we’ll be so busy killing each other for food no one will have time to say, “I told you so.”

The silver vigilantes just want you to re-learn what the phrases like, “cold, hard cash,”  and “payment in full” are supposed to mean.  There not asking you to sink everything you have into physical silver,  just a little.  Silver can’t be printed into oblivion, or stolen by a cyber attack.  Why wouldn’t you want to own some of your very own? 

A paper dollar from 1960 is worth exactly the same as a paper dollar in 2010, but  four quarters from 1960 are worth more than $21.  Given the fiscal insanity of the US government, I can’t imagine the US dollar surviving another 50 years, but I’m quite sure that silver will still be useful.  Please consider getting some.

***

 

 

 

 

Update: All indications say this piece is the most widely read thing I’ve ever written.  I would like to thank everyone who helped make that possible especially Max Keiser, Steve Quayle and my friends at Zerohedge.  For the record: ANYONE (except seekingalpha.com – long story) is welcome to my original content here (which is like 99.9% of what’s here).  It would be nice if you mentioned me, but I won’t hunt you down if you don’t.

Some Personal Favorites:

M. C. Escher – Economist   (This graphic in particular)

Giant Leaps  – My best (and most ignored) work.

Tin Foil Hat America (the Eskimo Test) – provides insight into my madness

I can’t believe it’s no Capitalism! – graphic

Candy from Strangers – Who’s buying our debt? (I still don’t know)

“Shut-up And Eat Your Paint Chips, Kid” – Miseducating America (the ZH discussion  was great, and I love the Daily Bail’s graphic (not mine))

Understanding the National Debt (Sesame Street Edition) 

Hopefully there’s other wortwhile stuff here, but I think that’s all the shameless self-promotion any of us can stand.

Thanks for stopping by!

Candy from Strangers (Corrected)

In Government, Open Thread, Treasuries on Tuesday, August 10, 2010 at 5:33 pm

 Author’s note: Numbers in the original published version of this piece were derived from fed table F.209 not L.209 (in other words, the wrong table). I sincerely apologize to all for the error. And I hope the fact that I’m a dunce won’t distract you from issues I was trying to address. A more detailed description of the error can be found here.

When TrimTabs Charles Biderman questioned the source of the money that propelled stocks 65% from the March 2009 lows, he got beaten with the idiot stick so badly that he turned bullish in April 2010.  Lost in the ensuing choke-out was the fact that no one ever actually answered his question, unless scoffing and muttering “dark pools and stuff,” under your breath counts (and he’s the one who should be wearing the tin-foil hat?).  Here we go again.

 

The first thing you should notice when looking at The Treasury’s 2010 Q1 Bulletin is that it’s  incomplete, as I’m sure most of Secretary Tim Geithner’s homework assignments were(1).  Of the 12 columns on Table OFS-2 (Estimated Ownership of U.S. Treasury Securities), Turbo managed to fill in only 5 (FYI: it takes Treasury more than two months to prepare the bulletin).

From the data actually present, we can determine that Treasury issued 461.7 Billion in new debt Q1.  That’s not surprising, we’ve been running at the $500 per person per month clip for almost two years now.  What is surprising is that the Fed  &  Intragovernment holdings went down $17B.  Foreigners, God bless ‘em, scooped up an additional $192.5 B, while  US saving bond  holdings were basically flat (-$1.1 B).

Um, we’re out of data now, but not debt.  287.4 Billion  (62%) of  Q1′s public debt is not accounted for on the report.   Fortunately when discussing who could digest that much debt in three months, we can quickly eliminate 6 of the 7 “not available” data points (depository institutions, pension funds, mutual funds, insurance companies, and State & local governments).  The only logical conclusion is at least a quarter trillion  in debt was purchased by “Other Investors” in Q1.

Aren’t you glad we cleared that up?

What’s that?  “Who the hell are Other Investors,” you say?  Good question.  It does seem rather nebulous, especially considering that they are now clearly our best customer(s).   Not very bright though.  They stepped in and bought like crazy as interest rates went to record lows.  Still I think we should send a basket of fruit and a nice thank you note, because without them we would surely have had a failed auction (read Keynesian apocalypse).

The Treasury defines Other Investors as: 

Individuals, Government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors.

Thanks Turbo, for narrowing  it down to just about everyone under the sun.

Let’s go ask Ben!

Geithner’s a slacker, this is known, but Fed Chair Ben Bernanke’s SAT score (1590!) suggests analality (?) (mine was considerably lower).   Besides, Treasury’s footnotes on tables OFS-2 tell us that  the source for 6 of the 7 empty columns is the Federal Reserve Board of Governors, Flow of Funds Table L.209 (and which was actually released before the Treasury Bulletin – don’t get me started…).

The Fed’s flow of funds data is an exercise in convolution, but it wasn’t too difficult to extract the data missing from the Treasury bulletin.  Here’s the breakdown:

  • Depository Institutions   +$67.2 B (up 32.5% in one quarter!)
  • Private Pension Funds   +$32.4 B
  • State & Local Government Pension Funds  +$7.1 B
  • Insurance Companies  +$2.1 B
  • Mutual Funds  -$13.1 B
  • State & Local Governments  -6.6 B

Depository institutions and Private pensions purchased record amounts of  Treasuries in Q1.  Which means that “Other Investors” accounted for $198 B of the Treasuries issued in Q1.  Yes, I realize that this is somewhat lower than my original estimate, but in my defense that was a logical conclusion.  Who knew banks and private pensions are expecting another stock market collapse?  Nobody at CNBC anyway.  They’re too busy laughing at Main Street for not seeing the awesomeness of the recovery.

Before putting away the Fed’s flow of funds, it is worth noting that brokers and dealers added $8.4 B in holdings and GSEs bought 38 B (both groups are included as other investors and no the GSE number is not a mistake!)(2).  This brings us to the turd in the punchbowl.  The Household sector, who the Fed says purchased a whopping $148 B.  Now before you start thinking your neighbors are taking their unemployment checks and sneaking off to Treasury auctions, listen to what Sprott Asset Management’s Eric Sprott and David Franklin said of the household sector in their December 2009 report entitled, Is it all just a Ponzi Scheme?:

To quote directly from the Flow of Funds Guide, “For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector.” (Emphasis ours) So to answer the question – who is the Household Sector? They are a PHANTOM. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.

I guess that means your neighbor isn’t our superhero, and besides, if he was he’d have a cooler car.  So who are these strangers with candy hell-bent on making sure this sugar high doesn’t end?   I don’t know.  There I said it.  Maybe Charles Biderman gets rattled when everyone calls him a moron, but I’m used to it.  So fire away, but answer the question.

By the end of 2010, Other Investors will own more than 10% of the US public debt (1.5 Trillion or so).  They bought more than 40% of the new debt in Q1.  At what point does this kind of opacity become unacceptable?  Why can’t the Treasury fill out its own bulletin with information already available?  Why do we have to wait five months for information that is so vague, you can’t even call it information with a straight face?

And last but not least, where do we send the fruit basket?

  1. Treasury’s bulletins have always omitted the most recent data – the omissions are not unique to Geithner. The omissions are inexcusable, especially now, but not new. I didn’t explain that because I didn’t think it was particularly relevant and it ruined a perfectly good joke.
  2. This sentence was replaced. Data on the GSEs was omitted from the original post, and the broker and dealers number was changed from -19B to +8.4B.

 

Other Reading:

Is it all just a Ponzi Scheme? (Sprott & Franklin)

http://www.zerohedge.com/article/chinese-treasury-dump-brings-its-total-holdings-one-year-low-uk-continues-exponential-accumu

Treasury table OFS-2 (updated and corrected).

Are Leveraged ETFs a Dumping Ground for Government Debt?

In Leveraged ETF, SEC, stocks finance, Treasuries on Monday, March 1, 2010 at 9:40 pm

**note: all data used was captured as of the February 26 close.

I’m not big on suspense, so I’ll answer right up front – YES!  Yes they are. In fact when you boil off the bullshit, there’s not much else to them. The actual (net) holdings of one leveraged ETF pair (FAS/FAZ) is currently 84% Goldman Sachs Financial Square Government Fund ($1.44B). But that’s really only slightly more outrageous than Direxion’s total ETF family (here), which is comprised of $4.77B (79%) government debt vs. $1.29B actual investment.  

If you want to understand how I know this, you will have to indulge me a little.   

For a moment, think about the concept of leveraged ETFs; promising returns of up to 300% of a particular index, or its’ inverse (-300%)!  But beyond the ability to make (or in my case, lose) money astonishingly fast; I am astounded that such devices can even be designed, by NASA, or anyone else native to this planet.  Where would you start?  And who are these guys?   

Just another day at Direxion Funds, I guess. 

more…. Read the rest of this entry »