Letter 2008 12 30 - part 2
The Rules Of Thumb for 2008 were Easy
- If fully invested in large cap equity shares, then down 50%
- If in small cap equity shares, then down 75-90%
- If in real estate, then down 30%*
*Note: On your HK real estate purchased by Gold Citadel, (i) the properties were acquired cheap relative to the general market at the time of purchases as well as relative to inflation-adjusted mid-80’s construction costs, (ii) lovely renovations had been done where needed, and (iii) the contracted lease yields from better class of tenants are good relative to then and now interest rates, thus the value is at least what we paid for, and we look forward to our first distributions from earnings.
We are not looking to sell, as cash, in a fiat money inflation scheme now and ultimately, at zero % yield, is trash.
- If in cash, a mix of currencies, then down 10-15%
- If in gold mining shares, then down 30-90%
- If short the market, then up a speculative bit, mentally punished by the authorities, with gains to be later fritted away via long wagers, or, as in the case of Volkswagen shorts, squeezed hard and made to disappear
- If borrowed money to invest, then down 20-100%, and
- If in gold alone, then up 5.8% in US$ terms, and 100+% in any number of other terms.
What Happened and Why – Simply Summarized
At the beginning of every year since 2000 we had noted the increasing debt leverage in the global financial system that is based on the Japanese lending out their savings at effectively zero % interest to the Americans, and by so doing, to the whole wide world, thus enabling the Americans to turn today’s borrowings into immediate spending, on things needed in the future or never needed at all, bought from places like China, in effect transforming borrowed money into revenue of others, and having others funnel the true earnings from the make-belief revenue back into America as alleged ‘investments’ in Government Treasury bills and Fannie Mae agency debt – bits of paper claiming the earnings of Joe 6-Pack and Jane SUV.
The simple, intuitive and exponential mathematical game of circulating a progressively more poisoned pool of real funding, borrowing to pay interest, more and ever more, is nearing the end, and this toxic debt, as well as the volatile explosive 2nd, explosive 3rd and twisted 4th order derivatives of debt are now everywhere, ready to do their easy work.
During 2008, a confluence of events have acted to destabilize the poisoned global financial system, the details of which triggered what and led to where hardly matters. Simply put, the leverage in the financial system was high, destabilizing, toxic, and not sustainable – meaning something horrible will happen for sure – think in terms of someone coughing air-borne Ebola in a crowded elevator stuck on the twentieth floor.
At the onset of destabilization, an unwinding of the leverage commenced whereby earlier borrowed money used to buy all things, buildings, shares, commodities and corporate debt paper had to be sold. The more sold, the lower the price, triggering still more sales and lower prices. The proceeds from sales were converted into US$ and used to pay down debt in the USA, and by second order effect, pay down debt from Japan.
And so we see the crash of everything except gold and Swiss Francs CHF (who knows, perhaps also an important enough carry currency like Japanese Yen, just not as extremely used, but may also be treated also as a safe haven currency), and US$ and Yen.
Many financial instruments became unsalable in the subsequently illiquid market. Gold was simultaneously one of the few viable options for selling to raise cash needed to pay back debt, as well as an opt-out to the coming GZSMR – in case you forgot, standing for Global Zero-State Monetary Reset, or, easier to visualize, the zero to all fiat paper monies.
Again, summarized, gold bobbed up and down, caught between dying speculators needing to sell to raise liquid cash, thus letting go of their life preserver that is gold, and escaping savers racing to grab hold of the remaining monetary parachutes while on board the doomed monetary flying machine. Gold fell because folks got into such trouble, they had to sell what they could, not what they wished to sell. Gold rose because it is the only elemental money that is not the obligation of any unfaithful governing authority. It is the only natural and organic money today and throughout all of recorded history.
For additional reading, I again recommend “Fiat Money Inflation in France”, downloadable here mises.org . It is the epic morality tale of a people and their money, how it started, what were the sorry acts, and what happened for the next 200 tragic years, or the next many generations, whichever transpired first.
A quote, "And, finally, as to the general development of the theory and practice which all this history records: my subject has been Fiat Money in France; How it came; What it brought; and How it ended.
It came by seeking a remedy for a comparatively small evil in an evil infinitely more dangerous. To cure a disease temporary in its character, a corrosive poison was administered, which ate out the vitals of French prosperity.
It progressed according to a law in social physics which we may call the "law of accelerating issue and depreciation." It was comparatively easy to refrain from the first issue; it was exceedingly difficult to refrain from the second; to refrain from the third and those following was practically impossible.
It brought, as we have seen, commerce and manufactures, the mercantile interest, the agricultural interest, to ruin. It brought on these the same destruction which would come to a Hollander opening the dykes of the sea to irrigate his garden in a dry summer.
It ended in the complete financial, moral and political prostration of France—a prostration from which only a Napoleon could raise it." |
