Tag Archives: silver

Dinner with the Overclass (“Great Upload of 2013”)

(originally written Nov 17, 2010.  Part of the Great Upload of 2013.)

We had the pleasure of dining with the overclass on Monday, at an event put on by the wealth-services branch of a mutual fund company.  I’d charmed our way into that club earlier in the year, despite falling well short of the minimum asset requirements, using those charismatic powers that my wife seems curiously oblivious to. ;)  What clinched the deal for me, was the lure of a free dinner every time those guys swung through town — finally, someone giving us something for letting them gamble with our money! ;)

While there were a few of us pre-retirees there, the crowd leaned well-dressed and geriatric. No doubt some were keen wanting to move from merely ostentatious to fully obscene wealth — the kind of folks who might have forgotten (or never known?) the more immediate financial concerns of the bottom 98% of their fellow citizens, even in a well-to-do country like Canada. I believe I was the only person wearing sneakers. :)

A lot of people looked like they could’ve been from (exclusive Vancouver private boys’ school) St. George’s class of 1960. Or maybe 1950. But ex-Ballard colleagues were there — which was pretty cool. If anyone wants to get in touch with them, let me know.

The Eur-“uh-oh”-zone

The evening consisted of free (I wish I was a drinker!) cocktails followed by a dinner lecture during which each money manager discussed their economic outlook — which generally fell somewhere in the ominous-to-apocalyptic spectrum. (“The market giveth, and the market taketh away…”) Mainly for the reasons described in this deservedly-viral YouTube video.

With catastrophic irony, though the US Federal Reserve is trying to weaken the dollar with “quantitative easing” (to improve their economy through exports) it seems more probable (60/40?) that the US dollar will rise from here. (It’s notable that the Japanese government has been trying on and off to weaken the yen for, oh, half my life, but their currency recently hit all-time highs against the US dollar.) As bad as things are in the US, they’re even worse in Western Europe. It’s as if the US has halted its horse on the racetrack… but the EU’s horse is moving backwards.

Ireland is going to need a bailout; they’ll probably get one, because Germany leads the Euro bloc, and German banks are acutely exposed to Irish debt. Portugal’s also looking “sinking ship”-shape, and Spain — whose economy is roughly the size of Canada’s — is listing badly. Back in the day the US used “domino theory” to justify propping up governments in south-east Asia to prevent communism from spreading (“if Vietnam falls, Cambodia will fall, then Laos, and then … eventually, India”).

Right now, Eurozone governments are using similar logic, trying vainly to contain the financial contagion. Political problems are inevitably going to emerge from German bankers imposing austerity on Ireland, French citizens subsidizing Greek ones, and so forth. At least in the US, while “red states” might be irritated at having to bail out California, they share a national identity and mythos.

Siiiiiiilver

The speakers spent a bunch of time talking about silver, which has gotten a bit of attention with its sharp ascent (and descent) lately. While falling industrial consumption can negatively impact prices during tougher times, it would seem that in upcoming years it should continue to do well. This is mainly because, over the years, the “geniuses” at certain investment banks placed highly-leveraged bets on the commodity’s price… never imagined that anyone would actually be paranoid enough to take delivery of the actual metal, instead of booking paper profits. So they’re actually on the hook for a lot more silver than is readily available for purchase on the market.

Smelling blood, their deep-pocketed rivals have been hoovering up all available silver, in a successful-thus-far attempt to create scarcity and gouge the investment banks. As an example, the Sprott folks recently started up an exchange-traded fund whose business plan is… to store silver bars in a vault. They had to cut their IPO back from $750 million, though, because they could ‘only’ find about $600 million worth of silver on the open market. One of those ‘rich people problems’…

Mind you, I largely ignore the silver market. Because it’s so small, it’s insanely volatile — relatively small flows of money (by global standards) can completely distort the market, upwards or downwards. Most developing countries which successfully navigated their way to reasonable prosperity restricted capital flows for this same reason: too much money suddenly coming into a small economy can quickly create a bubble, and too much money suddenly leaving can exacerbate misery, neither of which are particularly beneficial.

517 – 1 !!  Awwwright!

One bright side for the global south did come out of the Overclass Night, though — it was the firm’s assessment that after centuries of colonization, mercantilism and marginalization, developing countries are generally in much better financial shape than their First World counterparts. Stagnation in the West for the next several years, should contrast with relative health in the majority world. Score one for the underdogs! :)

By my scorecard that makes it — let’s see, Columbus was 1492, right? — oh, about 517-1. ;)

Bankers uber alles

A few weeks into a planned three-month stint as a full-time parent, I’m amazed at how much less time I have; the only breaks I get in the day, are when our son naps! In contrast, I could reliably eke in minutes here and there throughout the workday; if I had a meeting in four minutes, or was waiting for a kettle to boil to refill my tea, I could whip out a paragraph or two, no problem.  You could think of it as the typing equivalent of the scam in Office Space where the heroes skim a half-cent off everyone’s hourly wages, into a slush fund.  The movie referenced Richard Pryor pulling the same scam in Superman 3, a movie with which our elder (or less-hip) readers may be more familiar.  ;)

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There was a recent IMF study not too long ago which concluded that a too-big financial sector was an impediment to growth.  The explanation is that when the financial sector gets too bit, it causes the misallocation of capital.  Which I’m guessing, based on recent experience, is code for “derivatives” and other highfalutin forms of gambling.

One sign that more financial innovation is worse-not-better, come from high-frequency trading algorithms — an example of which is the software “glitch” that caused Knights Capital to lose $440 million in 45 minutes last week.  And that wasn’t market capitalization, that was basically cash-on-the-books!  :)

High-frequency trading algorithms have flourished in the past few years, as under-regulation made way for un-regulation.  These enabled financial behemoths to make huge trading profits virtually every day, off of their customers, by “front-running”.  Which, as I understand it, is a fancy way of saying they inserted themselves as middle-men into every trade.  HFT is defended as the latest in financial innovation, which is a like saying bridge tolls are the latest in automobile technology.  ;)

HFT algorithms submit bids-to-buy and offers-to-sell hundreds of times per second (see here for pretty graphs) in various patterns to determine exactly what price sellers and buyers are seeking, and are willing to accept.  The bids and offers would be near-immediately cancelled, because the investment banks had no interest in actually following through with them — for all intents and purposes, these were fake bids and offers.  (Which would make HFT trading a form of quote-stuffing.)  The brokerage firms would then run-in-front of the buyers (hence “front-running”) to buy the stock first, then immediately turn around and sell it to the other buyers for just a bit more.  The other buyers, in many cases, being the brokerage house’s clients.  How does that saying go?  “Do unto others before they can do unto you”?  :)

Putting it in real-world terms, if a mutual fund wanted to buy a million shares of BigCorp at $10, but were willing to pay $10.05 per share, in an earlier era they might have gotten an average price of $10.02.  Thanks to HFT front-running, their average price might be in the whereabouts of, say, $10.025.   As the guys in Office Space proved, getting a fraction of a cent off of zillions of transactions, can be really lucrative!

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The usefulness of a big financial sector may actually get some discussion in this year’s US elections, since Mitt Romney made his fortune as a financier.  His company, Bain Capital, would purchase companies, loot everything of value, then shut the doors.  Kind of a profit-through-bankruptcy model.  Romney was caught a few months back saying “corporations are people”, inspiring Stephen Colbert’s SuperPAC to air an ad comparing Romney to a serial killer (Mitt killed a lot of companies; companies are people; therefore Mitt is a serial killer).

Of course, Colbert is exaggerating for effect.  :)  Romney wasn’t so much a serial killer, as a guy who bought people and turned a profit by selling off their organs; if they died, that was unfortunate, but… hey, wait, that meant there would be more organs to sell!  It’s a kind of “the sum of the parts is greater than the whole” philosophy.

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It’s well-known that Romney is a Mormon; and congratulations to those guys for getting one of their own on the Presidential ticket.  Despite this, I think Hinduism is the most illuminating lens through which to understand the Presidentially-aspiring Romneys.  (Mitt’s father George tried to get the Republican leadership nomination in the 1960’s.)  While George Romney led a car company, American Motors, that created jobs and prosperity for employees and suppliers alike, Mitt Romney was a corporate raider whose company, Bain Capital (fitting, that) would buy other companies, extract the wealth, and let them go under, causing misery.

Applying a Hindu overcoat to the Mormon Romneys, we might say that George Romney was the Brahma (“the creator”) to Mitt Romney’s Shiva (“the destroyer”).  ;)

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As an appended aside, the fact that Bain was allowed to continue doing what it did, may reflect the fact that for the past generation the US has followed a policy of deliberate deindustrialization in favour of a service economy.  Pity then, that too much finance isn’t good for you, eh?  One definitely gets the impression that industry in Germany, other European countries, and Japan remains healtheir than in the Anglo-capitalist countries have (US, UK, Canada, Australia).)

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Still, the foibles of Knights Capital, Bain Capital, and even HFT front-running, are beer-league infractions compared to the scandal surrounding LIBOR — the London InterBank Offered Rate — which investment bankers have been manipulating to their benefit since 1991 or earlier.  That’s so long ago, the Soviet Union was still around!!

Just as the central bank’s prime rate is the reference rate for mortgages in many countries, LIBOR has been a reference rate for probably trillions of dollars of loans and investment products (“interest rate swaps”) over the years.  So LIBOR manipulation is a Very Big Deal — conceivably, in a just world, every affected party could sue for damages.  And according to Matt Taibbi, the floodgates may have started

Fortunately for those involved, we don’t live in a just world, and the principals involved seem as likely to go to jail, as the Washington Generals are, to beat the Harlem Globetrotters…  :P

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The acknowledgement of LIBOR manipulation gives credence to gold enthusiasts’ long-held insistence that gold prices are also manipulated.  Of course, given that prices have gone up five-fold in 12 years, it can be hard to feel empathetic.  ;)  There’s also the reality that the world is ruled by is’s, not should’s.  Enbridge might think the Northern Gateway pipeline should get built; whether it is built, is another thing entirely.  Titans and insiders should play fair, but alas, in life, that’s not the way to bet.  :)

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The chart which probably best shows why gold bugs have been up in arms for years, is the following.  It shows daily price movements, on a percentage basis, over the course of four years (from 2006 to 2010).  Visually, you can see that in each two-minute span, prices generally move a maximum of about ± 0.004%.  Except for one wee anomaly at -0.018%.  Which occurs exactly when markets close in London.  Where brokerage houses have been coincidentally manipulating LIBOR for the past twenty years.  Smoke, meet fire; fire, smoke.  ;)

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I don’t think such price charts follow a “normal distribution” as defined by statistics, but if for our purposes we pretend they do, and we assume that one standard deviation is ±0.003%, that would mean 99.7% of the data would fall within ±0.009%, which looks roughly right.  This would also mean that the -0.018% datapoint represents six standard deviations, which screams “special cause” as opposed to “nothing to see here, but normal variation”.

I can’t pretend to know these apparent chicaneries’ intricacies, but it would appear that gold has a habit of dropping violently on options expiry dates, when extraordinary quantities of the stuff seem to enter the market.  Adding to the sense of Something Very Awry, the CFTC may apparently drop a four-year investigation into price-fixing in silver futures, without publishing their findings.

Still, for all of that, it would seem the precious metals will continue to be a reasonably good investment class, at least until stocks’ P/E ratios reach “end of bear market / start of bull market” territory.  After all, if years of possible manipulation can’t stop a five-fold rise, how likely is it to prevent further increases going forward?