The Black Swan

[anotherT34C]

I don't really know anything about money or investing, but it seems to me that if you put a pile of cash anywhere, there's a significant risk today of it dissappearing.

I'd humbly suggest (to 'sully') investing in yourself (an EE MS or MBA) and landing a lucrative professional land-job for a decade or two. I think struggling for money is going to start to get old pretty soon. If you cleverly choose your job (hint: sabbaticals) you can still cruise for 1/6 of your working career years. And do so with money.

[Spammy]

Money today is largely "electronic". It is created through debt, and can disappear in the case of default. Central banks create it when they lend money to other banks for the purpose of making loans for profit. None of this money is backed by anything other than a promise. Certainly no "green paper". In the days of the US "Gold Standard", money was backed by reserves of gold and the the money supply was effectively fixed, since you can neither create nor destroy gold. Any rise in money supply was inflation. Governments do not like to be constrained by tangible and verifiable assets. Not easy to create money under those circumstances. when the gold standard was abandoned years ago, Pandora's Box of money creation was forever opened. In my lifetime, a dollar buys less than one tenth what it used to.
One way to hedge against inflation is to actually buy physical gold. This is not attractive to many, because it does not offer conventional "appreciation". The physical gold does not "grow". But it does retain tangible value.....always. Since the earliest days of civilization, gold has always represented value. That is unlikely to ever change. It is portable, exchangible for goods and services, and fungible. It can't collapse or be wiped out by a bank failure.
Food for thought.

Rocky and Lily

[ssullivan]

Questions:

anotherT34C: What is an average salary for one of these jobs you mention, and what is the cost an MBA today in USD? I would need that data to formulate a proper question on top of this question. I ask because I've had plenty of lucrative "land jobs" making good money. The problem is... profits are made by looking at *both* sides of a balance sheet. High paying jobs (how high are we talking?) are great, but if you spend $50K trying to get there, plus $1000's on cars, clothing, going out to lunch, etc... etc... that "high paying job" is not very profitable. I'd like to run some numbers and go through that exercise with you.

Spammy: Have you looked at historical gold prices in the late 70's and early 80's at the end of our last oil crisis? Wouldn't you think that at this time we are in the same type of spike (speculation) in value seen back then?

A little factoid:

I could pay off over half the boat today, if I wanted, thanks to frugal living. I am just stumbling on if that is a good idea, or if it's better to invest this $$. And then...what to invest in.

Thanks:

Thank you for all of the investment/financial input. I enjoyed reading each post and the various strategies voiced in them. It may be time to close the investment account and just dump it into the boat... but then will I miss the big ride up that's coming?

[Spammy]

ssullivan,

Please recall that I said gold was a HEDGE. Like any commodity, it has speculative spikes, as well as some valleys in dollar value. But it has generally been a commodity that has retained value. I was not advocating it as a means of making profit. That only happens in dollar terms SOME of the time. But if you refer to historic gold value charts over that past 50 years, particularly those adjusted for inflation, it has done well, particularly in inflationary times. If you own physical gold ( I did, and I still do), it will never disappear due to a bank failure, and it can always be converted to money. This thread referrred to failures in financial institutions, and I still maintain that Gold is perhaps the surest way of storing wealth. Speculators may be burned. Gold never gains interest. But it doesn't evaporate, either.
Rocky

[ssullivan]

Originally Posted by Spammy

ssullivan,

Please recall that I said gold was a HEDGE. Like any commodity, it has speculative spikes, as well as some valleys in dollar value. But it has generally been a commodity that has retained value. I was not advocating it as a means of making profit. That only happens in dollar terms SOME of the time. But if you refer to historic gold value charts over that past 50 years, particularly those adjusted for inflation, it has done well, particularly in inflationary times. If you own physical gold ( I did, and I still do), it will never disappear due to a bank failure, and it can always be converted to money. This thread referrred to failures in financial institutions, and I still maintain that Gold is perhaps the surest way of storing wealth. Speculators may be burned. Gold never gains interest. But it doesn't evaporate, either.
Rocky

Gotcha. Thanks. I understand now. I had looked at buying gold back after 9/11, but had no capital to do so. I would like to buy gold now, but I feel that it is right where it was in 1979-1980 or so... around that peak. If I recall (and I may have dates off a little bit), if you bought in 1980 or so, it would have taken you until just a couple years ago just to get back to par in non-inflation adjusted $$s. So although I'd love to get gold, I feel it's too expensive right now to buy in due to recent speculation.

It's good... but I feel my timing couldn't be worse.

[Sandero]

A lot of the creation of wealth came out of the thin air. Something which has a value determined by demand has no litter intrinsic value.

Take a a painting. For 50$ you can buy the stretcher, canvas, paints and brushes to create the painting. The you spend some time and have a painting. What is it worth? If you are David Sally it might be hundreds of thousands, if you are Sully it might be $75. David sells it and gets the $.5MM so he created wealth out of thin air and some talent because his paintings are "in demand". If everyone accepts their notion of valuation of "things" wealth can be ... and is constantly being created.

Wall Street has created all sorts of financial instruments whe are deriviative in that their is no underlying product which is traded. Instead bets are made in enormous sums based on how some index will be at some time in the future. If they win the bet the other financial institution will pay. And these fellas has all these bets and are creating wealth by winning at craps.

Some bubbles are founded in tangible property but still subject to the whims of the market. My boat is increaing in value, because of the sinking dollar because it was built in the EU. So as the US$ sinks against the EU$ my boat's value is rising faster than depreciation. Yippee. But this is illusory wealth.

And the housing bubble was what is behind most of the disaster in credit and financial market because these tangible assets were tied to mortgages and real estate. When you survey the landscape you are looking at all millions and millions of mortgaged properties. If the value of the property was stable we would never have had the home equity loan shananigins where people extracted wealth from the "apparent" increase in the value of their homes. They believed that real estate cannot tank and worst stays flat and the trend has been for it to increase in value. At development proceeds it seems to lift all property values. But...

When high oil fuel prices make home ownership untenable these sub and exburbs properties start to loose their value. This becomes a real bind for people who then walk away from their obligation to pay for their mortgages and many can't even afford the ARMs and other nasty schemes the banks sucked people into.

You read about banks selling their mortgages to other financial institutions... bundled together. Big transaction fees. Why does a bank or any lender sell his loans? Because they made them with money they didn't have and so they need to sell them at a discount to get the cash to survive. So it they loaned out millions at 7% for 20 yrs they sell them for 6.5% to make .5% and have the cash to then do the same over and over again. it's a pyramid scheme. The guys who bought them for 6.5 sell them for 6% and so on and so on.

But what happens when the mortgagees default or their property value plummets? Whomever holds those loans own debt obligation (IOUs) they can't collect on. Can't get blood from a stone. So they are left with properties which are worth way less than they paid. They are insolvent... just the home owner who owns more than he earns. The more you borrow, the more interest you pay, the more "traders" and money lenders make and eventually own.

We have a new form of feudalism. Wealth as a concept when distributed can make an economy appear healthy, but when it becomes concentrated you are back in the middle ages where we have lords and vassals.

We're getting there pretty quick. We believed that the ponzi scheme would work and that there were always more at the bottom to exploit and keep the bubble afloat. The bubble is bursting and it won't float.

This is going to get very interesting very fast.

[TaoJones]

Originally Posted by ssullivan

Gotcha. Thanks. I understand now. I had looked at buying gold back after 9/11, but had no capital to do so. I would like to buy gold now, but I feel that it is right where it was in 1979-1980 or so... around that peak. If I recall (and I may have dates off a little bit), if you bought in 1980 or so, it would have taken you until just a couple years ago just to get back to par in non-inflation adjusted $$s. So although I'd love to get gold, I feel it's too expensive right now to buy in due to recent speculation.

It's good... but I feel my timing couldn't be worse.

You're one of the brighter lights on this forum, Sean, so I know you understand full-well how to do the math to compensate for inflation. I can't stress enough how important it is to train one's mind to filter all monetary considerations through one's "on-board inflation computer."

To only compare nominal figures is to miss the point, it seems to me. The purchasing power of $850 in 1980 is ~$320 today, or, to look at it another way, to match 1980's purchasing power of $850 would require ~$2257 2008 dollars. And these figures are based on the Bureau of Labor Statistics' inflation calculator. Many, and I am one, don't trust the government's method of calculating inflation, and rely on John Williams' Shadow Government Statistics - Home Page.

In nominal terms, gold today is higher than its previous peak of ~$850 in 1980, but adjusted for inflation, it is nowhere near its spike high then. It currently sits on the doorstep of a re-test of the $1000/ounce barrier that it exceeded in March. The battle at $990-$1035 will be fierce, and it may take more than one more penetration of the four-figure number to establish it as a floor of support, rather than a ceiling of resistance, but it will happen!

It is important to understand that gold is a currency (some would argue that it is the only currency), and that its primary function is to preserve one's accumulated wealth. Fiat "money" cannot do that. So, while you must adjust your monetary calculations for inflation, you must also adjust your concept of what constitutes wealth.

If you merely want your quantity of investment assets (i.e. fiat American dollars) to return to you in future as an equal amount of same, plus x%, that is relatively easy to do. If, however, you want to maintain the purchasing power of those assets today over a period of time, that is harder to do - but certainly not impossible.

The argument can be made that the day is coming when the return on your investment assets is less important than the return of your investment assets. I disagree - I maintain that that day is today! From now on, one must think first of preserving purchasing power, not putting assets at risk for the sake of some inconsequential yield percentage when the result may be the total loss of those assets.

TaoJones

[ssullivan]

Originally Posted by TaoJones

You're one of the brighter lights on this forum, Sean, so I know you understand full-well how to do the math to compensate for inflation. I can't stress enough how important it is to train one's mind to filter all monetary considerations through one's "on-board inflation computer."

To only compare nominal figures is to miss the point, it seems to me. The purchasing power of $850 in 1980 is ~$320 today, or, to look at it another way, to match 1980's purchasing power of $850 would require ~$2257 2008 dollars. And these figures are based on the Bureau of Labor Statistics' inflation calculator. Many, and I am one, don't trust the government's method of calculating inflation, and rely on John Williams' Shadow Government Statistics - Home Page.

In nominal terms, gold today is higher than its previous peak of ~$850 in 1980, but adjusted for inflation, it is nowhere near its spike high then. It currently sits on the doorstep of a re-test of the $1000/ounce barrier that it exceeded in March. The battle at $990-$1035 will be fierce, and it may take more than one more penetration of the four-figure number to establish it as a floor of support, rather than a ceiling of resistance, but it will happen!

It is important to understand that gold is a currency (some would argue that it is the only currency), and that its primary function is to preserve one's accumulated wealth. Fiat "money" cannot do that. So, while you must adjust your monetary calculations for inflation, you must also adjust your concept of what constitutes wealth.

If you merely want your quantity of investment assets (i.e. fiat American dollars) to return to you in future as an equal amount of same, plus x%, that is relatively easy to do. If, however, you want to maintain the purchasing power of those assets today over a period of time, that is harder to do - but certainly not impossible.

The argument can be made that the day is coming when the return on your investment assets is less important than the return of your investment assets. I disagree - I maintain that that day is today! From now on, one must think first of preserving purchasing power, not putting assets at risk for the sake of some inconsequential yield percentage when the result may be the total loss of those assets.

TaoJones

Wow... great post.

I keep re-reading it.

I honestly didn't drop inflation into the mix because I didn't want to make too strong an argument. My point was that if I had bought at the last big gold peak (near 1980, before the drop), I would have *lost* significant money and not gained it back until just a couple years ago. Putting inflation into the mix, I actually would have *never* recouped that initial 1980 investment.

My point was (supposed to be... but I may not have said it correctly) that while gold isn't the same inflation-adjusted spike it was at in the 80's, it certainly seems expensive and speculated up at this time. I was trying to say it might be almost akin to buying it in/near the 1980 spike - and that buying it now, you might stand not to ever recoup that initial investment.

Of course, I could be way off. I'm only a beginner.

I will give a lot more thought to your last couple paragraphs. I do tend to think that way as well, which is why I have to wonder...

What if gold loses favor, like so many other things do? (railroad companies, tech companies, real estate, oil, etc... etc...)

Isn't gold just as risky as anything else because it's simply some arbitrary element that's "in favor" and has been for quite some time?

Sorry... I'm a bit dense, but my mind works by analyzing every possible angle then coming up with one that seems to fit.

[TaoJones]

Originally Posted by ssullivan

Wow... great post.

I keep re-reading it.

I honestly didn't drop inflation into the mix because I didn't want to make too strong an argument. My point was that if I had bought at the last big gold peak (near 1980, before the drop), I would have *lost* significant money and not gained it back until just a couple years ago. Putting inflation into the mix, I actually would have *never* recouped that initial 1980 investment.

My point was (supposed to be... but I may not have said it correctly) that while gold isn't the same inflation-adjusted spike it was at in the 80's, it certainly seems expensive and speculated up at this time. I was trying to say it might be almost akin to buying it in/near the 1980 spike - and that buying it now, you might stand not to ever recoup that initial investment.

Of course, I could be way off. I'm only a beginner.

I will give a lot more thought to your last couple paragraphs. I do tend to think that way as well, which is why I have to wonder...

What if gold loses favor, like so many other things do? (railroad companies, tech companies, real estate, oil, etc... etc...)

Isn't gold just as risky as anything else because it's simply some arbitrary element that's "in favor" and has been for quite some time?

Sorry... I'm a bit dense, but my mind works by analyzing every possible angle then coming up with one that seems to fit.

I understood the point you were making, Sean, and you are quite correct. There are those who bought in at the 1980 top in gold (there always are such people) just as there are people who were out buying houses in 2005 and 2006. While they may be able to sell at the same nominal price at which they bought at some distant point in the future, their loss of purchasing power will be significant.

Bill Bonner likes to use the example of raw land in western Kansas. In ~1880s, there was a euphoric land-rush there, with prices climbing to ~$250/acre. The (trick) question is: How long did it take for those who bought at the top of that wild speculative period to be able to sell their land for an equal amount?

It's a trick question, because the correct answer is that there is no answer - in inflation adjusted terms, the price has never gotten high enough to match what was paid at the top.

As to your observation that gold ". . . seems expensive and speculated up at this time," ask yourself this question: How many of your fiat American dollars would you give in exchange for a quantity of gold if you were convinced that those fiat American dollars were returning to their intrinsic value, which is zero?

You ask: "What if gold loses favor, like so many other things do? (railroad companies, tech companies, real estate, oil, etc... etc...)" I would answer with a question of my own: Which item on your list is similar to gold? That is, do any of the items on your list possess all of gold's essential properties: Gold is portable, divisible, indestructible, fungible and recognizable.

Any exchange-traded item is subject to the excesses that bedevil markets, of course, and gold is no exception - but only when it is compared to some other thing, which, in the present, is American dollars. My point is that, absent a comparison to some other entity, gold is gold, with the attendant five properties listed above. The speculation you feel may be present in today's gold price is a reflection of the comparison item (fiat American dollars) and not the gold.

I'm not telling you, or anyone, to rush out tomorrow and buy gold. It is one of the more volatile markets one can enter, at the moment, and there will be many who are right on the fundamentals and direction, but wrong on their timing, understanding of market forces, or ability to withstand the urge to "just get out" when those forces are allied against their position.

This describes the "weak hands" in the market. They invariably lose capital even when they are invested on the right side of the right market. That is why I maintain that understanding psychology is the key to understanding markets, and knowing yourself is the key to successful investing.

TaoJones

PS: You are not ". . . a bit dense," Sean. To the contrary, you possess a brilliant mind, but like many with the ability to think deeply about any number of things at once, you are prone to "paralysis by analysis." I'm a bit that way, myself, but I've learned that acting leads to much more satisfactory results than thinking about acting ever could.

[Jolly Roger]

Oh dear! this is all giving me a headache!
So should I blow the cash I have on the fifty foot Hudson I've been drooling over for a year, and go and live a simple life, or should I buy gold bricks and stay where I am sweating in Florida? And don't anyone tell me to buy the boat and use the gold bricks as ballast - 'cos I've already thought of that.......

[Zach]

Interesting thread so far...

Found this presentation earlier:

Money As Debt

Its a critique of the fiat monetary system... with tons of quotes from noteworthy people scattered throughout.

[Spammy]

TaoJones,
I agree with your views on gold as an investment. Your observations on fiat money are spot on.
I would argue that gold IS money. It was money before dollars were, and likely will be after the dollar has fallen. A dollar is nothing more than a promise to pay. Its value is not intrinsic but based on consensus. Dollars may in fact disappear, just as they are created out of thin air. It is distressing to have one's "investments" benchmarked to a currency whose future value is unknown, but whose track record has been of continuous erosion in value. It is quite possible to invest in an instrument that causes the number of dollars of its value to increase, but the actual buying power of the investment to decrease over time.
Unfortunately, governments can "cook the books" in terms of inflation. The actual rate of inflation has been concealed for some time, but is intuitively felt by consumers when they attempt to trade in their dollars for goods and services. The government uses obscure terms such as "hedonic deflators" to justify how they rig inflation numbers. Furthermore, when items such as food and fuel (hardly tivial to most of us) are excluded from the Core Consumer Price Index, it's easy to see that the issued numbers are suspect. And when it comes to the money supply...well the US government stopped reporting the M3...
In my own case, I have decided to maintain a very small amount of cash, and convert it to tangible goods as soon as I can. I'd love to completely eliminate debt, because it is wealth confiscation, but it's not easy to do so today. I plan to invest the lion's share of my net worth in a boat.
Rocky

[David_Old_Jersey]

I like gold. It's nice and shiney

Unbeatable as a medium of exchange (aka Money) - as long as their are people in the world buying and selling stuff gold will always be useable, maybe not always conveniently accepted everywhere but always retains it's value as a medium of exchange. Always has done and always will.

If you want a medium of exchange that has a track record of several millennia over countless civilisations (both the rise of and the fall) then Gold is the one to go for........"for everything else their is Mastercard"

But that does not automatically make gold a good investment as it neither creates nor fully stores wealth. And of course the supply is always increasing from folks digging it out of holes in the ground, even if demand also increases, this is never guaranteed to match.

If I was living in Iran then at the moment I would be buying gold - just in case my country / govt / currency dissapears in a cloud of democracy dropped from 30,000 feet. And I would be buying the physical stuff, not paper IOU's from Tehran Savings and Loan . The US or the EU? No need. The currencies may (or may not) go down the toilet, but both the Dollar and Euro bills will still be accepted as mediums of exchange - the only problem is the buying power. If their comes a point where folk are worried that abroad and yer local 7-11 will not take Dollar / Euro notes then that is the time you need to buy gold, the real stuff. and guns. lots of both ....or go and see a shrink to deal with feelings of paranoia

Not to say that gold is not a good investment at the moment, just that it is never a given. and gold does have downsides.

[Spammy]

David Old Jersey,
Agreed about gold...but the thing about diggiing it out of the ground is a bit complex. All of the easily-extracted gold on the planet has been found. It's becoming increasingly difficult and xpensive to find. For example, in South Africa, there are many mines where they must go several miles undergound to mine poor-quality deposits because that's all that's available. (Durban Roodepoort Deep). In the USA, expensive giant open-pit mines are used with heap-leaching extraction using cyanide (not exactly environmentally friendly). In short, while there is indeed some increase in gold supply, it is expensive and increasing much slower than the dollar supply. Eventually, commercially viable deposits will be entirely exhausted. Short of alchemy, we cannot create it.
To repeat myself a bit, I'm not advocating gold as an investment. It is a relatively reliable storage medium that cannot be manipulated by bankers and governments.
Rocky

[Zach]

Hmm... I think that so long as money is changing hands, and profit is being made it doesn't really matter what form the "money" is in. Be it gold, oyster shells, greenbacks.... or plastic.

Bad time to be somebody that accepts plastic:

Latest on American Express

Bloomberg.com: Worldwide

"Profit in the company's U.S. card business dropped 96 percent to $21 million from $580 million a year earlier as provisions for losses more than doubled to $1.5 billion from $640 million. Uncollectible debt in the unit rose to 5.3 percent of loans from 2.9 percent a year earlier."

Not to say that 21 million is a small number when it comes to profit... but a 96 percent drop from last year... Yikes. Wonder what their operating costs are...

Thats with 5.3% of loans being defaulted on. 2.9% was last years rate... A 2.4% increase in defaults, knocks 96% of the cream off the top. If we are caught in a downward slide, does 2.4 more percent defaulting next year put American express in the hole a half billion dollars?

If they add no new customers... that 2.4% would hold greater weight than that of today. If inflation is to blame, and Tao's link to John Williams is correct... that the real rate is 8%, then in 2.4 months... we're there. If its three percent, we're there in 8 months. (Simple interest... but still, yikes.)

Bummer... Evaporating dollars. Where do they all go?