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Why Growth is Dead

Thursday, May 12, 2011, 12:47 PM

The end of the second round of quantitative easing (QE II) is going to be a complete disaster for the paper markets -- specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE III, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the "Muni Asset Trust Term Liquidity Facility" or the "American Prime Purchase Program," but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.  

A Premature Victory Lap

Bernanke recently stood at a lectern and announced to the assembled audience that the Fed's recent policies could be credited with elevated stock prices and an improved employment statistic while somehow keeping inflation low. 

It was his own version of a 'mission accomplished' speech, just like the one G. W. Bush gave. Similarly, it does not mark the end of significant difficulties, but the probable beginning of a very long period of treacherous economic and financial disruption.

Here's one recent version of how the Fed's actions are being interpreted, courtesy of Bloomberg:

Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit

Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.

The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.

“Looking at market indicators, you have to be convinced it’s been a success,” said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. “When you get into periods of aggressive central bank easing, and we’re clearly in the most aggressive period of easing that we’ve ever seen, the markets tend to lead the real economy.”

A rising stock market, low inflation expectations, and lots and lots of cheap credit for even the riskiest companies. What's not to like?

The main problem is that this is all an illusion. If it were truly possible to print one's way to prosperity, history would have already proven that to be possible, yet such efforts have always failed. The reason is simple enough: Money is not wealth; it is a commodity that we use as a temporary store of wealth. Real wealth is the products and services that are made possible by an initial balance of high-quality resources that can be transformed by human effort and ingenuity.

For some reason, however, this basic concept has managed to elude the high priests and priestesses of the money temples throughout time. Somehow it always seems compelling to give money printing a try, maybe because this time seems different. But it never is. And it's not different this time, either.

Even as the markets are beginning to correct in anticipation of the end of QE II (which I predicted in my newsletters as early as March 8, 2011), we should note that the Fed is still pumping an average of $89 billion per month into the markets.

When we compare the $370 billion that the Fed has printed and placed into the financial system year-to-date against the levels of money flows going into and out of mutual funds, exchange-traded funds (ETFs), and money market funds, we observe that the Fed's actions swamp those flows by a factor of roughly 2:1. That is, the amount the Fed is putting in is quite significant, and its disappearance from the markets is something that needs to be carefully considered.

On the plus side, we can all be thankful for the one thing that money printing can do, and has done, which is buying a little more time for everyone. As I consistently advocate, such time should be used, at least in part, to ready oneself for a future of less and to become more resilient against whatever shocks are yet to come.

While money printing can so some wondrous things in the short term - (Hey, give me $2 trillion to spend and I'll throw a nice party, too!) - it cannot fix the predicament of fundamental insolvency. The United States has lived beyond its means for a couple of decades and promised itself a future that it forgot to adequately fund. The remaining choice is between accepting an unpleasant but relatively steady period of austerity leading to a new lower standard of living -- or a final catastrophe for the dollar. The former is akin to walking down around the side of a cliff, and the latter is jumping off.

Too Little Debt! (or, One Chart That Explains Everything)

If I were to be given just one chart, by which I had to explain everything about why Bernanke's printed efforts have so far failed to really cure anything and why I am pessimistic that further efforts will fall short, it is this one:

There's a lot going on in this deceptively simple chart so let's take it one step at a time. First, "Total Credit Market Debt" covers everything - financial sector debt, government debt (fed, state, local), household debt, and corporate debt - and is represented by the bold red line (data from the Federal Reserve). 

Next, if we start in January 1970 and ask the question, "How long before that debt doubled and then doubled again?" we find that debt has doubled five times in four decades (blue triangles).  

Then if we perform an exponential curve fit (blue line), we find a nearly perfect fit with an R2 of 0.99 when we round up. That means that debt has been growing in a nearly perfect exponential fashion through the 1970's, the 1980's, the 1990's and the 2000's. In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again from $52 trillion to $104 trillion. 

Finally, note that the most serious departure between the idealized exponential curve fit and the data occurred beginning in 2008 -- and it has not yet even remotely begun to return to its former trajectory.

This explains everything.

It explains why Bernanke's $2 trillion has not created a spectacular party in anything other than a few select areas (banking, corporate profits) which were positioned to directly benefit from the money. It explains why things don't feel right, or the same, and why most people are still feeling quite queasy about the state of the economy. It explains why the massive disconnect between government pensions and promises, all developed and doled out during the prior four decades, cannot be met by current budget realities.

Our entire system of money, and by extension our sense of entitlement and expectations of future growth, were formed in response to and are utterly dependent on exponential credit growth.   Of course, as you know, money is loaned into existence and is therefore really just the other side of the credit coin. This is why Bernanke can print a few trillion and not really accomplish all that much. It's because the main engine of growth is expecting, requiring, and otherwise dependent on credit doubling over the next decade.

To put that into perspective, a doubling will take us from $52 to $104 trillion, requiring close to $5 trillion in new credit creation during each year of that decade. Nearly three years have passed without any appreciable increase in total credit market debt, which puts us roughly $15 trillion behind the curve.

What will happen when credit cannot grow exponentially? We already have our answer, because that's been the reality for the past three years. Debts cannot be serviced, the weaker and more highly leveraged participants get clobbered first (Lehman, Greece, Las Vegas, housing, etc.), and the dominoes topple from the outside in towards the center. Money is piled on, but traction is weak. What begins as a temporary program of providing liquidity becomes a permanent program of printing money, which the system becomes dependent on in order to even function.

In addressing these questions in Part II of this report (Positioning For The Coming Rout), I have become increasingly confident that the Fed's efforts to exit quantitative easing will lead to a substantial market rout that will roil all asset classes this year. That's just the short-term outlook. Continued and eventually greater turbulence will result from the government's subsequent response.

Click here to access Part II (free executive summary; paid enrollment required to access) for specific predictions on what to expect in the months ahead as well as recommendations for protecting your wealth.

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22 Comments

macro2682's picture
macro2682
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Reinvesting interest in new fed purchases

Chris,... from an enrolled member forum response I gave to a "Jim Rickets" article...  What value do you place on the reinvestment of interest payments made to the Fed by the treasury (aka Fed)?:

 

"Balance sheet is currently $2.8 trillion.  Assuming an average interest rate of 4%, this corresponds to cash injections of about $10B per month into perpetuity.  Certainly a good point that the liquidity help continues... But it's a far cry from the $100B/mo that the market is used to under QE programs.

Then again, the fact that it's "forever" has to do something for the valuation.  Would you rather have $600B over 6 months? or $10B per month for life?  

Assuming a discount rate of 3% (our GDP hopes and dreams) the present value of the annuity is worth about $340B... So in other words, QE2 was twice as sweet as "reinvested interest."  But I didn't take into effect the balance sheet growth over time so that changes things... Algebra and and basic DCF analysis is free - you'd have to pay me to break out the old calculus book.

Other things to keep in mind:

1.  3% is probably not the appropriate discount rate

2. I have no idea what the US WACC is these days from a Fed balance sheet perspective (4% seemed reasonable)

3.  I didn't account for rising yields

4. I am generally a weak financial analyst!"

SailAway's picture
SailAway
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macro2682 wrote: "Balance
macro2682 wrote:

"Balance sheet is currently $2.8 trillion.  Assuming an average interest rate of 4%, this corresponds to cash injections of about $10B per month into perpetuity.  Certainly a good point that the liquidity help continues... But it's a far cry from the $100B/mo that the market is used to under QE programs.

Macro,

There is something that I don't quite understand in the theory that the interest would be used as cash injection. I thought that most of the interest paid to the FED was returned to the Treasury. So if this $10B (in your example above) are not returned to the Treasury then it has to create an additional $10B of T-Bond to fill the void isn't it? What am I missing?

 

macro2682's picture
macro2682
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SailAway wrote: macro2682
SailAway wrote:
macro2682 wrote:

"Balance sheet is currently $2.8 trillion.  Assuming an average interest rate of 4%, this corresponds to cash injections of about $10B per month into perpetuity.  Certainly a good point that the liquidity help continues... But it's a far cry from the $100B/mo that the market is used to under QE programs.

Macro,

There is something that I don't quite understand in the theory that the interest would be used as cash injection. I thought that most of the interest paid to the FED was returned to the Treasury. So if this $10B (in your example above) are not returned to the Treasury then it has to create an additional $10B of T-Bond to fill the void isn't it? What am I missing?

 

 

My understanding is that any interest payments that 'come in from the treasury' to pay back the loans held by the Fed (treasuries on their balance sheet) will be made in the form of new treasuries.  So, instead of demanding cash payment of interest owed to the Fed, the fed will be accepting treasuries (new borrowings) as payment.  

...So during QE2, the treasury issuing new bonds, selling them to banks at auction, and then the Fed purchased them from the banks with newly printed cash.

...When QE ends, the treasury will simply issue bonds directly to the Fed which will be accepted as the treasury's interest payments.  This cuts the middle man (other banks) out of the equation.  So the treasuries held by the Fed will not be receiving interest, they will be receiving treasuries... which will be receiving treasuries... etc.

In this way the Fed's balance sheet can grow exponentially at the prevailing interest rate for treasuries. 

But of course it's not just treasuries.... The Fed bank owns $2.8 Trillion of treasuries and other securities that it purchased from various other banks with money that was created with the Fed's computer.  So now the US government, pools of mortgage borrowers, and who knows what other borrowers need to make interest payments to the Fed.  The mortgage borrowers need to pay with cash or risk loosing their home.  The treasury can simply pay their interest with new borrowings.

It's essentially like taking a few trillion in government debt and allowing it to grow exponentially within the Fed... isolating it from the bond market.  Perhaps this can continue for a while until other countries call foul. 

macro2682's picture
macro2682
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Interest as Cash Injections

... The "cash injection" takes place when the treasury spends the money...

Arthur Robey's picture
Arthur Robey
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Black Arm Band

I shall wear a black arm band today. The flagship of western civilization is sinking. There is no cheer.

It seems I escaped the collapse of civilization on it's fringes (Rhodesia), only to find the middle sag beneath me.

SailAway's picture
SailAway
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FED profits & end of QE2
macro2682 wrote:
SailAway wrote:
macro2682 wrote:

"Balance sheet is currently $2.8 trillion.  Assuming an average interest rate of 4%, this corresponds to cash injections of about $10B per month into perpetuity.  Certainly a good point that the liquidity help continues... But it's a far cry from the $100B/mo that the market is used to under QE programs.

Macro,

There is something that I don't quite understand in the theory that the interest would be used as cash injection. I thought that most of the interest paid to the FED was returned to the Treasury. So if this $10B (in your example above) are not returned to the Treasury then it has to create an additional $10B of T-Bond to fill the void isn't it? What am I missing?

 

 

My understanding is that any interest payments that 'come in from the treasury' to pay back the loans held by the Fed (treasuries on their balance sheet) will be made in the form of new treasuries.  So, instead of demanding cash payment of interest owed to the Fed, the fed will be accepting treasuries (new borrowings) as payment.  

...So during QE2, the treasury issuing new bonds, selling them to banks at auction, and then the Fed purchased them from the banks with newly printed cash.

...When QE ends, the treasury will simply issue bonds directly to the Fed which will be accepted as the treasury's interest payments.  This cuts the middle man (other banks) out of the equation.  So the treasuries held by the Fed will not be receiving interest, they will be receiving treasuries... which will be receiving treasuries... etc.

In this way the Fed's balance sheet can grow exponentially at the prevailing interest rate for treasuries. 

But of course it's not just treasuries.... The Fed bank owns $2.8 Trillion of treasuries and other securities that it purchased from various other banks with money that was created with the Fed's computer.  So now the US government, pools of mortgage borrowers, and who knows what other borrowers need to make interest payments to the Fed.  The mortgage borrowers need to pay with cash or risk loosing their home.  The treasury can simply pay their interest with new borrowings.

It's essentially like taking a few trillion in government debt and allowing it to grow exponentially within the Fed... isolating it from the bond market.  Perhaps this can continue for a while until other countries call foul. 

Macro,

Thanks for your explanation but I don't think you answered my question.  According to Wikipedia:

"The U.S. Government receives all of the system's annual profits, after a statutory dividend of 6% on member banks' capital investment is paid, and an account surplus is maintained. In 2010, the Federal Reserve made a profit of $82 billion and transferred $79 billion to the U.S. Treasury."

http://en.wikipedia.org/wiki/Federal_Reserve_System

So the FED profits come from the different borrowers paying interest back to the FED as you explained.  In 2010 the Treasury received $79B. It will be more in 2011 (larger ballance sheet) but since the Treasury normally receives this money anyway, what I don't get is if this money is used to buy T-Bond instead, how it can reduce the impact of ending QE2 ?

 

 

macro2682's picture
macro2682
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Reply

The the portion of the Fed's profits that are the result of treasury interest will not actually be paid to the Fed.  Instead, treasury will just pay them interest in the form of new treasuries for them to hold on their balance sheet.  Then next payment period they will have to give them more, etc...

The Fed isn't "purchasing newly issued treasuries" with money they've created... they are "purchasing" newly issued treasuries with money that they would have received from treasury if they had the ability to pay.

It's ass backwards, I know, but the end effect is that the Treasury gets to pay interest to their largest creditor in the form of new borrowings from their largest creditor.  And since that creditor is the Fed, the exponential growth will be contained within the fed (for now).

Does that make sense?

Another way of looking at it is that there is now a portion of national debt that can be financed without having to worry about demand for treasuries (since it's an arm's-length transaction).  It's the equivalent of purchasing treasuries to inject cash, but instead of injecting cash it's removing a debt (indefinitely) which is the same thing.

 

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QE is not a main line directly to Wall Street.

 

Chris, 

Thanks for another interesting article.

The "fact" that the Fed has been adding about $100 B per month to the financial system is putting it a little too glibly, similar to the distorted "money printing" monicker.

Remember, the Fed has been monetizing most of the Federal deficit which means most of the money created by the Fed goes to the Treasury to fund government spending. Only a small part, perhaps 2-3% enters the financial markets directly which are the commissions paid to the "primary dealers"/commercial banks (everybody should get to make a fair profit, right taxpayers?). So, only about $3 B per month gets to be spent on Fed approved speculations to raise asset prices, the rest enters the market in myriad ways through government spending. However, the indirect effect, which is the biggest bang but hard to quantify, is the additional speculative or "hot" money that enters the markets because of leverage via low-interest rate borrowing backed by the knowledge that the Fed has their backs and essentially guarantees one-way profitable trades. 

It is for this reason that the consequences of the ending of QE 2 is not as clear to me. If the Fed still signals to Wall Street it will not let the markets fall (except for oil and precious metals) then the party may maddeningly continue.

As far as I'm concerned, and I think you agree, it all comes down to the bond market. The reactions of the bond markets are what will determine what happens. I'm surprised that Treasuries are still being held and bought at these rates, but I may have to start using a different adjective because "surprise" implies a time frame, and this circus has been going on for years already.

SailAway's picture
SailAway
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Re: Reply macro2682

Yes it makes sense Macro, thank you.

I guess this mechanism is already in place today so if I try to put that in a simple equation it should be something like:

Currently with QE:  "Total amount of FED treasury purchase" = "Newly printed money" + "Interest owned to the FED by the US Treasury"

After QE ends: "Total amount of FED treasury purchase" =  "Interest owned to the FED by the US Treasury"

So roughly during QE2 every month we have:

"Total amount of FED treasury purchase ~ $600B/6=$100B/month" = "Newly printed money ~ $90B/month" + "Interest owned to the FED by the US Treasury ~$10B/month (from your calculation)"

So still if QE2 ends ~90% of the money injection  by the FED would be gone. But as you said the FED balance sheet would keep growing and so would the $10B/month.

 

 

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Why Bernanke thinks QE could work

Chris's graph of Total Credit Market Debt shows that debt has doubled roughly once per decade for the last forty years. That corresponds to an increase of about 7% per year, but in the meantime inflation has averaged about 5% per year over the same period, so real economic growth has actually only averaged about 2% per year. That real rate of increase is enough to double the real, inflation adjusted economy in about the same forty years. Bearing in mind that energy consumption increases at about two thirds the rate of real economic growth, this economic growth is also commensurate with the increase in energy consumption in the U.S. over the same period of time.

Bearing in mind that most of the debt increase over the last forty years is inflationary, it is not obvious that we have necessarily reached the end of debt growth. A renewed inflation rate of about 7% per year would put us right back on the trend prior to 2008. That would also reduce the real government debt by half in a decade. Bernanke's problem is how to get consumer, business and government borrowing to resume in an inflationary environment while keeping bond yields low. So far only government is cooperating as Ben kicks the can down the road.

 

 

idoctor's picture
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Victor Sperandeo

Victor Sperandeo

westpennpogo's picture
westpennpogo
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mission accomplished

     Just to be accurate, George W. Bush never said 'mission accomplished' aboard the USS Abraham Lincoln.  Yes a banner was displayed proclaiming this but it was more of a reference to the naval mission in Iraq.    Look up and read the speech again and you get the impression this was a battle won in the continuing war on terror. He made no illusions that this was over.  "The battle of Iraq is one victory in a war on terror that began on September the 11, 2001 - and still goes on."  You can read more similiar quotes also. The media portrayed this speech as a mission accomplished but when you read the speech it sounds almost polar opposite.  Bill Whittle has a video on this also (refering to false menes).

     So to be fair, Bush had no illusions about the war on terror being over, while Bernanke grandiosely does believe the war against inflation is over (does he REALLY believe this, I don't know).  I realise you are just showing the similiarities between the two, I was only trying to clarify what Bush really said. 

Hope I didn't muddy the waters up.  I am by no means attempting to denigrate this blog.  I enjoy it immensely.  I was just trying to dispel a myth.  Readers who want to further their research can.

 

 

 

eleven's picture
eleven
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What to do with PMs?

Chris, I'm very long physical silver and I happen to agree with you that the end of "QE" will badly affect commods and most markets. Fortunately I've been buying silver since about 2001 and I probably own it at $17 average cost.I  took some off near $40, but only a single digit percentage.

I don't expect I will ever be 100% out of silver but I'm starting to think that if 1: QE ends and 2: the Euro goes into crisis, there is going to be a pretty fervent inrush into dollars.

What I'm saying is that IMHO there could be another $10 downside in silver. Whether that is true or not is a matter of prediction and/or opinion and nobody can predict the future.

If YOU were convinced of this possibility, would you try to exit a goodly percentage of your silver and attempt to rebuy at lower prices?

I DON'T think this is such a concern with gold. Gold could lose 10% and it wouldn't faze me too much. However, I believe silver is a lot more vulnerable, even after this last pump & dump. I only bought a tiny amount of silver up high and I never "believed" any price over $35, though I bought 20 or so silver dollars @ Ag $40 just to get a few buying ya-yas out of my system.

Thoughts?

Thanks in advance!

 

 

 

 

macro2682's picture
macro2682
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Protecting physical longs with Paper shorts...

Eleven,

Selling out of physical metal with the intention of buying back in at a later date is an expensive transaction.  If you are concerned about short-term volatility, using protective puts is often a better alternative. 

Granted the volatility in silver has been significant, which causes Put/Call bid-ask spreads to be high... but you can still protect 100 ounces of silver from a 5% loss over 3 months for a price of about $240 plus commission. 

Let's say you had 100 ounces currently worth about $3,500.  You could sell it for maybe 2% under spot and receive $3,430.  Then in 3 months you could buy it back for 2% over spot (if you're lucky) plus shipping.  Your cost for the transaction would be about $200, and you run the risk of being wrong.

If instead, you bought a July 33 SLV Put for $240, your position would be protected from a 5% price movement (you have the option to sell SLV at $33 regardless of market price).  If physical silver fell to $33 (which would mean an SLV price of 32) your put option would have an intrinsic value equal to a $1/oz fall in the price of a 100oz pile of silver.

This is about the same cost as selling your silver and buying it back, and it can be done with just a few keystrokes as opposed to the hastle of actually dumping the physical.  But the real benefit is that your maximum loss is the cost of protection.  If silver tanks, you are protected, but if silver skyrockets (or enters a period of BAD backwardation) you are protected as well.  If you had sold your physical, and got it wrong, you stand to lose quite a bit of money.

This strategy is even more effective with gold holdings because options are still fairly cheap.  Being long physical and short paper will someday be the trade of the century... but until that day, it's an effective way to buy insurance to protect physical holdings.

SingleSpeak's picture
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Thanks idoc - Victor Sperandeo

 

If the fed can't borrow money... will they default or will they print? There's no question, they're going to print..

          Concur.

        SS

 

eleven's picture
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Protecting physical longs with Paper shorts..

In theory and in general practice, that (buying SLV put protection against physical Ag) is a good idea and I've considered it at some length on your suggestion. And I think it's a good suggestion and I appreciate it. One issue is that with the recent volaitlity in Ag (and thus SLV) those puts are a tad dear. Each such put @ $240 /$3500 is approaching 7% of the value of the protected item (100 oz Ag) and maybe that's reasonable. It seems highish. The second issue is that such protection would be a pricey exercise on 2500 oz of silver.

Just FYI and having no bearing on anything in particular, I think I'd have to lean towards selling 1/3rd and siting in cash, perhaps buying ITM puts which would not lose much value over time; selling 1/3rd and buying gold; and leaving 1/3rd alone.

 

Regards,

Brainless's picture
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Moneymachine

Another way would be this:

with 700 oz converted to cash. maybe a 1100 oz fixed amount leaving 700 oz to 'play' with.

Sell 7 puts and sell 7 calls. Both out of the money. The 700 oz converted to cash will be a 100% margin for the sold puts. De 700 oz physical is 100% margin for the sold calls.

In this sample you use the high spread to your advantage. If the silver price is higher then the strike on the calls you would have to sell, the final price you get is strike + put premium + call premium. If silver price goes lower then the put strike you would have to buy for strike - put premium - call premium.

Over the long run this will make a decent return especially when spreads are bigger, the difficulty is to maintaining enough physical to be able to sell about even numbers of calls and puts with 100% cover.

The number of put and calls don't have to be the same, you can use your own 'crystal ball' and give one or the other more weight.

The best scenario is when the price is between the 2 strikes so choose those put and call strikes far enough out of the money so that exercise of those options is with prices you are comfortable with. I often have a bigger difference in strike and price on the put side.

Be careful with options as things can go fast, make sure you understand them before using them!

http://traders-software.com/Download/Dynamic%20Trader%20Example/te9802.pdf

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Insurance?
eleven wrote:

In theory and in general practice, that (buying SLV put protection against physical Ag) is a good idea and I've considered it at some length on your suggestion. And I think it's a good suggestion and I appreciate it. One issue is that with the recent volaitlity in Ag (and thus SLV) those puts are a tad dear. Each such put @ $240 /$3500 is approaching 7% of the value of the protected item (100 oz Ag) and maybe that's reasonable. It seems highish. The second issue is that such protection would be a pricey exercise on 2500 oz of silver.

Just FYI and having no bearing on anything in particular, I think I'd have to lean towards selling 1/3rd and siting in cash, perhaps buying ITM puts which would not lose much value over time; selling 1/3rd and buying gold; and leaving 1/3rd alone.

 

Regards,

Eleven -

IMO the beauty and utility of Puts to insure a position are greatly underestimated and asa result are done wrong by most people.  If you sell the Puts before option expiration you at the very least take that much money out of your basis with your holdings AND you still have the original position at a lower value.  Buying and selling Puts on silver (or any equity) position over and over will eventually get you to a point where your position has no basis.  At that point you could care less what the price is.  As long as you never sell the position and just use it to "print" money.

Of course, the difficult part is being certain that the price is pulling back and purchasing Puts is the correct move.

Ultimately, when you see the pullback coming you can sell naked Calls (that will drop in value as the underlying price drops) and buy Puts.  Once the pullback is over, buy back the Calls at a lower price than you sold them for to close that position, sell the Puts at a higher price than you paid for them to close that position, take the profits out of the basis of your original position and enjoy the fact that you made twice the profit on a single price move.

Then ask your accountant to try and figure out the return on an investment that has a zero basis value!!  If he/she comes up with anything other than an "Error" on their calculator they have done it wrong and you should get a new accountant.

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One theory of things....

My morning trip around the internet discovered this article. What if the scam-train's still hurtling downhill?

Strauss-Kahn, IMF Scam Fails, the Debt Crisis Crescendo

Politics / Global Debt Crisis May 15, 2011 - 12:35 PM

By: Andrew_McKillop

 

When Dominique Strauss-Kahn, then director of the IMF, fled his Manhattan hotel room in a vain attempt to take an Air France plane to Europe, Roman Polanski style, he inexplicably left his cellphone in the room where he had alledley attempted to rape a hotel maid. The cellphone was of course loaded with a list of very interesting names and numbers, pored over by New York police and Federal US officials.

Why was Stauss-Kahn in New York ? He went there instead of flying direct from Washington to Berlin, first stop on a European tour and first meeting set with chancellor Merkel of Germany. To reassure Merkel that the next bailout of Greece would cost little to German finances, that the euro would stay strong and credible because the US dollar was now close to terminal meltdown - and was receiving special treatment from the IMF.

The special treatment was designed in ultra-secret conditions with the US Federal Reserve, led by the Federal Reserve Bank of New York, the foremost link in the Fed's debt and deficit recyling program, in place since 2005-2006. The program is described, in coded messages, by many Fed Bank of NY publications, vaunting its role in recycling gray and off-white capital flows from non-OECD countries. In premier place, these include the Arab oil exporter and small island tax haven countries, but the Fed's activities in propping the dollar and diluting US overseas debt are also linked with and rivalled by Russian, Chinese and Indian capital laundering banks and institutions. 

THE DEBT CRISIS CRESCENDO
Strauss-Kahn had played a kingpin role is reassuring capital markets, debt-strapped governments and opinion formers by operating a global-size version of what started in the USA with the Paulson plan in the dying days of the G W Bush presidency, late 2008.

This was a losing quest, but Strauss-Kahn's failure was only known to insiders - and his enemies. The scope of the challenge resumes in a few figures.

After a declining trend in the 1990s, US national debt dramatically increased from US$ 5.7 trillion in January 2001 to $10.7 trillion at the end of 2008, and then $14.3 trillion through April of 2011 when the debt reached 98 percent of 2010 GDP of the USA.

The approximately US$ 3.6 trillion added to US national debt since the end of 2008 is more than double the market value of all private sector manufacturing in 2009 ($1.56 trillion), more than three times the market value of spending on professional, scientific, and technical services in 2009 ($1.07 trillion), and nearly five times the amount spent on non-durable goods in 2009 ($722 billion). Only taking interest paid on Federal debt in the first six months of the present financial year (October 2010-April 2011), nearly $245 billion, this is equal to more than 40 percent of the total market value of all private sector construction spending in 2009 ($578 billion).

Compared with the bugaboo of olden times - the price of oil - the world's biggest oil importer country faces a debt crisis that is out of control. The US ran an oil trade deficit in March 2011 estimated by the Commerce Dept. on the basis of gross oil imports - before re-exports of higher value refined products - of 333,831,058 barrels in March at a month-average barrel price of $ 93.67, giving a gross deficit before re-exports of $ 31.3 billion for the month. Taking only interest paid on US Fed debt as approximately $ 490 billion-per-year in 2011, almost certainly set to rise, this comfortably covers 1.5 times the total gross cost of all US oil imports at a record-high average price of $ 93.67 per barrel.

Taking the growth of debt since December 2008, about $ 3600 billion, this amount would cover almost exactly 10 years of gross total oil import costs for the US at current volumes and current record high oil prices. While recycling petrodollar capital surpluses is a key need for the US Fed, with the Fed Bank of NY in the lead role, and the siphoning of illegal capital exports from the world 20-leading tax haven small island states is also useful, total amounts cannot match the USA's runaway debt growth.

THE STRAUSS-KAHN PLAN
Right through his tenure as IMF chief, Strauss-Kahn not only trawled the comfort ladies, but also worked hard to ramrod the ultimate in shock treatment for the global economy: the selective demonetization of the US dollar, the world's prime reserve currency. The basic plan is simple: cancel and dishonor debts in US dollars through reducing or completely stopping dollar convertibility, for example by limiting the use and the holding of the US dollar to US citizens, only. Another version is to create and launch a new reserve currency, linked with the dollar, at a very favourable double conversion rate for the dollar: debts in dollars will be depreciated; holdings in dollars by US citizens and US-favoured corporations will be appreciated, when the new money is introduced. The inflation which comes with this will help mask the depreciation of debt and appreciation of holdings. Within six months, a fait accompli will be created, with no way back.

From December 2009, Strauss-Kahn went public with his new money initiatives, under the imprimatur of the IMF, with the Green Energy Fund proposal to fight climate change in low income countries with a fund built from the IMF's own printable money - SDRs - starting at the equivalent of $ 100 billion. Other versions of this plan by Strauss-Kahn and his personal team were advanced, at growing scales and declining credibility, through March-April 2010, but were each time shot down by capital surplus countries led by China and including the Arab petro states, Russia, India, Brazil and Argentina.

Each time, the Straus-Kahn target was to exchange US dollars for new money, and dissolve US debt in new and printable fiat paper money. recycling wealth from the few capital surplus countries to the OECD debtor countries, headed by the US but including all EU27 states and Japan.

From mid-year 2010 the European PIIGS crisis only got worse, as US debt also worsened, forcing Strauss-Kahn to shelve public airing of his pipedreams and concentrate on saving both the euro and the dollar. The role of recycling and siphoning capital surpluses from smaller players with big holdings, starting with the Arab petro states and small island tax haven states, became more important than ever, as remarks by Strauss-Kahn and variable geometry allies and friends like George Soros, at the 2011 Davos Forum suggested to observers able to cut through the counter-noise. Likewise the role of SDR allocations and plans for radically increasing the production or issuance of SDRs most surely placed Strauss-Kahn in private conflict with very big players, starting with the US and China.

The latest plan was almost ready for launch, 14 May. Federal officials invited Strauss-Kahn to New York, arranged the hotel and travel, and set the agenda for a final review before going public on Strauss-Kahn's last plan to roll US debt into European debt, in which the Federal Reserve, and all its State banks, as well as European central banks would disappear. We know what happened, next.

By Andrew McKillop

Contact: [email protected]

. http://www.marketoracle.co.uk/Article28147.html

 

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
dizzyfingers wrote: My
dizzyfingers wrote:

My morning trip around the internet discovered this article. What if the scam-train's still hurtling downhill?

Sell naked Calls.

Buy Puts.

Let it run for a bit. 

Buy back the Calls cheap and close the position.

Sell the Puts.

Convert profits to PMs.

Or tomatoes.

Or Martin guitars.

Or a biodiesel set-up like Ready's.

Thumb your nose at "The System".

Repeat.

pangiagreg's picture
pangiagreg
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Joined: Jan 28 2009
Posts: 11
Game Over article by Mark Lapolla

I am curious as to what others here at CM think about this article by Mark Lapolla. The article is in alignment with NO GROWTH as a reality, however, the author paints (in my opinion) a very convincing outcome that is different than what I have been planning for. 

I am definitely interested as to what others think about Lapolla's conclusion and points of view.

Link to PDF: http://welling.weedenco.com/html/20110429_Welling_Lapolla_REPRINT.pdf

Thanks!

jpitre's picture
jpitre
Status: Gold Member (Offline)
Joined: Mar 3 2009
Posts: 366
Game Over article by Mark Lapolla

Obviously Mark is well informed and intelligent person with a clearly thought out perspective based on historical market information and personal insight. The weak point seems to me to be in his complete lack of concern over other major factors including Peak Oil. Many of the charts he shows are also weak in that the measure of GDP (and other info) is grossly skewed by changes in what the data includes and how it is treated - all of which can lead to erronoeous conclusions. I've heard the stories about Intellectual Property which gives us control over offshore manufacturing and will allow us to do what we do best in developing new technolody etc, however over time, Asia will come to dominate even the development of new technology given that we will end up giving them most or all of what we currently have. We are losing our drive to excel - even our university students are unwilling to seriously compete with the Asian drive to reach the top in technical terms.

I think (IMHO) if one looks at where we are going from a grassroots level and not so much from the lofty heights of Wall Street, Economists and government statistics, the picture gets much closer to a view of the Creash Course.

Jim

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