Grandpa Ben, Gold Bug

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machinehead's picture
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Grandpa Ben, Gold Bug

NO ... not Ben Bernanke, silly. But Grandpa Ben Einhorn, as explained in this Bloomberg article:

Jan. 28 (Bloomberg) -- Greenlight Capital Inc. founder David
is finally taking his grandfather’s advice. The $5.1
billion hedge fund is buying gold for the first time amid the
threat of inflation from increased government spending.

Since Einhorn was 10 years old, his grandfather has warned
him that investing in bullion and gold-mining stocks was the only
“sensible” thing to do given the threat of inflation and the
risks of so-called fiat currencies, New York-based Greenlight
said in a Jan. 20 letter to clients. The firm had never before
considered buying bullion or mining-company shares.

“To everyone’s dismay, we believe some of Grandpa Ben’s
predictions are playing out,” Greenlight said in the letter, a
copy of which was obtained by Bloomberg News. “The size of the
Fed’s balance sheet is exploding, and the currency is being
debased.” Greenlight said in the letter that in addition to buying
gold, it has added call options on gold and the Market Vectors
Gold Miners exchange-traded fund to its other investments. The Federal Reserve’s policy of taking unorthodox steps to
boost the supply of credit is essentially “printing money,”
Greenlight said.

Greenlight, which Einhorn, 40, started in 1996, has returned
an annual average of 20.8 percent from its Greenlight Capital LP
fund. The firm said it made “too many mistakes” last year, when
it lost 23 percent from its main fund, its first annual loss.

Verry interesting. And I concur. Doubling the monetary base in six
months is no minor matter. And by the way, maintaining an average
return north of 20 percent for a dozen years is a rather spectacular
achievement, which few ever accomplish. Einhorn's advice from Grandpa
Ben should be taken seriously.

Grandpa Ben, meet your nemesis, Airman Ben, captain of the Federal Reserve Kash-Drop(TM) helicopter fleet.

machinehead's picture
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Re: Grandpa Ben, Gold Bug

Finance professor Michael Rozeff expands on the theme in a Q'nA. Excerpts:

9. How large
is the M1 money multiplier and what is its recent behavior?

The M1 money
supply is currently less than the monetary base. M1, which
is primarily currency plus demand deposits, is $1,602 billion. The
multiplier is about 0.9 as of 1/14/09.

The M1 multiplier
has been about 1.6 in recent years. The drop to 0.9 has occurred
starting in late September of 2008. It is due to the greater rise
in the monetary base than M1. M1 has risen from $1,392 billion in
early September to $1,602 billion at present, or at an annualized
rate of about 36 percent a year. The monetary base has risen from
$870 billion to $1,774 billion. The annualized rate is about 249

10. How high
would M1 rise if the M1 multiplier were to return to its level of

M1 will rise
to about $2,563 billion if the multiplier of 1.6 is restored. That
is an increase of about 84 percent over its early September level
of $1,392 billion.

18. What determines
the rate of increase of the CPI?

An important
factor is prior rates of growth in money supply over periods of
5 to 10 years. The CPI rose by 33 percent between 1945 and 1950,
reflecting high money growth during World War II. Money growth was
subdued in the 1950s and so was CPI growth. Money growth accelerated
in the 1960s and 1970s, and so did CPI growth.

19. What is
the prognosis for future rates of increase in the CPI?

The current
M1 growth is the steepest in 25 years. Past accelerations in M1
growth were accompanied or preceded by rates of growth in the monetary
base of almost 12 percent a year. The M1 growth rates were at least
as high as the growth rates in the monetary base.

current rate of growth of the base is 249 percent a year. The M1
money growth rate
growth rate can rise from its current 20 percent year-over-year
rate to a substantially higher rate. This typically leads to higher
CPI growth.

The prognosis
is for much higher rates of CPI growth than at any time in post-World
War II U.S. history.

How could this looming inflationary disaster be stopped? The Fed
would have to reverse the giant spike in the monetary base. The reason
they can't involves 'Pozni dynamics' -- any halt in growth leads to
immediate collapse.

For example: the Fed's balance sheet stopped growing in December.
Promptly, in January, a fresh wave of weakness engulfed the money
center banks, to the point that a vast 'Bad Bank' (more correctly,
'Worse Bank' ) program is about to be announced. Plus, over $800
billion in fiscal stimulus which the Fed likely will be obliged to
monetize to some extent.

Without Fed monetization, such massive debt issuances will push up
long-term yields. Thus, the proposed program for the Fed to buy
long-term Treasurys to force down yields. It wasn't adopted at the last
FOMC meeting. Most likely, they are holding it till the 'stimulus
borrowing' gets underway, when it will really be needed.

My best guess is that the chart of y-o-y CPI during 2009 will
resemble a 'V' -- a low point during mid-year, followed by a
'Saturn V rocket' blastoff which will rumble on into 2010 with
eye-popping shockwaves of unbelievable, infuriating price increases. As
the CIA is well aware, high inflation is a proven formula for
destabilizing a society, and even inciting revolution against its

machinehead's picture
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Re: Grandpa Ben, Gold Bug

George Soros offers his own version of the 'V' curve:

In a deflationary environment, the weight of accumulated debt can
sink the banking system and push the economy into depression. That is
what needs to be prevented at all costs.

It can be done – by
creating money to offset the contraction of credit, recapitalising the
banking system and writing off or down the accumulated debt in an
orderly manner. They require radical and unorthodox policy measures.
For best results, the three processes should be combined.

these measures were successful and credit started to expand,
deflationary pressures would be replaced by the spectre of inflation
and the authorities would have to drain the excess money supply from
the economy almost as fast as they had pumped it in.
There is no way to
escape from a far-from-equilibrium situation – global deflation and
depression – except by first inducing its opposite and then reducing it.

George, George -- I was all on board witcha, until you started
spinning this fantasy about the authorities 'draining the excess money
supply as fast as they pumped it in.' As I just pointed out above,
Ponzi dynamics make this quite impossible.

Any attempt by the authorities to 'drain the excess money supply'
will result in '1937-38 all over again' -- that is, a quick 50 percent
drop in stocks, a prompt slide back into recession, and a multi-year
spike in unemployment.

So go ahead, Airman Ben -- withdraw that bloated monetary base. Make my day, pal. Cool



cmartenson's picture
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Re: Grandpa Ben, Gold Bug

Here's another interesting take (in the FT today) on  this whole new direction for the Hedgies:

Hedge funds offer to price in gold
A hedge fund has begun offering investors the chance to have their investment denominated in gold, as worries grow over governments debasing their currencies by printing money.

Osmium Capital Management, a $178m hedge fund manager based in Bermuda, is launching a new share class allowing investors to hold shares measured as troy ounces of the fund, rather than US dollars, sterling or euros.

Hmmmm....denominate my investments in gold?...that's an interesting approach.

Of course, one could also just cut out the middleman and invest in gold directly, and I am not referring to the paper promises that the hedge fund is certain to be dabbling in.

But, still, I am loving this sea-change in sentiment that is just beginning to develop.

One could interpret it as "gold bullish" but I prefer to think of it as "fiat bearish".


machinehead's picture
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Posts: 1077
Re: Grandpa Ben, Gold Bug

All that's missing from this picture, Dr M, is the world's greatest 'economist' -- Alan 'Johnny Law' Greenspan:

Indeed, recent research
within the Federal Reserve suggests that many homeowners might have saved
tens of thousands of dollars had they held gold-principal mortgages rather
than dollar-principal mortgages during the past decade, though this would not
have been the case, of course, had gold prices trended sharply upward.

Of course, I have tampered with this quote. Greenspan was actually
flogging ARMs on Feb. 23, 2004 -- probably the worst time in history to
borrow at an adjustable rate.

But if gold-principal mortgages were available at a lower rate, I
have no doubt that Magoo would be touting their attractions. Speaking
of which, isn't it wonderful that he's disappeared from the radar
screen? Now that his fantasyland Ponzi scheme lies in blood-spattered
wreckage, Greenspan's advisors doubtless have counseled him not to walk
the streets without bodyguards, for fear of angry peasants with

Hell, even a snow shovel would do in a pinch. Innocent


machinehead's picture
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Posts: 1077
Re: Grandpa Ben, Gold Bug

Gold's at a 4-month high, before the Friday morning Crimex open. Bloomberg's quoting $924 for the nearby future.

few dollahs more, and it'll be a 6-month high ... the best since July
2008. And that was the 2nd highest peak ever, exceeded only by March
2008's legendary $1,033.

Gold's record highs TODAY in other currencies are giving us a clue. Join me for the next meeting of Club 1033. As your local Realtor has been saying for all these years ... 'Buy now, before prices go up.' Money mouth

machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Grandpa Ben, Gold Bug

Grandpa Ben must be smiling today, with the nearby gold futures at $964.

Test of one thousand dollah, dead ahead.

Have you hugged a gold bug today? Kiss

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