A Call for Silver

The long-term fundamental case for silver has never been better. The above ground available inventory of silver is rapidly declining while at the same time the demand for silver has never been more robust. Over 46 billion ounces of silver has been mined throughout history. Yet, in 1950, just 10 billion ounces of above ground inventory existed. By 1980, that number dwindled to 3.5 billion ounces of available inventory. Today, the above ground available inventory of silver has diminished to a scant 700 million ounces or so while demand is going through the roof.

For an investor, this is an especially exciting time to own silver over the long-term when one considers the two-sided dynamics that accounts for the vast demand of silver. On one side, next to oil, silver has more industrial applications than any other element in the world, while new uses for silver continues to grow in technology, medical devices, and alternative energy. On the other side of the equation is the investment demand for silver. With countries debasing their paper currencies around the world, investors more than ever are looking toward stores of value for diversification against fiat currency risk.

On the manufacturing side, silver is an indispensable cost component in a myriad of industrial applications with its superior characteristics. No other base element has the conductivity, light reflexivity, or heat transfer qualities that silver possesses; the irreplaceable elements of silver makes the bullion a prerequisite in manufacturing computers, medical equipment, solar energy panels, the auto industry, insulation and energy, water filtration systems, cell phones (including iPhones and all other iProducts), and so on. There are currently 10,000 total uses for silver and they are expanding.

To get an idea how little 700 million ounces is in above ground available inventory, at $33.7 dollars per ounce all it would take to wipe out the inventory completely is a mere $23 billion dollars. That’s peanuts when you consider that the U.S. government spends $23 billion in unfunded deficit spending in less than eight days. It’s also less than the amount consumers spent to buy iProducts in Apple’s most recent quarter. And if one took a look at silver’s input into solar panels, ten years ago only trace amounts of silver were used in the embryonic solar industry. Today, almost 80 million ounces of silver is consumed annually from solar panels alone—estimated to grow to well over 100 million ounces by just 2014.

On the investment demand side, more than anytime is our lifetimes, there is also a strong case to diversify one’s assets out of paper currencies into precious metals. Silver was first considered a precious element over 6000 years ago and has stood the test of time, so we’re not looking at a new fad here. During this 6,000 year time frame, 3,946 paper currencies have become worthless.

In today’s environment of endless currency printing, exploding derivative exposure, mounting worldwide debts, and that no paper currency has ever lasted over the long term before becoming worthless, the question really isn’t why own real assets like silver, the question really is why not?

The way to satisfy the enormous demand for silver with such limited supply over time can be met in two ways—higher prices over time or sudden, huge production coming online.

For years, as can be witnessed by the dwindling above ground inventory, miners reserves have been depleting and finding new reserves have been difficult at best. It's no wonder that miners are starting to hoard the silver instead of selling their inventory at prices estimated to be too low given the supply/demand side economics.

With the average cash cost to mine new ore at roughly $5.39 per ounce, and with silver currently selling above $30 per ounce, it would make for a great investment endeavor to strike for new silver. Yet, reserves continue to deplete along with the available above ground supply of silver.

This leaves the price of the bullion to satisfy the necessary demand for silver. The price needs to rise materially over time to either slow industrial consumption of silver down or to pry silver away from silver investors. For us, that price is far higher than where silver sits today.

At some point, silver could go parabolic. Should the Federal Reserve start printing money again, which Bernanke alluded to many times this week that he probably will, the case for storing real assets like silver will only become stronger.

I have countless more data on silver, and if you want more on silver or any other holdings just contact me anytime. I am always available to discuss our portfolios. For now, I hope you’ve enjoyed this quick take.

Yours,

Nicholas Green

Dancing Along the Bottom

As the country dances along the zero bound, I wonder how many market participants have bothered to do the math. Yesterday, the Federal Reserve extended their zero percent interest rate policy until late 2014. It’s no surprise, at least to me, the Fed keeps announcing that rates will remain low for years. This policy tool has become all too predictable and a real hoot for anyone paying attention.

It was just last summer when Bernanke announced he would keep interest rates at near zero until mid 2013….so now the zero bound policy has been extended another year and a half from that. In the FOMC statements and Q & A yesterday, it’s what they didn’t tell the viewers that matter.

The truth is that the Federal Reserve has boxed itself into a corner with the zero percent interest rate policy and cannot move them much higher, if at all, due to the sheer size and scope of our national deficits, which have surpassed 100% of gross domestic product quite handily. Simply,the debt America owes is greater than our economy.

The reason why the Federal Reserve is boxed in with interest rate policy is if interest rates rise our country’s huge and growing debts become more expensive to fund, exasperating the net deficit problem, something we can ill afford.

Yet Federal Reserve board members stated that they believe by the end of 2014 their zero percent interest policy will be able to normalize to 4 – 4 ½ percent from the near zero percent we sit at now. This is a joke. The Federal Reserve sending the prime rate to 4 or 4 ½ percent by 2014 is very unlikely to materialize, ever.

As it stands today, for every 1% increase in interest rates our national interest payments would increase by $140 billion dollars annually. By the end of 2014, according to the Congressional Budget office, the United States will have accumulated another $3-5 trillion in total debt, so our interest expense costs will be even higher by then for every 1% increase in interest rates.

Back of the envelope math tells us that if the Federal Reserve were to truly raise interest rates to a mean reversion of 4% or so by the end of 2014, our interest expense alone will add another $560 billion a year at a minimum to our annual deficits. In other words, the Federal Reserve cannot truly move rates in a meaningful way without bankrupting our country anytime soon.

The Federal Reserve is in a zero bound trap. Anyone believing they’d be raising rates anytime is off their rocker.

The more significant news out of the Fed was the chairman communicating at least 7 times yesterday he’ll do more rounds of money printing at the drop of a dime for almost any reason at all. With interest rates at near zero for several years, if not forever, and with the Federal Reserve chairman communicating many times yesterday he’ll pump money at will, it’s no wonder Gold and Silver went on a tear with every passing Bernanke sentence. Following is an intraday chart of Gold during yesterdays Federal Reserve Q & A session, it's not hard to guess at what point Bernanke was speaking, eh?

The markets certainly understand that all this jaw boning is nothing more than pure U.S. dollar debasement. Our Federal Reserve is committed to the race to the bottom in the currency wars to try to spur enormous growth, and should Europe stumble badly, which they very well could, I won’t be surprised to see the mother of money pumping as current leadership is steadfast on trying to grow our way of our debt and credit situation.

When the Federal Reserve pumps confetti paper money into the system, there are two assets that are the most favorable to preserving absolute and real wealth. I'll share my favorite of the two in another e-mail.

Stay tuned, I will also send out another e-mail in another week or so explaining to you what is keeping the Fed up at nights—it’s not what you may think, after all corporate profits are just fine thanks to record unfunded transfer payments entering the economy from our profligate fiscal policy.

Expect us to begin to get far more constructive as we get close to more money pumping.

Yours,

Nicholas Green

It's So Easy to Spend Money (!)

The August numbers are out. U.S. government debt in the month of August grew $210 Billion. It’s so easy to make government promises to constituents for re-election, no?

https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=10083100.pdf

Here’s the big picture, folks. Since the housing and banking crisis began in late 2008, the U.S Treasury, our government, has spent $3.9 trillion it didn’t have to prop up the economy. Since late 2008 Gross Domestic Product, also known as the size our economy, has “grown” a mere $300 billion, from $14.3 trillion to $14.6 trillion. Read those last two sentences again to make sure the message is brought home.

And they call this a recovery, right? It’s the great cover up.

Letting my computer calculate some basic math for me—since the Great Crisis began, thanks to our American Gamblers Club of Big Banks and loose Monetary Policy—our U.S. Treasury has borrowed $3.9 trillion in future claims from taxpayers to produce $280 billion in GDP. And spending looks like it will go on as far as the eye can see…

In fact, the U.S. has increased many of its already structural issues. For e.g., we know we have a net present value deficit on Social Security, Medicare, and Medicaid of $80 trillion dollars—that is with a T. However, since the Great Crisis began, Medicaid costs alone have soared $273 billion over the last two years and more than 50 million people are now covered under Medicaid, with 16 million more people entering the Medicaid system in 2014.

Folks on food stamps has grown 21% from June ’09 to June ’10—33 million to 40 million people, respectively. Meanwhile, the cost of this increase is up 80%, to $70 billion annually. This means that over 10% of the GDP “growth” has been supported by more and more families going on food stamps—another claim on taxpayer’s in the years to come.

Money flooding the system with massive amounts of government credit card spending, or worse—monetizing our debt through the means of printing money out of thin air, will make it harder for Americans, especially those left in the middle class—to make ends meet as purchasing power quickly erodes. Protecting your loved ones of this Elephant in the room—unsustainable debt levels—should become an all-important theme in your personal life as well as your investment choices.

Please continue to tell your friends and family about Green Partners, LLC.

As the World Turns on Credit (!)

Courtesy of the war on credit contraction and personal deleveraging by many governments around the world as they grapple with decaying economies, many currencies around the world are going up in a blaze of glory as the unintended consequence.

Government’s full frontal assaults on currency destruction would make an interesting visual….with loose money more fake and phantom than the Torpedo Breasts of Pamela Anderson and more destructive than any precision point warhead. If we’re going to lose, it’s not going to be the will of powerful armies and dangerous enemies…it’s going to be the greenback collapsing into proverbial oblivion. Yes sir. War is on us—and most are completely unaware of it.

The worst credit culprit at the moment, however, is Japan. Japan is at the Keynesian endpoint; their debt service is officially higher than their tax revenues and what can’t go on forever won’t. Interestingly, this phenomenon is eerily similar to the U.S. housing bubble in 2007. Time magazine 2009 Man of the Year, Ben Bernanke, is on record just before the housing crash vehemently suggesting that since there’s never been a national housing price decline, a total melt-down in housing was “extremely” unlikely. Well, the story of that one didn’t end well….as Ponzi schemes never do.

The greatest Ponzi scam right now is Japan’s bond market. Their stock market and housing market has been nothing short of disastrous over the last 20 years—the Nikkei is down 75% over the last 20 years and housing prices are down almost as much. The one thing citizens have never lost money on in the country is buying JGB’s (Japan Governmental Bonds) and they just can’t get enough of them—forming a massive Government debt bubble. It will end badly for them. Ho ho.

Japan’s debt situation is so precarious and dangerous that it is no wonder their former Minister of Finance, Shiochi Nakagawa, appeared wildly intoxicated at the G7 meeting last February and then suddenly froze up and died for no apparent reason in the summer of 2009. Following on his heals was a finance minister that after being elected in September was so emotionally stressed that he checked himself into a psyche ward just after quitting after a few short months. When the stability of your country is on the verge of a meltdown and human misery is just about to follow it’s really no wonder…

I would get ripped, too, if I had to oversee Japan or a number of many other countries for that matter. Fortunately, I’m not and I can still just enjoy my vice of fine cigars for now as I watch the U.S. follow suite in a completely unsettling and toxic way: leveraging our currency into Oblivion.

At any rate, I wonder who else ponders what happens to Japan if they go to roll their debt and get scant bids. Or worse, what happens when the finite amount of money can no longer fund their financing gap? Is Kyle Bass and I the only ones that are worried about these types of ripple effects?

At any rate, those are the larger questions at hand today and they’ll be thrown around on much larger platforms than this. The stories of massive piles of debt stacking up around the world are only getting started. First we will see Japan unravel, then Greece and others. Preparation for these things is now a necessity. “May you live in interesting times” might be a proverb that will have to be re-written. That’s it for today folks.

The Fat Finger Trade (!)

Are you confused by the markets slapdash action? Don’t be. Here’s the 101 primer on what’s going on. HFT’s, (High Frequency Traders), are unscrupulous trading companies that are set up based on nothing more than algo’s (algorithms) that trade in milliseconds.

There are 9 exchanges and the HFT’s have “front running” status with them in return for their trading volume. When a news scan or a queue is lined up in earnest interest for a security, the HFT’s see this and buy ahead of the interested parties only to quickly re-sell it right back to the queue at slightly marked up prices. This is called "frontrunning" and is supposed to be illegal; it also royally violates the NBBO principles of the exhanges (Next Bid Best Offer) but apparently the SEC and FINRA have turned a blind eye to it. But why? Well, the HFT’s are currently generating 70% of the volume on the exchanges—money, the root of all evils.

The NBBO problem is exasperated as more HFT’s are entering the picture. And why wouldn’t they want in this action? The largest HFT gangster says they haven’t lost money in a single day over the last 5 years. As the HFT’s increasingly compete against one another—the computers—the programmers try to gain an edge over one another by not trading in milliseconds but micro-seconds and next, nano-seconds?

While no one has officially declared why the May 6^th flash crash has happened, Nanex—a research analytic company, puts HFT’s at the top rung. As the HFT’s continue to try to gain an edge over one another there is the very really possibility of them clogging the system up---creating imbalances to an otherwise placid market, creating a complete lack of liquidity. The result: a huge meltdown. May 6^th might have been just the tip of the iceberg. You know, when the market crashed 1000 points in the middle of the day for apparently no reason at all?

The “fat finger” explanation for the May 6^th flash crash that the media and the scoundrels want you to believe would actually be funny were it not so completely ridiculous. Sure, someone accidently punched in an extra zero. Yeah right. And I’m Butterfly---right out of a cocoon.

Deflation will be off the Table (!)

It’s official. The FOMC has a sign over their door that says “Deflation in not an Option.” Yet, the bullets in their chamber are low…ZIRP is already at zero and will remain there for the foreseeable future. So can Bernanke really stoke the market as he leans hard on the zero interest rate policy—indefinitely—as he continues to toy with the market as though it’s a puppet? Goldman Sachs believes QE2 is already priced into the market and that the FOMC could re-purchase $1 Trillion worth of securities. And if they don’t?

Actually, it’s all a mute point because the FOMC has to stimulate anyway. They’re already knee deep and there’s simply no turning back now…..deflation simply can’t be an option in their Keynesian world, especially with a Federal balance sheet overleveraged. So they will continue to keep the pedal to the metal as we head toward the hyperinflationary wall of scary. Yes sir, deflation=less tax revenue, inflation equals more. My take, hyperinflation is coming to a theatre near you and the massive deflationary chatter is the ultimate contrarian indicator as the only real thing Bernanke is sure to stoke is inflation. Yes, I do know the deflationary data.

And there are deflationary pockets everywhere, but so too, are some huge inflationary pockets….food, oil, medical, education, etc….so with the Fed committed to stimulating the economy on a would be bankrupt balance sheet were it treated like a corporation because they need tax revenues, jobs, and votes hyperinflation is all but guaranteed once deflation is clearly out of its way.

To bolster the eventual hyperinflation argument, the Treasury markets, used for U.S. deficit spending, has to contend with China and Saudi Arabia starting to diversify away from the dollar, as they are buying gold and other foreign currencies, and Japan no longer has the ability to purchase any meaningful amounts of the greenbacks. Is the tipping point and our addiction to low interest rates coming to a head? Will the U.S. Treasury run the printing presses overtime and debase the dollar? Foreigners think so as does Naseem Talib and Warren Buffett. Importantly, if China and Saudi Arabia are stocking up on gold should precious metals be considered for diversification once the deflationary trade comes to an end? And if the dollar continues to erode substantially over time, will we be looking for jobs in China America?

Washington: Are you listening?

http://www.cnbc.com/id/15840232?video=1506508223&play=1