Institutional Thinking and the Creature from Jekyll Island


by Scott Causey, GWP Resource Correspondent


Today I’d like to take a break from my usual pound the table rants for precious metals. Buy the “rumor” and sell the “news”, in other words. Gold, silver, and platinum have all had monster moves in the last 30 days. I hope that everyone who has been reading my articles thought they had enough validity to buy metals and have profited from this move. To be clear, if you already have a position in metals, hold onto them for dear life. If you haven’t yet pulled the trigger, the risk reward in the very short term is now not the same. The market is now saying it’s time for, at best, a consolidation in prices and, at worst, a slight pull back that should be bought with both hands.

What the Middle East will continue to say, on the other hand, no one knows. The first U.S. Ambassador to be assasinated since 1979 was killed in Libya this past week. The South African army has been put on “high alert” to squash tens of thousands of striking gold and platinum miners. Keep in mind that South Africa is the world’s largest platinum producer and third largest gold producer.

I’d like to take a moment and discuss institutional thinking and why it is a threat to your wealth. Most free thinking people grasp the concept of the relationship between politics and money. However, I don’t think nearly enough people realize just how powerful an incentive it is (even if you don’t work in the halls of Congress). Once you reach a certain stratosphere of wealth and success, you’re expected to conduct yourself in public not only in line with your own interests but with those of the ruling party as well. This is true whether you live in Russia or America.

Don’t believe that? Lets check the facts. In 2003, Mikhail Khodorkovsky was the CEO of Russian oil company, Yukos. At the time he was the 14th richest man in the world. Mr. Khodorkovsky had become increasingly more and more outspoken against what he called “corruption” within the Russian government. After many months of “shots across the bow” for him to cease and desist with his public comments, a team of commandos stormed his private jet in Siberia placing him under arrest. His formerly private company became the property of the Russian government and Mr. Khodorkovsky has remained imprisoned in wonderfully tropic locations such as Siberia and the Artic circle.

What about the good ole USA? Watch any interview with Warren Buffett, and tell me how many shots he takes at any administration. It does not happen and it will not happen. Mr. Buffett recently sold billions of dollars worth of municipal bonds. Good luck to you if you think that will be talked about on a network owned by General Electric.

Another American financial luminary is Ray Dalio, from the Bridgewater hedge fund. This is the largest hedge fund in the world, with approximatley 120 billion dollars under management. Mr. Dalio has been making the rounds lately in defense of monetary policy, saying that what we are witnessing is a “beautiful deleveraging”. Whereby, according to Mr. Dalio, if you sprinkle in just the right mix of austerity, deleveraging, and money-printing all is well. The only danger being if you hit an “air pocket”.

He gave this speech at the Council on Foreign Relations. Watching his speech was equal parts educational and comedy club. He spoke of the very real threat of world wide depression. He mentioned “If you don’t own gold, you don’t understand history”. He also spoke on how to see downturns coming if you understand what the saturation point is for the economy to service debt. All very valid points and I am not saying the man is unintelligent. The heart stopping moment came for me when Maria Bartiromo asked Ray, “Would you buy oil now?”. He responded, “I have no view on oil“.

That is absolutely hysterical on a lot of different levels, but let’s just stick with what is absolute fact. Ray Dalio started his career on Wall Street in the following way. “After completing his education, Dalio worked on the floor of the New York Stock Exchange and invested in commodity futures. He later worked as the Director of Commodities at Dominick and Dominick LLC. In 1974, he became a futures trader and broker at Shearson Hayden Stone. In 1975, he founded the Westport, Connecticut based investment management firm, Bridgewater Associates.”

So let me get this straight. You’re one of the world’s most renowned investors. You have 120 billion dollars under management. You started your Wall Street career in commodities, yet you have no frame of reference on the oil market or how that impacts markets going forward. Anybody else see that as political at best and an outright lie at worst?

Central banks and the governments that have grown up around them are the largest threat to free enterprise in the history of the world. The Federal Reserve now owns almost the entire treasury market from the 10 year out to the 30 year long bond. Now they are coming for MBS paper to the tune of at least 40 billion dollars a month. Operation Twist remains in place to keep short term interest rates at zero. The reason for that is painfully clear to those that can run a calculator; debt service for the entire western world is impossible at anything remotely resembling a normal interest rate. What Ray Dalio calls a “beautiful deleveraging”, I call “setting the treadmill at just the right speed”. The banks want you to be able to run just fast enough to meet their next debt payment but not so fast that you actually wake up to what the system is really all about. Keeping you as a perpetual debt slave.

The very observant among you may have noticed in the past couple of weeks the yield on the 10 year US treasury has moved to its highest level in months. This is no accident. While the FED is continuing to buy that part of the market, to the tune of 85 billion dollars a month, market participants are finally starting to realize “what’s next”. Being in a 10 year bond is not such a bad place to be when the price of the bond is still in rally mode. Now that the exuberance appears to be over, significant dollars have started to leave that market. What will replace them? It is my very strong belief that it will be YOU. In other words, your 401k’s and IRA’s will be automatically converted into treasuries in some form or fashion. If this sounds outlandish to you, consider that it has already happened in several European countries. You don’t really think the Creature from Jekyll Island has your back do you?

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