Monday, December 8, 2014

Money on the Move

Money is always on the move. Perhaps that is why they refer to cash and near cash assets as liquid. It is important to watch the flow of money around the world. Although, sometimes it is impossible for an outsider to understanding what is happening until it is too late. Since these kinds of stories are often not reported in normal press outlets it can be pretty hard to discover the truth about stories that can change your financial life.

Tesla is the darling of the environmentally oriented investment community. It is a company run by a promoter who could put Harold Hill to shame. A quick look on the Web indicates that nobody really knows how many cars Tesla sells because they do not report that kind of information. I saw one industry source that reports 1,600 a year. These cars are really cool toys for movie stars. The costs start at $101,000 for a car with a 265 mile range. Then you have to plug it for 52 hours to, “Fill her up.” To be fair a $10,000 optional “super charger” can drop that time to 22 miles of range per hour of charging. This silly little company (yes they do have some interesting technology) is capitalized at somewhere around $30 Billion depending on the price of a share on a given day. Daimler Benz owned a 4.0% stake in Tesla. Recently they looked around, scratched their head, asking the question, “We own what! At what price!” Wisely they sold their stake, netting a profit of $780 Million. A couple of days later Toyota sold out their 2.4% of Tesla for a $640 Million profit.

What is driving the S&P 500 into dangerously overpriced territory? For some time we have heard stories about retired savers who can not live on a less than 1% return on their safe investments. People like me looking for something closer to the traditional 3% return on bonds are forced to move more money into riskier investments, like conservative dividend paying stocks. That drives money seeking capital gains out of conservative growth into the wild world of “story” stocks, like Tesla, that are pretty much naked gambles.

There are other, less often reported powers at play in the current rally. Japan is trying to drive down the value of their currency. This is an attempt to improve the sales volume of Japanese industry by lowering the price of their exports. It is also an attempt to monetize their considerable national debt. Money is moving by means of “the carry trade” from Japan to the American stock market. U.S. companies are borrowing money from Japan at ridiculously low interest rates, using that money to buy back shares in their own company, as well as shares in other companies. Rising share prices make for happy share holders. When they sell these shares at higher prices they then can repay their debts in cheaper Yen.

To paraphrase an old Doo Wop song, “Is it real or is it ain’t.”

Or does it matter? Yes. Because the Japanese taxpayer is going to be left holding the bag and retired American investors are going to get hit hard in what is euphemistically termed the next “correction,” potentially wiping out a lifetime of hard work and thrift.

Closer to Main Street, we are enjoying the lowest gasoline prices seen in quite some time. Gas is currently selling for $2.47 in my neighborhood. That is about 46 cents a gallon in 1973 dollars (the year of the first oil crisis). That is some cheap gas! Why would OPEC allow this to happen? The Saudis can turn off the pumps tomorrow, sending the price of a gallon back to $4.00 almost overnight. It is suspected that OPEC wants to shut down American wildcatters in places like North Dakota before they can become a threat to OPEC domination of the world’s oil supply.

These producers of oil are probably even more worried about the Russians who are on the verge of becoming a giant energy producer. This adds interesting geo-political questions to the mix. Currently Europe is trying to pressure Russia out of the Ukraine. The EU can’t apply too much pressure because their industries are largely dependent on Russian natural gas. This is why Germany is investing heavily in solar and other alternative energy sources. A German currently pays twice as much for his electricity as a Texan, even though his energy bill is heavily subsidized by his Government. But perhaps that is better than being dependent on one’s ancestral enemy. The Russians are probably not too thrilled that their economy requires the continued sale of energy to nations (including Germany) that are attempting to bully them out of their own backyard. The Russians have recently reached an agreement with the Chinese to build a massive pipeline that would give them the option of selling energy to the Europeans or the Chinese. Then the Russians can credible threaten to shutdown European industry if the EU refuses to play nice about the Ukraine.

A recent news story announced that the Europeans are pulling their gold out of the Federal Reserve Bank at the highest rate in the last thirteen years, 42 tons in just one month. The author does not speculate why this is occurring, unusual for the financial press.

Countries store their gold all over the world. Why this true is a little hard for me to understand. One hears comments like, “For settlement of international agreements.” What, pray tell, does that mean? We are told that gold is nothing but a superstitious relic from our barbarous past. The entire world operates on fiat currency. The American Dollar, the Euro, the British Pound, the Yen, and all the other major world currencies are all based on nothing but the promise that they can be used to repay debt.

Whoops! A few weeks ago former Fed director Allen Greenspan slipped up. He amazed and astounded the financial world by stating, “Gold is currency; no fiat currency, including the dollar, can match it.”

Go figure. Maybe the Chinese and the Indians are right. They believe gold is money, so they are hedging their positions in American Treasury Notes with a little gold. Just like me. I have also read that even though the Russians are in serious pain as a result of a partially successful Western boycott of their economy over the Ukrainian questions and the drop in oil prices, they are buying gold. The Russians are one of the largest gold producers in the world. They have considerable gold reserves, one would expect that they would be selling their gold to get their hands on hard currency in this time of trouble, but they are buying gold at what they obviously must believe are bargain prices.

In trying to learn a little more about this often obfuscated topic, I discovered we really don’t know how much gold we have in Fort Knox or who actually owns it. We are told that the United States has about 5,000 metric tons of gold in Fort Knox, but there has not been an audit since 1953. Back then we had about 20,000 metric tons of gold in all locations. Today that number has dropped to 8,133 metric tons. I discovered a more troubling question, “Who owns our gold?” It turns out that our gold can be used as collateral by the Federal Reserve Bank. That’s interesting. Maybe the Chinese already own all our gold. Maybe not.

Of course we trust our Government. They would never take any action that was potentially illegal or not in the best interest of the country. Would they?

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