Wednesday, January 25, 2006


A 'Difficult Time' Ahead: Mellon

A British finance mogul had a warning for the west. "Jim Mellon says 2006 is the year to hunker down and consolidate. The high-flying financier says the party is over and it's time to prepare for the great depression of the 21st century. 'My suggestion is that the next two or three years are going to be a dangerous and difficult time for us,' says Mellon."

"The global entrepreneur and economic pundit is picking a rough sailing for western economies like New Zealand's. And he says much of the problem is stemming from America. 'Every man, woman and child in America imports approximately $16 worth of foreign product and they only export $9 so there's a gap of several dollars a day for every man, woman and child, multiplied by 282 million people, multiplied by 365 days a year, equals $US 650 billion a year which is bigger than most countries GDP by a mile...that's how deficit is the Chinese and Japanese banks buying American government debt,' says Mellon."

"'Ultimately how does America pay for that...there's only one way out and that's a lower standard of living for the Americans and hence for the rest of us in Anglo-Saxon economies.' Mellon says the West can't compete with China on a manufacturing basis because the average wage rate is between 20 and 30 US cents per hour while in Germany and the UK it's $US30 per hour. And he says the skills gap is not that great. 'We have approximately 15 years before China overtakes the US - it's already overtaken the UK, France and Germany.'"

"And Mellon says New Zealand has experienced the same 'frenzied boom' as in the UK, America and Australia. 'Property prices have gone up 10 times in the space of 20 years...that's a ludicrous rise and incomes haven't risen 10 times.' Mellon's own 'rough forecast' is that over the next five years or so properties could fall 50 percent."

"He is concerned that many people are loaded with debt rather than savings. 'There's no stigma attached to being in debt any more so your grandparents would have been mortified if they'd owed more than 5 shillings on something but now it's acceptable.'"

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Off topic - I've been reading that the fate of the Gold run depends on what Silver does.. I see today that Silver seems to have broken out a bit over ETF progress. Any thoughts?

Hey Ben- if this year turns out to be as good as many of us think.. maybe we should consider a housing bubble and metals cruise to Alaska. Many a stop to an oil shale site or silver mine?
it's here, probably.

Shine On – Part II: SEC Proposes Rules for Silver ETF Trading

by Charles Mackay, Tuesday January 24 2006

It’s coming. Despite roadblocks put up by the Silver Users Association, the Securities and Exchange Commission (SEC) in conjunction with the American Stock Exchange, has proposed new rules that will guide the trading of the upcoming silver exchange traded fund (ETF).

Let’s be clear – the proposed rule from the SEC governing trading of the silver ETF (Rule Change Relating to the Listing and Trading of Shares of the iShares® Silver Trust) should not be confused with the pending registration of iShares Silver Trust (SLV) shares with the SEC. These are separate matters. However the SEC action indicates the very clear intention of the SEC and AMEX to prepare for the eventual trading of the silver ETF. The proposed rule will take at least until February 7, 2006 to be approved, and possibly, it could be subject to further delays and/or changes.

Shine On – Part II: SEC Proposes Rules for Silver ETF Trading
Bought another 1000 Silver Eagles today in the green Mint boxes. Thanks again for the link, Ben.

What was the amount (or %) that you paid over spot, if you don't mind me asking?
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Looks like about $1.55/each over spot (inc. shipping and ins.)
Why would metals go up in a great deflation?

I predict a deflationary depression with 30% unemployment. The politics will turn to 30% socialists. Socialists will promote horrible riots. Regulations to prevent foreclosure or to delay them will passed on a state and federal level. Owners and bankers will be ruined by lawsuits, regulations and laws. Deeply depressed owners will commit arson and/or suicide for the insurance. Sheriffs will be murdered to prevent foreclosures.

Personally, I lean more to the deflationist camp, too. But as Robert Prechter once said, gold is good to have around with inflation or deflation. Both are destabilizing events, and it is hard to know what our government or the Fed may do.

If gold falls significantly, I will probably move more cash that way.
I should have taken the blue pill.
Blue pill? BTW, the 18 year high brings back memories, because I was buying and selling silver back then. The best price I ever got was over $11. Those silver eagles are nice and they have a slight value over the physical metal. Take good care of them!
From the Matrix.. Neo had the option of taking either the blue or red pill... After he took the red pill, he woke up to the reality of life. The blue pill offered ignorant bliss.

Your Blog would be a big ole' red pill.
India could over take the US in 20 or so years. Mellon dwells on China. India has cheaper labor than China and tremendously better and advanced software engineers.

The US could be in 3rd place in 25 or so years. Japan looked to be the next economic dynasty in the late 1980's but peaked in 1990. Japan's deflation is 15 years and going for longer.
The calls forecasts for defaltion are wishfull thinking IMO. Maybe 3-4 years down the road, but inflation is here to stay for awhile. There's just too much money floating around out there right now, and it won't go away overnight.
John, thanks for the related SLV link! No wonder SLW reached new highs. ;)

thejdog, I'm really concerned about hyperinflation (money press frenzy + Fed rate drops). How would one protect against this? Have investments outside of US and commodities? (If so, I'm in good shape.)
From todays that is a likely scenario IMO: "

Any weakening in the economy will cause concern for the Fed that the rubber band “Growth Economy” may be extended as far as it may go and cause them to print more money to support the markets and the economy, and usher in the later part of the inflation cycle where everyone pays and no one benefits. This is my feeling why M3 will be discontinued. The Fed wants to support the market with a flood in liquidity (M3) and doesn’t want anyone to think the market support is superficial, but actual strengthening of the economy."

The above quote is the first thing that came to mind after I heard about the M3 issue. I just don't see how deflation comes into play. Maybe currency devaluation or more likely stagflation. - which could lead to delation some years down the road after the Fed invariably over-corrects.
I'm really concerned about hyperinflation (money press frenzy + Fed rate drops).

The bond market does not agree with your fears.
I'd just like to note that this Blog is really seeing a pickup in activity!
Weakly bid Treasuries auction resulted in unexpected rise in rates today. Rates going up will deflated the housing asset bubble faster leading quickly to falling asset values.

The first to feel the declines in price are the sellers. The second ripple is the MEW's (mortgage equity withdrawal, home equity loans, HELOC's, etc) which depresses renovations and major purchases. The foreclosures and REO's come third because the laws give months and months of grace period. Oh, did I mention the defaulting mortgage backed bonds, especially derivatives.

In Europe and the US, instruments are growing ever more sophisticated and complex, as investment banks and exchanges - most of which have now floated to become aggressive profit-seeking concerns - offer an array of new derivative products. While valuations are always controversial, prices are not as excessive as they were in 1999 and 2000. To the pool of patient capital that has long been provided by pension funds has been added a much more active pool of money from hedge funds, which now account for more than half of the daily volume in the US stock market.

The fear is that the sheer pace of the growth in credit derivatives has outstripped both the scope of the existing regulation and the development of infrastructure to manage exposures in the sector. According to the International Swaps and Derivatives Association, the total notional volume of credit default swaps outstanding had reached $12,430bn by the end of June - a growth rate of 48 per cent in six months. The market had scarcely existed in 2000.

Collapsing mortgage backed bonds and derivatives, plus stock derivative and a declining economy will overwhelm the Fed. The central bank in 1990 failed. This is my reason to conclude that prices will fall in a severe deflation.
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