Friends, here is why the GLD fund aka ETF is the worst investment if you like GOLD.
1. GLD Is Paper Gold
GLD is actually the SPDR Gold Trust Electronic Traded Fund. It is a promissory note for GOLD. It is backed by physical gold but the real ratio is controversial. See
2. GLD Is Supported By The Fed Which Wants the US Dollar High and Gold Low
In a previous post, I discussed how the US Dollar and GOLD move in opposite directions.
In that post, I explained that the Federal Reserve wants to keep the dollar high so to do that, it depresses GOLD prices by encouraging the sales of paper GOLD. See
3. GLD is a CDO aka Tranche
Remember the Great Recession of 2008? It was brought on by CDOs and tranches based on bundled mortgages. GLD is a tranche aka a bundle of paper gold.
Statistics prove that 13% of CDOs before the Great Recession were sold to multiple buyers. It is like selling an acre of land in Florida multiple times.
4. Paper Gold is rumored to be oversold by 200 times
You need to read this.
5. GLD Has Lagged Gold Mining Stocks Year To Date
NEM, a gold mining stock, is up 34% from 01/01/2016 to 2/5/2016.
Meanwhile GLD is up only 10% from 01/01/2016 to 2/5/2016.
That is probably because investment companies are avoiding GLD. So NEM is a GOOD investment right now not GLD.
Here are Solutions when a Recession Comes
Here is Some More Information
Lessons From How The Great Recession Happened and What A CDO Is
PS I own NEM and care about you but I cannot be held responsible for your decisions.
Click on this link and then the first video box to see it.
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Friends, here is a tutorial on how we got here and how to prepare for the worst.
The Federal Reserve (Fed) offered Quantitative Easing (QE) 3 times. At first it saved the big banks and the stock market started going up. But then the Fed kept giving out easy money to the big banks.
Leveraged Loans and Junk Bonds
The banks, that received the QE money, issued junk bonds and leveraged loans that were used for debt creation not real products and services. Specifically QE went to Mergers and Acquisitions (M & A) and oil investments. Here is an example.
Richard Baker, chief executive, along with his investment firm, NRDC Equity Partners, relied heavily on borrowed [leveraged loan] money. Of the $1.2 billion that it paid for Lord & Taylor, only $25 million [2%] came in the form of equity, with the remainder made up of debt financing. [The New York Times]
Do you think any of us could buy a house with 2% down? Nope.
For 2014, three things happened. The dollar reached a new record high, the Dow Jones hit a record 32 times and leveraged loans went back to 2008 pre-recession levels. Some economists are calling this a bubble. Here is a chart to prove it.
Some Good News
The good news is the stock market is up, gas prices are low and unemployment is back to 2003 levels.
But the Economy Struggles
The economy is struggling for several reasons. First, the easy money went into debt rather than real products which creates jobs. Secondly, very little money went into infrastructure which also creates jobs.
And Wage Inequality Is Greater Than Ever
The CEO to worker compensation ratio is 296 to 1 today versus 20 to 1 in 1965. The rich have gotten richer. Unfortunately the upper class does not change its spending patterns. Several studies have proved this despite what politicians say.
So the economy has stalled even though the stock market is up. Only the middle and upper classes have money to invest in the rising stock market.
Oil Price Drops and Leveraged Loan Bubble Bursts
Oil prices have dropped because of excess supply and over-leveraged oil investors. For more information see this easy to understand website.
Solutions for the Federal Reserve and Congress
Here are some solutions because blogs should offer solutions rather than just complain about our problems.
There is still time for the Federal Reserve to pump up the economy by providing funding specifically for infrastructure which will create jobs and kick start the economy. Also Congress, or better yet, each state can raise the minimum wage. The economy will only take off if new jobs are created or lower class or middle class people get pay raises.
Here is a list of 7 suggestions that will not soak the rich.
But if the government drags its feet or does more of the same Quantitative Easing, here is what you can do to prepare for the worst.
Solutions for the Rest of Us
Lessons From How The Great Recession Happened and What A CDO Is
Hidden in recent Fed remarks by Yellen, are fears that CDM and CRE are bubbles.
CRE stands for Commercial Real Estate. In terms of CRE prices and change, the above chart from Gerdau shows investments across the country are soaring.
For example the General Motors building just sold for an amount that values it at $3.4 billion, the most expensive office building in the United States.
Also William Ackman and other investors purchased a penthouse apartment at One57 in Manhattan for over $90 million, the highest price ever paid in New York City, as an investment to flip for a profit.
The CRE bubble did not burst in 2008, but evidently is bigger now.
CDM stands for Corporate Debt Markets also known as Debt Capital Markets. In terms of CDM, the above chart by Dealogic, dated February 5th, 2015, shows a 30% increase in the spread for the year.
Specifically, the average spread to benchmark on 30-year global debt issuance peaked at 193bps in January 2015, a 30% increase on January 2014 (148bps), marking the highest monthly average benchmark spread since October 2009 (206bps).
Here is exactly what the Fed minutes said on 2/19/2015.
“However, the staff report noted valuation pressures in some asset markets. Such pressures were most notable in corporate debt markets (CDMs), despite some easing in recent months. In addition, valuation pressures appear to be building in the CRE sector.”
At least the Fed is aware of the bubbles and not totally focused on interest rates.
Like Poltergeist II, prepare for CDOs II.
(Here is Poltergeist II trailer – https://www.youtube.com/watch?v=rH-B6A04iK0 )
Remember those financial instruments known as Collateralized Debt Obligations that caused the 2008 Great Recession? Well they never went away. In fact they are baaack.
The Financial Crisis Inquiry Commission concluded that CDOs were one of the major causes of the 2008 Great Recession as shown at this website.
For 2014, global CDO Issuance is back to 2004 levels valued at about $135 billion.
Collateralized loan obligations (CLOs) are CDOs based on bank loans. Many of the subprime loans have been packaged and sold as CLOs.
The following chart shows that Collateralized Loan Obligations (CLOs) in 2014 have reached the same level as 2007 or $35 billion. Total outstanding CLOs in the US amount to $300 billion.
Though the large financial institutions have backed away from collateralizing mortgages, they are now doing it for commodities such as gold, silver and oil. Here is one example.
Another problem is not the collateral but the reselling of the same assets. In 2007 one financial firm sold 610 out of 3,400 CDOs more than once. That is nearly 18%. Let me repeat. More than once.
Because buyers are dealing with paper not physical assets, how do they know they are trading real, actual commodities? If the markets started to go down and everyone wanted their physical commodities such as gold, what if there was not enough gold to meet all the obligations? Would there be an international panic?
Evidently CDOs were not selling as well as desired. So the banks have renamed them “bespoke tranche opportunities.”
BTOs are slightly different, as explained in this website.
Multiple charts exist which predict another recession soon!
Normally I am a very positive person. But recently I found not one but two charts which show we could have a repeat of the recent Great Recession.
The first chart above shows how the Federal Reserve and Quantitative Easing have allowed financial institutions to run wild again. In summary, leveraged lending is out of control. For two years, leveraged loans have risen as fast and to a greater level than 2007, the year before the Great Recession.
The New York Times reports that leveraged lending is greater and the associated rules more lax than in 2007. Here is a portion of a news report.
What can’t be denied, however, is that standards in the leveraged loan market have become much looser in recent years. The companies that have taken out the loans are on average much more indebted than in recent years. Companies that have done deals this year have debt that is 4.9 times as large as their annual cash flows, measured using earnings before subtracting expenses like interest, taxes and depreciation, according to data from Standard & Poor’s Capital IQ. That multiple is up from 3.9 times in 2011 — and it is the same as the number for 2007, when the last boom in leveraged loans peaked.
This time around, however, one aspect of leveraged lending is much more aggressive. The special provisions within loan agreements that were once thought crucial for protecting creditors are fast disappearing. So far this year, 63 percent of leveraged loan deals lack such provisions, far higher than 25 percent in 2007, according to data from S.&P. Capital IQ. “Contractually, things are really at their weakest,” said Christina Padgett of Moody’s Investors Service.
You can read more details at one of these websites:
A second chart shows that recent Dow Jones record increases also occurred in 2008.
Unfortunately 10 out of 20 increases of 400 or more of the Dow occurred in 2008, the year of the last recession
Can another Great Recession be stopped? No. Apparently the Federal Reserve did not act fast enough nor aggressive enough in 2014 to stop the out of control leveraged loans.
To protect yourself, read this website:
Thanks for reading this.
I am talking about huge swings in the market.
No, not that type of swing. I am talking about the huge daily changes in market value. See the chart below courtesy of bigcharts.marketwatch.com.
Specifically, this chart shows huge daily changes in the Dow Jones Industrial Average (DJIA) during the week of Sept 22-26.
Monday 9/22 down 105
Tuesday 9/23 down 100
Wednesday 9/24 up 150
Thursday 9/25 down 250
Friday 9/26 up 167
The summary is the market is frothy. Why? Because the QE3 is winding down, the economy is still struggling and the financial sector has been over stimulated. Thus there is a lot of nervousness.
The conclusion: we are overdue for a big correction.
The Bank for International Settlements, BIS, warns that silence is NOT golden.
The BIS has been warning for years of the dangers of very low interest rates.
“A common mistake is to take unusually low volatility and risk spreads [aka silence] as a sign of low risk when, in fact, they are a sign of high risk-taking,” said Claudio Borio, head of the monetary and economic department at the BIS.
Borio added that the last time uncertainty was this low was in 2007 — just before one of the largest forecast errors the economics profession has ever made [aka Great Recession].
Now the BIS has warned the world again. This time with specifics.
The BIS said 55% of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash. “Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said.
See the following link for more information.
Does the BIS have to get out its big guns to make its point?
Multiple charts exist which predict another recession this year!
Now, I am normally a very positive person. In fact my first post for the new year was very hopeful. But recently I found not one but two charts which show we could have a repeat of the recent Great Recession.
The first chart above shows how the Federal Reserve and Quantitative Easing have allowed Credit to run wild again. In summary, the Net Margin (Credit minus Debt) is out of control. For the past year it has risen as fast and to the same level as the year before the 2008 Great Recession. Daniel Fisher of Forbes reported this as found by Ricardo Ronco of Aviate Global. Ronco says, “…equities are running away from borrowing levels.”
How do we fix this bubble? We convince the Federal Reserve to issue loans to cities and states rather than financial institutions that only buy stocks and bonds. Cities and states will use the money for infrastructure which will create jobs.
Here is another prediction for the S&P 500 to drop 30%. See http://blogs.marketwatch.com/thetell/2014/04/03/sp-500-will-peak-around-1900-to-1950-then-drop-30-saxo-bank-strategist/
But based on the above chart, I predict a drop of 50% not merely 30% in the S&P 500.
Big name investors like Warren Buffet and George Soros have cut their stock investments or shorted the market.
If another Great Recession occurs, riots will take place that are greater than the Occupy Wall Street demonstrations and President Obama will face impeachment.
Can another Great Recession be stopped? Yes, the Federal Reserve can take two actions.
1. Put restrictions on QE funds to minimize leveraged lending.
2. Stop issuing QE funds to institutions that use “expected rent” as collateral.
You can make a difference by voting for the following White House Petition.
Thanks for reading this.