March 15, 2012
By Kevin Michael Grace
Gold was down (at press time) $42.50 (-2.5%) for the week to $1,658.70, and silver was down $1.41 (-4.2%) to $32.50. Reuters attributed gold’s decline to (narrative alert!) “removal of the premium attached to further quantitative easing, with prices giving up almost all of the gains made since January 25 when the Fed signaled the potential for additional policy stimulus.” In addition, “A modest upgrade of the [Fed's] economic outlook gave the dollar fresh impetus and investors an excuse to lighten holdings of bullion.”
This column has noted the MSM’s decision to ignore the substantial quantitative easing promulgated by the European Central Bank. Which was not enough, according to Ambrose Evans-Pritchard of the Telegraph: “M1 money supply growth in the big G7 economies and leading E7 emerging powers buckled over the winter. The gauge…peaked at 5.1% in November. It dropped to 3.6% in January and to 2.1% in February. This is comparable to falls seen in mid-2008 in the months leading up to the Great Recession.”
“Rightly or wrongly,” Evans-Pritchard asserts, “the US Federal Reserve does not intend to do anything about this. Time is running out for Ben Bernanke before the US election season closes the political window on fresh stimulus, yet he gave no hint of largesse in his latest testimony to Congress. He fretted about inflation instead, causing gold to crash over $100 (£64) an ounce within hours.”
Evans-Pritchard may well be right about the Ben Bernanke’s intentions, but given that President Obama is close to panic regarding rising gas prices, it seems unlikely he would risk having the nascent “recovery” strangled in its crib.
John Manfreda at Wall Street for Main St agrees. “There is no way the government will be able to finance its budget without more Quantitative Easing,” he writes. “So this year I expect the QE trigger to be pulled; now I am not sure if they will call it Quantitative Easing, but it will be done regardless.” Furthermore, “If the Euro gets devalued due to the crisis in Greece, the ECB will most likely fire up the printing press, and the Euro could come close to a one to one ratio with the US dollar. This scenario would make US exports very expensive in the Euro region and drastically hurt the US export market. As a response, the US would most likely issue another round of QE.”
Technically, QE refers to the issuance of Treasury bonds bought by the US Government. What most people don’t know about this is that the USG does not simply move the numbers from one side of the balance sheet to the other but rather employs investment banks such as Goldman Sachs, which make a tidy profit facilitating this switcheroo.
So further QE would be good news for Goldman Sachs, which could use some. Yesterday, Greg Smith, described as “executive director and head of [Goldman's] United States equity derivatives business in Europe, the Middle East and Africa,” resigned and dropped a bomb on his erstwhile employer in the New York Times.
Smith doesn’t beat about the bush. In the first paragraph of his essay, he describes Goldman as “toxic and destructive.” He explains, “Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.” And the best way to make money is to persuade clients to buy junk paper.
As might be expected, Goldman does not have a high opinion of its clients. Smith reports, “It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal email.”
Smith concludes with a call to reform. “I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist.”
At Minyanville, Christopher Witrak has assembled a variety of responses to Smith’s cri de coeur. Goldman Chairman/CEO Lloyd Blankfein and COO Gary Cohn characterized Smith as a “disgruntled” man whose “assertions…do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.” They had no response to any of Smith’s specific assertions.
Others quoted by Witrak noted that Smith was at Goldman for 12 years, including 2007-2008, when its activities were the stuff of legend (or infamy, according to taste). So what are the reasons he didn’t speak out earlier? Cynics have it the reasons are green and numerous.
Karl Denniger calls Smith “disingenuous.” Smith claims, “I don’t know of any illegal behavior,” and Denniger responds, “The textbook definition of fraud is the act of intentionally misrepresenting a material fact to someone with the intent of inducing them to enter into a transaction they would otherwise not entertain, when that material fact (or facts) are then a proximate cause of loss.”
Denniger argues that Goldman Sachs is no worse and no better than any of the TBTF financial institutions: “We have over 100,000 admitted acts of screwing not just with people but with court process in the ‘robosigning‘ mess. That’s not ‘taking advantage,’ it’s perjury, and it’s not an allegation; it was admitted to by the act of withdrawing the affidavits.
Matt Taibbi, who has done more than anyone to popularize the case against Goldman, applauds Smith in Rolling Stone. He concludes, “This always had to be the endgame for reforming Wall Street. It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry. Real change was always going to have to come from within Wall Street itself.”
Bob Lefsetz strikes the same chord: “How long can an enterprise that puts its clients last and rips them off survive? Not long.” Lefsetz compares Goldman to the record labels which have perennially cheated their acts of royalties, and this is where his argument comes apart. No one is compelled to buy compact discs or MP3s. A world without (monetized) recorded music is perfectly feasible, but a world without financing is not. Goldman is part of the cartel that controls the global economy with the full support of all the politicians, including Mr Hope and Change himself, Barack Obama.
The proponents of internal reform are betting on Muppets against Mammon, and history is littered with the corpses of those who took that wager. In the event, Greg Smith will be forgotten in a matter of days, while Lloyd Blankfein will go on his merry way, “doing God’s work,” as he so modestly puts it. And as Bob Dylan sang, “I can’t think for you/You’ll have to decide/Whether Judas Iscariot/Had God on his side.”
And now to cases. Reuters reports March 15 that CIBC has cut Semafo’s TSX:SMF price target from $13 to $11 (currently $5.25), March 14 that RBC has cut NovaGold’s TSX:NG target from $11 to $10 (currently $7.03) and March 9 that Canaccord has cut HudBay’s TSX:HBM target from $14.50 to $14 (currently $11.67).
At the Globe and Mail, Martin Mittelstaedt advises, “For bulls on silver, there is a way to play the precious metal that’s literally dirt cheap: Buy it while it’s still in the ground, at the rock bottom price of only 51 cents an ounce.” He’s referring to Silver Standard TSX:SSO.
From the same source, David Parkinson employs the analysis of Brockhouse Cooper to identify the three mining stocks with the best return on investment over the last year. They are Nevsun TSX:NSU (46.1% ROE), First Majestic Silver TSX:FR (34.7%) and Pan American Silver TSX:PAA (23.1%).
And Reuters features innovator Nautilus Minerals TSX:NUS, which “has permission to explore massive sulphide deposits in the floor of the Bismarck Sea off the coast of Papua New Guinea for copper, gold, zinc and silver.” According to Andy Davidson of Numis, “If it works, it’s going to be a game changer for the mining industry in many respects because there is a lot of this stuff out there on the ocean floor… This is a high-risk, potentially very high-reward speculative play.”
Finally, jubilation reigns at Auguries Manor, with the return tonight (from forced hiatus) of Community, described previously in this space as “not only the greatest sitcom ever but quite possibly the greatest thing in the history of things.” Despite this authoritative pronouncement, ratings remained dismal. Unless they increase, the hiatus will become permanent. If that happens, the lovely and talented women at the heart of the show will once again be reduced to tears. You don’t want that on your conscience, do you?