Current Metals Price Craziness

Now, in the book, I point out that the point of investing in precious metals is NOT that I think the value will go up – I have no idea whether or not the value of gold and silver will go up or down. The point of investing in precious metals is that it is a permanent asset. You can hand it to your grandchildren. In addition, it’s value is intrinsic, not extrinsic. It doesn’t depend on the reliability or morality of another group to hold its value. An entry in a portfolio is extrinsic value. The numbers in the statement mean that there is value somewhere else. But owning physical gold/silver means that the value is right here. Where I can see it.

Anyway, having said that, owning precious metals has meant that I do take the time to look at the market, and right now it is crazy. The price of gold and silver are below what it costs to mine it. In other words, let’s say I owned a silver mine, and owned all of the equipment to mine silver. I already own it. Done. At the current price of silver (less than $18 according to SLV), it would cost me less money to go to the coin store and buy my silver than it would be to go into my mine and dig it up.

Because of this, some precious metals vendors are beginning to close up shop. Golden Minerals just announced that a href=””>it is suspending production until prices come back up (list of current company press released here).

So, the question is, with physical demand high, and prices too low to allow more supply to come into the market, where will this lead to on the silver front? Higher prices is the obvious answer, but that has not been how it has played out so far. I predict an interesting ride ahead.

No One is Surprised, So Why Do We Keep Sinking Money Into This?

Fed Shocked To Find Student Loans Used For Anything But To Learn

Federal officials are cracking down on fraud in student-aid programs, responding to evidence that a growing number of recipients—acting alone or as part of organized crime rings—are pocketing federal loans and grants without any intent of going to school.

Since January, the agency said it has flagged 126,000 applicants, about 1% of all those seeking aid for the 2013-2014 school year.

“What we find are very poor students academically that are borrowing to the max, getting the maximum in their Pell grant and just going from school to school,” said Rich Heath, director of financial aid at Anne Arundel Community College

More than 34,000 participants in crime rings improperly received federal student aid last year, up 82% from 2009

“We started seeing student borrowing that was just over the top with no explanation for why,” Ms. Zanders said. “We have individuals that have told me, ‘I spent all this money on graduate school. I can’t get a job. I’m living in somebody’s basement. I can’t afford to live, I need the money.’ It’s not so much about the education, it’s the money.”

When money is being handed out, you are asking people to abuse the system.

Rooftop Gardening

I tried to do a rooftop garden at my office. I ran into several difficulties:

  • Water – I had to carry water to the roof by bucket – lots of work!
  • Distance – it took a while to get to the rooftop
  • Heat – in Oklahoma, in the summer, it gets really hot
  • Time – since this was at the office, I didn’t always have the time I needed to tend the garden
  • Containers – I used cheap plastic containers. They didn’t really stand up to the heat. Not sure what the best thing to use is. Probably clay pots, but they are expensive. Perhaps building a raised bed and adding dirt would work, but that sounds like a lot of time, effort, and money.

I’d like to give it another try, but I have to think around these issues. If anyone is curious, I got a teeny-tiny crop out of my vegetables, but I don’t now remember what exactly it was that I planted.

What Citizens Realize About the Economy

Seth Klarman is a leading hedge fund manager. In a recent letter to investors (April 30, 2013), he wrote the following:

Is it possible that the average citizen understands our country’s fiscal situation better than many of our politicians or prominent economists? Most people seem to viscerally recognize that the absence of an immediate crisis does not mean we will not eventually face one.

They are wary of believing promises by those who failed to predict previous crises in housing and in highly leveraged financial institutions. They regard with skepticism those who don’t accept that we have a debt problem, or insist that inflation will remain under control. (Indeed, they know inflation is not well under control, for they know how far the purchasing power of a dollar has dropped when they go to the supermarket or service station.)

…When an economist tells them that growing the nation’s debt over the past 12 years from $6 trillion to $16 trillion is not a problem, and that doubling it again will still not be a problem, this simply does not compute. They know the trajectory we are on. When politicians claim that this tax increase or that spending cut will generate trillions over the next decade, they are properly skeptical over whether anyone can truly know what will happen next year, let alone a decade or more from now.

They are wary of grand bargains that kick in years down the road, knowing that the failure to make hard decisions is how we got into today’s mess. They remember that one of the basic principles of economics is scarcity, which is a powerful force in their own lives.

They know that a society’s wealth is not unlimited, and that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse. For if you must rescue everything, then ultimately you will be able to rescue nothing.

…And when you tell the populace that we can all enjoy a free lunch of extremely low interest rates, massive Fed purchases of mounting treasury issuance, trillions of dollars of expansion in the Fed’s balance sheet, and huge deficits far into the future, they are highly skeptical not because they know precisely what will happen but because they are sure that no one else–even, or perhaps especially, the policymakers—does either. (emphasis added)

More of the letter can be found here.

The Assumption of Inflation

Sometimes, you are so far into a problem that it is difficult to see it. Sometimes, you have seen it so often, it just looks “normal”. I’ve been reading a lot of business books lately. One issue seems to be baked into every entrepreneurial book I’ve read – wages will go up. That is, you must pay your people more next year than you did the year before. This will happen for a long time and cause problems. That is what every book says.

Why must paychecks go up? Where is that a law of the economy? And, if they do go up, shouldn’t it be based on performance?

After some thought, I think I figured out the issue – the Fed has been inflating the money supply for so long, it just seems normal to give everybody more money each year. This has been going on for so long, it doesn’t even have a name – it just is the way it is. If we had a real currency, then when we have massive increases in production, wages can actually go down and still be worth more. But, since we don’t, we must always just assume that the money supply is forever increasing, therefore we must always just assume wages should go up every year to compensate. It really is a bizzarre situation when you think about it.

Here Comes the Next Crisis/Scandal – Student Loans

Students are taking out loans they can’t repay, and recently judges have started discharging student loans for students who can’t repay them. This means that the banks and investment institutions carrying student loans face the same crisis that we just went through with housing in 2008. These investments are essentially worthless.

Interestingly, it seems at least this time the institutions are realizing this ahead-of-time. Sallie Mae, who owns many of these loans, is splitting itself into two companies. One of the companies will only handle student loans. Why the split? According to the press release, the purpose of this move is “to unlock value and enhance long-term growth potential.” However, I fear that the real reason is to shield shareholders from an impending breakdown of the student loan market. By splitting off the student loans into an isolated company, when it fails, only the student loan company will fail, leaving the main company standing.

This is yet another of many reasons I am frustrated by the attempts to expand the student loan program. The federal government is creating the monster, and I’m sure they will blame the market, not themselves, when their policies make many banks and investment houses insolvent.

Saving Money by Charging Directly

Another doctor has flown the insurance coop.

“I’m freed up to do what I think is right for the patients,” Ciampi said. “If I’m providing them a service that they value, they can pay me, and we cut the insurance out as the middleman and cut out a lot of the expense.”

“I’ve been able to cut my prices in half because my overhead will be so much less,” he said.

Before, Ciampi charged $160 for an office visit with an existing patient facing one or more complicated health problems. Now, he charges $75.

Patients with an earache or strep throat can spend $300 at their local hospital emergency room, or promptly get an appointment at his office and pay $50, he said.

Ciampi collects payment at the end of the visit, freeing him of the time and costs associated with sending bills, he said.

“If more doctors were able to do this, that would be real health care reform,” he said. “That’s when we’d see the cost of medicine truly go down.”