The Cody Word
« Citigroup and the World Bank Illuminati are stealing our money
My tweets this week - "You guys are better off because we bailed out and we stimulated" »

  • June 16, 2009 11:15 AM EDT by Cody Willard

    I was wrong: Gold's going to crash

    The government’s been bailing out entire industries left and right. The Fed’s got their Fed Fund rates at 0%, giving banks the ability to borrow taxpayer money at no cost in this country. The Fed’s guaranteed trillions in worthless debt at the world’s biggest investment banks. You’d think the money supply in this country would be exploding right now. Certainly, that’s what I’d been expecting to see as the overpowering macroeconomic trend in this country for the next two to five years.

    Alas the money supply, especially if you reconstruct the M3 money supply which the government used to publish as the most complete measure of how much liquid money is sloshing around this country, is collapsing. It stood to reason that if the Fed and Treasury are willing to print worthless dollars to send to the corrupt and insolvent banks, that a bunch of those worthless dollars would gush their way into the economy and increase the money supply. That increased money supply would devalue the existing money supply. That devaluation of the dollar would then likely translate into a bull market for gold.

    But something happened on the way from the pump. See, all those same insolvent banks don’t just have all those trillions of worthless debt that they’ve stupidly risked their depositors’ savings on. No, those same banks decided to take their customer’s monies and risk them in secondary, derivative markets that were initially created to “insure” all those trillions in worthless loans the stupid banks made. Like a poker player on a losing streak, they started betting ten times as much on the derivative markets as they had in the actual lending markets. You know who they thought would pay them and make those insurance payments if those bets were to work out? Mostly AIG. And other insolvent banks.

    They did this ten times over, dwarfing their initial bets that they’d already made ten times over on their depositors’ money, eventually gambling on tens of trillions of dollars on insurance on that worthless debt.

    And now that the cows have come home and real estate et al is collapsing in this country, these same insolvent banks have to make their balance sheets look better even as they have tens of trillions of dollars of losses that they’re pretending don’t exist.  That's because even after the government has made these corrupt banks whole on about $200 billion of worthless insurance they bought from AIG, $200 billion is a small fraction of what the banks have actually pretended they’ve got on their balance sheets and that they’ve now got to “mark to market” slowly but surely.

    And as those trillions of dollars of losses are brought back onto their balance sheets and recognized for the reality they are, the banks find themselves ever more insolvent. And so they have to hoard every dollar they can get their hands on to try to build up their reserves. And that means that despite all that taxpayer money being given hand over fist to these insolvent banks that the money supply keeps shrinking. In the US economy, debt creation equaled money creation which meant the money supply was increasing. Debt is being destroyed now and that means money is being destroyed. And that means money supply is decreasing.

    And this trend isn’t about to reverse itself magically. The money will keep being sopped up by these insolvent banks’ balance sheets until they are forced to recapitalize entirely – washing their shareholders who foolishly bet on bad management (and often dishonest, fraudulent management such as at Bank of America and Goldman Sachs where the executives in charge always deny their need for capital even when they are desperate for capital), hurting the people who risked their money lending the company money (bondholders, that is) and ensuring that every depositor is made whole.

    The preceding sentence is what the government is supposed to do now since Timothy Geithner, Mary Shapiro, Sheila Bair and the rest of the bureaucrats at the SEC and the FED and the FDIC completely failed at their jobs of protecting depositors’ money and policing for ponzi schemes and making sure the banks didn’t lever themselves up recklessly.

    Until the FDIC, the FED and the SEC start doing their job and while they continue to redistribute trillions of working people’s money to the shareholders and counterparties of these corrupt, insolvent banks, we’re going to see wealth in this country destroyed and the money supply decline.

    And that’s why gold ain’t going higher any longer. Gold can be a great hedge when the money supply is exploding. I’m still convinced that we’ll see inflation in many commodities that we “need”, such as food and milk. But betting on gold to go higher in a situation where dollars are actually being eaten out of the system isn’t the bet I want to make. Indeed, because of this new analysis, I expect we’ll see gold below $500 an ounce sometime in the next year or two.

    Best bet for the next two to five years – higher interest rates. Regardless of where the FED keeps its FED Funds Rate (they can keep it at 0% forever if they want) the cost of capital in this country and around the world is going higher. The money supply is dropping and people are going to want more interest on the money they lend the US government, the private sector and anybody else. I’m open to ideas on what the best strategy for betting on higher market rates over the next two to five years is. Anybody out there think they got the best play on higher rates?

RSS Subscribe to Comments

paul dake

I am not an expert at any of this crap but did note that we did not get into this mess til gas went up to $4.00 per gallon--then people could not afford their housing--etc and it all went south from there--By the way--even in a down turn there will be crooks--just new faces---As for gold-you can't eat gold--As you noted--the only things going up in price are those we can not live without---so food is high on the list..Everything now has a price--it is just a question of how much..

June 18, 2009 at 12:04 pm

Rich Vermillion

Cody, I am a bit surprised at you. You look only at one metric (M3) and then extrapolate amazing conclusions, not supported by either history or the overall data at large. I recommend that you consider taking a look at a recent and comprehensive analysis of inflation by Mark Lundeen at http://www.gold-eagle.com/editorials_08/lundeen061309.html on the web. His charting, historical overview, and analysis of current trends and government policy is far more comprehensive than what you presented here. Cody, I typically enjoy your commentary (though sometimes you get wild and incoherent), but I think you are getting overworked and loosing sight of the forest for a single tree. Based on a dollar to "reported" gold in storage ratio ALONE here in the USA, gold could easily be trading in the $3000-$4000 range NOW (and possibly higher) if it were not for "Plunge Protection Team" interventions in the precious metals markets. Check Mark's analysis and graphs, and look at the history. The "Greatest Depression" is soon to come...regrettably. May those who created this mess and the suffering that will soon occur, be held accountable here on earth. (Though, as a Christian, I I have no question that they certainly will be held accountable in the Final Judgement... unless they come clean beforehand). -Rich Vermillion

June 18, 2009 at 12:17 pm

MJ

Cody, I usually love your commentary, but I have to respectfully disagree. Let me give you some bullet points: 1. There is more of an outcry for the abandoning of the dollar as the leading currency. Russia is now trading China in Rubles for oil. Russia is the biggest oil supplier in the world. China, who is our biggest debt holder, is raising concerns on the state of the US. China has formed a stronger partnership with Brazil verses the US on currency issues. China & Russia are also building up their gold reserves. They are even approaching the IMF for additional gold resources. 2. Gold has been in a consistent uptrend for the past 9 yrs. The US is also losing control of its currency. Since 1972, when the dollar was taken off the gold standard, our currency has greatly devalued. Add in the US budget deficit, bailouts, etc., Hyperinflation is inevitable. Take a look at the history of the German Mark. The same situation could happen to the US. 3. Northwestern Mutual Life Insurance Company makes the first gold purchase in 152 years. 4. Gold/Siver has been used for financial stability since the beginning of time. You can even refer to the Bible (Abraham - Genesis). I would hate to see you or anyone else lose their lifetime savings if the dollar has no value. I recommend that you hold on to some precious medals reserves. I know that you are getting several inquiries about your position. If you can, please address this subject on HH tonight to let your viewers know.

June 18, 2009 at 2:27 pm

Anna

Hi Cody Willard- I just heard you on FOX say that gold is going to crash. Now I usually think you are one of the smarter guys on FOX but I think you are missing the big picture. When the US went off of gold and relegated silver to a low class industrial metal, the die was cast (for the record, I think taking silver away from the government was a very smart move on the part of central bankers who are probably hoarding silver at give away prices - silver should be trading around $62/oz at the historical 15:1 silver:gold ratio.) At that point, the dollar was cut loose and became fully dependent on the progressive inventiveness of Western Man, who could now do anything and be everything when cut free from his formerly restrictive moorings. Well, Progressive Western Man has failed to deliver, BIG TIME. Everyone, including you, is asking, where can I put my savings in case I lose my job or just want to retire??? When economic activity is completely stalled, due to government attempts to fix everything, it is going to become plainer than the nose on my face that gold is money. Silver is money. The day for theories and economic prizes is over. Now, all the world knows, even progressive inventive Western Man has to have an anchor. Peter Schiff is exactly right, IMO, when he says the bottom will be when the DOW = 1 oz gold. That will be the anchor, a re-setting of the economy from which all assets great and otherwise will be priced.

June 18, 2009 at 6:59 pm

canta

Sorry Cody, I would rather have gold and silver in my hand than a worthless piece of stock in a company I have no control over. I will take my chances. Last time you will see any of my money in the market. I lost too much.

June 18, 2009 at 7:48 pm

Graham

Cody you hit the nail on the head I'm just surprised it hasn't already done it $500/oz government must be holding up the value or maybe the Chinese. I think everything is in limbo right now and when America wakes up and gets mad everything will colapse and if they wait to long and keep spending it will be desasterous!!!!

June 18, 2009 at 11:22 pm
(1 Reply)

Ima Hansen

Cody, You hold your stocks, bonds and dollars... I'll GLADLY hold my silver and gold. The economy will crash (actually already has... effective 18% unemployment), the dollar will become worth less (well on its way NOW), and virtually all stocks will go to ZERO (most likely starting the next down phase now). So worst case scenario, gold drops LESS than everything else and your gold (and I mean physical gold in you hand) will still be WAY AHEAD in value of most everything else. Gold is PAYMENT IN FULL. Gold is not an IOU like fiat currencies, Gold is an international currency. Gold is and has always been highly LIQUID. Everyone should PROTECT themselves NOW. The next big move up in gold is right around the corner. By the end of this year (2009) gold will most likely have a MUCH HIGHER value. What do you think will happen to the money supply as the perfect storm that has ALREADY OCCURRED passes overhead? Unemployment skyrocketing, tax receipts cratering, businesses bankrupting. The money supply has gone ballistic ALREADY!!! What do you think will happen in the months ahead when unemployment funds run DRY, tax receipts become a trickle, entire states default and the few people left with productive jobs give the government the FINGER when asked to pay their taxes. Its a JOKE, but its NOT very FUNNY. In fact, I do NOT hear anyone laughing where I'm standing! P.S. The bankers and financial MASTERS need to be hung like they were in the crash of 1890!

June 21, 2009 at 1:28 pm

about this blog

  • Cody Willard is an anchor on the FOX Business Network. Willard is also the principal of an investment management company. He was a long-time featured columnist for the Financial Times and TheStreet.com as well as a regular featured economist and stock picker on CNBC's ''Kudlow & Company."

browse posts

most popular posts