But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

Even though I’m not a hardcore gold bug, I’ve recently come to believe that “paper” gold is not really gold. Unless you hold physical gold, you miss out on several advantages of gold ownership. In addition to its properties as an investment, gold also provides some protection against really nasty things like hyperinflation, confiscatory governments, and major counterparty failure for COMEX gold. Not to mention that it’s a completely untraceable form of wealth (unless you blog about it).

And the final reason: there is a growing disconnect between the physical and paper gold markets. Many coin shops and even the US Mint have completely sold out of physical gold. And there is a growing spread between what you pay for gold and the spot price.

So today, partly because of my investment thesis and partly out of curiosity, I purchased my first gold coin. I called all of the coin dealers in the Raleigh/Durham area and eventually found two that had gold coins. One shop had two coins – an American Eagle and a Canadian Maple Leaf – but wanted $140 over spot! Eventually I found a dealer who had a single American Eagle for sale at $80 over spot. I bought the coin and also had an interesting conversation with the owner of the store. In the end, it was a fun experience…. I’m hoping for a continued decline in gold prices so I can buy more!

How could the richest and most productive economy the world has ever known have a financial system so prone to periodic and catastrophic break down? One answer is the baleful influence of Thomas Jefferson.

Jefferson, to be sure, was a genius and fully deserves his place on Mt. Rushmore. But he was also a quintessential intellectual who was often insulated from the real world. He hated commerce, he hated speculators, he hated the grubby business of getting and spending (except his own spending, of course, which eventually bankrupted him). Most of all, he hated banks, the symbol for him of concentrated economic power. Because he was the founder of an enduring political movement, his influence has been strongly felt to the present day.

It’s so interesting that today’s financial crisis can be traced back to the fight between the Federalists and the Anti-Federalists – between Jefferson and Hamilton. I can’t help but to compare today’s congress with Jefferson circa 1790: well-intentioned and in positions of great power, but with an acute lack of financial sophistication.

The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not.

The grid today, according to experts, is a system conceived 100 years ago to let utilities prop each other up, reducing blackouts and sharing power in small regions. It resembles a network of streets, avenues and country roads.

The basic problem is that many transmission lines, and the connections between them, are simply too small for the amount of power companies would like to squeeze through them. The difficulty is most acute for long-distance transmission, but shows up at times even over distances of a few hundred miles.

The antiquated electricity transmission infrastructure poses a classic Catch-22: we need alternative energy and the technology exists, but we can’t utilize it because the grid can’t handle it. An overhaul of the grid is needed – something which became very apparent after the NYC blackout and Hurricane Katrina – but it’s almost impossible to accomplish on a national scale because of all the competing interests.

SIGG Water Bottle
These things are impossibly cool. I finally broke down yesterday and bought one. At $20 for the small bottle, I’m sure someone, somewhere is making a ton of money!

Tilex Fresh Shower
I love having a clean shower, but I hate scrubbing. I’ve been using this product on my new shower for over a month and it still looks good as new!

High Thread Count White Sheets
There’s something nice about bright white sheets. These are luxurious and soft — worth every penny.

Bill Fleckenstein offers a great explanation for the strange recent action. Notable excerpt:

There are huge amounts of money being managed according to mechanical or mathematical trend-following systems. When those systems kick in, gold and silver can drop in price even on days when inflation is reported to be high, as happened Aug. 14. That’s because when a major liquidation is under way, the economic fundamentals have no bearing on market action. The quantitative systems take control.

Except for the dollar’s huge rally, virtually nothing has changed in the case for owning gold, though the price recently tanked by more than 20%. However, in the short run, fundamentals do not make any difference when powerful tailwinds or headwinds push prices around.

In the stock market, price action often reflects underlying events in businesses, industries and the economy. With commodities, price is just a reflection of the market’s attempt to help balance supply and demand, as the cost of production and other variables have only long-term relevance.

A closer look at the gold market reveals shortages driven by price declines and a subsequent explosion in retail demand, and many dealers have run out of assorted forms of gold coins, bars, etc. If you click here, for example, you can see that Tulving is out of gobs of products. Kitco.com has been warning about delivery delays.

These shortages likely have something to do with the fact that last week the U.S. Mint suspended sales of gold coins — a reflection of the surging demand. The fall in price also triggered an outpouring of buying in India and the Middle East. In addition, the exchange-traded funds, or ETFs, that hold gold and silver showed an amazing resilience in the face of plunging prices.

Thus we witnessed an unusual dichotomy: Physical buying (and here I’m kind of including the ETFs, though they aren’t purely physical) was ratcheting up even as the selling of futures contracts was driving the market lower. When the price was rallying, the futures market had a big hand in that, so we can’t ignore it when it seems to be at the epicenter of lower prices.

In any case, if we saw (as it appeared) heavy selling or short-selling in the futures market while demand for gold in the physical world was rising, that historically would be a very bullish development.

The mobility of capital combined with the mobility of information across countless interconnected nodes, hindered occasionally by politics and the transparency tolerance of various governments, gives the largest holders of capital something of a “God-complex” in today’s global economy. Small banks expand to become mega-banks, regional banks consolidate to become universal banks, and foreign central banks “self-insure” to become sovereign wealth funds. Wealth and capital supercede the common CEO, the everyday purchasing manager, and humble central bankers of today in velocity, mobility and connectivity. Global central bankers in particular need to catch up quickly.

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The article in a nutshell:

• Global asset prices are deflating

• This is having a contractionary effect on the real economy and causing a decrease in aggregate demand (or, at least the growth of agg demand in certain countries)

• The problems of the financial system – whose collateral is these falling assets – is resulting in a reduction of available credit.

• Central banks are doing everything they can to liquefy the banks and to ensure the world that they will not let the big banks fail. But it’s not having enough of the desired effect – cost of capital is still too high for the banks.

I’m not sure what McCulley’s prescription is, though he seems to suggest that central banks should pay more attention to asset prices. I think by now we should realize that asset prices are as important to consumption and demand as consumer prices (blogged about here).

That was my third KC concert (second one blogged about here) and I had feelings of deja-vu when he played some of the same songs I’ve heard at every concert. It’s weird to repeat things after a multi-year break. I felt the same way visiting the Calgary airport a few weeks ago.

It makes me think about how random life is and also about how much has changed in my life… mostly for the better!

Why I’m Undecided

I am totally opposed to Obama’s plans for taxes and healthcare. If they get passed, I think it will be disastrous for the country. On both of these issues, I prefer McCain’s plans.

But when it comes to “social” issues, I think Obama will be a better president. He will nominate left-leaning judges to courts that are likely to hear cases on gay marriage and other issues that are important to me. Beyond the judge thing, I think Obama has the opportunity to permanently change public opinion on these matters.

Paul’s Argument

Paul makes an interesting, if cynical, argument. He says a) social issues are more important anyway; and b) major policy proposals have little chance of passage. He uses Bush as an example: Bush claimed to be fiscally conservative yet his administration has been marked by huge budget deficits, profligate spending, a collapsing currency, and inflation.

This is a smart argument because it plays on my cynicism about the Federal Government. But even if it is logically coherent, I’m not sure it’s empirically plausible. There are numerous recent examples of presidents affecting major policy changes: Bush tax cuts, Iraq War, NAFTA, and several examples from the Reagan administration.

So when I’m thinking about who to vote for, I’m assuming there’s a reasonable chance that his policy proposals will become law. And so I have to decide what’s more important to me: healthcare and taxes or social issues?