Wednesday, August 12, 2020

It’s Greek to Me

Looking for 16% on your money? Look no further than Greek short-term bonds because that’s what they’re yielding. The Euro bailout package that started at $20 billion is now more than $100 billion and it will go much higher if Portugal follows suit. The floodgates have been opened and the situation in the Euro zone is approaching critical status. The printing presses are working overtime all over the world and that makes gold even more attractive than it was just a week ago.

Owning gold is a smart move, even smarter if you’ve been buying and owning it over the past decade. Gold unlike currency is not an obligation to pay based on trust and faith in paper. It is not a liability. It’s an asset that you have in your hand.


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Yet, what is perplexing me is that gold is not higher. It should be north of $2,000 per ounce right now based on all the crap that is happening around us. Yet, it is actually LOWER in inflation adjusted terms than it was in the early 80s when it broke $800 per ounce. Either people just don’t get it…or people are betting on the US and the rest of the world becoming fiscally responsible overnight…or inflation being non-existent. I am betting on the first observation…that people just don’t get it.

Advance GDP numbers came out today and showed a nice rise of close to 4%. That should make the market and the lemmings happy. But, that is not the number that matters. What matters are the unemployment rate and the pace of recovery in the housing market. Both of those are suffering badly still with no end in sight. There are millions of housing units still left unsold even after a 50% haircut in price in many places. Jobs are hard to come by – a friend of mine, a PhD working in the research field in Maryland told me yesterday that he knows of at least 30 people in his field with his qualifications that have lost their jobs since October. It’s people like them who provide real economic activity because they are…or were…well paid when they were working.

Now, there is some truth to the recovery, even I have to admit that. Anecdotal evidence like retail sales, mall traffic etc, do show that consumers are loosening their purse strings. But, will it be enough? When 16% of the population is either out of work or not making enough to get by, how much can spending increase? And, with companies slashing costs, still, where will future profits come from? Exports? About the only thing that foreigners are interested in buying from us right now are I-phones, and even those are made in China.

My friends, things are looking rosy because the market is moving higher and making people feel wealthier. But, that is no different than it was the last time. Except, this time, the market is moving higher while the individual investor is sitting on the sideline. An interesting fact: mutual fund outflows are still greater than inflows. Who’s buying the stock? Not mom and pop – they’re not ready yet. They still don’t trust the market.

God’s Work

In November 2009, Lloyd Balnkfein, the CEO of Goldman Sachs said in jest that he (Goldman) was “doing God’s work” referring to how the company was instrumental in making commerce function through lending and investing activities. I don’t disagree that there is a place for investment banking activities in our society. I would argue that capitalism would not exist, as we know it without a profit motive for the lending class.

But, what I have a problem with is the hubris that accompanies the rhetoric. Investment banking is not an art, it’s a science. Those people putting the deals together know full well before the deal hits the clients books whether it will succeed or fail. Wall Street is a brotherhood, an insider’s game, and a rigged market. It’s the constant denial of these facts that keeps me on my toes. Listen, when you are the “market maker” in a deal and you’re secretly betting on it going to hell because you put a crappy product into the basket you just sold, your actions are not ethical or moral…but they are legal. That’s the rub. What Goldman did was not illegal, just not exactly kosher in my opinion…and certainly not “God’s work”.

Gold or Goldman?

And why should they? Did you catch the Goldman Sachs hearings earlier this week? The real question and the only one that I thought worthy of mentioning was when the defendants were each asked if their allegiance was to their clients or to their firm. Basically, the question was “would you screw over your customer while whispering sweet nothings in their collective ears about how much you care about them”? The pauses were telling. Sometimes silence speaks volumes. In this case the answer was so obvious. If you’re a client, you take your chances because the firm comes first. Listen, you can’t pay out billions in bonuses unless you’re taking in billions more.

I’m all for trading profits, investing in derivatives etc., but I also know that I am dealing with scoundrels and scammers regardless of how crisply their shirts are starched. I once knew an executive who worked for a wire house (big brokerage firm). They had a saying that went something like this: “two out of three ain’t bad”. What he meant was as long as the firm and the broker made money, to hell with the client. That was more than twenty years ago. It’s something that has stuck with me since that time and I suggest that you take it seriously as well and pick up some pieces of gold now and again.

Best regards,

Kevin Raymond

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