

The Smartest Man in Europe Is Very Cautious - rafaelc
http://www.blackstone.com/cps/rde/xchg/bxcom/hs/firm_commentary_6873.htm

======
JanezStupar
Strange, one would expect The Smartest Man in Europe to be at least somewhat
contrarian.

What I have read is a collection of pop fearmongering. Basically his stance is
the prevalent position among people out there today. Thus it reeks of
manipulation. It is a piece meant to evoke a specific emotional response. That
it is written by a hedge fund executive only reinforces the stench.

Thus I mark this piece as hedge fund propaganda. True meaning is a feint
within feint.

Edit: I suspect that Blackstone is trying to unload its gold and trying to
create a market. Gold is probably in the last phase of bubble. Why do I think
so? Only one reason. In my country there is a vocal MLM type gold investment
operation going on. Very similar to what was going on with stocks and
derivatives in the 2006/2007 era. If there is one fundamental truth about
markets, it is that when your hairdresser and butcher start giving investment
advice it is time to get out. There is no more bigger fools out there. Gold is
going down.

~~~
econgeeker
It is true that in a bubble everyone is telling you to buy. But I don't think
we're in a bubble for the gold price for a couple reasons. The first is that
most people with an unsophisticated financial perspective (eg: hair dressers)
are not aware of gold (in the countries I've visited.) The slightly
sophisticated (Eg: people who invest in mutual funds) have been claiming there
was a gold bubble going all the way back to when it was only $400 an ounce.

But the other reason is we haven't seen gold take leave of the fundamentals.
The financial crisis that has been unfolding since 2008 has revealed that the
only response governments seem willing to take is ever more monetary
inflation. The more money out there, the higher the price of gold. Secondly,
most gold trading is at the level of very sophisticated people, not the
average joe. When average joes start piling in and blowing up the price, then
gold may take leave of its fundamentals and we'll have a bubble.

The thing is, in bubbles, supply rushes in to meet demand-- but you cant'
scale up supply of gold like you can dotcoms or houses. Environemntal
regulations and kleptocratic governments keep new mine production
opportunities limited.

Finally, mining companies-- which should be the darlings of the gold bubble if
there is one-- are trading sympathetic with the rest of the stock market, not
contrary to it. If we were in a gold bubble, then good news for gold (eg: bad
financial news) would cause those prices to go up-- but they don't they go
down now. This indicates that they are not seen as an alternative, but as
being subject to the bad news the same way General Electric, et. al. are.

We won't enter a bubble phase until that has changed. When people start seeing
gold as a safer asset (or as a bull market "you just gotta get into!") then
we'll have entered a bubble. At that point, when there's bad news for General
Electric, you'll see a bump in the price of GoldCorp. We saw this in the
dotcom bubble-- a big IPO for a tech company would cause a decline in General
Electric or Gold for that matter.

All of these are subjective observations, so neither of us can really prove
the other wrong of course. I found it interesting is that we use the same
signal to detect a bubble-- the hair dressers and MLM schemes. I'm impressed
to see how much more popular gold is outside the USA than it is inside the
USA. I take that as a sign that it is heading towards a bull market.

However, if you're right and I'm wrong, I will be very severely punished by
the markets. I'm not too worried, though. I got punished by the dotcoms. I
played the housing bubble successfully going up and going down and got out a
bit early, but am happy with the result.

I remember being told I was crazy on forums because I said there was a bubble
in housing. So, you're not crazy, I just think you're too early.

~~~
JanezStupar
This is quite interesting to hear. So in the US it hasn't taken hold yet? Here
in Europe the buzz is starting, the MLM aspect has been less than a year old.
So I have caught this in the early stage?

Can someone else from the US confirm or deny econgeeker's claim?

This is the specific scheme I was invited to: <http://www.securitas-
aurum.com/>

But its hard for me to believe that Slovenia (where I am from) is ahead of US
on this one. We usually lag a year or two in such phenomena.

So I can explain it in 2 ways -> You are either a nugget of gold, if your
statements are legit, then there is still money to be made from this one.

The other explanation is that you are one of the team doing the pumping.

What does the hive mind have to say?

~~~
econgeeker
Certainly there is more awareness of gold in the USA than there was in the
1990s. On political radio- conservative or liberal- you hear "buy gold!"
advertising. I've been hearing those ads going back, at least, to 2005! They
were there in between the mortgage refinance ads back in the day. On TV you
see people pitching "investment grade" and "rare" gold coins. They think
numismatics are the way to go, and they are charging too much money. I've seen
that since the 1990s. I bet the amounts of both of these kinds of marketing of
gold is up significantly in the last 10 years.

All around Europe, eastern and western europe, I've seen lots of signs at
money changers and some banks who are happy to sell you gold. These signs are
generally posters in the windows, not metal signs or painted, so this gives me
the impression this is a new phenomena. I was very happy to see these signs,
given my experience in the USA.

In the USA, if you want to buy gold, you can spend way too much to buy it on
the TV. Or you can go to one of the few local retailers who sell bullion - but
generally their primary business is either selling collectable coins or
selling jewelry. The bullion is a side business. Unless things have changed in
the last year, it is a pain in the ass to buy gold in the USA. There may be
one or two of these bullion dealers in a larger sized town. You can't just go
to the money changer or the bank.

I gave you several reasons for my perspective. Consider them critically. But
if you're looking for someone to agree with you, and tell you I'm a dirty
rotten capitalist who is full of it, you'll have no trouble finding that.

I would strongly recommend that you not rely on my opinion, or that of the
"hive mind" or anyone else to make any sort of financial decisions. You have
to use your own judgement and you have to learn what you can about the
subject. This is why I said, "If I'm wrong, I'll be punished"-- the market
will take one action or the other, long after this conversation is finished.

I would suggest reading economics books such as "Economics in one lesson" by
Henry Hazlitt Free here: <http://www.hacer.org/pdf/Hazlitt00.pdf>

By all means, keep a critical eye on anything anyone says in favor -- or
opposed-- to gold. That is why I read what you said and considered it
seriously. I'm keenly looking for evidence of a bubble, and you referenced a
metric I use.

I'd also recommend looking a bit into the history of gold, preferably by
reading articles here: <http://mises.org>

Here's the short summary, see if this fits with what you know of the world:
Gold is historically been the best form of money because it was difficult to
counterfeit, had reasonable value per given weight, was malleable, didn't
degrade, etc. But governments want to spend more than they have, so they
choose paper currencies over gold. The nice thing about paper is that they can
make it "money" by passing a law, forcing people to use it... and they can
print as much as they want. The downside is, they get addicted to this
spending, and in doing so, they always need to spend more and more. The more
paper there is in circulation the more pieces of paper it takes to buy
anything tangible, and prices rise, which means costs rise for the governments
and they need to print paper at an even faster rate.

These effects take a very long time to play out. They ultimately result in a
currency crisis, however. Gold is merely something that is difficult to
counterfeit, and it is difficult to bring new mines into production. So it
serves as a hedge against currencies.

I don't think there's ever been a gold bubble. When gold has gone up in
response to a currency, really it is the value of the currency declining with
respect to gold. The amount of gold in the world doesn't change very fast- it
can't- at least in terms of currencies, and thus really the "gold price" is
the "price of the currency in units of gold." $1,580 is not a gold price, it
is a measure of the value of the dollar.

~~~
JanezStupar
Indeed, your writing makes much sense and most of it I am aware of. It may not
be as useful to me as to other members of the community.

Id just like to clarify that I am not looking for investment advice I am
merely collecting opinions. It just so happens that opinions of this community
are more valuable since on average members of this community are the very
intellectual elite of the world - as far as communities go.

------
paganel
> The Smartest Man in Europe Is Very Cautious

I first thought it was going to be an article about Grigori Perelman and about
how we are all one step closer to Apocalypse because he was very close to
finding that there is indeed no foundation for Mathematics (or any similar
conclusion that is way over my head in even trying to explain). Instead I
stumbled upon an article about a rich heir to "a mercantile family" who talks
about money, money, money. Not that's anything wrong with talking about money,
but if that's we consider as the "smartest thing" in an entire Continent I
think we have a problem.

~~~
singular
There _is_ no foundation for Mathematics [1] :-)

[1]:
[http://en.wikipedia.org/wiki/Godel%27s_incompleteness_theore...](http://en.wikipedia.org/wiki/Godel%27s_incompleteness_theorem)

~~~
praptak
Goedel's theorem is not about nonexistance of foundation in mathematics, it's
about existence of true but nonproveable statements in every nontrivial formal
system.

One could imagine a hypothetical stronger result - maybe every nontrivial set
of axioms can actually derive p^(not p)?

~~~
singular
IANAM, but I do know it was an unassailable problem in Russell + White's
efforts to found mathematics on a firm basis in Principia Mathematica [1].

[1]:[http://en.wikipedia.org/wiki/Principia_mathematica#Consisten...](http://en.wikipedia.org/wiki/Principia_mathematica#Consistency_and_criticisms)

------
TheSkeptic
After pointing out that "The central bankers throughout the world have lost
touch with reality" and discussing the messes that have been created in large
part by inept bureaucrats, The Smartest Man in Europe dismisses all of the
problems brewing in China with a naive "the authorities will figure out
solutions to solve them."

Anyone who truly believes that the "authorities" in China are any more capable
than the "authorities" outside of China isn't very smart at all.

~~~
CamperBob
_Anyone who truly believes that the "authorities" in China are any more
capable than the "authorities" outside of China isn't very smart at all._

A representative sample of China's Politburo:

Hu Jintao, 62, president of the People's Republic of China, graduate of
Tsinghua University, Beijing, department of water conservancy engineering.

Huang Ju, 66, graduate of Tsinghua University, department of electrical
engineering.

Jia Qinglin, 65, graduate of Hebei Engineering College, department of electric
power.

Li Changchun, 61, graduate of Harbin Institute of Technology, department of
electric machinery.

Luo Gan, 69, graduate of Freiberg University of Mining and Technology,
Germany.

Wen Jiabao, 62, premier of State Council, graduate of Beijing Institute of
Geology, department of geology and minerals.

Wu Bangguo, 63, graduate of Tsinghua University, department of radio
engineering.

Wu Guanzheng, 66, graduate of Tsinghua University, power department.

Zeng Qinghong, 65, graduate of Beijing Institute of Technology, automatic
control department.

\-------------

A representative sample of the US Senate:

... 100 people who are pretty much all lawyers

Not saying this implies anything, but my money's on the government run by
engineers.

~~~
econgeeker
China's errors seem to be ones of engineering: Overbuilding. America's errors
seem to be ones of lacking fortitude: constantly increasing over spending.

If neither change, china is headed for continued growth and maybe some painful
re-allocations of capital, while the US is headed off of a cliff.

------
wickedchicken
I found a fun game to play whenever reading superlatives from financial news
sources: append ", in finance" to every one you see. Thus, "the Smartest Man
in Europe" becomes "the Smartest Man in Europe, in finance." Things start to
make more sense that way.

------
aj700
I knew all this. Stocks are bound to be crap, they depend on making a profit
from selling goods and services. There are only two types of people left in
unequal economies. Those who can't afford the stuff and those who don't need
to buy any more than they do. Consumption, profits and stocks would all be
much higher if societies were more equal. There is tons of money locked up
that never needs to be spent by the people who've got it. Economic demand is
money + (desire or need). Every consumer has one or the other but not both.
Maybe the poor deserve no more a share of the resources than they get, after
Reagans tax cuts, but the result is terrible for companies. To sell anything
PROFITABLY, chase the super-rich. Everyone else is broke.

We won't be able to transfer the unneeded wealth of people in Luxembourg to
Nigerians or Romanians of course, we must wait a few decades for the abolition
of scarcity (of most things) and the abolition of money and economics.
Otherwise known by: "Tea, Earl Grey, hot."

~~~
econgeeker
I disagree with you strongly, but I think you made a good attempt at an
argument and I think it is wrong you were downvoted, so you have my meager
upvote.

I think your argument is disproven by walmart. Walmart doesn't chase "the
super rich" they actually chase the bottom end of the market. They make good
money by doing their darndest to make prices as low as possible, both to
increase volume (and marketshare) but also to cater to the market that doesn't
have a lot of disposable income.

I don't see the problem here as a lack of "equality", in fact, the super rich
are taxed more than the poor. If things were equal they'd all pay the same
_dollar_ amount (not even the same percentage, the same amount in absolute
terms.) That would be more moral as well.

The reasons those with less money have trouble affording things is that they
have been impoverished by government. Presume you're at the lower tax bracket
and paying %15 to the IRS. You're paying another %15 to Social Security
(though only half is reported on your check, you have to earn the other half
as well or you wouldn't have your job.) You're paying- what %4 to medicare? %3
for unemployment insurance, say %5 in state income taxes (just picking a low
number since some states don't have it and it varies.) That's %42 of your
income right off the bat.

Now if you're just scraping by, that means you're spending all of the
remaining %58! All of that is taxed at rates from %8 (city sales tax) to %30
(cable, phone, an flights) to as much as %40 (gasoline).

If we take the lowest figure there, %8, then that means of every $100 that
person makes, government takes %50. It is worse fro people in the middle and
lower middle incomes. Their state and federal income taxes are higher.

That's why people have trouble making ends meet.

~~~
gjm11
> If things were equal they'd all pay the same _dollar_ amout [...]. That
> would be more moral as well.

Why?

> The reasons those with less money have trouble affording things is that they
> have been impoverished by government.

This (and the argument that follows) is very wrong, for at least the following
reasons.

1\. The fraction of the money a person receives and spends that gets taken in
tax is smaller, not larger, for poorer people.

2\. In particular, there are personal exemptions and deductions, which make up
a substantial fraction of the salary of people with low incomes, and the
lowest tax rate is 10% and not 15%. Many of your other numbers are also wrong,
and curiously all in the same direction. Social security taxes are not 15%
unless you include the payroll taxes that fund Medicare, in which case the
Medicare rate is 0%, not 4%. (It wouldn't be 4% anyway; payroll taxes are
2.9%, including the portion paid by the employer.) 8% of 58% is not 8%. Your
percentages are, to put it bluntly, bullshit.

3\. If you are going to include the employer's social security contribution in
the figure being taxed, you lose the right to say that what's being taxed is
so-and-so-many percent "of your income". Because, y'know, it isn't.

4\. The money paid to the government in taxes doesn't simply disappear into a
hole. It is used to provide services. For instance, that Medicare payment pays
(astonishingly enough) for Medicare. Which, if you happen not to be rich, you
are likely to have need of one day. In a hypothetical world in which Big Bad
Government didn't take all that money, those services would need to be
provided privately, and they would cost money. Probably about the same amount
of money as the government spends on them. If our hypothetical low-income
person is going to avoid being "impoverished" by the government, presumably
that means they simply don't get the use of those services. Sorry, Mr Low-
Income Person, I know your house was burgled, but you haven't paid the private
police and judicial services: no law enforcement for you! Oh, and your child
was injured by a toy whose makers were recklessly indifferent to safety? Well,
you should have paid for a safety audit yourself. Oh, you lost your job and
are starving to death? You'd better find a private charitable organization
that wants to help you, then: keeping you alive is no job for the state.

5\. (This is more or less #1 from a different perspective.) The difference
between poor and rich people, which explains why the poor people can't afford
to make ends meet, is not that the government is taking the poor people's
money and not the rich people's. The government is taking everyone's money
(and doing useful things with it, see #4, but that's a separate issue).
Imagine for a moment a world in which the money taken in taxes really _does_
just get burned in a big incinerator. What happens? Answer: there's a large
deflation rate, so presumably the currency needs re-denominating every now and
then. Aside from that -- which would, yes, have bad effects because of the
rapid change, but that's not relevant here -- everyone would in fact be about
equally well off. Every year you'd lose half your money, and so would everyone
else, so all the prices would have to halve to keep supply and demand in
balance, so that half-your-money would be worth the same as it was before it
was halved. Of course that's an oversimplification because in our hypothetical
world income is being taxed but investment isn't. So the deflation rate would
be a bit lower and the net effect would be a steady transfer from those with
less capital to those with more. But in the real world, gains from investments
are taxed just like gains from income are. If taxation is impoverishing the
poor, the reason is the _difference_ between the tax rate on income and the
tax rate on capital gains, and you should be arguing for equalizing those, not
for reducing taxes as such.

------
chrismealy
The smartest man in Europe is about an enlightening as Thomas Friedman column.

------
JeffL
"All the problems really started when the dollar was no longer convertible
into gold. That happened in August 1971 and eliminated all currency restraints
because money became only paper and not backed by anything real."

Interesting to find that in the middle of the article.

~~~
mmaunder
There's a school of thought that blames the gold standard for the great
depression. The French accumulated massive amounts of gold between 1928 and
1932 and some scholars say the global deflationary effects of Bank of France's
policy during this time caused the great depression.

The gold standard also ties money supply to gold production which is a little
like tying fed policy to the quarterly flip of a coin. For example, the
Australian and Californian gold rushes of the 1850's caused huge short term
price instability.

I'd counter the above statement with the following:

Many problems were solved with our departure from the gold standard and paper
money is backed by the faith and credit of the country that prints it and it's
value should, and does, fluctuate accordingly.

But arguing with an anonymous "smartest man in Europe" is a little like
arguing with Santa.

~~~
stretchwithme
The gold standard was not the cause of the Great Depression; the collapse of
the investment bubble created by the Federal Reserve, along with the
interruption of international trade by the Smoot-Hawley Tariff Act caused the
initial problem. Subsequent interference in the economy by both Hoover and FDR
extended the problems.

The gold standard merely prevented the government from inflating away the
dollar and using inflation to hide the consequences of other bad policies. Its
a form of discipline that the founders wisely put in place to prevent the
disastrous policies that many other governments have perpetrated throughout
history.

But now the constraint of the gold standard is off and much larger bubbles can
be created.

The supply of gold changes very slowly. The vast majority of all gold ever
mined is still part of the supply. Its the manipulation of the value of paper
currency that causes demand for gold to fluctuate.

~~~
nhaehnle
It's not that simple. The gold standard basically established an international
monetary union, similar to the Euro today.

In such a setting, long-term trade imbalances cannot be balanced out by
exchange rate adjustments, so there is a very real danger that countries are
drained of money by running net imports in the long term. While this then
prevents the country from net importing even more - which is only fair - it
also reduces the purchasing power of the country's population internally.

The circulation of money is slowed, causing unemployment and the very bizarre
situation where people cannot afford to buy desired XYZ, while at the same
time there are involuntarily unemployed producers of XYZ. Everybody's unhappy,
simply because the social construct of money ties their hands.

By decoupling from the gold standard, countries left what was effectively a
currency union, which enabled them to restart internal circulation.

This is also the choice that Greece has right now, which this supposed
"smartest man" does not, or for ideological reasons refuses to, see: leave the
currency union to restart internal circulation of a new currency.

~~~
econgeeker
We went off the gold standard in 1914. There was a minor depression in 1920,
but the government did nothing and it resolved itself. In 1929, the government
decided to abandon that policy and took action, and by 1933 the use of gold as
money in the USA was forbidden by executive order.

When you criminalize the wealth of the country, it is hard to blame people's
use of that wealth for the problem. By 1933 it was literally a crime for money
(in the form of gold) to circulate, and much of it was sent overseas to hide
it.

------
sandstrom
I hope Byron Weiss is better at picking smart men than predicting the future:
[http://www.zerohedge.com/article/byron-wiens-prediction-
trac...](http://www.zerohedge.com/article/byron-wiens-prediction-track-record-
zero-out-ten)

------
thadeus_venture
I don't always invest, but when I do, it's in gold and Swiss francs.

~~~
dualogy
You invest your money... in money? Well, guess it's a smart move these days =)

~~~
Estragon
It's a reddit-style joke. ("Most interesting man in the world.")

------
terhechte
He made one interesting point, which is to invest in Swiss Francs. I have been
contemplating doing that over the past weeks, what are your opinions on that?

~~~
econgeeker
Switzerland still has a conservative financial system, and may benefit from a
"flight to safety" as the euro deteriorates. That might be his reason for
buying francs.

Francs used to be backed by gold, and might still be partially backed by gold.
I think they are not redeemable in gold anymore, but that the country keeps a
large supply of gold onhand. So, sort of a partial fiat currency.

However, one can own gold directly, which provides a hedge against all
currency risk. It sounds like this is what he is doing, and then also holding
some francs against a panic in europe.

------
JulianMorrison
All this talk of "but they have no other choice" amuses me. Yes they do. And
they will probably exercise it.

------
rajpaul
Why should I believe that "The Smartest Man in Europe" is anything other than
a sock puppet talking up Blackstone's book?

~~~
meric
Still, an interesting read nonetheless.

~~~
roel_v
Depends I guess on how often one reads finance articles. There's nothing new
in there, there is an entire 'school of thought' that has been saying what's
in this article since 2008. New economies are the future, fiat money is bad
mmkay, US and Europe don't have enough room for growth to out-grow debt.

The appeal to authority with the Baghdad real estate deal is one of those
tell-tale signs of a sensationalist article. If the building in case had been
blown up and nothing could have been recouped because nobody wants to insure a
building in Baghdad, nobody would've ever heard about the whole deal. Survivor
bias at its most obvious.

------
kahawe
> _I remain positive on China._

I cannot help but wonder about China... I am convinced they are extremely
clever in toying our Western system of capitalism and number games one way or
another. The only example coming to mind right now is the artificial surge in
car sales in China and the government is behind a lot of it, buying and
storing cars in huge parking facilities. And the refusal of publishing
economic statistics or just blatantly making them up.

And they are just as incredibly clever and diplomatic in political affairs;
the rhetoric used in their more recent foreign affairs are nothing but jaw
dropping and display an unprecedented self-understanding an pride that is
bordering smugness. They do not even try to hide or acknowledge violations of
human rights; they simply wipe it off with "none of your frakking business"
kind of answers. They are showing very clearly: we bow to no one.

For me as a European, their last display of power here in Europe felt like a
slap in my face when they offered to "help" in the current financial crisis in
Greece and the rest of the EU when I saw how little their ongoing violations
of human rights mattered all of a sudden.

Please note I am not bashing Chinese people but wondering about Chinese
politics and their regime and how the west, generally so proud of their
"humanity" and "human rights", bends over back- and sideways now that China is
becoming an influential world power.

