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How do you spell “anticipated hyperinflation”?

January 6, 2010 Leave a comment

O.I.L.

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Categories: Oil

Charles Goyette proves I am not insane

January 4, 2010 Leave a comment

I’m not as alone as I thought!

As you begin to appreciate the gravity of the situation Charles lays out in a most eerie fashion what the most likely scenario awaits us and builds a strong case for why he believes the dollar will collapse. At this point most readers not familiar with economics or America’s history of debt may begin to panic and pass out from fear, as Charles’ arguments are extremely convincing. From a long term perspective there is very little to argue about, our fiat pyramid of debt has to and will eventually collapse – the only question is of timing. This question is crucial to properly answer as it will spell out the direction of the next several years. While Charles attempts to answer the question with an open mind, his views can be best described as inflationist and he firmly believes that the forces in charge of our destiny will turn to the only tool available to them – currency depreciation.   Once again, in the long run this may be true, but for the time being America finds itself in a unique situation where our dollar is still the reserve currency and is still trusted around the world. Certain technical reasons also suggest that the dollar may strengthen in the coming months not so much due to any internal policy, but the systemic failures in other parts of the world. Still, as Charles poignantly argues our status as the reserve currency is on borrowed time and can change with a blink of an eye.  For this reason the book’s last section presents advice valuable for every American regardless of what one’s prognostication may be.

Charles is partial to value, a concept easy to grasp when you realize just how worthless the dollar can become. Therefore common sense approaches involving gold, silver and oil are presented. Charles makes a deliberate effort to provide options for any would be investor regardless of experience and if you are under the impression that you must build a ten ton safe and start hoarding gold ingots then you are mistaken, it is easier than you could ever imagine.  Several sections are also devoted to address other popular investment strategies like equities and treasuries and why you should think twice before you invest in these increasingly risky asset pools. A rather amusing analogy between America’s credit strength and a shady uncle constantly looking to borrow should be reprinted and distributed all over the Internet.

The Dollar Meltdown is a unique and valuable book, offering the complexities of economics in order to explain where we are and how we got here while presenting investment strategies for those people interested in taking control of their financial feature.  If you prefer eating glass over reading economic text or think Wall St. is a prerequisite before making investments, then this book is a must read for you and your family.

Gold wins gold: Best asset to hold this decade

December 26, 2009 1 comment

One picture truly can tell a thousand words:

Marc Faber reassures me that we are doomed

December 21, 2009 Leave a comment

It’s mildly reassuring when another analyst is suicidal about the future.  It reassures me that I am not totally alone.

I disagree with Faber on two points however. 

First, it’s unlikely we will see hyperinflation and the “pure” monetisation of the trillions in US debt.  No hyperinflationist thinks through the precise mechanism of monetisation.  To increase the budget deficit by even more, the US govt will have to increase its own debt levels.  Bonds yields will likely spike at some point.  Then the Fed will try to buy the bonds to keep prices up (yields low).  This will allow relatively limited leakage of money to the US govt’s friends, but in no way plug the hole left by the collapse in the housing bubble.  Not only will govt spending not replace the hole left by Peak Credit, govt spending further distorts the economy, resulting in more failed private businesses the further away you get from the US govt’s largesse. 

You’ll end up with millions of debt-slaves sycophantically praying to the bankers and the Fed govt, running around doing the bidding of their Masters, and economic chaos and widespread starvation beyond the tiny green gated communities of bankers and govt employees.

Kabul is a good future model for the major Western economies (especially the US): There are some massive luxury (tasteless!) villas going up in Kabul.  I’ve seen them.  They are the houses for the govt ministers and associated hangers-on from the opium trade.  Nearby are the hotels the UN employees frequent.  Beyond these few blocks, hundreds beg for food from aid agencies and there’s complete chaos.  But within these tiny communities connected close to the corrupt govt, the opulence is incredible.  Govt banquets are frequent, whilst literally right outside the banquet halls, local Afghanis are starving.

That is our future.  Kabul is our future. 

And remember – Kabul is a city now created by the US.  It is what the US govt “wanted” to create (or at least what it did create after taking over). 

So that’s the best the US and UK govts can do today when “creating” a city.  That’s the proof regarding what they are capable of.  Sad, but true.

So that’s what they will continue to produce at home.

“Kabul” does not spell hyperinflation to me.  It spells stag-deflation with a possible sudden depreciation of the US dollar at some point – but not hyperinflation.  So I still think US govt bonds and gold are a better bet than US stocks if I was forced to choose.  Of course, long-term, farmland, security services, and govt jobs will all be highly sort after.  But I wouldn’t be buying canned food just yet.  You don’t want it to go out-of-date before you need to eat it.

Second, there will be war, but it won’t be to distract people from their debt problems.  It will be over the rapidly diminishing supply of food and water and oil.  The malinvestments caused by the decade-long low-density housing boom in the West have actually caused massive environmental destruction as well as financial chaos.  Literally millions of acres of fertile arable land across the US and Australia and other countries has been re-zoned and “redeveloped” (destroyed) for what is euphemistically termed a “more intensive use” (i.e. “for speculative property development”) – just at the time when unprecedented climate change has destroyed many “food basins” around the world (Myanmar, Thailand, Cambodia, Australia, China, Europe and the US have all experienced tsunamis, typhoons, hurricanes or drought in their vital farming areas).

CCD is also a massive threat to our food supply.  It is still a problem that no media organisation wants to talk about.  The cause is unknown (I suspect GM crops, but who knows?).

No one seems to have connected up the housing boom and bust with massive unprecedented and irreversible environmental destruction. 

But they will.  Eventually.

Predictions for 2010

December 4, 2009 7 comments

As the year comes to an end, let me list my predictions for 2010.  Note: Anyone who says their predictions are based on modelling is an idiot or a liar.

As was clear from our experience in 2009, politics, connections, favours, and plain old everyday third world corruption play a major part in any economic outcome today.

The “logical” prediction for 2009 would have been the bankruptcy of AIG, the bankruptcy of a number of major US and UK banking institutions, deflation, a continued stockmarket collapse, a spike in long-term interest rates (caused by a decline in demand for T-bonds due to US govt deficits), a collapse in the value of the US dollar and a spike in gold.  Almost none of these happened because of the multiple, trillion dollar interventions of the Fed and the US Treasury.  AIG was saved, US and UK banks received hundreds of billions in bailouts, swapping toxic trash at the discount window 100 cents in the dollar, the stockmarket was artificially supported, the long end of the bond market was (allegedly) supported by the Fed, and gold was shorted relentlessly by the primary dealers.

So predictions for 2010 are really political predictions and these cannot be taken very seriously.  Nevertheless, it’s fun to speculate, so here goes:

1.  A CRE and housing bust in Oz in the second half of the year due to (a) wholesale funding costs jumping for Cth Bank and Westpac in particular and a fight for deposits (b) APRA liquidity requirements kicking in (c) high $A killing exports and local manufacturing, combined with a generally slowing economy due to a fall in Asian growth and a crisis in Japan (d) pullback of the FHBG and other handouts from Rudd Bank (e) pull back on the govt backing of Oz banks, exposing them to “market” rates for wholesale funds especially for LT debt (f) housing prices already being ridiculously too high, as Steve Keen has pointed out many times in the last 3 years.  It should be a bloodbath in CRE in 2010. 

We’ll see whether the govt and the desperate Oz banks can hold back the receding tide.  Unlisted funds with illiquid assets were massacred in 2009 by the govt’s bizarre, indiscriminate bank guarantee (thereby predictably and savagely killing off the supply of liquidity for unlisted CRE trusts).  This should mean that the marginal players in the finance industry have simply had their executions stayed, not commuted. Will this now infect the whole CRE market, as supply continues to overwhelm declining demand due to liquidity tightening for the dumb Oz retailers of debt?  Bank guarantees should have engendered moral hazard in the marginal lenders.  This should have made the problem worse.  This problem may be deferred until 2011, but something tells me this Ponzi-scheme can’t be sustained throughout 2010.  We’ll see.

2. S&P 500 down for the year, with a “crisis” in early and/or mid 2010 due to (a) the fallout from the bubble being delayed this year – meaning that the bust will be even bigger and flow into 2010 (b) a significant portion of consumers (70% of the US economy) being bankrupted in unsustainable debt (c) debt levels threatening the long-end of the US bond market (d) unemployment continuing towards 15% in official terms and 25% in unofficial terms (e) a possible US dollar/bond crisis, with an unprecedented volume of bonds being needed to be flushed into the market (f) the banks being supported, but the bulk of US industry being left to die.  The S&P 500 includes much more than just Goldman Sachs (which will continue to perform well, given they print their own profits).

3. Gold up – for all the reasons in (2) above, plus the fact that the Fed will continue to pour e-dollars out into the market in the trillions, without any effect (see Japan over the last 15 years).  So gold will be the only place for the e-dollars to go.

4.  Silver to go up more than gold – for all the reasons in (3) above, plus the fact that silver is a tighter market with the massive short positions in silver finally having to be unwound on reality.

5.  Oil higher.  Inflation’s got to go somewhere.   And Peak Oil has arrived.

6.  Food and food inputs higher.  Possibly significantly higher.

7.  Fed Funds Rate probably around where it is now.  The big story will be everything BUT interest rates.  Interest rates will stay low (to save the banks) but chaos and volatility with be a tempest around stable, low rates.  The debt load is massive and people will be killing themselves to extract themselves from this killer debt-load by repeatedly trying – and failing – to spark a new bubble in the stockmarket.  Then in desperation they’ll spark a bubble in oil, food, gold and silver.  Currency volatility will be unprecedented.  There is the real prospect of a US dollar meltdown.  If so, gold will soar on its angelic wings.

The overall theme for 2010 will be continued unprecedented volatility.  Price swings, especially in the stockmarket, will be violent as liquidity sporadically dries up due to the unsustainable debt loads and banks desperately juggling debtors to stave off insolvency – both in their clients and themselves.

The Makian Distribution predicts increased volatility with increased debt.  We have increased debt.  So, according to the theory we must have increased volatility.

Without oil, we starve

December 2, 2009 1 comment

Estimate (roughly) the percentage of products in the supermarket that have to some extent relied on oil to be packaged, produced or shipped to store.

I would estimate 100%.

Estimate those products where oil was a significant (10% or more) component of the cost. 

I would estimate around 80% of all products sold in the supermarket (including fertilizer, transport, plastic packaging and other oil-related derivative costs).

When you add fertilizer, drugs and cosmetics to transport and packaging, it’s fair to say we are almost wholly dependent on oil for our cities to survive. 

An organic farmer in the UK is struggling valiantly to wean her farm off oil, admitted that the whole food chain is “dripping in oil.”  We simply could not survive without oil.  That’s an ORGANIC farmer talking.

Now, consider this:  some in the oil industry are predicting another oil crisis within the next 2 years, due to Peak Oil problems.   

How stupid to create a whole economy around an imported, unsustainable, polluting fossil fuel!  How insane to create a supply chain wholly reliant on a fuel that, with 100% certainty, we know will run our!  How bizarre that this has been allowed to happen without debate, without discussion, without comment!

Either I’m mad, or the whole world is mad. 

I suspect it must be me, because no one else is screaming about this.

Collapsing arable land = need for higher and higher food productivity = eventual catastrophic collapse in food production through excessive depletion of phosphate and water. Simple

November 24, 2009 2 comments

I thought I should put it all the heading this time.   The Economist is starting to worry, which is good.  Except it’s about 20 years too late. 

Ever painted yourself into a corner?  Well, the system of fractional reserve banking induces supernormal profits for residential housing, which in turn distorts the economy towards debt-induced housing production and against farming and agriculture (which cannot “live” sustainably in a debt-based monetary system because the returns on farming cannot compensation for the higher uses the land can be developed into via re-zoning).

We’ve only been able to feed ourselves through more and more intensive use of less and less arable land.  At some point that’s going to be unsustainable.  We know the world’s human population could not live on 1,000 megalitres of water a year, feeding 1000 hectares of arable land.  But what is the limit?  And are we reaching that limit? 

With exponential growth in human population, depletion of natural habitat, exhaustion of soil and river systems, the reliance on oil for food production (at a time of peak oil production) and an aging population I can see this is not going to work out well.

We will need a miracle for it to work out well.  And that already happened with the green revolution increasing farming productivity in the 1960s and 1970s.  That trick ain’t gonna happen again – and may have painted ourselves into a smaller corner by allowing more arable land to be gobbled up for residential development on urban fringes when this land would have been ideal for agricultural production when peak oil hits (meaning long-distance transport of food no longer becomes feasible).

To think the likes of Monsanto are going to get us out of this whole is madness.  GM foods are more likely to destroy agriculture in the long-term, not save it.

Again, the insane depletion of the world’s tuna stocks – right under the world’s collective noses, with modern, sophisticated governments apparently powerless to stop it – is the “model” for all food crises in the future. 

Lots of words, lots of plans, no action, the robbing of future generations’ food supply to pay down today’s debts, with two-faced politicians deploring the desperate environmental situation on the one hand, whilst trying to give their own fishermen every hidden advantage on the other.

To think this is going to work out well is madness.

Malthus was not wrong.  He was just early.