Interesting Fed intervention

[Toro]

Read this

http://www.tilsonfunds.com/Einhorn-4-08.pdf

 

[Zoomie1980]

No, I'm not necessarily talking about here. I interact with people in my community politically. I attend as many GOP meetings as I can, as well as other events. I also try to explain it to my friends and family.

It's tough over the computer. I have talked about inflation here on numerous occasions though.

The simplest "explanation" is that the Fed is adding as much money into the system right now as they can get away with, because it's the only option they have.

One one hand, it's theoretically, and superficially, keeping banks afloat. On the other hand, it's not only devaluing our currency, it's delaying the inevitability of continued loss of Dollar value, thereby making the ultimate end that much worse.

I'd much rather just let the failing businesses fail, and let the recession run its natural course. No economy is recession-proof, so why devalue our currency trying to avoid one?

If you'd like to know the best ways to hedge your cash reserves against inflation, commodities are where to be right now. Gold, silver (I suggest physically owning it), agriculture, oil...

I'd also suggest going out ASAP and stocking up on daily essentials while the prices are still where they are.

Alarmist or not, doom and gloom or not, prices are still going to be rising. There's no possible way that it will not happen considering our current monetary policy, especially the way it's been run of late.

I've NEVER understood why governments are so eager to avoid recessions by taking measures that often neuter the latter recoveries and in the end generally make things WORSE than just letting the market do what it is supposed to do.

Recessions are a natural and even HEALTHY part of an economic cycle. They come about mostly as an equilibrium mechanism. Things get too far out of balance and they jerk back. They are healthy in that they CLEANSE the market place of weak and marginal business leaving the strong to move forward.

As for commodities, I personally believe they almost run their course. They are at or near their sustainable peak and as a naturally contrarian investor I am beginning to buy stocks again, and beginning to slowly take profits from my from my Yen and Euro positions and am actually considering betting against Oct Corn as more and more US ethanol ventures are collapsing and demand for corn is going to crash some time in the next two years...

 

[Zoomie1980]

Yeah, I hear ya.

Long gold, Canadian energy income trusts, coal stocks, sugar futures, Canadian nat gas stocks, potash stocks, etc.

Its all good.

Short REITs, though I'm wondering if I should take this position off, at least for the moment.

Commodities are about as good an investment as betting at a casino. They look good now but when this current down turn bottoms, gold, oil, and food are not just going to decline, they are going to outright CRASH. There is NO supply problem for any of these, including oil. In fact, demand is trending DRAMATICALLY down as much of the third world, China and India have parked their mo-peds and are back to bicycles, and Americans are ditching their SUVs at near record rates. Demand for gasoline in Iowa (where I live) alone is DOWN almost 10% from a year ago. Over the coming years hybrids will become the dominant propulsion further lowering oil demand. The only thing keeping oil and gold up is a continuing weak dollar as most of the other speculative pressure has eased as political unrest has past in Nigeria and Venzuela and demand is actually DOWN. As the dollar bottoms out and turns the corner investors are going to FLOCK back to CHEAP equities in droves and the only thing you will hear from commodity brokerages is a huge SUCKING sound of cash leaving out the door....

And see how many ethanol ventures have died in just the past six months? $2.50 corn may not happen this year but it will in 2009.

 

[Toro]

Commodities are about as good an investment as betting at a casino. They look good now but when this current down turn bottoms, gold, oil, and food are not just going to decline, they are going to outright CRASH. There is NO supply problem for any of these, including oil. In fact, demand is trending DRAMATICALLY down as much of the third world, China and India have parked their mo-peds and are back to bicycles, and Americans are ditching their SUVs at near record rates. Demand for gasoline in Iowa (where I live) alone is DOWN almost 10% from a year ago. Over the coming years hybrids will become the dominant propulsion further lowering oil demand. The only thing keeping oil and gold up is a continuing weak dollar as most of the other speculative pressure has eased as political unrest has past in Nigeria and Venzuela and demand is actually DOWN. As the dollar bottoms out and turns the corner investors are going to FLOCK back to CHEAP equities in droves and the only thing you will hear from commodity brokerages is a huge SUCKING sound of cash leaving out the door....

And see how many ethanol ventures have died in just the past six months? $2.50 corn may not happen this year but it will in 2009.

You are correct when you say that at some point commodities will crash. You are dead wrong when you say there are no supply problems. Have you not been paying attention to the riots around the world because of a shortage of rice? LME inventories for some base metals like zinc were being measured in hours a year or so ago. And where is all this supply in oil? Near as I can tell, we've been producing about 85 million or so barrels a day for the past three or four years, yet oil ticked at $117 today. Where is all this oil that the laws of supply and demand say should be flooding into the market if there is no problem with supply? Commodities will fall hard at some point. But not with China and India running hard and the Fed at 2.25%.

Equities are cheap? Maybe. I ran the numbers on the SP500 this morning. Trailing 12 month profits are $64. The market is trading at 20x earnings. That's not cheap. Analysts are projecting $93 this year, you say? Not likely, considering that profit margins are coming off all time highs and bottoms up analysts have barely budged on their second half estimates. Top down analysts are around $80 for the year, which is a more reasonable estimate. That's still 17x earnings. That ain't cheap.

 

[Zoomie1980]

You are correct when you say that at some point commodities will crash. You are dead wrong when you say there are no supply problems. Have you not been paying attention to the riots around the world because of a shortage of rice? LME inventories for some base metals like zinc were being measured in hours a year or so ago. And where is all this supply in oil? Near as I can tell, we've been producing about 85 million or so barrels a day for the past three or four years, yet oil ticked at $117 today. Where is all this oil that the laws of supply and demand say should be flooding into the market if there is no problem with supply? Commodities will fall hard at some point. But not with China and India running hard and the Fed at 2.25%.

Equities are cheap? Maybe. I ran the numbers on the SP500 this morning. Trailing 12 month profits are $64. The market is trading at 20x earnings. That's not cheap. Analysts are projecting $93 this year, you say? Not likely, considering that profit margins are coming off all time highs and bottoms up analysts have barely budged on their second half estimates. Top down analysts are around $80 for the year, which is a more reasonable estimate. That's still 17x earnings. That ain't cheap.

My family are all energy people, mostly oil and gas and now....bio-fuel. Nothing about supply "flooding" the market, it's mostly about forecasts for demand being GROSSLY over stated. Long term I am a peak oil theory believer but short term no. Demand has never yet exceeded supply and will not for at least a few more years, especially now the demand probably peaked late last fall or early winter, levelled off, and when the next quarter's number come in will be seen to be in DECLINE for the first time in years. I'm betting demand this summer will be 3M or more barrels a day LESS than was forecast last winter, maybe even more.

These days commodity markets have less to do with market fundamentals than at any time in history. There was a time when supply and demand were about the only thing that drove them, except in rare times of panic of confidence like the late 70's early 80's. Commodities, especially oil and gold, have long since left demand supply fundamentals behind as the primary basis for their behavior. Speculators used to have cool heads but are largely panic driven these day. They are in a perpetual state of panic anymore. Every tiny political incident or natural phenomena is treated as a global crisis in the markets. Add to that the collapsed dollar, in which all commodities are priced, and you have a runnaway FEAR driving the market.

Phychology drives markets today more than any mathematical fundamental, which makes them all scary as hell. As soon as enough speculators loose their fear, REGARDLESS of supply and demand, commodities will crash. And the general psychology of most traders I know, regardless of many of the money supply issues you guys have been debating, is that if we haven't turned the corner yet, we are very close to it, and what is left is "residualness". Basically, the FEAR is beginning to leave and bottom line, commodities are driven up by FEAR more than any fundamental. When the fear leaves, the markets will cave, regardless of what fundamentals say they should do. It happened in the early 80's and it is beginning to happen again.

 

[Zoomie1980]

It sounds like we have similar investments. I have had (and continue to have) a substantial amount of money in commodities. I am long in sugar, corn, wheat, and soy. I am also long in base metals, gold, and silver. Finally, I am long in energy, general agriculture, utilities, and infrastructure. I have investments in the Australian Dollar, New Zealand Dollar, Singapore Dollar, Hong Kong Dollar, Canadian Dollar, and Swiss Franc. I have exposure to the Euro via the Merk Fund.

Brian

A year or so from now every single one of those is probably going to be viewed as a HORRIBLE investment vehicle. I'm a natural hater of commodiites, in general, but even I have swallowed the bitter pill and made good returns the past year going long in oil, gold and corn.

This market is almost 100% PSYCHOLOGICAL and no stochastic model will ever predict when the fundamental psychology (which is best described abject fear..) is going to turn. The last time I can remember something like this was in the early 80s back in my youth, just starting out. What happenned then was Ronald Reagon simply made everyone finally feel GOOD again and HOPEFUL....that included investors and speculators. Once fear psychology exitted the trading floor commodities crashed, gold went to $250 oil to $18 and they stayed down there for two DECADES.

As soon as investors feel the worst is behind us, no amount negative fundemental analysis is going to slow the great sucking sound of money leaving the markets of oil and gold...

I guess the question is WHEN is that going to happen. I say sooner, as by mid-summer, guys like you fellows say later. I think both of you are relying on your models and technicals too much and ignoring the early sings of fear beginning to abate. Psychology is EVERYTHING in the markets these days. 20 years ago no one ever heard of "consumer confidence". Today it's all that matters. Imagine that....

 

[Toro]

My family are all energy people, mostly oil and gas and now....bio-fuel. Nothing about supply "flooding" the market, it's mostly about forecasts for demand being GROSSLY over stated. Long term I am a peak oil theory believer but short term no. Demand has never yet exceeded supply and will not for at least a few more years, especially now the demand probably peaked late last fall or early winter, levelled off, and when the next quarter's number come in will be seen to be in DECLINE for the first time in years. I'm betting demand this summer will be 3M or more barrels a day LESS than was forecast last winter, maybe even more.

These days commodity markets have less to do with market fundamentals than at any time in history. There was a time when supply and demand were about the only thing that drove them, except in rare times of panic of confidence like the late 70's early 80's. Commodities, especially oil and gold, have long since left demand supply fundamentals behind as the primary basis for their behavior. Speculators used to have cool heads but are largely panic driven these day. They are in a perpetual state of panic anymore. Every tiny political incident or natural phenomena is treated as a global crisis in the markets. Add to that the collapsed dollar, in which all commodities are priced, and you have a runnaway FEAR driving the market.

Phychology drives markets today more than any mathematical fundamental, which makes them all scary as hell. As soon as enough speculators loose their fear, REGARDLESS of supply and demand, commodities will crash. And the general psychology of most traders I know, regardless of many of the money supply issues you guys have been debating, is that if we haven't turned the corner yet, we are very close to it, and what is left is "residualness". Basically, the FEAR is beginning to leave and bottom line, commodities are driven up by FEAR more than any fundamental. When the fear leaves, the markets will cave, regardless of what fundamentals say they should do. It happened in the early 80's and it is beginning to happen again.

Sure, I don't necessarily disagree with that, but the commodities boom that peaked in the 1980s had its seeds in the 1960s. You could have made the argument you made in 1972 and would have been wrong for a decade.

There have been several commodity booms over the past century or so. They have ranged from 8 to 21 years, lasting on average 14. And I certainly do not agree that we have turned any corner. It may be that some commodities have peaked - I don't know if you'll see nickel at $25 a pound again, but many commodities are no where near either their all-time highs or their inflation-adjusted all-time highs. And as Jim Rogers has noted, eventually all (or almost all) commodities take out their previous highs in bull markets.

Monetary and development cycles are measured in decades, not months or quarters or even years. We have not entered into some brave new world where commodity prices are going to stay extremely high forever. After all, as they say in the commodities pits, there is no cure for high prices like high prices! But there is no evidence of any sort that this commodity boom is anywhere near over. It feels more like 1971 than 1981 (if, you know, I was trading in 1971 and 1981!)

For example, Citigroup estimates that total investments in commodities are $400 billion. Exxon alone has a market cap of nearly $500 billion. One single solitary stock.

Heck, we've just touched the average ratio of the Dow to gold.

There's much more to come.

 

[Zoomie1980]

Sure, I don't necessarily disagree with that, but the commodities boom that peaked in the 1980s had its seeds in the 1960s. You could have made the argument you made in 1972 and would have been wrong for a decade.

There have been several commodity booms over the past century or so. They have ranged from 8 to 21 years, lasting on average 14. And I certainly do not agree that we have turned any corner. It may be that some commodities have peaked - I don't know if you'll see nickel at $25 a pound again, but many commodities are no where near either their all-time highs or their inflation-adjusted all-time highs. And as Jim Rogers has noted, eventually all (or almost all) commodities take out their previous highs in bull markets.

Monetary and development cycles are measured in decades, not months or quarters or even years. We have not entered into some brave new world where commodity prices are going to stay extremely high forever. After all, as they say in the commodities pits, there is no cure for high prices like high prices! But there is no evidence of any sort that this commodity boom is anywhere near over. It feels more like 1971 than 1981 (if, you know, I was trading in 1971 and 1981!)

For example, Citigroup estimates that total investments in commodities are $400 billion. Exxon alone has a market cap of nearly $500 billion. One single solitary stock.

Heck, we've just touched the average ratio of the Dow to gold.

There's much more to come.

I think gold has to get somewhere near $2200 to hit its inflation adjusted high...or something like that.

My personal problem is that I am simply NOT a commodity investor. I use them for nothing more than a hiding place for money when equities go soft. I, like Warren Buffet, am almost a 100% stock guy. If I make money in commodities at all it's via stock in commodity companies like Exxon, which thankfully I loaded up on about eight months ago..... I also used to use them as a hedge to protect my basis when I shipped cotton years ago for a living.

What commodities I do know a little about are oil and ag stuff, mostly corn now since I married into a big corn and soybean farming family...my side are oil people from Texas. So that what I know best, even though I know painfully little about either other than what they tell me.

Corn -- probably peaked now, if not now soon. Everyone in this commodity was betting on the come of big ethanol. That's pretty much busted back now and the only thing keeping corn up is marginally,but normal higher worldwide demand, the tanked dollar and the general flight to commodities at-large. Most farmers believe this is the last great year for corn in this run. Thus the $2.50 corn again by 2009.

Oil -- again, like corn, the push over 100 has been fueled almost exclusively by the falling dollar and the big at-large rush to all commodities as stocks tanked. But no one tanker has been turned away from a loading terminal yet because of no product. And none will for at least several years yet. My sources tell me worldwide production peaked at about 86M barrels a day or so in 2005, will hold steady for about five years or so, and then start a slow decline that will grow over time.

The fears about exploding demand, however, have been grossly over blown. Contrary to some popular belief, China and India are NOT running full bore anymore and are, in fact, cutting back very similarly to Americans. Very good friends of mine on the street in Goa, Madras and Bombay claim Indians are as fed up with high gasoline prices as Americans are, and back to riding bikes and the trains and have parked their mo-peds and cars for the most part. If anything demand this year will be trending LOWER and will either not grow at all or continue to decline for another year or more. The state of Iowa this year is already facing a highway funding crisis because gas tax revenue is so depleted because Iowans are consuming upwards 10% LESS than a year ago. I don't know where you get your supply-demand numbers for oil, be they private or government, but if they aren' showing a SIGNIFICANT downward demand trend domestically or from at least India, you'd best find new sources.

Long term America and much of the west WILL begin a DRAMATIC turn away from traditional internal combustion engines that should slow long term growth in demand that should at least lessen the impact of world wide declining production. China and INdia, likewise will embrace hybrids, fuel cells and electrics as they are fed up as we are with high energy prices. This assumption that so many have that China and India somehow are immune to the same price panics we are is preposterous. Like us they are cutting back as well, partly due to their economic slowdowns and partly from their own conservation efforts.

As for other commodities, I simply don't follow them at all. Like said, I'm a stock market guy and am comfortable only there.

 

[gonegolfin]

A year or so from now every single one of those is probably going to be viewed as a HORRIBLE investment vehicle. I'm a natural hater of commodiites, in general, but even I have swallowed the bitter pill and made good returns the past year going long in oil, gold and corn.

Well, we are going to have to disagree. I think you are dead wrong. You also missed a good part of the bull market to date if you just got in a year ago. I also think you will get taken to the cleaners if you get back into general domestic equities now. There is a lot more pain coming in the financials. I think that the only way gold and silver go down in nominal terms is if we have a deflationary collapse (without a preceding hyperinflation). But even then, gold and silver will hold their value.

There will be a time to get out of commodities, gold, and silver. And a time to get back into the domestic equity markets. But there are a tremendous amount of excesses that needed to be worked out of the system. We have a long way to go. And the actions by the Fed are making it longer.

Brian

 

[Zoomie1980]

Well, we are going to have to disagree. I think you are dead wrong. You also missed a good part of the bull market to date if you just got in a year ago. I also think you will get taken to the cleaners if you get back into general domestic equities now. There is a lot more pain coming in the financials. I think that the only way gold and silver go down in nominal terms is if we have a deflationary collapse (without a preceding hyperinflation). But even then, gold and silver will hold their value.

There will be a time to get out of commodities, gold, and silver. And a time to get back into the domestic equity markets. But there are a tremendous amount of excesses that needed to be worked out of the system. We have a long way to go. And the actions by the Fed are making it longer.

Brian

I guess we'll know better by this summer. I'm pay a lot more attention to mood and a lot less to numbers and formula. The modern economy is psychotic not scientific. When the mood begins to shift that when the markets will shift whether the technical analysis agrees with it or not.

My 30 years of experience tell me markets ALWAYS and WITHOUT FAIL, over-react. We now have a Fed that over reacts. Now that should spell opportunity but as always, its the timing that counts. Like you said I missed a lot of the bull market for commodities mostly because I loathe them for a lot of reasons. But I will continue to regularly pump money into my domestic equity positions no matter what it does for the rest of the year and reap those benifits five years from now. At the same time I'm not selling my gold any time real soon....but I am going to short Oct Corn....

And like I said earlier, I've always been a CONTRARIAN investor. Most of the time when the "experts" are telling I should be doing something, I usually do pretty much the opposite. And right now, everyone tells me avoid the US stock market, so as always, I'm BUYING at a steady pace now. Lucky me, though last summer when everyone was still telling me to buy, I started taking profits and instead of putting then US money markets and CDs to hold for my next buying period I put it all in gold and energy stocks, and Euros and Yen. And if the US stock mkt tanks even more all I will do take more profits from my gold and currency positions and INCREASE my domestic stock purchases until my positions are used up!

 

[Paulie]

I've NEVER understood why governments are so eager to avoid recessions by taking measures that often neuter the latter recoveries and in the end generally make things WORSE than just letting the market do what it is supposed to do.

Recessions are a natural and even HEALTHY part of an economic cycle. They come about mostly as an equilibrium mechanism. Things get too far out of balance and they jerk back. They are healthy in that they CLEANSE the market place of weak and marginal business leaving the strong to move forward.

As for commodities, I personally believe they almost run their course. They are at or near their sustainable peak and as a naturally contrarian investor I am beginning to buy stocks again, and beginning to slowly take profits from my from my Yen and Euro positions and am actually considering betting against Oct Corn as more and more US ethanol ventures are collapsing and demand for corn is going to crash some time in the next two years...

I agree about your position on corn. But that's practically obvious at this point. I don't however, agree with you about commodities in general. You seem like a smart enough guy on economics. You should be able to see the inflationary forces at work. The market hasn't even seen the worst of it yet. The mainstream is trying to keep a bearish attitude towards commodities because otherwise, it provokes panic. I believe this is the eye of the storm we're in right now, and that it's going to get much worse before it ever gets better.

Read Jim Rogers. The man has made a fortune in commodities, and he's about as bullish on them right now as it gets. I know you like to say that Buffet never invested in commodities, so they must be worthless. Everyone has their niche. You certainly don't NEED to invest in commodities to make money, but there are times when it is highly beneficial, and right now is the time. If nothing else, they provide a great place to store your wealth and protect it from inflation.

 

[Zoomie1980]

I agree about your position on corn. But that's practically obvious at this point. I don't however, agree with you about commodities in general. You seem like a smart enough guy on economics. You should be able to see the inflationary forces at work. The market hasn't even seen the worst of it yet. The mainstream is trying to keep a bearish attitude towards commodities because otherwise, it provokes panic. I believe this is the eye of the storm we're in right now, and that it's going to get much worse before it ever gets better.

Read Jim Rogers. The man has made a fortune in commodities, and he's about as bullish on them right now as it gets. I know you like to say that Buffet never invested in commodities, so they must be worthless. Everyone has their niche. You certainly don't NEED to invest in commodities to make money, but there are times when it is highly beneficial, and right now is the time. If nothing else, they provide a great place to store your wealth and protect it from inflation.

I don't think there is near as much upside left in most commodities or better said that by this time anyone has largely missed the boat. Mainly because the dollar is about as low as its going to go. There might be a few more months of upside pressure but as get through the summer I think that will be about it for most of them.

 

[Paulie]

I don't think there is near as much upside left in most commodities or better said that by this time anyone has largely missed the boat. Mainly because the dollar is about as low as its going to go. There might be a few more months of upside pressure but as get through the summer I think that will be about it for most of them.

What do you base all this on? Hope?

I'm not sure how you see the dollar coming back up anytime soon. Hyperinflation seems to be the most likely outcome in all of this. It's probably why M3 publishing has been discontinued. I mean, why else? There are more major banks that will fail. You say who cares. I say the same thing. However, the Fed does not, and they seem quite willing to devalue the dollar as much as needed to keep the banks afloat.

 

[Zoomie1980]

What do you base all this on? Hope?

I'm not sure how you see the dollar coming back up anytime soon. Hyperinflation seems to be the most likely outcome in all of this. It's probably why M3 publishing has been discontinued. I mean, why else? There are more major banks that will fail. You say who cares. I say the same thing. However, the Fed does not, and they seem quite willing to devalue the dollar as much as needed to keep the banks afloat.

I think the even the slow-witted Fed realizes now that it can't continue to weaken the dollar since that is at the core of the commodity price problem and in turn the primary fueling of inflation now. According to Saudi Arabian officials during the Administration's last visit, almost 100% of the current run up of oil was the weak dollar. Oil prices converted to Yen and Euro and only up modestly.

As for the banks, I hope no more fail because it negatively affects the psychology of the market and it's that psychology that is all that really matters anymore. But I won't be among those mourning if some do. They basically did it to themselves every bit as much as the people who borrowed money knew very well they could never pay it back.... Americans living beyond their means and banks allowing it to happen. The good that will come out of this....at least for a while, is Americans will more likely be living more withing their means meaning any recovery is going to be slower than desired and eventual growth more subdued....and reasonable. We don't need booms, roaring decades, we need just slow, and steady long term growth.

 

[Paulie]

Here's a take on possible hyperinflation in our future:

http://www.gold-eagle.com/gold_digest_08/taylor041708.html

Economist Walter Williams
Sees Hyperinflation As Early As 2010

Jay Taylor

Economist Walter (John) Williams issued a special report on the evolving hyperinflation that he sees coming into the U.S. as early as 2010. Such a claim may seem incredible to most of us who have never lived in such an environment and have enjoyed the benefits of economic and political stability all our lives. To be sure, we have experienced some uncomfortable times like the deep but short-lived recession of 1981-82 and the double-digit inflation ofthe 1970 Carter Presidency. But I believe Williams makes a very, very strong case for hyperinflation with the dynamics driving it very much like that of theGerman Weimar Republic. Williams shows how it will be absolutelyimpossible for the U.S., as a massive debtor nation, to meet its trillions ofdollars of obligations going forward, given: (a) foreign savers bailing out ofthe U.S. dollar, and (b) the obligations of the U.S. now exceeding even a100% tax rate imposed on Americans!

We would much rather not believe what Williams is telling us. It would bemuch more pleasant to stick our heads in the sand and enjoy the summer atthe beach and next winter to live a luxurious life on the ski slopes or vacationin the Mediterranean or Caribbean. Ignorance is indeed bliss, but bliss for themoment cannot change longer-term realities. And quite frankly, when wespeak of “long-term,” 2010 isn’t far away. Now, if a mere 2+ years seemsmuch too soon for any kind of catastrophic inflation to develop, take a look atthe chart on your left that pictures the hyperinflationary event in Germany inthe 1920s that led to the rise to power of one of the most evil fascist dictatorsin modern history, Adolph Hitler. Note how dramatically and rapidly pricesrose. From a base of 100 in 1921 they rose by more than 22,000% by themiddle of 1923!

Ludwig von Mises has stated that policy makers can continue to inflate the system as long as the population believes inflationary problems will end. Our policy makers (and quite frankly liars) have been distorting our real cost of living for quite some time now and the constant talk about deflationary forces as well as real deflationary forces in process (such as theimplosion in the housing markets) have also served to retard fear of inflation. Those of us who have for years looked at government with suspicious eyes have seen this coming for some time. Our willingness to think outside the box the establishment tries to imprison us in has served us well. As can be seen in the next section, we have benefited very nicelythrough the sectors we have been invested in. Indeed, our Model Portfolio has more than tripled since January 2000 because of our Austrian views of economics, which allowed us to think differently than through the lenses of the Keynesians and monetarists who dominate modern economic thought.

While I have become increasingly confident that we are heading for a major inflationary event, I do not ask that you believe and trust me without doing your own homework. In fact, I highly recommend you subscribe to the work of Walter John Williams. His newsletter, Shadow Government Statistics, is a good starting point. You can subscribe from John’s Web site, which is www.shadowstats.com. I do personally subscribe to John’s work. His charge is reasonable. I think it is under $200 per year or thereabouts. Also, you might want to review an interview I did with John in the July 16, 2007, monthly issue of J Taylor’s Gold & Technology Stocks newsletter. Nearly nine months have passed since we last spoke to John, and unfortunately, his predictions have been right on track. That is not good news, to be sure. But eventually, even worse news will come to those who stick their heads in the sand and ignore the impending economic doom that will most certainly befall a nation that hasbought into the wishful thinking of Keynesian and monetarist economics, both of which suggest we can have our cake and eat it too. Life just isn’t like that and for the first time in a couple of generations, I believe, Americans are about to learn that lesson.

Quotes from John Williams’s Special Hyperinflation Report

Following are some quotes from John Williams’s special report on hyperinflation as published in the April 8 issue of Shadow

Government Statistics:

* Inflationary Recession Is in Place
* Banking Solvency Crisis Has Opened First Phase of Monetary Inflation
* Hyperinflationary Depression Remains Likely As Early As 2010
__________

Overview

The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement.

The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to meet their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar andrelated dollar-denominated paper assets.

What lies ahead will be extremely difficult and unhappy times for many. Ralph T. Foster, in his "Fiat Paper Money" (see recommended further reading at the end of this issue), closes his book’s preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor at Harvard and University of California Berkeley, who experienced the Weimar Republic hyperinflation: "It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money."

This Special Report updates and expands upon the three-part Hyperinflation Series that began with the December 2006 SGS Newsletter, exploring: (1) the causes and background of the evolving hyperinflation and great depression; (2) why circumstances will differ from the deflationary Great Depression of the 1930s; (3) implications for politics and the financial markets; (4) considerations for individuals and businesses.

The broad outlook has not changed during the last year. More generally, though, developments in the economy and the financial markets have been in line with projections and have tended to confirm the unfolding disaster. Specifically, the current inflationary recession has gained much broader recognition, while the still-unfolding banking solvency crisis has confirmed the Fed’s and the U.S. government’s willingness to spend whatever money they have to create in order to keep the financial system from imploding. While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar. That event is important to the shorter-term timing of the pending hyperinflation.

Regular readers may recognize text from last year’s Series, as well as material from various SGS newsletters, but such is the nature of revisions to prior material. Points that may be repeated from earlier newsletters are done so in sequence to help build the arguments explaining the unfolding crisis. Great thanks are extended to the numerous subscribers who offered ideas, questions and materials that have been incorporated in this report.

Defining the Components of a Hyperinflationary Great DepressionDeflation, Inflation and Hyperinflation.

Inflation generally is defined in terms of a rise in general prices due to an increase inthe amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to goods and services, not to the pricing of financial assets.

In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple-digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen inGermany (Weimar Republic) in the early 1920s, in Hungary after World War II and in the dismembered Yugoslavia of the early 1990s.

The historical culprit generally has been the use of fiat currencies — currencies with no asset backing such as gold — and the resulting massive printing of currency that the issuing authority needed to support its system, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.

Foster (see recommended further reading at the end of this issue) details the history of fiat paper currencies from 11th century Szechwan, China, to date, and their consistent collapses, time-after-time, due to what appears to be the inevitable, irresistible urge of issuing authorities to print too much of a good thing. The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off.

 

[Toro]

I don't think there is near as much upside left in most commodities or better said that by this time anyone has largely missed the boat. Mainly because the dollar is about as low as its going to go. There might be a few more months of upside pressure but as get through the summer I think that will be about it for most of them.

I agree that the dollar is near a bottom, and that may be cause some near term weakness in commodities. However, if the dollar is bottoming, it isn't because the US economy is getting stronger. It is because Europe and Japan are getting weaker.

There is a natural boundary to which the dollar cannot break against other major currencies. $2 for a euro would be disastrous for Europe. 75 yen for a dollar is untenable over the long run. Both would lead to recessions. (Emerging currencies are in structural bull markets though.)

Weakening growth will lead to less demand for commodities, but the responses from governments will ultimately be positive for commodities. As economies slow, central banks will flood the system with liquidity and increase deficit financing. Flooding the monetary system with fiat currencies will buoy prices of real assets. This is the road map for the future.

The other effect to strengthen the dollar would be for a contraction in American money supply, which would increase interest rates. But that's not happening.

Even if commodities fall 20%-30% - and remember stocks fell over 20% several times in the bull market of 1982-2000 - they will still be in a structural bull market because even if a recession dampens demand, there is still a problem with supply. At some point, high prices will trigger a supply response, but that has not happened en mass.

I don't believe in the hyperinflation argument. There will be no hyperinflation in America. I don't even know if we will see consumer price inflation in the high single digits in the US. But I agree with the Austrians that inflation is not a general rise in prices. Inflation is a general rise in the supply of money beyond the quantity needed over the long-term for the economy. This is what is happening now.

The rise in inflation, the structural increase in demand from the rise of emerging markets, and the lack of capital expansion to increase supply in most commodity markets is why the structural bull market will continue for some years to come.

 

[BaronVonBigmeat]

Gary North is a big goldbug, but he says that M1 has been flat or shrinking slightly, even while M2 and MZM have been growing. He says M1 is the one to watch for consumer price inflation.

http://www.lewrockwell.com/north/north615.html
http://www.garynorth.com/public/3328.cfm

I am still confused as to how they hold M1 steady while pumping up other measures, or really what the implications of that are.

 

[Toro]

M3 reconstructed.

http://www.nowandfutures.com/key_stats.html

Considering the 3% decline in the fed funds target and all the liquidity facilities offered, this makes sense to me.

One thing to remember about increasing the money supply, it tends to find its way into the hottest asset classes more so than the assets that needs it the most, another reason to be bullish on commodities.

 

[Paulie]

M3 reconstructed.

http://www.nowandfutures.com/key_stats.html

Considering the 3% decline in the fed funds target and all the liquidity facilities offered, this makes sense to me.

Indeed it does, but where I'm in slight disagreement is, when you consider from '01 to '03 when the FF rate dropped 6 points down to 1%, the M3 trend upwards wasn't nearly as profound as it is now with a 3 point drop in slightly less than a year.

I'm sure you can explain that better than I can speculate it, but it appears to me that money supply expansion is greater now more than ever, with no signs of slowing down. More and more economists, TRUSTED ones, have been making a case for hyperinflation. There's also the risk of continued war on into Iran, and no end in sight to the full scale occupation in Iraq. Also, these major banks that have either failed, or are on the verge, are all going to be getting a shot in the arm from the Fed. Look at BOA, profits down 77% (could they be next?). This will no doubt keep the "printing presses" pumping. We're massively in debt in this country, and history shows that the eventual, and inevitable remedy for this has been hyperinflation.

This said, could you make your case for why we WON'T see hyperinflation?

 

[gonegolfin]

Gary North is a big goldbug, but he says that M1 has been flat or shrinking slightly, even while M2 and MZM have been growing. He says M1 is the one to watch for consumer price inflation.

http://www.lewrockwell.com/north/north615.html
http://www.garynorth.com/public/3328.cfm

I am still confused as to how they hold M1 steady while pumping up other measures, or really what the implications of that are.

I follow Gary North (have for some time) and I really like him. But I think he is wrong here to use M1 as the indicator for consumer price inflation and as evidence that the Fed has an overall policy of actually deflating (as he has been claiming). Regulatory changes made in the early 90's caused M1 to become much less useful as a general monetary indicator. These rule changes allow banks to reduce the amount of reserves required on deposit to the Fed by sweeping money held (for example) in checking deposits to savings accounts (on the books). The difference here is that money held in checking deposits are counted as part of the M1 money supply. But savings accounts are counted as the non-M1 part of the M2 money supply. Thus, due to the shifting of money by the banks, you do not get an accurate representation of the real M1.

That said, I think that practically all of the inflation (monetary) we have experienced in the last seven years (until six to eight months ago) has been due to bank lending and not the Federal Reserve. Of course, the Fed spurred this bank lending by cutting the price of credit. So, they were indirectly responsible.

Brian