All Signs Pointing to Gold

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

With another syringe of quantitative easing being injected into the U.S. economy’s bloodstream, Ben Bernanke is giving the markets their liquidity fix. The Federal Reserve’s action reaffirmed my stance I’ve reiterated on several occasions that the governments across developed markets have no fiscal discipline, opting for ultra-easy monetary policies to stimulate growth instead.

The government’s liquidity shot promptly boosted gold and gold stocks, as investors sought the protection of the precious metal as a real store of value. You can see below the strong correlation between the rising U.S. monetary base and growing gold value. Since the beginning of 1984, as money supply has risen, so has the price of gold.



The dollar declined due to the Fed’s easing, which isn’t surprising, given the fact that gold and the greenback are often inversely correlated, and increasing money supply generally causes the currency to fall in value.

What’s interesting is that currency decline was what Richard Nixon sought to avoid when he ended the gold standard in 1971 and announced that the country would no longer redeem its currency in gold. During his televised speech to the American public, Nixon translated in simple terms the “bugaboo” of devaluation, saying, “if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.”

As you can see below, more than 40 years later, a dollar is worth only 17 cents. This significant decline in purchasing power only strengthens the case of gold as a store of value, likely prompting Global Portfolio Strategist Don Coxe to propose making Nixon the “patron saint of gold investors,” during this year’s Denver Gold Forum.



As Milton Friedman once said, “Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless.”

In its long-term asset return research charting economic history in comparison to current markets, Deutsche Bank illustrates multiple ways how “the world dramatically changed post-1971 relative to prior history.” While the research firm makes it clear that returning to the gold standard would be “disastrous,” DB finds that the “lethal cocktail of unparalleled levels of global debt and unparalleled global money printing” are relatively new governmental developments.

Prior to the last four decades, deficits only occurred in extreme situations of war or severe economic setbacks, such as the Great Depression. Balanced budgets were a “routine peace time phenomena in sound economies.” Since 1971, surpluses have been rare. The U.K. has had an annual budget deficit 51 out of the past 60 years and Spain has had 45 years of deficit spending over the past 49 years, according to DB.



Many developed countries are in a predicament, as fiscal austerity attempts have led to weaker-than-expected growth in Greece, Ireland, Portugal, Spain and Italy. DB asks, “Can we really be confident that the developed economies that we have created over the last 40 years have the ability to withstand the effects of austerity and cut backs? Do our modern day econometric models have the ability to understand the impacts of fiscal retrenchment after a financial crisis having been calibrated in a period of excessive leverage?”

Countless discussions over fiscal and monetary policies will carry on, but time will tell. Ian McAvity, editor of Deliberations on World Markets, says, “Excessive debt creates deflationary drag that they repeatedly fight by throwing fresh ‘liquidity’ or ‘stimulus’ at, to debauch the currency of that debt… For private investors, gold is the best medium for self-protection and preservation of purchasing power in my view.” I agree. Rising money supply, declining purchasing power and annual deficits are giving the all-clear to include gold in your portfolio.

Many others appear to agree with us, as sentiment has shifted in favor of the metal in recent days: According to Morgan Stanley’s survey of 140 institutional investors in the U.S., gold sentiment was at its highest bullish reading since July 2011 and the largest month-over-month increase during the survey’s three-year history!

So, gold investors, if you haven’t put in your orders, consider getting them in quickly, because the bulls are buying. Credit Suisse saw “massive inflows” into gold exchange-traded products in August after experiencing significant outflows compared to crude oil and the broader market in March, April, May and July. August shows a clear preference toward gold.



We generated lots of interest when we showed our standard deviation chart a few weeks ago, so I updated it through September 13. Although gold has been on a tear recently, breaking through the stumbling block of $1,600 and climbing to $1,770 by Friday, bullion still looks attractive, with a low sigma reading of -1.7.



A look at a histogram shows how many times gold bullion historically fell in this sigma range. Today’s sigma of -1.7 has occurred only about 2 percent of the time. Bernanke and Draghi only made the decision more obvious for gold and gold stock buyers.



The Fed and ECB also make my job presenting at the Hard Assets conference in Chicago very exciting. Don’t miss my presentation on September 21. I invite you to be there in person if you live in close proximity to Chicago, or you can download a pdf at www.usfunds.com following the meeting.

You might also learn something you didn’t know with our newest interactive slideshow, the 10 Surprising Uses of Commodities. Check it out and share with a friend.

souce : www.321gold.com/

Crisis Economics: A Crash Course in the Future of Finance

"A succinct, lucid and compelling account . . . Essential reading." -Michiko Kakutani, The New York Times

Renowned economist Nouriel Roubini electrified the financial community by predicting the current crisis before others in his field saw it coming. This myth-shattering book reveals the methods he used to foretell the current crisis and shows how those methods can help us make sense of the present and prepare for the future. Using an unconventional blend of historical analysis with masterful knowledge of global economics, Nouriel Roubini and Stephen Mihm, a journalist and professor of economic history, present a vital and timeless book that proves calamities to be not only predictable but also preventable and, with the right medicine, curable.



Author :  Nouriel Roubini is a professor of economics at New York University's Stern School of Business. He has extensive senior policy experience in the federal government, having served from 1998 to 2000 in the White House and the U.S. Treasury. He is the founder and chairman of RGE Monitor (rgemonitor.com), an economic and financial consulting firm, regularly attends and presents his views at the World Economic Forum at Davos and other international forums, and is an adviser to cental bankers around the world.

The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation

 Author A. Gary Shilling

 

"You will be a better investor having read this book. . . I cannot recommend it (the book) strongly enough."
—Dennis Gartman, from the Foreword, The Gartman Letter

". . . brilliantly exposes the delusions of the bullish consensus . . . one of the sharpest thinkers on economic issues and their market implications. This is a must-read book for all."
—Nouriel Roubini,Professor of Economics

"Gary Shilling is rarer than a black swan; he's an economist who foresaw deflation. Shilling has predicted the ‘ impossible' several times in his career, so his colleagues should no longer be surprised when he turns out right."
—Robert R. Prechter Jr.,Author of Conquer the Crash

"Ignore Gary at the peril of your investment portfolio. Let him show you alternatives that will work in a world of deleveraging, deflation, and slower growth."
—John Mauldin, President, Millennium Wave Advisors

"The acid test of advice: those who followed Gary's not-always-popular advice during these turbulent times made money. This man is an original-and well worth listening to."
— Steve Forbes,President, CEO, and Editor-in-Chief, Forbes magazine

Top economist Gary Shilling shows you how to prosper in the slow-growing and deflationary times that lie ahead.

While many investors fear a rapid rise in inflation, author Gary Shilling, an award-winning economic forecaster, argues that the global economy is going through a long period of de-leveraging and weak growth, which makes deflation far more likely and a far greater threat to investors than inflation. Shilling explains in clear language and compelling logic why the U.S. and world economy will struggle for several more years and what investors can do to protect and grow their wealth in the difficult times ahead. The investment strategies that worked for last 25 years will not work in the next 10 years. Shilling advises readers to avoid broad exposure to stocks, real estate, and commodities and to focus on high-quality bonds, high-dividend stocks, and consumer staple and food stocks. .
Written by one of today's best forecasters of economic trends-twice voted by Institutional Investor as Wall Street's top economist
Clearly explains what to invest in, what to avoid, and how to cope with a deflationary, slow-growth economy
Demonstrates how Shilling has been consistently right about major economic trends since he began forecasting in the early 1980s Filled with in-depth insights and practical advice, this timely guide lays out a convincing case for why investors need to be prepared for a long period of weak growth and deflation-not inflation-and what you can do to prosper in the difficult times ahead.

 

Q&A with Author A. Gary Shilling

 

Your book is called The Age of Deleveraging. Could you explain what you mean by deleveraging and how it informs your long-term view of the economy?
Starting in the 1970s, financial institutions worldwide began to leverage their equity by heavy outside borrowing. U.S. consumers did the same, commencing in the early 1980s as they dropped their saving rate from 12% to 1% in 2005, slashed their down payments on houses and hyped their borrowing with credit cards, student and home equity loans. Now, embarrassment over the near-financial meltdown and newly-vigilant regulators are forcing the financial sector to delever.

Meanwhile, American consumers have no choice but to save more and repay debt. After earlier home equity withdrawals and the collapse in house prices, few have any equity left in their houses and a quarter of those with mortgages are under water. With the stock nosedives in 2000-2002 and 2007-2009, few individual investors trust their equity portfolios to finance their kids’ educations and their own early retirements. The postwar babies desperately need to save for retirement, and many can. Many are in their peak earning 50s and their offspring’s college tuition payments are completed. Also, continuing high unemployment is encouraging saving for contingencies.

The deleveraging of the global financial and U.S. consumer sectors as well as seven other forces detailed in my book portend slow global economic growth in the next decade. 

You see deflation as more likely than inflation. What would you say to investors who are worried that so-called QE II will ignite inflation in the years ahead?
Deflation is looming because chronic slowing global economic growth will mute demand. At the same time, worldwide supply will surge due to spreading globalization and the flowering of productivity-soaked and cost-reducing technologies such as semiconductors, computers, the Internet, biotech and telecom.

Massive fiscal and monetary stimuli have done little to promote economic growth or deflect deflation. The $814 billion 2009 fiscal stimulus program didn’t slash the unemployment rate to 7.0% in late 2010, as Obama’s economists predicted in January 2009. Instead, it reached 9.8% in November 2010 and consumers saved over half the resulting rise in after-tax income. With QE I, the Fed created $1 trillion in excess reserves that the banks don’t want to lend and creditworthy borrowers don’t want to borrow. So those reserves didn’t turn into money. QE II will simply add $600 billion to that excess pile. And if lenders and borrowers are energized to do business, it will take three or four years for robust global growth to use up excess capacity and threaten inflation. That will give the Fed plenty of time to extinguish surplus reserves, as Chairman Bernanke said they would in his December 5 “60 Minutes” interview. 

What are the risks that the long period of deleveraging and slow growth could lead to protectionism or other counter-productive policy responses that potentially could contribute to another protracted recession?
Sadly, protectionism is the normal result of high unemployment, and politicians find it very attractive since the foreigners against whom it’s directed don’t vote in domestic elections. American consumers were for decades the buyers of first and last resort for the world’s excess goods and services via U.S. imports. But now U.S. consumers are retrenching, and the world has turned to ultimately ineffective but destructive competitive devaluations to replace their demand.

Rising protectionism is one of nine forces leading to slow global growth in the next decade, as discussed in my book. Furthermore, protectionism and persistent financial woes threaten to turn chronic slow global growth into a worldwide depression.

What is the outlook for Europe? Will the eurozone remain intact?

The eurozone has been a noble experiment, combining the Teutonic North and the Club Med South under a common currency, but with no common fiscal authority. It held together due to robust global growth from its 1999 inception until the Great Recession, but is now flying apart. The North doesn’t like bailing out the South, including Ireland, but has little choice given the heavy Southern exposure of Northern banks.

The threat to the U.S. and other non-European major countries is not so much the high probability of renewed recession on the Continent. Instead, as detailed in my book, it’s the global intertwining of banks and other financial institutions that will spread unfolding European troubles worldwide.

In The Age of Deleveraging, you discuss 10 investment areas you favor. What do they include?

In 1981, I predicted the unwinding of then-double digit inflation. I went on to recommend 30-year Treasury bonds, then yielding 15.25%, and stated, “We’re entering the bond rally of a lifetime.” Since then, 25-year zero coupon Treasurys have outperformed the S&P 500 by seven times despite the strength of equities in the 1980s and 1990s. And even though the current 4.4% yield on 30-year Treasurys may seem very low, there’s more appreciation in store.

I’ve never, never, never bought Treasury bonds for their yield, but only for appreciation, the same reason most people buy stocks. If the 30-year bond yield drops to 3% due to the slow economic growth and deflation I foresee, the gain in price will be 27% plus interest coupons, and 51% appreciation on a 30 -year zero coupon Treasury bond.

Another of my 10 buy suggestions is equities with high, consistent and increasing dividends. With slow growth in the economy, corporate profits will rise modestly in the years ahead. So dividends will likely constitute the majority of the total return on stocks.

In your new book, you also discuss 12 investment areas to sell or avoid. Which ones?

Companies involved with big-ticket consumer purchases will suffer for two reasons. Leisure airline trips, ocean cruises, new household appliances and vehicles are expenditures consumers will postpone or avoid as the ongoing saving spree persists for years. Furthermore, in deflation, falling prices for these items will encourage prospective buyers to waits for still-lower prices. Then inventories and excess capacity will pile up, forcing prices lower and encouraging buyers to wait still further in a self-feeding downward cycle.

I’d also avoid conventional homebuilders and related companies. There are at least 2.5 million excess housing units in inventory over and above normal working levels, and more to come as foreclosures proceed. That’s a lot considering the long run annual construction rate of 1.5 million units. The crushing inventory burden will probably push median single-family house prices down another 20%. At that point, 40% of homeowners with mortgages will be under water, owning more than their houses are worth, up from 23% now. That will encourage many more to abandon their abodes, resulting in many more foreclosure sales.

 

 source www.amazon.com

Developed World in Financial Decay – How Long Before Money Collapses?

 

by Julian D. W. Phillips - Gold Forecaster
Published : September 14th, 2012

The Current Scene

Since 2007 and the start of the “credit-crunch” the developed world’s money system has been under stress. As a consequence, there has been an economic downturn that government and bankers have not been able to stop, convincingly, in the last five years.

The developed world has decayed to the point that it can’t handle another major crisis such as an oil price well into the $100+ area.

• · Food inflation now threatening, must not be allowed to take off because consumer/voter reaction will undermine government and money still further. 

• · As it is confidence in both the euro and the dollar is at a low ebb. Yes, it is still the only means of exchange and it can be forced onto citizens, but general confidence in the economy, the monetary system and a broad range of markets is suffering as never before.

There are bright sparks of hope, such as the Dow Jones Index returning to the highs it saw in 2007; however, this is by no means in the same investment climate as before the credit-crunch. Fear and instability pervades most markets as faith declines.

Daily we see another Eurozone crisis unfold casting doubts on the continuance of the euro and the financial credibility of its weaker members. Overall, on both sides of the Atlantic, consumer confidence continues to fall after so many efforts by central bankers to resuscitate their economies.

Why is so large a burden being put onto the central bankers, who should only really support governments’ actions? Because the U.S. government is mired in political gridlock, it cannot achieve the vigorous action needed to do all it can to restore growth and confidence, and doubts now remain as to whether it’s too late for any government to do so.

[Forecasts of a dollar decline are seen daily as its debt levels mount to new unacceptable highs. With the impending ‘fiscal cliff’ on the horizon and promises of a heated political battle, consumers and companies expect a savage tax blow around year’s end, further damaging consumer confidence. Will we see a recession in the States next year? It seems likely. Its timing could not be worse.

In the Eurozone, we daily see discord between citizens of the financially stronger nations and the weaker ones. Government discord is constantly apparent. Growth is proving even more elusive in the world’s biggest trading bloc as it stands in a mild recession already.

Hope springs eternal, but today, realities keep hope on the run.

Can the Money System Collapse?

The thought seems unrealistic to people because it’s what we use every day. But the money we use is entirely reliant on government and its central bank. If their performance does not meet the criteria required by money then confidence in that money will collapse eventually. It’s clear that all currencies are not performing well at the moment as the balance sheet of most nations (except China) gets weaker and weaker. If most nations were individuals, then they would have been bankrupted by now.

A look back in history shows that not one paper currency system has lasted throughout the centuries, with the exception of those based solely on gold and silver which remain as money assets all the way.

Not today, you may well answer! We say oh, yes, today too. Despite all the rhetoric since 1971 gold remains in the bulk of the world’s leading reserves for that rainy day when something else is needed other than the currency issued by the nation’s central bank.

How Does Money Collapse?

Look back at Argentina in the 1990’s and you see it using the U.S. dollar, but the economy of Argentina could not support the use of the dollar so it reverted to the Peso after savaging its citizen’s dollar savings in exchange for that Peso. That was a ‘collapse’ of their currency. If the Greeks return to the Drachma or the Spanish the Peseta, we will see a similar scene; it will be a collapse of their currency (the euro) inside their nation.

Can the dollar collapse? Because it’s a government-controlled money system, the dollar will remain the means of exchange it is, even in a collapse.

A collapse will be expressed in several ways:

· Its exchange rate against other currencies can fall heavily. In the case of the dollar as the world’s foundation, un-backed currency, this is unlikely as it supports the un-backed currencies across the world indirectly. Its trading partners will try to pull their currencies down with it so as to protect their trading with the U.S. The same applies to a greater or lesser extent with the other main trading blocs of the world such as the Eurozone and China. You will have noted the narrow trading range of the € & the $ between $1.21 and $1.45 over the last few years. This is because of the mutual support between the Fed and the ECB by way of currency swaps.

• It can collapse inside the country, as its buying power declines rapidly. This is monetary inflation usually caused by the over-issuance of a currency.
  
• Another form of collapse could include a bond market collapse where the markets push interest rates up so high as to make it impossible for governments to repay debt. This level is generally set at 7% and we have seen it in the P.I.G.S. nations of the Eurozone over the last three years. If these countries had separate currencies, they would have collapsed, but inside the euro we see that that final collapse will be expressed by exiting the Eurozone and returning to past currencies.
  
• In a nation where there is still a working economy, a collapse can also be expressed by the imposition of Capital and Exchange Controls, restricting the flows of money in and out of a country to protect the capital inside its borders. Its citizens usually bear the brunt.

Can the Global Monetary System Collapse?

We’re of the opinion that even if the system is hobbling along, it will continue until global economies collapse. This was the case in Zimbabwe in the last decade. The Zimbabwe dollar continued in use because the government enforced its use inside its borders. But to all intents and purposes, it has collapsed long before then. In the case of Zimbabwe, the U.S. dollar became the currency in use in the country and in what’s left of its economy. This is still the case today.

Before any such collapse occurs, we are certain that each individual developed world economy would cooperate with each other to take whatever measures are available to them to shore up the monetary system. These measures will prevent the system from a total collapse, keeping it staggering on all the way. We believe that they will fully harness gold then.

The questions remaining are how and when?

source :  http://www.24hgold.com/

The Dark Side Of QE: The Next Chapter In Our Stor...

I am about to tell a story with a very happy beginning and a very sad end. Unfortunately, it happens to be the story we are living in today, but because we are still in the happy part of the story most people cannot see what is coming ahead. I will provide that for you here.

The immediate knee jerk reaction to the Fed's announcement today is that the Fed printing $40 billion per month and pumping it into the banking system is fundamentally strong for every type of asset in the world. Those that graduated from college in 2009 and have only been watching the market for a few years would believe this is a fact.

In essence: buy everything and just keep on buying.

Now that we know we are on the path of QE to infinity it is very important to understand how an endless running stream of new money fundamentally impacts assets differently. You'll notice a repetition of the word fundamentally because for long periods of time assets can move in the opposite direction of their fundamentals. Think of the 100% par value of subprime mortgage tranches in early 2006 or the multi-billion dollar valuation of Pets.com in 1999. Over time assets have a tendency, like gravity, to revert back to their fundamental value. This is what causes booms, busts, opportunity, and disaster.

Before we go any further, let's quickly review how QE actually works. The Fed shows up at the doorstep of primary dealer (the largest) banks with a printed bag full of money and asks them if they can come in and buy some mortgage bonds. The banks agree, hand them the bonds, and take the bag full of cash. The banks now have a new lump sum of money to spend or do with what they like. This is also new money that did not exist in the economy before which is how the money supply is increased. In reality, there are no knocking on doors with bags of money, this process takes place electronically with a few key strokes from either side. The outcome, however, is the same.

Part 1: The Positive Benefits Of QE (March 2009 - September 2012)

We'll start with mortgage bonds as a completely separate conversation because the Fed has targeted this one asset as their choice of purchase. Mortgage bonds and mortgage rates will have an obvious fundamental advantage to the Fed purchasing them every single month. If the Fed decided they were only going to purchase blue Honda Accord cars every month, it would have a positive fundamental impact on the price of those cars.

The QE process of mortgage bond purchases has the immediate impact of lowering mortgage rates (a new larger buyer of mortgages in the market - higher demand equals lower rates). It also has an alternative impact due to the bag of money left at the doorstep of the banks. The banks can now take this money and spend it. They can purchase treasury bonds, corporate bonds, and municipal bonds (plus a few other assets we'll get to in a moment).

This bond purchasing lowers the cost of borrowing for everyone as lower interest rates allow corporations, local governments, and the federal government to borrow more. This is the Fed's second goal: to lower the cost of borrowing to stimulate the economy.

Stocks rise with the Fed easing in part for the very reason just discussed. If it costs corporations less to borrow money it increases their profits and allows them more opportunity to grow. QE also has the ability to push up stock prices because banks now have more fresh cash that they can put to work in the stock market.

The positive benefit of QE, the happy part of the story, is essentially what we have experienced since the first QE program began in March of 2009. Interest rates on every type of bond in America: treasury, corporate, municipal, mortgage, auto, credit card, and junk bonds have fallen significantly.

Stocks have soared, rising over 100% in the S&P 500 since the first QE began that March. This creates an immediate wealth effect for those holding stocks (their portfolio says $400,000 instead of $200,000 making them more likely to spend and boost the economy).

Corporate profits have surged with the lower cost of borrowing, the massive reduction in expenses (mostly through employee layoffs), and an increase in productivity.

Over the past 3.5 years when rolling out QE 1 & 2 the dollar index has moved sideways and even appreciated (due mainly to the over weighting of the index to the euro).

So far we have only experienced the good part of inflation. We have only experienced the high of the drug, and the buzz of the alcohol. If the story ended here today it would appear that QE was the correct decision all along and that the unlimited QE program announced today has no reason to be anything but positive.

But the story will not end here today. We will look now look at what comes next.

Part 2: The Dark Side Of QE (2013 - 2016)

This is where we move away from the fairy tale and back into reality.

When the Fed shows up at the bank with the bag of cash there is another asset class the bank can purchase with the money: commodities.

Commodities include agriculture (food), energy (oil and natural gas), metals (copper, steel, aluminum), lumber, water, precious metals, and every other tangible good in the world. Many of these items are either directly purchased by consumers (food and energy) or they are purchased as a byproduct of other items they use such as a car, shirt, or washer and dryer. This directly raises the cost of living for consumers. A higher cost of living means less disposable income and less money available to buy goods such as iPads, furniture, vacations, or cars. A slow down in spending in these areas not only impacts the stock prices of these companies, it spurs lay offs at them as well.

This is looking directly at the consumer side, but what about the corporate side? At the end of the day a company is judged (with its stock price) based on its ability to generate profits. If the cost of goods to produce rises (with rising commodity prices) and companies are not able to raise prices enough to offset those costs (which would occur if wages were not rising at an equal or greater pace) then profit margins fall.

Do you see, based on the fundamentals of economics, how inflation does not help the price of stocks. This is, in part, why stocks were crushed during the stagflationary period of the 1970's.

What about bonds?

Bonds face a similar dilemma, only magnified. Why? Because bonds do not have the ability to raise prices the way a company can to offset inflation (even though we just saw how companies can only raise prices so far without choking off all demand). Bonds are set at a fixed interest rate. If the underlying value of the currency the bond is held in depreciates in value then the investor is trapped.

Many bonds today actually have a negative yield. This means that the cost of living is rising more rapidly every year than what is paid out in interest. Investors buying these bonds know going in that they are losing purchasing power. Why would anyone ever do this? I have no idea. Why would they purchase Internet stocks in the year 2000 at sky high valuations when the companies had no profits? Bonds today, like stocks then, are in a bubble. The madness of crowds has set in.

At some point, as new QE money enters the money supply and continues to depreciate the value of the currency there will be an awakening moment for bond holders. What will trigger this "moment?" I have no idea. But I know that it is coming. Those trapped inside the long term bonds that have been front running the Fed's QE programs will suddenly realize that they are running in quicksand.

How about the currency itself? Paper bills. They have no interest rate risk right? They have no corporate margins to worry about right? Holding cash at the bank seems like the best available option.

In reality it will be ultimately be the worst. The only thing worse than a low interest rate during a period of high inflation is no interest rate. We live in a borderless world today where investors do not have to hold their money in a domestic bank (just watch what is taking place right now in Spain). Money can be moved to a bank in Switzerland, Hong Kong, Brazil, or Canada. It can also be held in those currencies at those banks.

This is what will take place at first slowly in America and then in a rush at the end. Most will likely not be allowed to escape as the borders are shut when the politicians realize what is taking place. Their money will be trapped inside the closed room being filled with water by Bernanke. Their purchasing power will drown.

How about real estate? This is one of the favorites for those arguing for an inflation investment. The problem is that real estate is purchased with debt. If the cost of the debt rises significantly (interest rates rise) then the price of the asset is going to fall, even if the cost of building a new home is rising as well. This will only occur over the short term because we still have an enormous amount of untapped supply to mop up. It is only in a hyperinflationary environment, not a very high inflationary environment, that real estate will be a strong investment.

So after understanding why stocks, bonds, cash, and real estate fundamentally should go down in a high inflationary environment, what is the best investment option?

Commodities

I have explained numerous times using historical examples and charts how we are in a long term secular bull market for commodities which began in the year 2000. Energy, agriculture, water, rare earths, and precious metals have been and still are my personal favorites.

If the Fed prints more money tomorrow there is no fundamental downside for the price of gold. There are no corporate margins squeezed. There are no interest rate risks. There is no dilution of the money. It is just a larger amount of paper money chasing a stable amount of physical gold. Throughout history that has only led to one thing: a price adjustment in the price of gold to account for the paper money that has been created.

Usually this happens very slowly over a long period of time and then very suddenly and violently at the end. Almost all of the entire bull market run in gold during the 1970's happened in the last 90 days leading into January 1980. I think it will be the same this time as well.

Thursday, September 13, 2012

source from : http://www.ftense.com

No CB Solutions: Liquidity vs Insolvency

 by Jim Willie CB - Hat Trick Letter

 

The Hippocratic Oath dictates never to do harm to the patient. The central bankers instead take the Hypocritical Oath that dictates to cripple the patient, to drain the blood, to preserve power by tightening the straps, to erode buying power from hard work, and to render life savings a weak shell, while whispering lies in the ears on blame for what went badly wrong, against the background din of endorsed war themes. The effectiveness of the latter oath is seen in the systemic failure of the USEconomy, whose financial and economic structure has been destroyed by bad economic policy, the poor paper financial foundation from the monetary system, corrupt bond market practices marred by $trillion frauds, and a marriage between the state and sanctioned large corporations whose only efficiency is seen in dark corners protected by criminal impunity. The Fascist Business Model showed itself in bold terms in the 1990 decade, in the strengthened links between state and major corporations, where inefficiency, favoritism, and corruption produce the bitter fruit of a sclerotic financial structure and weakened body economic. The Gold price responds to the systemic failure of the ruinous financial and economic policy, aggravated by the devoted ghoulish doctors and their perverse solutions that neither fix anything nor attempt to apply remedy. The Jackson Hole conference was another gathering of losers, stuck in apologist mode to explain their vast ongoing enduring failure. It has become an empty echo to the Davos Forum. This year, after two years of the drastic treatment reliant upon bond monetization (Quantitative Easing), the display revealed more vividly than in the past the gaggle of losers gone fishing. The Bernanke speech said nothing of substance, nothing. He is out of ideas, out of tools, out of credibility, holding a ruined balance sheet which will not be restored. The latest Bernanke stupidism is the continued bond monetization until a certain threshold of economic growth (GDP) is reached. These loser bankers do not even attempt legitimate solutions, choosing instead their usual fare to work toward power preservation whose schemes are marred by yet more paper mache covering of toxic sores. The financial markets look to clues on QE when it never ended, and thus its participants appear truly clueless. They appeal beseechingly like emaciated hound dogs seeking small food scraps from the fat bankers who never miss a $200 lunch, the tab always paid by the starving serfs and vassals that peer through the windows. In past years the Jackass was eager to hear the buzz from the conference, looking for choice morsels to indicate future direction. This year, a walk around the block to look at blossoms from the vibrant flora has been brought more satisfaction. Even EuroCB chief witch doctor Draghi decided not to attend the conference, perhaps unwilling to be tarnished by a broad inept banker brush, or to find himself impaled by a fishing hook. The banker losers will continue to ply their trade, to print more money and avoid the Gold Standard. They will find ways to justify more propping of the giant insolvent banks, whose business model has been wrecked, whose balance sheets have been wrecked, whose executives live large despite the wreckage. The dangerous dastardly desperate concoctions with hidden derivative platforms and cables erected by the big banks in the 1990 and 2000 decades bought them more time, but did not avert the mutually assured destruction. The central bankers have no solutions. The Gold price responds to the systemic failure of the ruinous financial and economic policy, aggravated by the devoted ghoulish doctors and their perverse solutions that neither fix anything nor attempt to apply remedy. 

 

 

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What Bill Gross Is Really Doing With Treasuries

 

The PIMCO Total Return manager offers more definition on the fund's current Treasury positioning and the motivation behind it.

More Videos: http://www.morningstar.com/cover/videoCenter.aspx

The Intelligent Investor

This classic text is annotated to update Graham's timeless wisdom for today's market conditions...

The greatest investment advisor of the twentieth century, Benjamin Graham, taught and inspired people worldwide. Graham's philosophy of "value investing" -- which shields investors from substantial error and teaches them to develop long-term strategies -- has made The Intelligent Investor the stock market bible ever since its original publication in 1949.

Over the years, market developments have proven the wisdom of Graham's strategies. While preserving the integrity of Graham's original text, this revised edition includes updated commentary by noted financial journalist Jason Zweig, whose perspective incorporates the realities of today's market, draws parallels between Graham's examples and today's financial headlines, and gives readers a more thorough understanding of how to apply Graham's principles.

Vital and indispensable, this HarperBusiness Essentials edition of The Intelligent Investor is the most important book you will ever read on how to reach your financial goals.

 

Author Biography : Benjamin Graham (May 8, 1894 – September 21, 1976) was a British-born American economist and professional investor. Graham is considered the first proponent of value investing, an investment approach he began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd through various editions of their famous book Security Analysis. Graham's followers include Warren Buffett, William J. Ruane, Irving Kahn, Walter J. Schloss, Chris Johnston and others. Buffett, who credits Graham as grounding him with a sound intellectual investment framework, described him as the second most influential person in his life after his own father. In fact, Graham had such an overwhelming influence on his students that two of them, Buffett and Kahn, named their sons, Howard Graham Buffett and Thomas Graham Kahn, after him.

A Gift to My Children: A Father's Lessons for Life and Investing

He’s the swashbuckling world traveler and legendary investor who made his fortune before he was forty. Now the bestselling author of A Bull in China, Hot Commodities, and Adventure Capitalist shares a heartfelt, indispensable guide for his daughters (and all young investors) to find success and happiness. In A Gift to My Children, Jim Rogers offers advice with his trademark candor and confidence, but this time he adds paternal compassion, protectiveness, and love. Rogers reveals how to learn from his triumphs and mistakes in order to achieve a prosperous, well-lived life. For example:

• Trust your own judgment: Rogers sensed China’s true potential way back in the 1980s, at a time when most analysts were highly skeptical of its prospects for growth.

• Focus on what you like: Rogers was five when he started collecting empty bottles at baseball games instead of playing.

• Be persistent: Coming to Yale from rural Alabama, and in over his head, Rogers never stopped studying and wound up with a scholarship to Oxford.

• See the world: In 1990, Rogers traveled through six continents by motorcycle, gaining a global perspective and learning how to evaluate prospects in rapidly developing countries such as Brazil, Russia, India, and China.

• Nothing is really new: anything deemed “innovative” or “unprecedented” is usually just overhyped, as in the case of the Internet or TV, airplanes, and railroads before it

• And not a bit off the subject, and very important: Boys will need you more than you’ll need them!

Wise and warm, accessible and inspiring, A Gift to My Children is a great gift for all those just starting to invest in their futures.

Author Biography : Born in 1942, Jim Rogers had his first job at age five, picking up bottles at baseball games. Winning a scholarship to Yale, Rogers was coxswain on the crew. Upon graduation, he attended Balliol College at Oxford. After a stint in the army, he began work on Wall Street. He cofounded the Quantum Fund, a global-investment partnership. During the next ten years, the portfolio gained more than 4,000 percent, while the S&P rose less than 50 percent. Rogers then decided to retire-at age thirty-seven-but he did not remain idle.Continuing to manage his own portfolio, Rogers served as a professor of finance at the Columbia Univer-sity Graduate School of Business and as moderator of The Dreyfus Roundtable on WCBS and The Profit Motive on FNN. At the same time, he laid the groundwork for his lifelong dream, an around-the-world motorcycle trip: more than 100,000 miles across six continents. That journey became the subject of Rogers's first book, Investment Biker (1994), now available from Random House Trade Paperbacks. While laying plans for his Millennium Adventure 1999-2001, he continued as a media commentator at Worth, CNBC, et al., and as a sometime professor.He now contributes to Fox News, Worth, and others as he and Paige eagerly await their first child. 

Bull in China

If the twentieth century was the American century, then the twenty-first century belongs to China. According to the one and only Jim Rogers, who’s been tracking the Chinese economy since he first went to China in 1984, any investor can get in on the ground floor of “the greatest economic boom since England’s Industrial Revolution.” But the time to act is now.

In A Bull in China, you’ll learn which industries offer the newest and best opportunities, from power, energy, and agriculture to tourism, water, and infrastructure. Rogers demystifies the state policies that are driving earnings and innovation, takes the intimidation factor out of the A-shares, B-shares, and ADRs of Chinese offerings, and profiles “Red Chip” companies, such as Yantai Changyu, China’s largest winemaker, which sells a “Healthy Liquor” line mixed with herbal medicines. Plus, if you want to export something to China yourself–or even buy land there–Rogers tells you the steps you need to take.

No other book–and no other author–can better help you benefit from the new Chinese revolution. Jim Rogers shows you how to make the “amazing energy, potential, and entrepreneurial spirit of a billion people” work for you.

Author Biography : Born in 1942, Jim Rogers had his first job at age five, picking up bottles at baseball games. Winning a scholarship to Yale, Rogers was coxswain on the crew. Upon graduation, he attended Balliol College at Oxford. After a stint in the army, he began work on Wall Street. He cofounded the Quantum Fund, a global-investment partnership. During the next ten years, the portfolio gained more than 4,000 percent, while the S&P rose less than 50 percent. Rogers then decided to retire-at age thirty-seven-but he did not remain idle.Continuing to manage his own portfolio, Rogers served as a professor of finance at the Columbia Univer-sity Graduate School of Business and as moderator of The Dreyfus Roundtable on WCBS and The Profit Motive on FNN. At the same time, he laid the groundwork for his lifelong dream, an around-the-world motorcycle trip: more than 100,000 miles across six continents. That journey became the subject of Rogers's first book, Investment Biker (1994), now available from Random House Trade Paperbacks. While laying plans for his Millennium Adventure 1999-2001, he continued as a media commentator at Worth, CNBC, et al., and as a sometime professor.He now contributes to Fox News, Worth, and others as he and Paige eagerly await their first child. 

Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market

The next bull market is here. It’s not in stocks. It’s not in bonds. It’s in commodities –and some smart investors will be riding that bull to record returns in the next decade.

Before Jim Rogers hit the road to write his bestselling books Investment Biker and Adventure Capitalist, he was one of the world’s most successful investors. He cofounded the Quantum Fund and made so much money that he never needed to work again. Yet despite his success, Rogers has never written a book of practical investment advice–until now.

In Hot Commodities, Rogers offers the lowdown on the most lucrative markets for today and tomorrow. In 1998, gliding under the radar, a bull market in commodities began. Rogers thinks it’s going to continue for at least fifteen years–and he’s put his money where his mouth is: In 1998, he started his own commodities index fund. It’s up 165% since then, with more than $200 million invested, and it’s the single-best performing index fund in the world in any asset class. Less risky than stocks and less sluggish than bonds,, commodities are where the money is–and will be in the years ahead. Rogers’s strategies are simple and straightforward. You can start small–a few thousand dollars will suffice. It’s all about putting your money into stuff you understand, the basic materials of everyday life, like coal, sugar, cotton, corn, or crude oil. Once you recognize the cyclical and historical trading patterns outlined here, you’ll be on your way.

In language that is both colorful and accessible, but Rogers explains why the world of commodity investing can be one of the simplest of all–and how commodities are the bases by which investors can value companies, markets, and whole economies. To be a truly great investor is to know something about commodities.

For small investors and high rollers alike, Hot Commodities is as good as gold . . . or lead, or aluminum, which are some of the commodities Rogers says could be as rewarding for investors.

Author Biography : Born in 1942, Jim Rogers had his first job at age five, picking up bottles at baseball games. Winning a scholarship to Yale, Rogers was coxswain on the crew. Upon graduation, he attended Balliol College at Oxford. After a stint in the army, he began work on Wall Street. He cofounded the Quantum Fund, a global-investment partnership. During the next ten years, the portfolio gained more than 4,000 percent, while the S&P rose less than 50 percent. Rogers then decided to retire-at age thirty-seven-but he did not remain idle.Continuing to manage his own portfolio, Rogers served as a professor of finance at the Columbia Univer-sity Graduate School of Business and as moderator of The Dreyfus Roundtable on WCBS and The Profit Motive on FNN. At the same time, he laid the groundwork for his lifelong dream, an around-the-world motorcycle trip: more than 100,000 miles across six continents. That journey became the subject of Rogers's first book, Investment Biker (1994), now available from Random House Trade Paperbacks. While laying plans for his Millennium Adventure 1999-2001, he continued as a media commentator at Worth, CNBC, et al., and as a sometime professor.He now contributes to Fox News, Worth, and others as he and Paige eagerly await their first child. 

Adventure Capitalist

Drive . . . and grow rich!

The bestselling author of Investment Biker is back from the ultimate road trip: a three-year drive around the world that would ultimately set the Guinness record for the longest continuous car journey. In Adventure Capitalist, legendary investor Jim Rogers, dubbed “the Indiana Jones of finance” by Time magazine, proves that the best way to profit from the global situation is to see the world mile by mile. “While I have never patronized a prostitute,” he writes, “I know that one can learn more about a country from speaking to the madam of a brothel or a black marketeer than from meeting a foreign minister.”

Behind the wheel of a sunburst-yellow, custom-built convertible Mercedes, Rogers and his fiancée, Paige Parker, began their “Millennium Adventure” on January 1, 1999, from Iceland. They traveled through 116 countries, including many where most have rarely ventured, such as Saudi Arabia, Myanmar, Angola, Sudan, Congo, Colombia, and East Timor. They drove through war zones, deserts, jungles, epidemics, and blizzards. They had many narrow escapes.

They camped with nomads and camels in the western Sahara. They ate silkworms, iguanas, snakes, termites, guinea pigs, porcupines, crocodiles, and grasshoppers.

Best of all, they saw the real world from the ground up—the only vantage point from which it can be truly understood—economically, politically, and socially.

Here are just a few of the author’s conclusions:

• The new commodity bull market has started.
• The twenty-first century will belong to China.
• There is a dramatic shortage of women developing in Asia.
• Pakistan is on the verge of disintegrating.
• India, like many other large nations, will break into several countries.
• The Euro is doomed to fail.
• There are fortunes to be made in Angola.
• Nongovernmental organizations (NGOs) are a scam.
• Bolivia is a comer after decades of instability, thanks to gigantic amounts of natural gas.

Adventure Capitalist is the most opinionated, sprawling, adventurous journey you’re likely to take within the pages of a book—the perfect read for armchair adventurers, global investors, car enthusiasts, and anyone interested in seeing the world and understanding it as it really is.

Author Biography : Born in 1942, Jim Rogers had his first job at age five, picking up bottles at baseball games. Winning a scholarship to Yale, Rogers was coxswain on the crew. Upon graduation, he attended Balliol College at Oxford. After a stint in the army, he began work on Wall Street. He cofounded the Quantum Fund, a global-investment partnership. During the next ten years, the portfolio gained more than 4,000 percent, while the S&P rose less than 50 percent. Rogers then decided to retire-at age thirty-seven-but he did not remain idle.Continuing to manage his own portfolio, Rogers served as a professor of finance at the Columbia Univer-sity Graduate School of Business and as moderator of The Dreyfus Roundtable on WCBS and The Profit Motive on FNN. At the same time, he laid the groundwork for his lifelong dream, an around-the-world motorcycle trip: more than 100,000 miles across six continents. That journey became the subject of Rogers's first book, Investment Biker (1994), now available from Random House Trade Paperbacks. While laying plans for his Millennium Adventure 1999-2001, he continued as a media commentator at Worth, CNBC, et al., and as a sometime professor.He now contributes to Fox News, Worth, and others as he and Paige eagerly await their first child.

Economics for Real People

The second edition of the fun and fascinating guide to the main ideas of the Austrian School of economics, written in sparkling prose especially for the non-economist. Gene Callahan shows that good economics isn't about government planning or statistical models. It's about human beings and the choices they make in the real world.

This may be the most important book of its kind since Hazlitt's Economics in One Lesson. Though written for the beginner, it has been justly praised by scholars too, including Israel Kirzner, Walter Block, and Peter Boettke.

Author Biography : Gene Callahan is an American economist and writer. He is an adjunct scholar with the Ludwig von Mises Institute, a charter member of the Michael Oakeshott Association, and is the author of two books, Economics for Real People and PUCK. Callahan has written for Reason, The Freeman, The Free Market, Slick Times, Java Developer's Journal, Software Development, Dr. Dobb's Journal, Human Rights Review, Independent Review, NYU Journal of Law and Liberty, Review of Austrian Economics, and other publications. He was also a frequent contributor to LewRockwell.com, prior to 2008. Originally from Connecticut, Callahan has a Master's degree from the London School of Economics, a PhD from Cardiff University, and currently lives in Brooklyn, NY.

The Theory of Money and Credit

Economist and philosopher, Ludwig von Mises present his "Theory of Money and Credit" by first looking at the nature and value of money, why there is a demand for money, and how it is used as currency. He goes on to explain the purchasing power of money and how it determines economic and monetary policy, often in a way that results in financial melt-downs.

Author Biography : Ludwig Heinrich Edler von Mises ( 29 September 1881 – 10 October 1973) was a philosopher, Austrian School economist, and classical liberal. He became a prominent figure in the Austrian School of economic thought and is best known for his work on praxeology. Fearing a Nazi takeover of Switzerland, where he was living at the time, Mises emigrated to the United States in 1940. Mises had a significant influence on the libertarian movement in the United States in the mid-20th century.

What Has Government Done to Our Money?

What Has Government Done to Our Money? was first published in 1962 as Money, free and unfree and then a year later under its current title. It details the history of money, from early barter systems, to the gold standard, to present-day systems of paper money. Rothbard explains how money was originally developed, and why gold was chosen as the preferred commodity to use as money. The author also explains how the gold standard makes money a commodity, and how market forces create a stable economy. Rothbard shows that many European governments went bankrupt due to World War I and left the gold standard in order to try to solve their financial issues, which was not the right solution. He also argues that this strategy was partially responsible for World War II and led to economic problems throughout the world.

Author Biography : Gene Callahan is an American economist and writer. He is an adjunct scholar with the Ludwig von Mises Institute, a charter member of the Michael Oakeshott Association, and is the author of two books, Economics for Real People and PUCK.

Callahan has written for Reason, The Freeman, The Free Market, Slick Times, Java Developer's Journal, Software Development, Dr. Dobb's Journal, Human Rights Review, Independent Review, NYU Journal of Law and Liberty, Review of Austrian Economics, and other publications. He was also a frequent contributor to LewRockwell.com, prior to 2008.

Originally from Connecticut, Callahan has a Master's degree from the London School of Economics, a PhD from Cardiff University, and currently lives in Brooklyn, NY

The Road to Serfdom: Text and Documents--The Definitive Edition

An unimpeachable classic work in political philosophy, intellectual and cultural history, and economics, The Road to Serfdom has inspired and infuriated politicians, scholars, and general readers for half a century. Originally published in 1944—when Eleanor Roosevelt supported the efforts of Stalin, and Albert Einstein subscribed lock, stock, and barrel to the socialist program—The Road to Serfdom was seen as heretical for its passionate warning against the dangers of state control over the means of production. For F. A. Hayek, the collectivist idea of empowering government with increasing economic control would lead not to a utopia but to the horrors of Nazi Germany and Fascist Italy.

First published by the University of Chicago Press on September 18, 1944, The Road to Serfdom garnered immediate, widespread attention. The first printing of 2,000 copies was exhausted instantly, and within six months more than 30,000 books were sold. In April 1945, Reader’s Digest published a condensed version of the book, and soon thereafter the Book-of-the-Month Club distributed this edition to more than 600,000 readers. A perennial best seller, the book has sold 400,000 copies in the United States alone and has been translated into more than twenty languages, along the way becoming one of the most important and influential books of the century.

With this new edition, The Road to Serfdom takes its place in the series The Collected Works of F. A. Hayek. The volume includes a foreword by series editor and leading Hayek scholar Bruce Caldwell explaining the book's origins and publishing history and assessing common misinterpretations of Hayek's thought. Caldwell has also standardized and corrected Hayek's references and added helpful new explanatory notes. Supplemented with an appendix of related materials ranging from prepublication reports on the initial manuscript to forewords to earlier editions by John Chamberlain, Milton Friedman, and Hayek himself, this new edition of The Road to Serfdom will be the definitive version of Hayek's enduring masterwork.

Author Biography : Friedrich August Hayek (1899-1992), recipient of the Medal of Freedom in 1991 and co-winner of the Nobel Memorial Prize in Economics in 1974, was a pioneer in monetary theory and the principal proponent of libertarianism in the twentieth century. He taught at the University of London, the University of Chicago, and the University of Freiburg. His influence on the economic policies in capitalist countries has been profound, especially during the Reagan administration in the U.S. and the Thatcher government in the U.K.

How the West Was Lost: Fifty Years of Economic Folly

Book Description : In How the West Was Lost, the New York Times bestselling author Dambisa Moyo offers a bold account of the decline of the West’s economic supremacy. She examines how the West’s flawed financial decisions have resulted in an economic and geopolitical seesaw that is now poised to tip in favor of the emerging world, especially China. 

Amid the hype of China’s rise, however, the most important story of our generation is being pushed aside: America is not just in economic decline, but on course to become the biggest welfare state in the history of the West. The real danger is a thome, Moyo claims. While some countries – such as Germany and Sweden – have deliberately engineered and financed welfare states, the United States risks turning itself into a bloated welfare state not because of ideology or a larger vision of economic justice, but out of economic desperation and short-sighted policymaking. How the West Was Lost reveals not only the economic myopia of the West but also the radical solutions that it needs to adopt in order to assert itself as a global economic power once again.

Author Biography :

Dr. Dambisa Moyo is an international economist who writes on the macroeconomy and global affairs.

She is the author of the New York Times Bestsellers "Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa", "How The West Was Lost: Fifty Years of Economic Folly - And the Stark Choices Ahead" and "Winner Take All: China's Race for Resources and What It Means for the World".

Ms. Moyo was named by Time Magazine as one of the "100 Most Influential People in the World", and was named to the World Economic Forum's Young Global Leaders Forum. Her work regularly appears in economic and finance-related publications such as the Financial Times and the Wall Street Journal.

She completed a doctorate in Economics at Oxford University and holds a Masters degree from Harvard University. She completed an undergraduate degree in Chemistry and an MBA in Finance at the American University in Washington D.C..

Jim Rogers Blog: The Solution Is Not Papering It Over

Jim Rogers Blog: The Solution Is Not Papering It Over: A recent video interview with Reuters. Jim Rogers is an author, financial commentator and successful international investor. He has bee...

International investor Jim Rogers says all that the Fed has done with QE is to artificially inflate stock and bond markets. He argues the Fed could push the U.S. into another recession in 2013. (September 12, 2012)

Debt and Hyperinflation

by Ranting Andy www.milesfranklin.com

The inevitable COLLAPSE of the U.S. dollar is a mathematical certainty, but the timing of its occurrence is impossible to predict. Assuming no “black swan” events – like nuclear war or catastrophic market crashes – I believe the dollar will have lost the last vestiges of its “reserve currency status” within two to three years; and likely, within five years be replaced by a new, gold-backed currency. However, such numbers are pure speculation, as no one truly knows what will happen, or – more importantly – when, and why.

That is why I repeatedly recommend ownership of PHYSICAL gold and silver; as regardless of this time frame, the likelihood of prematurely selling your bullion is extremely low – barring personal financial emergencies, of course. And the same goes for “betting” on the timing of Hyperinflation – as if you hold too much debt before it occurs, you could lose the underlying assets – such as your home – or even your PHYSICAL PMs if you need to sell them to pay off your debts.

Moreover, think long and hard about the wisdom of purposefully holding large amounts of debt into what could be a cataclysmic financial event. Ann Barnhardt says to pay off as much debt as possible beforehand, with the aim of distancing oneself as much as possible from “the system” when “the Big One” hits. And frankly, I agree with her, 100%. Sure, if your bank fails, your mortgage obligation may go with it. But who’s to say the bank won’t be acquired by a more evil entity, such as the U.S. GOVERNMENT? For all we know, a new, totalitarian dictator will declare all mortgaged homes state property – or some other, equally draconian decree.

As for what happens to debt during Hyperinflation, it is absolutely devalued – benefitting the borrower, at the expense of the lender. Out of control MONEY PRINTING may cause a loaf of bread to cost $500,000, but your $500,000 mortgage will still be the same; in other words, worth the same as the bread. If you have limited savings, you still won’t be able to pay off your mortgage – especially if you lose your job, a highly likely scenario. However, you could sell ITEMS OF REAL VALUE – like a loaf of bread, or a gold coin – to obtain the funds to pay off your mortgage. Moreover, a handful of companies might even institute inflation-adjusted pay – though I wouldn’t count on it.

Hyperinflation could break out at any time – as in the case of the aforementioned “black swan” events. However, more likely a 1930s-like scenario of unemployment, poverty, social unrest, and war will precede it. PHYSICAL Precious Metals will protect you under all scenarios, but DEBT could prove just as much an albatross as a boon. It’s VERY rare for anything positive to ever come of debt, so I strongly advise you do not consider it an “asset.”

Author : Ranting Andy Andrew Hoffman was a buy-side and sell-side analyst in the United States (including six years as an II-ranked oilfield service analyst at Salomon Smith Barney), but since 2002 his focus has been entirely in the metals markets, principally gold and silver. He recently worked as a consultant to junior mining companies, head of Corporate Development, and VP of Investor Relations for different mining ventures, and is now the Director of Marketing for Miles Franklin, a U.S.-based bullion dealer.

The Faustian Bargain

The Faustian Bargain by guggenheimpartners.com

Since 2008, governments that have relied upon quantitative easing instead of undertaking structural reforms have arguably entered into a Faustian bargain of epic proportions. What are the potential consequences of global central banks printing trillions of dollars, euros, pounds, francs, and yen in an attempt to provide short-term fixes for their nations’ long-term economic problems?

In Goethe’s 1831 drama Faust, the devil persuades a bankrupt emperor to print and spend vast quantities of paper money as a short-term fix for his country’s fiscal problems. As a consequence, the empire ultimately unravels and descends into chaos. Today, governments that have relied upon quantitative easing (QE) instead of undertaking necessary structural reforms have arguably entered into the grandest Faustian bargain in financial history.

As a result of multi-trillion dollar quantitative easing programs, central banks around the world have compromised their ability to control the money supply, making them vulnerable to runaway inflation. When interest rates rise, the market value of central bank assets could fall below the face value of their liabilities, potentially rendering the banks incapable of protecting the stability and purchasing power of their currencies.

In the Beginning, There Was Gold

To better understand the potential consequences of quantitative easing, it is useful to review the historical evolution of central banking. Early central banks acted as clearing houses for gold. Individuals and trading companies placed their bullion on deposit at a central bank and received a claim that could be redeemed upon demand. The system’s strength was largely derived from its simplicity. This innovation had a profound effect on global trade. In the British Empire, for example, it meant a gold-backed pound note from London could be used for commercial purposes in Bombay.

Today, the gold standard no longer exists and for the first time the entire global monetary system is built on a foundation of fiat currencies. This monetary paradigm works because of an abiding faith that paper money will be accepted as a medium of exchange and remain a store of value. At the core of this system is the presumption that central banks, as the issuers of paper money, have enough assets that can be readily sold in the event that their currencies’ value begins to fall and the money supply needs to be reduced. When confidence in a central bank’s ability to reduce its money supply in a sufficient amount to maintain its currency’s purchasing power is drawn into question, there is a risk of a currency crisis or even hyperinflation.

While Europe has had central banking since the 17th century, the United States did not have a central bank until the beginning of the 20th century. As a direct result of the panic of 1907, the Progressive political movement created the Federal Reserve System in 1913. Under the newly created Federal Reserve, the definition of eligible central bank reserve assets was extended beyond gold to include short-term bills of trade such as bankers’ acceptances. By expanding the definition of reserve assets the Federal Reserve had the ability to temporarily increase the money supply in excess of the amount of its gold reserves, to provide elasticity to credit markets. This incremental flexibility in money creation was designed to reduce the risk of panics which had plagued the U.S. through most of the 19th century under the gold standard.

During the Great Depression of the 1930s the Federal Reserve sought greater flexibility and leverage. In 1934, the Federal Reserve noteholders’ right to convert paper to gold on demand was unexpectedly revoked and the U.S. government seized all of the citizenry’s gold holdings. Subsequently, the Treasury arbitrarily re-valued the price of gold from $20.70 to $35 per ounce. Nevertheless, the presumption remained that every U.S. dollar was “as good as gold” because the Federal Reserve continued to hold bullion as its primary reserve asset. 

A Dangerous Game

In 1935, the Federal Reserve was also granted “temporary” emergency powers allowing it to begin using Treasury securities, or government debt, as a reserve asset. The problem with Treasury securities as a reserve asset is that, unlike gold, they are affected by changes in the level of interest rates. The impact of interest rates on the value of these securities is commonly measured in units of time and price sensitivity referred to as duration.

The higher the duration of an asset, the more sensitive its price is to changes in interest rates. For example, an upward move in interest rates will cause the value of a bond with a duration of 10 years to fall by 10 times the value of a bond with a duration of one year.

DURATION: A way of measuring the sensitivity of a bond’s value to changes in interest rates. A bond’s duration is the number of years it takes for its cash flows to equal the price for which the lender (investor) bought the bond. A bond without periodic payments (zero-coupon bonds) has a duration equal to its term to maturity.

As the Federal Reserve’s holdings of Treasury securities increased relative to its gold holdings, its portfolio took on greater duration risk. For the first time, the potential existed that rising interest rates could cause the market value of the Federal Reserve’s assets to fall below the face value of its liabilities (Federal Reserve notes). This was not a concern under the tautological gold-backed system because the value of a central bank’s outstanding notes was directly tied to the amount of gold in its vaults.

The way to minimize the risk of a meaningful decline in the value of balance sheet capital resulting from a rise in interest rates was for central banks to maintain a relatively low debt-to-equity ratio while keeping a relatively short interest rate duration on its assets. By maintaining this discipline the Federal Reserve was virtually assured of having enough liquid assets at market levels to repurchase dollars without incurring large losses on its portfolio.

A Quantitative Quagmire

From the 1930s until the early part of the current century, the Federal Reserve was able to engage in relatively effective monetary policy. In 2008, just prior to the first of two rounds of quantitative easing, the Federal Reserve had $41 billion in capital and roughly $872 billion in liabilities, resulting in a debt-to-equity ratio of roughly 21-to-1. The Federal Reserve’s asset portfolio included $480 billion in Treasury securities with an average duration of about 2.5 years. Therefore, a 100 basis point increase in interest rates would have caused the value of its portfolio to fall by 2.5%, or $12 billion. A loss of that magnitude would have been severe but not devastating.

Beginning in 2008, the monetary orthodoxy of the previous 95 years quickly disappeared. By 2011, the Federal Reserve’s portfolio consisted of more than $2.6 trillion in Treasury and agency securities, mortgage bonds, and other obligations. This resulted in an increase in the central bank’s debt-to-equity ratio to roughly 51-to-1. Under Operation Twist the Federal Reserve swapped its short-term Treasury securities holdings for longer-term ones in an attempt to induce borrowing and growth in the economy. This caused an extension of the duration of the Federal Reserve’s portfolio to more than eight years.

Now, a 100 basis-point increase in interest rates would cause the market value of the Federal Reserve’s assets to fall by about 8% or approximately $200 billion which would leave the Federal Reserve with a capital deficit of $150 billion, rendering it insolvent under Generally Accepted Accounting Principles (GAAP). Although this may not happen in the immediate future, if interest rates rose five percentage points the Federal Reserve could lose more than a trillion dollars from its fixed income portfolio.

Staring Into a Monetary Abyss

Unlikely as it seems in a world of zero-bound interest rates, someday, as the economy continues to expand, the demand for credit will increase to the point that interest rates will begin to rise. In time, significantly stronger growth will create economic bottlenecks, placing upward pressure on prices. At that time the Federal Reserve would be expected to restrain credit growth by selling securities, resulting in a further increase in interest rates.

As interest rates rise, the market value of the Federal Reserve’s assets will fall. It could then become apparent that the face value of the Federal Reserve’s obligations had become greater than the market value of its assets. This could leave the Federal Reserve without enough liquid assets to sell to protect the purchasing power of the dollar, resulting in a downward spiral in its value.

If the dollar weakens relative to other currencies, its use as a reserve currency, and the safety of U.S. Treasuries, could falter. Given the United States’ dependence on foreign capital to finance its large fiscal deficits, a reduction in foreign flows could cause Treasury securities to lose a significant amount of value. The Federal Reserve could then find itself having to support the price of the country’s debt by becoming the buyer of last resort for Treasury securities. This scenario would closely resemble events unfolding in the periphery of Europe today. By printing increasing amounts of money to finance the national debt, the Federal Reserve would lose control of its ability to manage the money supply, leaving the government hostage to its printing press.

Investment Implications

To hedge against deterioration in the dollar’s purchasing power, investors have already begun migrating toward hard assets such as gold, commercial real estate, artwork, collectibles, and rare consumer products like fine wines. Such diversification may have significant barriers to entry, however, considering the risks built into financial assets, long-term investment portfolios should be at least partially composed of tangible assets.

Other areas that are likely to perform well in the immediate term due to effects of quantitative easing are credit-related instruments including bank-loans and asset-backed securities. High yield debt should perform well because abundant liquidity means default rates will remain low. Additionally, the ongoing balance sheet expansion by the European Central Bank means European equity prices are likely to outperform U.S. equities over the coming years.

Long-duration, fixed-rate assets such as government bonds are likely to underperform. Given the primacy of Treasury securities in the Federal Reserve’s current yield curve management program, Treasury bonds will come under the greatest pressure once the Federal Reserve ends QE. This asset class’ yields have fallen by over 1100 basis points in the past three decades. While no one knows if we have reached the bottom for Treasury rates, staying in the market for the final 50 or 60 basis points appears imprudent. As Jim Grant has noted, investors’ perception of U.S. Treasuries – and most sovereign debt – is shifting from representing risk-free return to “return-free risk.” Now is a better time to sell Treasury securities than to buy them, and for the stout of heart this is an opportunity to set short positions in the asset class.

An Uncertain Future

Half a year before the centennial of central banking in the U.S., neither policymakers nor investors have much to celebrate. By abandoning monetary orthodoxy and pursuing large-scale asset purchases, global central banks have increased the risk of inflation and compromised their ability to stamp it out. Inordinately higher leverage ratios and the extension of central bank portfolio duration means governments now face the potential for central bank solvency crises. It is too early to predict exactly how this Faustian bargain will play out; but, with each additional paper note that rolls off the printing press or gets conjured up in the ether, the likelihood of a happy ending becomes increasingly evanescent.

Source : http://guggenheimpartners.com/