May 2009


From the comments section. I’ll address the points individually during the next few days.

chivasontherocks Says:


the main differences between now and the 70’s are as follows;

1- wage inflation, the big driver of the 70’s

2- shortages, now if you have the money you can buy anything.

3- inefficient american manufacturing. part of the 80’s bull market had to do with the restructuring of corporate America.

4-residential r/e was hot between 1976-1981

5- credit availability was not a problem.

6- leverage (debt) a lot greater today.

7- outsourcing of jobs was virtually non-existant

8- tech today helps keep inflation in check ( many reasons )

9- unions were a lot more influencial.

i can go on, believe me.

yes, it’s always good to be prepared, but with 500-700 trillion in debt out there, most of it in derivatives, it will take an act of God, to allow us to inflate the problem away. the good news is, that until real clarity is known, gold will do well. and it will do even better with deflation or extreme inflation.

again, until we resolve that 70% portion of GDP, economic growth and inflation, imo, will remain anemic.




Difficult to quantify the following, but interesting nonetheless. Sentiment clouds that identify where the crowd [unquantified] are looking. Thus, providing areas for further research.


First off, a general, macro-economic cloud. We can see the themes that still predominate…gold, banks, financials, dollar.

Then go to stockcharts, and view their ticker cloud, GLD for gold is their largest interest, and has been certainly through last week.


Again, gold has appreciated by 2.1% over the past week, but more intresting is that over the last 52 weeks, it’s appreciated by 10.3%, which apart from the US dollar, is the only bull market in the chart.

Gold is in a bull market. Where it will end is the question.



“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

What would be required? Two components.

The first are the banks that are the key in the credit expansion that would be necessary, combined with some parties wanting to borrow. Let’s look at the historical list.

*Commercial Real Estate and Property developers
*Residential Real Estate [the previous bubble]
*Hedge Funds
*Consumer credit
*Foreign debt
*Business credit
*The Black Swan borrower [currently unknown]

Confidence is the second component required. We had the globilisation trend that drove, or was part of the dual stock market & real estate bubbles that developed since 1982, the end of the previous bear market. This provided the confidence within the creation of credit, that it was supporting wealth creating enterprise, and thus, the interest due would be provided for, and the principal safe.

Commodities will most likely benefit in any credit expansion, simply due to the fact that they [commodities] are the underlying ingredients to all products. Products [in greater or lesser] are still being demanded, thus there is a base that will hold. Most likely, that base has already been seen.

Second, commodities, as primary exchange goods, effect some of the value that is associated with money. When money devalues, commodities appreciate. Thus, even in the absence of a growth in demand, commodities adjust their nominal price, to reflect their real values in terms of exchangability.

Third, commodities need to be produced in of themselves. This production is not instantaneous, it requires lead times. Supply therefore can be constrained in the rapidly fluctuating demand for commodities. When demand falls quickly, there comes a relative oversupply, driving forces that then curtail the supply. This supply cannot simply be switched back on. Thus, if demand picks up from a black swan demander, supply will be severly constrained.

That any black swan demander for credit would be the first in line for said credit, they would profit hugely from the initial advantage of having expanded buying power in a world of reduced buying power [relative] and would stand to make outsize profits.

The smart money would catch this new sector quickly, and as others joined in creating potentially another bubble, would, potentially realize outsize profits. The confidence engendered by this nascent sector, would potentially stimulate the banks into credit creation into other sectors that benefitted from this unseen profitable sector.

Thus confidence and credit gain traction, lifting once again GDP. The problem of course is that the banks are nowhere near in reality sound currently, and cannot sustain the growth in credit that the government would like to see, and would therefore encourage. The likelihood therefore remains of a further deflationary contraction in credit should another bubble eventuate.

That another bubble is being sought by the government seems unequivocal. The difference however seems to be the belief that they can control the next one. That they will let it inflate only enough to lift GDP and most importantly employment, and then through judicious management, they will limit it’s size, presumably to allow the bubble to mature into a self-sustainable sector/industry.

Ignoring for the moment any visionaries who have already spotted the next big thing, or will, if and when it eventuates, the resultant lifting of economic activity will create demand for commodities. Thus, commodities, based on their three characteristics remain the best place to allocate investment funds currently.


Goldman Sachs is one of the buyers on the commodity side, while, concurrently writing a downgrade.


The inflationary trade adding a further datum of evidence to the area that will likely see a bull market.


Today’s chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes 192 ounces of gold to buy the median single-family home.

This is considerably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 68% from its 2001 peak and remains within the confines of its four-year accelerated downtrend.


Gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium.” – Murray N. Rothbard


Gold gapped open past a resistance point. Thus, technically, looking good for $100 on the ETF. Should the $100 target be reached, we then enter potentially a very interesting psychological area for Gold.

All time nominal highs will be on a lot of traders watch lists, as new 52 week highs in a bull market are quite high probability trades. With the inflation fears starting to be signalled through other asset classes, Gold might go on a bit of a jog.

Should it break down, how fast, how far? Do you take some profits, tighten stops, or just hang on? Gold has always been pretty volatile, will increasingly be so at these approaching levels.



From Bloomberg

May 27 (Bloomberg) — The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.

“There are some concerns of a risk from inflation from all the liquidity injected into the banking system but it’s not an immediate threat right now given all the excess capacity in the U.S. economy,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “I have a little more confidence that the Fed has an exit strategy for draining all the liquidity at the appropriate time.”

Action Economics is predicting inflation of minus 0.4 percent in the U.S. this year, with prices increasing by 1.8 percent and 2 percent in 2010 and 2011, respectively, Cohen said.

Near Zero

The U.S.’s main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, Glenn Rudebusch, associate director of research at the Federal Reserve Bank of San Francisco, said yesterday.

Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years.

The global economy won’t return to the “prosperity” of 2006 and 2007 even as it rebounds from a recession, Faber said.

Equities in the U.S. won’t fall to new lows, helped by increased money supply, he said. Still, global stocks are “rather overbought” and are “not cheap,” Faber added.

Faber still favors Asian stocks relative to U.S. government bonds and said Japanese equities may outperform many other markets over a five-year period. “Of all the regions in the world, Asia is still the most attractive by far,” he said.

Gloom, Doom

Faber, the publisher of the Gloom, Boom & Doom report, said on April 7 stocks could fall as much as 10 percent before resuming gains. The Standard & Poor’s 500 Index has since climbed 9 percent.

Faber, who said he’s adding to his gold investments, advised buying the precious metal at the start of its eight-year rally, when it traded for less than $300 an ounce. The metal topped $1,000 last year and traded at $949.85 an ounce at 12:50 p.m. Hong Kong time. He also told investors to bail out of U.S. stocks a week before the so-called Black Monday crash in 1987, according to his Web site.


Tried to hang on yesterday, but, just couldn’t take the risk. Today…up +7%.



Credit destruction was the hallmark of the current crisis. In times of credit contraction, the demand for money rises. Money, essentially becoming an insurance policy that can pay out on any future risk. Insurance policies require that the risk be pre-indentified, then a premium charged, with the risk offset.

Credit, is an insurance policy that money will not be required for the maturity contracted, and a premium [interest] charged. When uncertainity dominates, insurance is no longer written, or written only at very high premiums.

So it was with the credit crisis. Money, liquidity, was the insurance required, from the highest creditor, the US Government, and money fled to the short-end Treasuries, sitting idle [hoarding]

The demand for money has resulted in unprecedented dollar infusions into the financial markets. The result now being that credit, once again is starting to flow.


LIBOR spreads [inter-bank lending] are down from crisis levels.


Treasury Bills [90 day] from going negative, viz. you paid the government to hold your money, we can again make a little yield.


TED spreads, tightening.


Bank loans, starting to move off the bottom.


Bank reserves, at all time highs, due largely to the Federal Reserve paying interest on those reserves. That is as close to free money as they will ever see. The release of reserves will occur when the Federal Reserve rescinds interest payments…

All-in-all, the signs are that the institutional demand for money is starting to abate. Credit will once again become money. The growth in the credit as money, returns dramatically the volume of money within the system, highly inflationary.

The 10yr is thus reflecting, amoungst other things, the realization of an increased money supply, and falling demand for money.

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