James Dines on excessive credit creation and his view that we’re on a collision course with hyperinflation.
Feb 042012
Jan 242012
Juan Ramón Rallo, economist and university professor in Madrid, and Alasdair Macleod of the GoldMoney Foundation talk about the Spanish economy, gold and silver.
The inflation-deflation debate rages on.
Check out Jim Puplava’s interview with John Williams (of ShadowStats fame).
Jan 192012
Guest post by Stephen Johnston
Partner – Agcapita Farmland Investment Partnership
Are we witnessing the end of a mercantilist, Keynesian financial system? Gustave Flaubert said “The future is the worst thing about the present.” Gustave would have made a wonderful central banker. Who can read this and not feel that it is an apt description of the global financial situation? Despite all the high level assurances that matters are improving who can’t help feel that more bad news lurks in the future. The political and financial classes are attempting to create a state of suspended animation based on a dread of what the future surely holds for their deficit & leverage heavy operating models. They seem to genuinely believe that the problems can be indefinitely postponed by further mercantilist, Keynesian debauchery in the form of even greater deficits and deeper currency devaluations. If only all life’s problems could be managed this way.
For those of you unfamiliar with the term – in its current application, mercantilism is a policy of government intervention in foreign trade to try to create a positive balance of payments most often via currency devaluation. As for Keynesianism, at this stage in the financial crisis I doubt the concept of government deficit spending needs much introduction.
The tide has been going out for a few years now and we are beginning to see who has been swimming naked – this hackneyed phrase is a simpler way of saying that we are finally discovering what themes, managers, and sectors were actually just providing debt fueled beta while advertising alpha. The finance, insurance & real estate economy ( “FIRE”) particularly real estate and most of what passes for investing by the financial industry come to mind immediately. In fact, a large part of the financial sector has been engaged in a business model that I have heard described as “picking up dimes in front of a moving steamroller. Leverage allows you to pick up lots of dimes but eventually the steamroller flattens you with ugly results for your investors.”
Instead of relying on privatized gain and socialized losses as a modus operandi, I would encourage the FIRE economy to return to more fundamental models – seek out value, try to invest with a linkage to sectors/markets with demonstrable growth prospects, and if possible incorporate some low cost inflation hedging as insurance against continued central bank misbehavior.
Perhaps the reason for the foreboding in the west is that we are experiencing the simultaneous denouement of three powerful trends – central bank inflation/currency debasement activities, state sponsored mercantilism and demographic driven insolvency.
As states strive to create or maintain current account surpluses there is what amounts to a race to the bottom in the currency markets. Unfortunately it is a truism that few people win in a currency war – other than holders of real assets.
State debt service as a percent of tax revenues is already at high levels for most developed nations, yet interest rates are at historic lows. As state finances enter distress, they are forced to finance themselves at shorter durations creating roll-over risk. The combination of interest servicing issues and duration compression leaves them heavily exposed to even modest increases in interest rates. When rates rise, state revenues will be rapidly consumed by just the interest on servicing their debt, let alone funding day-to-day commitments.
And therein lies the issue. Our commitments are entering a high growth phase in the face of deteriorating demographics. The magnitude of our impending entitlement costs are barely on the radar. Layer on an absence of political support for a reduction in government spending and can some form of printing press default be far behind? Its certainly difficult to see how any combination of tax increases, economic growth or marginal adjustments to entitlements is going to close western funding gaps. The era of exponentially growing government borne by a linear productive economy is in the last gasps – the question is then how does it end? Current indications are with a default by the printing press to fund ballooning fiscal deficits.
If this is the case, and it looks increasingly likely, then the unvarnished truth is that we are living beyond our means and dishonestly passing the cost onto future generations. On that note I will leave you with the words of Herbert Hoover who prophetically said “Blessed are the young for they shall inherit the national debt”.
A few regular readers have asked for our list of ‘must read’ books on finance, economics and investing for 2012. The following list includes books I have read (and want to re-read) and books that have been recommended to me by respected colleagues. I intend to read all 12 this year.
If you intend to purchase any of the following, please use the links below. A small fraction of the proceeds will be re-directed to Plan B Economics, helping us keep the analysts well-caffeinated.
1. The End of Growth: Adapting to Our New Economic Reality (Richard Heinberg)
Description:
Economists insist that recovery is at hand, yet unemployment remains high, real estate values continue to sink, and governments stagger under record deficits. The End of Growth proposes a startling diagnosis: humanity has reached a fundamental turning point in its economic history. The expansionary trajectory of industrial civilization is colliding with non-negotiable natural limits.
Richard Heinberg’s latest landmark work goes to the heart of the ongoing financial crisis, explaining how and why it occurred, and what we must do to avert the worst potential outcomes. Written in an engaging, highly readable style, it shows why growth is being blocked by three factors:
- Resource depletion
- Environmental impacts
- Crushing levels of debt
2. Currency Wars: The Making of the Next Global Crisis (Jim Rickards)
Description:
In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.
Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries’ stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.
3. Extreme Money: Masters of the Universe and the Cult of Risk (Satyajit Das)
Description:
The human race created money and finance: then, our inventions recreated us. In Extreme Money, best-selling author and global finance expert Satyajit Das tells how this happened and what it means. Das reveals the spectacular, dangerous money games that are generating increasingly massive bubbles of fake growth, prosperity, and wealth–while endangering the jobs, possessions, and futures of virtually everyone outside finance.
“…virtually in a category of its own — part history, part book of financial quotations, part cautionary tale, part textbook. It contains some of the clearest charts about risk transfer you will find anywhere. …Others have laid out the dire consequences of financialisation (“the conversion of everything into monetary form”, in Das’s phrase), but few have done it with a wider or more entertaining range of references…[Extreme Money] does… reach an important, if worrying, conclusion: financialisation may be too deep-rooted to be torn out. As Das puts it — characteristically borrowing a line from a movie, Inception — “the hardest virus to kill is an idea”.
-Andrew Hill “Eclectic Guide to the Excesses of the Crisis” Financial Times (August 17, 2011)
Extreme Money named to the longlist for the 2011 FT and Goldman Sachs Business Book of the Year award.
4. This Time Is Different: Eight Centuries of Financial Folly (Carmen Reinhart and Kenneth Rogoff)
Description:
Throughout history, rich and poor countries alike have been lending, borrowing, crashing–and recovering–their way through an extraordinary range of financial crises. Each time, the experts have chimed, “this time is different”–claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes–from medieval currency debasements to today’s subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much–or how little–we have learned.
Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts–as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.
An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.
5. When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany (Adam Fergusson)
Description:
When Money Dies is the classic history of what happens when a nation’s currency depreciates beyond recovery. In 1923, with its currency effectively worthless (the exchange rate in December of that year was one dollar to 4,200,000,000,000 marks), the German republic was all but reduced to a barter economy. Expensive cigars, artworks, and jewels were routinely exchanged for staples such as bread; a cinema ticket could be bought for a lump of coal; and a bottle of paraffin for a silk shirt. People watched helplessly as their life savings disappeared and their loved ones starved. Germany’s finances descended into chaos, with severe social unrest in its wake.
Money may no longer be physically printed and distributed in the voluminous quantities of 1923. However, “quantitative easing,” that modern euphemism for surreptitious deficit financing in an electronic era, can no less become an assault on monetary discipline. Whatever the reason for a country’s deficit—necessity or profligacy, unwillingness to tax or blindness to expenditure—it is beguiling to suppose that if the day of reckoning is postponed economic recovery will come in time to prevent higher unemployment or deeper recession. What if it does not? Germany in 1923 provides a vivid, compelling, sobering moral tale.
6. The Modern Survival Manual: Surviving the Economic Collapse (Fernando Ferfal Aguirre)
Description:
My book is a Modern Survival Manual based on first hand experience of the 2001 Economic Collapse in Argentina. In it you will find a variety of subjects that I consider essential if a person wants to be prepared for tougher times: -How to prepare your family, yourself, your home and your vehicle -How to prepare your finances so that you don’t suffer what millions in my country went through -How to prepare your supplies for food shortages and power failures -How to correctly fight with a chair, gun, knife, pen or choke with your bare hands if required -Most important, how to reach a good awareness level so that you can avoid having to do all that These are just a few examples of what you will find in this book. It’s about Attitude, and being a more capable person and get the politically correct wimp out of your system completely.
7. The Age of Deleveraging, Updated Edition: Investment Strategies for a Decade of Slow Growth and Deflation (Gary Shilling)
Description:
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 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
8. The Crash Course: The Unsustainable Future Of Our Economy, Energy, And Environment (Chris Martenson)
Description:
The next twenty years will be completely unlike the last twenty years.
The world is in economic crisis, and there are no easy fixes to our predicament. Unsustainable trends in the economy, energy, and the environment have finally caught up with us and are converging on a very narrow window of time—the “Twenty-Teens.” The Crash Course presents our predicament and illuminates the path ahead, so you can face the coming disruptions and thrive–without fearing the future or retreating into denial. In this book you will find solid facts and grounded reasoning presented in a calm, positive, non-partisan manner.
Our money system places impossible demands upon a finite world. Exponentially rising levels of debt, based on assumptions of future economic growth to fund repayment, will shudder to a halt and then reverse. Unfortunately, our financial system does not operate in reverse. The consequences of massive deleveraging will be severe.
Oil is essential for economic growth. The reality of dwindling oil supplies is now internationally recognized, yet virtually no developed nations have a Plan B. The economic risks to individuals, companies, and countries are varied and enormous. Best-case, living standards will drop steadily worldwide. Worst-case, systemic financial crises will toss the world into jarring chaos.
This book is written for those who are motivated to learn about the root causes of our predicaments, protect themselves and their families, mitigate risks as much as possible, and control what effects they can. With challenge comes opportunity, and The Crash Course offers a positive vision for how to reshape our lives to be more balanced, resilient, and sustainable.
9. Endgame: The End of the Debt Supercycle and How It Changes Everything (John Mauldin)
Description:
Greece isn’t the only country drowning in debt. The Debt Supercycle—when the easily managed, decades-long growth of debt results in a massive sovereign debt and credit crisis—is affecting developed countries around the world, including the United States. For these countries, there are only two options, and neither is good—restructure the debt or reduce it through austerity measures. Endgame details the Debt Supercycle and the sovereign debt crisis, and shows that, while there are no good choices, the worst choice would be to ignore the deleveraging resulting from the credit crisis. The book:
- Reveals why the world economy is in for an extended period of sluggish growth, high unemployment, and volatile markets punctuated by persistent recessions
- Reviews global markets, trends in population, government policies, and currencies
Around the world, countries are faced with difficult choices. Endgame provides a framework for making those choices.
10. Unexpected Returns: Understanding Secular Stock Market Cycles (Ed Easterling)
Description:
Why is the stock market acting differently in the 2000s than in the 1980s and 1990s?
Before you read any how-to investment books or seek financial advice, read Unexpected Returns, the essential resource for investors and investment professionals who want to understand how and why the financial markets are not the same now as they were in the 1980s and 1990s. In addition to explaining the fundamentals, this book takes you on a graphic journey through the seasons of the market, tying together economics and finance to explain the stock market’s cycles. Using comprehensive full-color charts and graphs, it offers an in-depth exploration of what has changed over the past five years – and what you can do about it to avoid disappointment with your investments. This unique combination of investment science and investment art will enable you to differentiate between irrational hope and a rational view of the current financial markets. Based on years of meticulous research, it provides the sensible conclusions that will drive your future investment choices and give you the confidence to rely on your investment outlook, whatever your financial strategy.
11. Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned? (Steve Keen)
Description:
Debunking Economics – Revised and Expanded Edition, now including a downloadable supplement for courses, exposes what many non-economists may have suspected and a minority of economists have long known: that economic theory is not only unpalatable, but also plain wrong. When the original Debunking Economics was published back in 2001, the market economy seemed invincible, and conventional “neoclassical” economic theory basked in the limelight. Steve Keen argued that economists deserved none of the credit for the economy’s performance, and “The false confidence it has engendered in the stability of the market economy has encouraged policy-makers to dismantle some of the institutions which initially evolved to try to keep its instability within limits.” That instability exploded with the devastating financial crisis of 2007, and now haunts the global economy with the prospect of another Depression. In this expanded and updated new edition, Keen builds on his scathing critique of conventional economic theory while explaining what mainstream economists cannot: why the crisis occurred, why it is proving to be intractable, and what needs to be done to end it. Essential for anyone who has ever doubted the advice or reasoning of economists, Debunking Economics – Revised and Expanded Edition provides a signpost to a better future.
12. Debt: The First 5,000 Years (David Graeber)
Description:
Before there was money, there was debt
Every economics textbook says the same thing: Money was invented to replace onerous and complicated barter systems—to relieve ancient people from having to haul their goods to market. The problem with this version of history? There’s not a shred of evidence to support it.
Here anthropologist David Graeber presents a stunning reversal of conventional wisdom. He shows that for more than 5,000 years, since the beginnings of the first agrarian empires, humans have used elaborate credit systems to buy and sell goods—that is, long before the invention of coins or cash. It is in this era, Graeber argues, that we also first encounter a society divided into debtors and creditors.
Graeber shows that arguments about debt and debt forgiveness have been at the center of political debates from Italy to China, as well as sparking innumerable insurrections. He also brilliantly demonstrates that the language of the ancient works of law and religion (words like “guilt,” “sin,” and “redemption”) derive in large part from ancient debates about debt, and shape even our most basic ideas of right and wrong. We are still fighting these battles today without knowing it.
Debt: The First 5,000 Years is a fascinating chronicle of this little known history—as well as how it has defined human history, and what it means for the credit crisis of the present day and the future of our economy.
Dec 222011
Source: Washington Examiner
Ohio homes that paid an average 8.51 cents per kilowatt hour for electricity in 2005 were paying 11.32 cents, on average, last year, according to information from the U.S. Energy Information Administration. The 2010 price was below the national average of 11.54 cents per kilowatt hour.
Read more at the Washington Examiner: http://washingtonexaminer.com/news/2011/12/ohio-electric-bills-rise-33-pct-over-5-years/2019696#ixzz1hGbkD6WH
Guest post by Stephen Johnston
Partner – Agcapita Farmland Investment Partnership
My purpose today is to leave you with some hopefully constructive ideas to mull over the holiday season. Most of all I want to give you what I believe will be a compelling recap of the rationale for direct, unlevered farmland investments in Canada.
Let’s turn our attention first to the matter of leverage. In todays volatile and alarmingly correlated markets, we believe most investors should avoid investments with material operating or financial leverage even more so when underlying assets have demonstrated high volatility themselves – this amounts to piling risk on risk and with that the magnitude of potential losses. The markets are finally returning to the idea that capital preservation should be the average investor’s first and foremost concern.
Financial leverage (at least as it has come to be used in the last 15 or so years) is the logical but abused investment tool of a great 30-year period of declining interest rates. I know this may seem counter-intuitive in a negative real interest rate environment, but I believe in the short to medium term most investments should incorporate less leverage rather than more. The reason is the lethal combination of increasing volatility and leverage or in the case of currently heavily indebted sectors (e.g. the finance, insurance & real estate or “FIRE” economy), de-leveraging. As a rudimentary example, we are now in a market where there is a pronounced difference between buying an asset using 100% equity or buying an asset with 25% equity and 75% debt. This was not often the case over the last 2 decades – leverage, both operational and financial, was virtually always your best friend.
We are moving into a period where “margin of safety” is your new best friend. Leverage is no longer a universally superior return enhancement strategy. On a purely cynical note, leverage has increasingly been employed with a view to enhancing management returns (who disproportionately share in the upside but not the downside) rather than investor returns. Remember that you are always free to create leverage yourself in the way you finance your investments rather than having management dictate the level of leverage for you. In this scenario, you also have the added benefit of being able to vary your leverage over the life of your investments. Of course, margin of safety returns are much more difficult to find and require more investment selection skills than the “leveraged beta returns” that have been passed of as “alpha returns” over the last 2 decades.
At the risk of being accused of talking part of my book I want to move to a discussion about the appeal of Canadian farmland. I believe it stems from some highly unique and increasingly sought after characteristics – low volatility, low correlations to traditional asset classes, high risk adjusted returns, strong linkage to emerging market growth with limited political risk, reliable cash-flow generation and, if structured correctly, minimal counter-party risk. Taking each of these in turn:
- Volatility: Farmland prices exhibit low volatility in general and in particular when compared to listed equities. Canadian farmland prices have experienced approximately 1/4 the volatility of the S&P 500 over the last 20 years.
- Absolute Returns: Farmland typically generates higher absolute returns than listed equities over most measurement periods. The combination of lower volatility with these higher absolute returns leads to one of the most important financial qualities of farmland – high risk adjusted returns or Sharpe Ratios.
- Risk Adjusted Returns/Sharpe Ratios. Investors in public equities are being asked to accept nominal returns below 6% over long periods but with increasingly high price volatility. Meanwhile, farmland generates higher absolute returns but with lower price volatility. The result is that farmland consistently generates superior risk adjusted returns over public equities – often by a substantial margin. Investors are beginning to realize that they are not being properly compensated for the risk/volatility of public markets and we believe that farmland is becoming the beneficiary of a secular reduction in listed equity exposure amongst investors. In the face of poor public market Sharpe ratios, investor capital is wisely moving elsewhere – one of those places is farmland.
- Correlation: Farmland has a low correlation to traditional retail investments – public equities and bonds and commercial real estate. Most of these traditional retail investments are exhibiting high positive cross correlations so it is very difficult for investors to construct diversified portfolios with the mainstream options. So for investors looking for genuine diversification, allocations to non-traditional and uncorrelated sectors like farmland continue to grow in appeal.
- Emerging Market Linkage: As emerging markets develop, the consumption of energy and agriculture commodities increases rapidly at the early stages of GDP/capita growth. However, recent events in SinoForest should highlight the difficulty of making direct investments into emerging markets. By way of contrast, direct investments into farmland in developed nations provide linkage to emerging market growth but without political risk, opaque accounting, dubious legal systems – the list goes on.
- Cash-flow: By cash renting (i.e. leasing the land to farmers for 100% upfront cash payment rather than operating) an investor in farmland can look forward to reliable cash-flow (on the order of 6-7% gross pa) wiithout operational risk. In addition, as cash-rents tend to track land prices with a lag, farmland rental cash-flows tend to be inflation hedging themselves.
- Minimal Counterparty Risk: The recent bankruptcy of MF Global has shown that investors cannot afford to be complacent about counterparties. It is increasingly apparent that many financial intermediaries only appear to be well capitalized because risks, where apparent, are thought to be hedged. Via hedge transactions, intermediaries argue that net exposure, rather than gross, is the key measure for investors to consider. This is not the case and where there is a concentration of risk in critical counter-parties (e.g. AIG), in a world of high positive correlations across markets and asset classes, hedges can fail leaving catastrophic gross rather than net exposure and therefore bankrupt counter-parties behind. It is because we believe that counter-party risk remains opaque and non-trivial that direct farmland investments make sense to us – an unlevered portfolio of farmland has no counter-party to fail.
In addition to the qualities above, Saskatchewan farmland also trades at a demonstrable discount to global averages which I believe provides the critical margin of safety necessary for value investments. Saskatchewan price increases over the last 4.5 years (the period over which Saskatchewan farmland prices began to accelerate) go a long way to bearing out the existence of this “margin of safety”:
- Alberta farmland returns (2007 to present, ex rents) – 6.4% per year
- Saskatchewan farmland returns (2007 to present, ex rents) – 11.4% per year
The margin of safety appears to be a substantial 5% per year of additional return (excluding rental cashflows) in Saskatchewan. Recent data also appears to support the idea that the Saskatchewan margin of safety returns may be growing. In the first half of 2011, when Alberta farmland increased a respectable 4%, Saskatchewan farmland increased 12%. Not surprising given that Alberta farmland trades for approximately $1,400/acre on average while Saskatchewan farmland trades for approximately $550/acre on average.
Thank you for reading these letters over the course of the last year. I hope you enjoyed reading them as much as I enjoyed writing them. Perhaps it is true that we are all thwarted writers at heart. Until the New Year…
Kind Regards
Stephen Johnston
Agcapita Partners
Oct 272011
90 min presentation…worth it if you have the time:
Oct 272011
Oct 202011
Sep 142011
Choice quotes on the truth behind money printing. By Dylan Grice:
On the monetization of government debt:
So let me explain why I believe printing money to be a
fundamentally dishonest endeavour. Think about how it works. When the central bank, at zero cost, increases the monetary base by 1%, where does that money go? Answer: into the market for government bonds. Since printing the money to buy government bonds costs nothing, government revenues are obtained ostensibly for free. Of course, it buys those bonds in the secondary market rather than from the government directly, and the pretense of an arm’s length transaction between government and central bank is thus maintained, with all parties claiming a separation of monetary and fiscal policy. But it’s only a pretense.
On the blame-game, that has historically turned violent:
The economic hardships this clandestine tax operation imposes are real and keenly felt. But because no one knows from where it comes the enemy is unseen.
Thus, during great inflations, societies turn on themselves with each faction blaming another for its malaise: the third century inflation crisis in ancient Rome coincided with Diocletian’s infamous persecution of the Christians; the medieval European debasements coincided with surging witchcraft trials; the extreme Central European hyperinflations following WW1 saw whole societies blaming their Jewish communities. More recently, the aftermath of the historically modest asset inflations in the tech market and the US real estate market have seen society turn on “fat-cat CEOs” and “greedy bankers” respectively.On the fallacy of economic thought:
To this I would reply that every right thinking person wants to see job creation. Those advocating the creation of inflation, or fiscal stimulus are doing so because that’s what the system of logic known as ‘theoretical macroeconomics’ teaches.
Yet this system of logic with its deeply flawed epistemological foundations is what brought us here in the first place! The macroeconomic body of knowledge represents no such thing – a cacophony of faiths would be more accurate.
The instruments and gauges it recommends policy makers rely on – CPI, trend growth, output gaps, NAIRUs, budget deficits, debt/GDP – are subject to such wide conceptual ambiguity, not to mention estimation error, as to render them utterly meaningless. The fact is the captains of our ship have no reliable gauges. They have no understanding of what a yank of this lever, or a push on that button will ultimately achieve.
They just think they do.
On living in a fantasy world:
…people prefer a false promise to a flat refusal
On gold:
…gold has no export sector, no pop-economists to be swayed by, and no populists to pander to. Gold might be a mere lump of dense, useless shiny metal, but it’s one which crackpot central bankers can’t print.
Indeed, benchmarked against the printing of The Ben Bernak, the price of gold at which the US dollar would be fully gold-backed is now $10,000.
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“I think the Fed is underestimating the severity of the coming economic downturn. Essentially they spent their bullets. It is very difficult to follow through with QE3 right here, because you have gold prices going ballistic, and you have the dollar being very weak, and so there are unintended consequences with implementing QE3 right here.” — Marc Faber
Recent audio interviews with a few market gurus:
Jul 282011
If you’re in the same camp as David Rosenberg and Gary Shilling you believe that the economy is in the throes of a deflationary cycle.
Whether or not I agree is irrelevant to this article. However I’d like to point a critical flaw in the deflationist’s investment strategy.
A deflationary economy will cause bonds to rally. This is because the present value of future payments rises with the purchasing power of a dollar. The purchasing power of a dollar rises if prices fall. This is true of the first effects of a deflationary spiral, and at this point the logical strategy is to own long-term government bonds.
It’s the second round effects that most deflationists fail to fathom – this is where the long term government bond strategy fails. If the economy was truly gripped by deflation, the banking system would collapse, risk assets would plummet, businesses would fail and millions would be added to the unemployment lines. (Debating whether these are the causes or effects of deflation is as fruitful as tracing the egg-to-chicken-to-egg.) The point is that if deflation grips the economy, business activity will plummet.
As business activity falls, government tax revenues drop and spending (to stimulate the economy) rises. Consequently, one might find that a deflationary episode increases budget deficits and, for an already indebted country like the United States, the risk of default. As default risk rises interest rates rise to compensate bond investors for the additional risk. As interest rates rise, bond prices fall.
So you can see how the typical deflationist strategy of investing in long-term goverment bonds could become an investing nightmare. Always watch for the secondary and tertiary effects of a trend, particularly when an economy, like the US today, is operating somewhere outside of its ‘normal’ state.
