Sunday, May 8, 2011

Stampede for fiat cash...

When this whole inflation, hyperinflation, fiat currency debasement scam started getting legs, I NEVER thought that the level of hysteria and disinformation could ever reach the proportions that it has. I have been surprised. Mania is mania and I guess we are about to start another one...however this mania should have much stronger legs than the hyper inflation fad has had.

Don't get me wrong, I have a lot of respect for some of the blogs that I link to and for a good reason - the authors are very smart guys and the blogs are very good resources. I have high regard for them. However, the problem is that many smart people and investors have married economic theories. Bill Gross and his minions are among those. Warren "Please print me some money Ben cause I can't see anything to derail the recovery  and don't ever buy Treasuries" Buffett is another one. As we know the market trades based on liquidity, and theories and fantasies, especially economic ones, seldom perform in harmony with said liquidity.

To see just how deeply wrong and misguided the thinking is and powerful the disinformation is you need only look at a few charts. Below is a chart of the T-Bill Yield, the shortest duration bond issued by the US government. What we can see in this chart is just how wrong people have it. The yield is collapsing...and yes it CAN go below zero.

To illustrate what is going on, I will use an analogy, Pictet, it is an unleveraged bank. A personal objective for me is to stay away from the leveraged financial system with as many assets as possible exposing as few assets as possible to the leveraged system for alpha generation and risk management. Pictet one option that is available to park assets in relative safety, there are others. However, the system works like this - you pay them 1% to custody your cash. It appears that this is the same thing that is occurring with Treasuries. Market participants will apparently be willing to PAY not receive yield, as it appears according to this chart, to give custody of cash to the US Government as opposed to the banking system. Damn...the Fed did a good job. Ben should really be proud of himself, though I am quite sure that he is very fearful right now. The guy gets everything wrong, makes everything worse and now he has to look into the abyss! Again, Ben...nice job and do you see this chart?

I think that this chart says it all and that I don't even need to add any other. However, the bull market that is playing out in the long bond that I have shown in previous articles is also telling. It certainly has not confirmed the highs of inflationary assets like junk bonds, commodities or equities - something that many people have been happy to overlook - rather powerfully. Mania is an amazing thing and people have nearly entirely disconnected from reality during this one. It is fitting that the mania started its final craze with the real-estate lending debacle in 2001 when Bin Laden struck the World Trade Center and the credit fueled commodity mania ran its course culminating on his assassination.

Of Silver and Gold Black Gold we think...and re-think...

I am well aware that some smart people have been long silver (hyperinflationary metaphor) for quite a while. However, I must point out that these longs were dangerous and a tedious slog upwards - the shorts will likely be far more efficient - though less popular. The reality is, that for me, silver has a price tag that will likely ultimately wind up reaching the $1's and $2's. Yes, you heard me correctly - my target for silver is $1.50. One dollar and fifty cents. Below the low that triggered the breakout of this parabolic fake out mania. So anything below 4.39 is will do...I think we will get to $1.50 over the longer term but I will give myself some berth as far as prices go...anything reasonably below 4.39 will full fill the next capitulation. This will be brought about by severe economic contraction triggering very weak end-demand for products that require silver, large amounts of overhead supply that will provide copious amounts of available silver (paper or otherwise) to be offered to any willing buyer and a general need to convert a whole gamut of deflating inflationary assets into cash.

For gold, I am a little more optimistic as I believe that gold will fare better and hold the $400 to $600 range simply as a fear price. What one needs to keep in mind here, however, is that the dollar's purchasing power will increase dramatically over the next years and that the $500 you get for an ounce of gold in the future will likely buy the same or more house, food, clothing or stocks as it does now. In fact, I believe that it will actually buy significantly more of many of these things than it does now. But the more desirable asset will be cash for the foreseeable future and gold will suffer due to that.

The inverted chart of oil could not breakdown out of its bull flag and has remained neatly inside the patten until last week when it officially reject the bottom of the flag and appears to be off and running for a breakout to complete wave 5 of a major bull pattern which should ultimately take Oil to below $10 a barrel. Remember, I am referring to an inverted chart...I will post an update later today. But Oil has behaved very very technically and will likely rally hard on the inverted chart which means sell down hard in real life.

Of Fiat we sing...

I find it truly stunning than the concept of the death of a system would be associated by so many professionals and very smart people, including Jim Rogers, with a collapse of the currency of the system. This represents a grave miscalculation of the human animal and the nature of our debt based currency and its economics. The reality is that the dollar will likely retrace a sizable amount of the naked short that began in the early 1900's. After that, the likelihood does favor an official devaluation which will create another round of bankruptcy when it happens...but till then people are going to go broke trying to understand why the collapse of a fiat system will result in a dramatic strengthening of the purchasing power of that system's currency. If you hold Gold through the whole episode, I think that this is a reasonable and a relatively safe will be rather volatile, but so too will official debasement. At least holding old will alleviate the timing risk of trying get in front of official debasemnt...tough there are better ways to go about that.

Though I have explained this story adnauseum...I understand that its a very difficult story to understand. That Ben BURNanke, Tim G-HEIST-ner and the Government as a whole, would commit suicide by creating the foundation for the crisis that we are now beginning and makes it impossible for them to repay the national debt, is beyond difficult to imagine. Everyone thinks these guys are doing everything they can to facilitate what appears to be currency debasement, so that its remotely plausible for the US to actually settle its national debt and its obligations. Significant debasement, of course, sounds logical but its time has not come yet - it will. But again from my chart above, what we see is a totally different story than the obvious hyper inflation, fiat currency and dollar to zero stories that appear absolutely everywhere...the obvious trade is almost never the right one and this time appears to be no exception.

I see, rising taxes, austerity, budget cuts, deflation, unemployment, municipal and corporate bond defaults and general financial destruction. We probably need to throw in a few wars and a few more revolutions for good measure...but as I said, this will not be pretty. Nor is it going to be kind to those who have it wrong. There is not an abundance of unencumbered liquidity out there, so really big trades being caught wrong footed in commodities, stocks and bonds will likely have dramatic consequences.  

For the record, below is the two year bond which broke out after a 5 month bull flag. If one would have thought that the credit outlook for US debt would demand higher rates...this chart does not show it. What is DOES show is that market participants are not feeling great about risky assets and will put up inordinately low yield and even a dimmed outlook for Treasuries rather than hold more risky assets.
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