Looking Beyond The Euro Crisis & Understanding The Big Picture

From The Future Tense:

Chris Martensen released an excellent piece this week where he discussed how people behaved in Weimar Germany between 1918 - 1922, the period of time just before hyper-inflation took hold.

This was documented most famously in the book "When Money Dies" by Adam Fergusson. During that period of time Germany was swept with intense bouts of deflation. The government continued to step in during the process and provide printed currency.

Over the years it appeared as if this currency was having very little effect on the price of goods. Just as things would begin to pick up in terms of prices there would be another major downfall creating the specter of massive deflation ahead.

Under the surface, just as today, there was an enormous amount of new money being created. The major difference today which is argued (correctly) from the deflationists is that we live in a credit based economy that relies far less on paper money. This credit has the natural tendency to contract, like gravity, when it becomes to large to be supported by the income levels of the society holding the debt.

This is the exact situation we find the world in today. We are in the process of one of the greatest monetary experiments in history. Never in history has the world been encumbered with so much debt at the consumer, banking, business, and government level. On the opposite side of the ledger, the world has never seen a global central bank response (money printing) with the size and scope we are witnessing today from every country around the world.

The unstoppable force has met the immovable object.

The only sure prediction I have of the future is that the outcome will be a complete disaster. The important, and far more difficult to determine, prediction of the future is how it will play out before we reach that ultimate point of "reset" or annihilation of the current monetary structure.

My long term (5 year) blue print of how the process would unfold, that I have reviewed an updated for well over two years running, is that the global economy and financial markets would experience one more massive deflationary shock; similar to the Lehman experience.

The reason why I feel deflation will occur first is because the sovereign debt crisis has begun first in Europe.Europe, unlike every other major developed country, does not have a central bank with an unlimited ability to print paper currency and purchase debt. The ECB has had to, and will continue to have to, play defense as Europe continues to implode.

It will take a crisis in order for the politicians to come together and beg for printed money. The actual origin of this crisis is unknown. It could be the failure of a bank in Spain, Italy defaulting on its government debt, or Greece finally leaving the Eurozone.

Once this event takes place there will be a serious bout of deflation spread across the financial system. With the global economy rapidly slowing down, discussed in detail in Europe's Virus Is Now Global Contagion, there could possibly be a "perfect storm" ahead for the markets. This topic was discussed this week in an interview with Nouriel Roubini.

My contention has been that during this coming "perfect storm" it will provide a tremendous buying opportunity for assets that will perform well during an inflationary response. I have discussed my personal favorites in the past.

Why do I think this will be a strong buying opportunity?

Once we move past the European disaster and subsequent response we will move on to the larger countries in the sovereign debt crisis; Japan, the UK, the United States. All three of these countries face no such central bank "limitations" that the European central bank faces (they have unlimited and unconstrained ability to print money).

Politicians and economists will look at the European experiment as the incorrect way to handle a sovereign debt crisis. They will try and front run any market moves out of their sovereign debt with a massive QE policy response. This may occur in coordinated fashion from Japan, the UK, and the United States with support from the IMF through the use of SDR's (global currency units that can be printed with unlimited capacity).

Those betting on another deflationary downturn during this coming chapter of the financial crisis will be caught on the wrong side of the trade. You will see gold and silver enter the mania stage of their bull market. The price of commodities, and in some areas real estate, will surge globally. Currencies and well managed government debt markets will see capital flood onto their shores as it flees the debasement of the "Big 3."

Most likely when things spiral out of control there will be price controls and trade wars; possibly followed by real wars. Then there will be a complete "reset" of the current monetary system. The monetary system has "reset" on average through history every 40 years. The current monetary structure was created in August of 1971. The reserve currency of the world, the US dollar which people assume will be in place forever, will also come under pressure.

Back to Martensen's article, where he provides a chart that many of us have seen many times, only he has highlighted certain points of time. The following shows the price of gold during the collapse of the German currency in the early 1920's. You can see during the bull market run as the currency was being debased thatthere we periods of massive corrections in the paper gold price. During every one of these pull backs the people were told by their government that the situation was under control. Most of the people that purchased some gold as insurance to protect their life savings sold their gold during the pull backs.

What happened next is the story that has been told numerous times. After the third major decline in gold and stabilization in the currency, complacency set in and most German citizens sold their gold for good. By the time the final round of inflation set in it was too late. A life savings in paper investments (stocks, bonds, cash) disappeared almost overnight.

Those that were not tracking the "paper" price of gold but continued to focus on the paper money printing became the new wealthy of Germany.

The following chart shows the current bull market in gold beginning in 2000 and running through July 2012. It shows multiple periods of massive pull backs and extended consolidation (we are currently in one of the periods).

This is when people become afraid to both purchase precious metals and they sell their current positions. They are lulled to sleep and no longer focus on the paper money creation taking place around the world.

Where do we go from here? I think gold can possibly fall to $1200 and silver can possibly fall below $22 during the coming storm in the financial markets. Am I personally waiting to for those possible targets to purchase precious metals? No, I am a buyer today and I will be a buyer if we reach those levels.

I do not focus on the "paper" price of precious metals. I watch the money creation. Do I think we will enter a hyper-inflationary period similar to Germany in 1923? Very unlikely. I think the global "reset" will occur before we get there. A new monetary system will be put in place with gold involved in some fashion. Jim Rickards discussed this topic in detail in his incredible book Currency Wars. With a gold price somewhere above $55,000 you could realistically back a significant portion of the money and credit in existence and immediately halt an inflationary paper money run (this number rises by the hour with global QE taking place).

So Freaking Obvious (SFO)

From The Mogambo Guru, July 9 2012

By Richard Daughty, a.k.a., 'The Mogambo Guru'

I have long argued, until my throat is raspy and raw from rudely calling people "imbeciles", "halfwits" and "low-life morons", that facts and figures don't lie, and from them one learns, to one's paralyzing horror, that We're Freaking Doomed (WFD).

Of course, being brought up on a steady diet of television and movies, I always thought that the world would end with an invasion from outer space, maybe with aliens sucking our blood for the hemoglobin or invading our brains so that we become slaves, and the best we can hope for is to be ruled by beautiful hot-looking young women running around in skimpy outfits, as sometimes happened.

More probably, though, the end of the world would be fire-breathing monsters rising up from beneath the ocean, going on a murderous worldwide rampage after succeeding, where all other monsters have failed, in finally destroying Tokyo by stomping all over it and burning it up with laser beams shooting out of their eyes --  zzzt!  -- and we, hopefully, somehow, end up getting ruled by hot-looking babes parading around in high-heel shoes and very skimpy outfits.

It was only when I grew older that I learned, with a certain joylessness about the relative lack of pretty girls in skimpy outfits in the real world, of the actual reason why we are all inescapably doomed: A central bank creating so much money and credit over the years that the entire fabric of the economy changes into a disgusting mutant economy, everything horribly twisted and distorted, totally dependent upon government spending, riddled with corruptions, pandemic mal-investments and constant inflation in consumer prices.

Of course, I may be wrong in my cheery optimism, and it could be far, far worse.

Did I say "could be" worse?  Hahaha! That just shows you what a wonderful, delightful sense of humor I have!  How come nobody likes me and are all out to get me?

The truth is that it WILL be worse! Much worse! Unimaginably worse! Hahaha!

Notice how I bravely laugh in the face of disaster! Hahahaha! My arrogant bravado is real this time, and not like that time I lied when I said "Baby, I don't care if your dad catches us, just gimme some of that hot monkey love!"

Well, it turns out that I did not laugh when her dad actually caught us, but I laugh now because I know what is going to happen because the demonic central banks of the world are creating insane amounts of money and credit, on top of the staggering mountains of money, credit and debt they created over the decades, in yet disastrously more of their ridiculous and preposterous neo-Keynesian quackery.

And because I know what is going to happen, I am naturally hunkering down with some serious weaponry and a "don't trust anyone" attitude, hoarding gold, silver and oil, which gives me the courage to laugh the aforesaid laughs at the similarly aforesaid preposterous monetary crap of the Federal Reserve, the aforesaid idiotic foreign central banks for the same reason, and the laughably-inept and deeply-corrupt aforesaid federal government.

Few others will laugh, however, as they are, one-by-one, busted-out by inflation, and are finally reduced to scratching around in the dirt looking weeds and bugs to eat.

And their complete lack of humor about starving to death will be because they did not buy gold, silver and oil in reaction to all the inflation in consumer prices, which is what I typically screech about in absolute horror, that will be caused by all that new money and credit created for the last half-century by the evil Federal Reserve, and still being created to the tune of trillions of dollars a year today.

Even worse, as in "making my guts crawl with horror," most of all those trillions of dollars created by the Federal Reserve were borrowed by the federal government, to be deficit-spent by one idiotic Congress after another, until we are now bankrupted from accrued debt, which is assuming nothing bad happens, which it will.

Now, bankrupted is one thing, but inflation is quite another, and so let us take a look at an essay titled "Deflation - Nowhere To Be Seen" by Adrian Douglas of Market Force Analysis.

He has looked at the Continuous Commodities Index over the past ten years, and found that "in examining price trends, the U.S. is experiencing shocking price increases" in prices.

Indeed, as his chart shows, the CCI was at about 200 in 2002, and at 550 in the middle of 2012, which is a rise of 275%!  In ten years! Ten Lousy Years (TLY)!

This 275% rise in prices over a short ten years calculates out to a mind-blowing, yearly, compounded inflation of 10.65%!  The Rule of 72 says that prices will double in less than 7 years!

As completely astounding and as morbidly terrifying as it is, I scream in yet more terror that the CCI at 550 is still lower than a cyclical peak of about 640 reached 2008, and another peak of about 680 in 2011!!

Please notice the use of two exclamation points to indicate particular emphasis.  This obviously means something, and the presence of two exclamation points cinches it!  This is Bad News Aplenty (BNA)!

But what is the BNA? Switching to a snotty, sarcastic tone, I say "In case you are new around here and ain't heard, or are brain-damaged, it means We're Freaking Doomed (WFD), ya moron! Hahahaha!"

Like a drowning man clutching at straws, you nervously ask "So what is the CCI? Maybe there is something wrong there! Maybe this is not as hopeless as it looks, and the Mogambo is a big fat stupid jerk for being afraid of nothing! Id' love that!"

I'm glad you asked that question instead of asking me one that I can't answer because either I don't know the answer or I am pleading the Fifth, as in answering the query "Where in the hell were you until two o'clock in the morning?"

In this case, thanks to your fortuitous question, I can just cut and paste the answer from Mr. Douglas's essay, which is that "The CCI is an index of 17 different commodities namely: Cocoa, Coffee ‘C’, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Live Cattle, Live Hogs, Natural Gas, Orange Juice, Platinum, Silver, Soybeans, Sugar No. 11, and Wheat."

As to your question about "Maybe something is wrong with the way the index is calculated, and it makes things just look bad, and so Mogambo is a big fat stupid jerk after all!", Mr. Douglas deftly anticipates it, and punctures your slim hope by explaining that "The index is equally weighted so it is the geometric mean of these 17 commodity prices. This means that the price of the CCI cannot spike due to an increase in price of just one or two commodities. For the index to rise 10% all 17 components would need to rise 10% or one component would have to rise 500%. If oil were to rise tomorrow to $400/bbl and all other 16 components did not change in price, the index would only rise by 10%."

His next sentence is the one that should send you screaming in terror, jumping into your car, careening wildly down the street to buy more gold, silver and oil.

He says "This means that the CCI is a stable indicator of price trends."

Buying gold, silver and oil in the face of price inflation of more than 10% year, and in the face of yet more rampant, irresponsible, insane amounts of money-creation by the Federal Reserve and the other central banks of the world, is So Freaking Obvious (SFO) that one can only chortle with unrestrained glee, happily chanting "Whee! This investing stuff is easy!"