The following is excerpted from the March 6th Edition of Notes From the Rabbit Hole:
While NFTRH was highlighting risk leading into the initial phase of inflationary blow-ups – and surely Egypt, Libya and other strained global situations are symptomatic of chronic and disenfranchising inflation – it is important to understand that headline events do not move markets, beyond the very short term. Indeed, I saw enough last week to nudge the very short-term risk profile toward neutral; and in an age of inflation onDemand one should question a net bearish stance more often than not. Inflation ran the 2003-2007 bull market quite well until ultimately, the soufflé pancaked in 2008.
Bloomberg’s top two headlines at the end of the week: “China’s Wen Targets Inflation as Top Priority to Cut Risk of Social Unrest” and “US Stocks Rise as Economic Optimism Overshadows Increase in Oil Prices”.
Back on message, inflationary policy is what the asset spectrum feeds upon, as the ‘ruling’ class (including you and me ladies and gentlemen, as asset speculators) benefits to the detriment of the non-investor classes, in the US and the world over. People are suffering due to the cheapening of the money used as the medium of exchange for their wages, even as we go forth and speculate on some high potential gold explorers, uranium prospects, emerging, productive and/or resource rich markets, and other areas that offer opportunity in an inflationary world.
Enter, the first Bloomberg headline above. In the article http://tinyurl.com/nftrh126a, Premier Wen Jiabao states “We cannot allow price rises to affect the normal lives of low-income people” to which I would answer “Mr. Premier, you have already allowed inflation to affect the normal lives of low income (really low income) people, because you have already promoted and feasted upon an epic and ongoing policy of inflation. You now attempt to stuff the genie back in the bottle because you see some frontier markets blowing up due to global inflation dynamics and perhaps wonder how long it will take for the flames to reach your homeland.”
From my vantage point in the downsized productive (i.e. manufacturing) segment of the US economy, I have watched a myopic and collective greed in the United States work in tacit partnership with China to cheapen the entire concept of free trade. The US, manufacturer of the world’s reserve currency, has been able to leverage and monetize its reputation – built of sweat equity in the earlier parts of the previous century (for ref. see my first ever public article from 2004, Frankemarket Lives http://www.biiwii.com/frankenmarket.htm) – in partnership with China, by selling Treasury bonds, printing money and creating a heretofore limitless inflationary drag on the US currency.
Edit: for an unbelievable view of that very different America, see here: http://tinyurl.com/biiwii3811d
China, in pinning its currency to the dollar, and accepting massive volumes of USD denominated instruments in exchange for the work and productivity of its people, has inflated right along with the US. Typical of politicians, the Politburo now tells the people the straight deal after it is too late and presumably upon feeling an implied threat as indicated by the Egypt and Libya uprisings. China’s emerging manufacturing economy has been built by direct, indirect and ongoing inflation.
A robotic talking head sums up the second article http://tinyurl.com/nftrh126b:
“It’s a battle between the negative geopolitical environment versus the very strong economic fundamentals,” said Benjamin Pace, who helps oversee about $420 billion as the New York-based chief investment officer of Deutsche Bank Private Wealth Management. “The economic environment is very equity friendly. The current geopolitical environment and its impact on oil prices, not so much.”
No sir, it is a battle between the geopolitical manifestations of inflation and the seemingly strong economic fundamentals produced by said inflation as grains, clothing materials and energy costs rise right along with precious metals in a not so tacit indictment of these “strong economic fundamentals” that you speak of. During the 2003-2007 cycle, the same thing happened as a result of policy makers’ refusal to allow the economy to purge itself through a hard downturn, which would have eventually set the stage for a new and lasting up cycle. No, in and around 2000, the game became inflation onDemand; inflation as economic stimulant; inflation… it’s what’s for dinner.
Short-term, global and especially US markets are back in the game of blaming oil for the market’s ups and downs. This is similar to the ending stages of the 2003-2007 cycle. Be aware that the majority of ‘Hope 09’ (and ‘Full Hubris 10’, ‘Suck-in 11’, AKA the inflationary cyclical bull born 2008, died… ?) has been attended by a positive correlation to oil, copper, food prices… the stuff that people need; which brings us right back to square one of this segment… the effects of inflation are beginning to erode peoples’ lives and it is becoming obvious. The actual inflation has been ongoing up to now.
Going forward, global policy makers will not be able to merrily inflate their way to bull nirvana. See Wen above; see Trichet last week talking about euro rate hikes. See Ben Bernanke… well, our Fed chief has not quite gotten the memo yet. But even in the US, the winds of change appear to be blowing. Whether our congress puts a stop to it or natural market forces do (I’ll take ‘b’ Alex), the inflation cannot go on uninterrupted forever.
And this, my friends, is where investing and/or speculating becomes tricky. This is where the specter of deflation or more accurately, a deflationary ‘event’ comes into play. At the root of this dynamic is the case for the NFTRH ‘gold stocks above all others’ stance, because it is in gold’s ‘real’ price that the gold mining industry finds its most positive fundamentals, with gold outperforming the things of positive economic correlation, including those that feed into gold mining cost structures.
Increases in gold’s ‘real’ price are most pronounced during a collapse of an inflationary construct, as in 2000 and again in 2008. This is usually accompanied by deflationary hysteria and if one is prepared, epic opportunity. Silver’s impulsive increase in relation to gold argues that the construct may not yet be ready to roll over since a positive silver-gold ratio (SGR) indicates that a sea liquidity continues to rise.
On that note, let’s now transition to the precious metals, commodities, etc.