Saturday, September 12, 2009

Inflation vs. Deflation

The following is a radio show interview with Jim Puplava of the PFS group and Peter Schiff of Europacific Capital. Last week Jim interviewed Robert Prechter, who is the leading voice in the deflation camp, and this week he took Robert's thoughts and then asked Peter for his response. To hear last week's interview with Prechter, or to download the interviews in mp3 format, you can click on the link below. Otherwise, please enjoy, this information is incredibly important at this time in history:

Friday, September 11, 2009

The Bull Tests $1,000 Again

Its been a while since I've talked about the gold market but with it crossing over the psychologically important $1,000 mark this week I thought I would take a minute to discuss where we are in this long term secular bull market.

The price of gold in dollar terms has very little importance to me regarding its fundamental value, but the price of gold has great importance to the general public; the masses.

Getting off the highway this morning at my exit to work, I noticed a small sign on the telephone pole that said "We Buy Gold and Silver," and a telephone number.

I thought back to 2001 when the very first signs began to appear on telephone poles saying "We Buy Houses." Do you remember those? They were everywhere by 2005. People were fighting for locations on the telephone poles.

I said during all of last year that I felt 2009 would be the year that we crossed over the $1,000 mark and the very first of the general public would begin moving into the market.

Secular bull markets move through four phases. The following outlines where we are in relation to gold:

1. Pessimism: 2000-2005 (The last bull market for gold peaked in 1980, and after 20 years of falling prices the general consensus was that gold was the worst investment out there)

2. Skepticism: 2006-2009 ( This is where we currently find ourselves in the market. During this phase investors have entered the market but have be shaken off and sold when the prices fell.)
3. Optimism: 2010- 20?? (During this phase investors enter the market that understand the fundamentals behind the move. Hedge funds, Mutual Funds, and the wealthy will enter)

4. Euphoria: 20?? - 20?? (This is when the masses enter the market. They will come rushing in as a herd and drive the prices to unimaginable levels. They will buy based on prices rising, not fundamentals. The euphoria will end when the public agrees in consensus that prices cannot fall. The masses will then be slaughtered)

Where will prices go from here? I have no idea. They may fall back down to $600. The important thing is that prices should rise from here based on fundamentals surrounding the global economy, just as the American dollar should fall in value.

If you understand that we are in a long term secular bull market, you should be rooting for prices to fall. All that will matter when we reach the euphoria stage years from now will be the number of gold and silver ounces you own.

It took decades for the DOW Jones to cross the psychologically important 1,000 mark, but it finally pushed through back in the early 1980's. Once it did, the market never looked back.

The same is on its way for gold. Once it crosses $1,000 and holds that mark, we will never see three digit gold again in our lifetimes.

Wednesday, September 9, 2009

Sea Shells and Sports Cars

I would like to take a moment and try and make two simple concepts even simpler. The first concept is that of debt.

There is a clock running to my left and a clock that is running at the very bottom of this page. One is approaching $12 trillion and the other is approaching $75 trillion. But what does that mean? Those numbers have no significant impact on the lives of Americans. In simple terms: they could care less.

The situation is easier to understand when you think about it in terms of an every day person.

Imagine someone borrows $1 million. They go out and buy a new car, a new house, a new boat, and a new wife. If that person did not have to pay back the million they would be rich.

But what happens when they do have to pay it back? This is the important question. Not only does the new spending have to go, they must also cut expenses below what they were before they borrowed the money. They must reduce their standard of living significantly.

The second concept is even simpler:

Imagine that three young men wash up on a deserted island. They decide to divide the labor between them so they will be more efficient and productive. One gathers coconuts. The other fishes. The third plants banana trees. The coconut gatherer and the fisherman exchange their products with each other.

But what about the banana planter? It will take a couple of years before his bananas are ready to eat; how will he survive?

The other two men recognize the benefit of what he is doing and look forward to eating bananas. They decide to give him coconuts and fish.......with the understanding that they will get paid back in bananas when they are ready. To effect the transaction, the banana planter issues "money" equal to his entire crop. It is understood that these little shells may be exchanged against his bananas, and thus do the other two men begin amassing their fortunes, feeling wealthier each time they acquire another shell.

But what if the banana planter decided to double the supply of money? What would be the point of it? The fish and coconut suppliers might think they were getting richer-but there would still be only so many bananas, no more.

These two examples help a beginner in economics and finance see how our global economy works. The United States has run up a massive debt and has positioned itself as the "wealthiest" country on the planet. Since they have no coming banana crop to pay back this debt, they have just decided to pay it back with sea shells.

How would you feel if you were the gatherer of coconuts or the fisherman? What if the banana planter decided to stop growing banana's, go on vacation, and just hand out shells instead of bananas?

Do not be confused by the large numbers or the fact that it is our country borrowing instead of an individual. The concepts are the exact same, and the story will end the same way it will for the three men on the island and the man that decided to borrow $1 million and spend it on luxuries.

Monday, September 7, 2009

China Is Selling, The Fed Is Buying

Over the past twenty five years the United States has financed its growth with a debt binge. Consumers, corporations, and the government have borrowed the greatest amount of money in both nominal and percentage terms in human history.

As discussed in great length since this web page begin a little over a year ago, this debt has been financed through the savings of foreign countries. They have worked hard, produced goods, and saved their money. They sent those goods to us, and we borrowed their savings in order to consume the goods.

The following is the recent timeline for US treasury bond purchase from China:

  • In 2006, China and Hong Kong accounted for more than 50 percent of the increase in the amount of Treasury debt sold to the public …

  • In 2008, their share had fallen to 22 percent as the U.S. government increased its public debt by a record $1.2 trillion …

  • In the first half of THIS year, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasury bonds that were sold — and now …

  • In June, China became a net SELLER of U.S. Treasury notes and bonds.
In the summer of 2007 the rest of the world began to shun the purchase of corporate and mortgage debt in the United States. They stopped financing the housing bubble and corporate merger/IPO mania.

The results of this have been clearly seen in our economy and housing markets.

In June of this year they have officially shun the purchase of our treasury bonds. This is the government's debt. Obama's spending party.

However, the bond prices have remained high as a record amount of supply ($2 trillion deficit this year) and a collapsing demand ($25 billion net treasury debt SOLD by China in June) have become the new market atmosphere.

How is this possible? For an in depth understanding, please see the article below written by Chris Martensen called the Shell Game. (Post: Sunday August 30th)

In simple terms, the Fed is now financing the vast majority of government debt. They are now the buyer of almost every new mortgage in our country. (See the Post below titled "Four Headed Monster" on August 12th)

The train that I have been discussing has now run over the edge of the cliff. We are officially bankrupt as a nation in every possible aspect. Our only form of financing is the printing press, and it is running full steam.

China has already figured it out. They have taken the Fed's purchase of government debt as the opportunity of a lifetime to sell their dollar based assets. They have announced massive purchases of gold, silver, copper, and have set up long term oil contracts with surrounding nations. They are purchasing every form of commodities they can get their hands on as the dollar remains artificially high and commodities remain artificially low.

They will continue this strategy along with setting up trade agreements based on non-dollar currency transactions. The clock is ticking, and everyone is now moving as quickly as possible to protect themselves from the coming dollar collapse. Americans are oblivious to what is taking place and can only cheer on the new "bull market" in front of them.