The Road To Hyperinflation
Posted on Sun, 06 May 2007 @ 20:37:38 PDT by Captain_Hook
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Private equity deals have replaced the consumer in continuance of expanding the macro-credit cycle, where the deals just keep getting bigger and bigger in the race to become more efficient operationally. This is how bankers are currently managing growth in the credit cycle, but with deflationary forces now bearing down on the commercial side of the equation too, to go along with an exhausted consumer, it must be recognized the larger cycle is set to wind down in coming days. This of course would not be good for inflation bulls if not replaced with something else to keep the larger monetary base growing.
Enter an accelerating liquidity cycle, where true to his promise, Bernanke is now aiding in the manufacture and deployment of money from helicopters, which will develop into hyperinflation as process unfolds. This is why gold is rising, albeit at a grinding pace due official measures to slow its ascent. In this respect it should be noted gold is actually doing quite well considering recently accelerating central bank gold sales aimed at hiding the inflation they themselves create. And as other factors come to bear on the bullion market, like the start of the monsoon-wedding season later this month, things could get interesting. In relation to slowing bullion sales in coming days, Neal Ryan, director of economic research at Blanchard & Co. was quoted yesterday saying, "we're going to see prices jump up and challenge the May '06 high in 2-3 weeks in my opinion." This seems to be a ‘fair conclusion’ to me given an increasingly tight supply mixed with rising demand (along with accelerating monetary debasement rates) is an optimum recipe for the gold price. Of course it’s impossible to know how all the factors affecting gold will come to bear in coming days, but one thing is for sure, more and more positives are falling in place. Here, John Embry of Sprott Asset Management also weighs in on the manipulation front, as follows:
If a deflationary episode is to be avoided, one of the costs will most assuredly be accelerating inflation in a textbook case of ever more paper chasing a limited amount of real goods and services. In the face of this I find it fascinating that many pundits acknowledge the longer-term attractiveness of gold but persist in trying to call short-term corrections. In markets as seriously manipulated as gold with the incredibly powerful fundamentals that it possesses, trying to be cute on corrections strikes me as a real mug’s game. The good news on the manipulation front is that it has become so blatant that it is revealing distinct signs of desperation, a necessary precursor to its eventual cessation.”
And if there is anything that’s going to accelerate an end to the present gold cartel, hyperinflation should do it. But you may say to yourself, how can one talk of hyperinflation before ‘true stagflation’ is proved. Here again, one thing is for sure, if you are depending on official statistics to prove any degree of significant inflation exists in the system one will never arrive at an appropriate view of reality due to manipulation of these statistics as well. Heck, I would go as far to say even those who publish shadow measures are not capturing reality either, where I would be more prone to look at rarely discussed monetary debasement rates, the ‘true inflation’, in assigning definitional framework. Be that as it may, here we see CPI estimates provided by Shadow Government Statistics are approaching 10 %, where when set against annual GDP growth, even the official numbers paint a picture of stagflation. (See Figure 1)
Figure 1
And here is what John Williams thinks ‘real’ GDP growth is running at these days. Let’s see now, negative GDP growth set against 10 % price increases. Yup – that’s stagflation all right. (See Figure 2)
Figure 2
And this is why I say things are actually getting so bad out there we now require hyperinflation to keep the economy afloat, where if the money is not to be borrowed into existence, assets must be increasingly monetized to prevent implosion. This is of course why the Fed no longer reports M3 growth (or bonds would crash), where it should be noted if shadow measures are correct, its components are now growing in the teens, but are surely destined to move far further into double digits if history is a good guide. (See Figure 3)
Figure 3
Hence, and as per our views espoused earlier this week, it’s my opinion the current episode of stagflation will be resolved with hyperinflation, whether through more natural means (meaning the money is borrowed into existence), or not. Of course if one is holding too many junior gold and silver stocks in your portfolio, you may be wondering why these supposedly inflation sensitive stocks are not discounting such a reality. And it’s difficult to blame investors for being a bit ‘yancey’ after yesterday, where gold broke higher, but many precious metals shares remain unimpressed, as has been the case for a very long time now.
In addressing this issue it makes a great deal of sense to start at the top, which is what most investors obviously do, that being buy the top performing and more highly liquid issues first. And in speaking of liquidity, if one is squeamish about a sector, which is the case regarding precious metals right now if recent COT data is any indication, then what would you do, buy the highly liquid large caps first or ill-liquid juniors? Naturally the answer is liquid large caps in case a hasty exit is desired. So, now you know part of the reason why precious metals shares are lagging in a larger sense, with particular emphasis on the juniors. Of course if more recent out-performance in the shares continues, the party will descend down the pecking order, where once the juniors finally begin to move, returns against their larger counterparts should reward the patient in well selected issues.
Along these lines, we had an interesting question from a subscriber last night regarding a lack of strength in the gold share group citing Jim Sinclair and his views on how the use of derivatives by gold producers to hedge production is a primary cause of this condition, and that for this reason royalty companies are the best place to invest. Of course the fact Jim controls a royalty company himself may have something to do with this train of thought, but I will leave such conclusions for you to decipher. Anyway, here is my response to this query, as follows:
“While your observation has merit, and is in reality a possible major definer of better invested future capital flows into the sector, at this point the primary reason shares are under-performing is more a function of psychology than any other. The current batch of crooks in financial services and government have done such a good job of convincing the investing population they don't need gold, they actually believe it, and the lack luster performance re-enforces this belief. It's a national conspiracy you know?
With this in mind, and in knowing the computers are quite simply programmed to fade the metals in systematic fashion, the illusions are maintained, and precious metals shares avoided, shunned, and effectively suppressed with programmed trading some 75% of total volumes in the markets these days. It's our institutional society at work you see. This too shall pass and reverse in good time, which will be best witnessed once the public becomes believers and directs more capital to resource and precious metals funds. But apparently not before the fate of precious metals shares is questioned thoroughly.” And I would just like to add that one cannot blame investors for being ‘turned off’ precious metals, or even afraid of the sector given the savagery used by officials in managing prices in the past. There is not a single precious metals investor out there that does not know what I am talking about, where at present for example, just the fact gold is not rising faster against the reality in price increases we witness every day is quite discouraging. So, can you blame investors for being slow to return to the sector? Not in my eyes. But the important thing is that they come back, and that they are positioned for when the crowds arrive. In this respect it’s my opinion precious metals are in a huge pressure cooker ready to explode. At the same time however, price managers appear bound and determined to keep a lid on the gold price with an obvious determination not witnessed previously in my observance. Of course if John Embry is right, this means the games price managers have been playing to suppress gold are almost exhausted, which sounds reasonable to me. So again, we wait patiently for pricing to better reflect reality.
Until next week, good investing all.
Captain Hook
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