02 February 2011

Gold Daily and Silver Weekly Charts - Hyperinflation vs. Deflation Debate



Just another day with the money makers.

I wanted to bring your attention to the Deflation vs. Hyperinflation debate coming up between Stoneleigh and Lira. I respect both of the participants so I am sure it will be interesting. 

I ought to note that, alas, I disagree with both of them I think. As you know my forecast has, for quite some time, been for stagflation. I consider both deflation and hyperinflation to be on the tails of probability and less likely excepting policy error in a purely fiat currency. With a fiat currency the outcome is most likely to be the result of a policy decision, tying in both the fiscal and monetary authorities.  By pure I mean not encumbered by external forces such as the gold standard or a dollar peg.

But nothing is pure in this world especially when it comes to politics and money.  Much of what happens depends on many exogenous actions from counter parties overseas, as well as the rise of a third party or some political element that is less hospitable to the financial oligarchs.

My goal is not to predict what will happen, but to know enough to be able to see it coming, if the outcome deviates from stagflation. And so I am always grateful to hear a reasoned debate on the subject since there are always aspects of this I might have missed. I am also wondering what this potential for civil disorder will do to the economic landscape.  War trumps other policy inputs almost every time.

As an aside, I have been wondering if hyperinflation is even possible in the absence of some external standard, some peg to something, whether it be a metal or a currency. I think the major cause of a hyperinflation in a fiat currency could only be triggered by a bond default, or an utter rejection of the bonds by exterior parties.

I have also been rereading some books from the 1990's regarding Japan, and remembering things that I have not considered in some time. It is still remarkable how few Westerners really understand how things work in Japan, and the origins of their protracted economic malaise. The lack of other instances of a protracted deflation following a credit incident in a fiat regime should provide a clue that there was something particular going on. Japan is a very highly managed, hierarchical, oligarchical and conservative society dominated by its business interests.

There is no doubt in my mind that their deflation is the result of a policy decision by the keiretsu and their friends in the government, particularly in MITI. Most people do not even understand that Japan was essentially a one party system after the Liberal and Democratic parties merged in 1955. This is only recently changing.

With the Fed now owning more Treasuries than even China, it appears that Benny *could* have a go at it, although technically he can raise short rates overnight, if the government is prepared to live with the consequences.

Best to keep an open mind, because the holder of a reserve currency in a largely fiat regime has, to my knowledge, never failed before. I don't think even Rome qualifies for this, and certainly despite their wonderful system of roads the decline would have seemed as in slow motion compared to the information age we are in today.

So let's hear it for civil discourse and fact based discussions. What I find most disheartening is those few bloggers and analysts who, for the lack of a proper argument or a better alternative, quickly resort to throwing their feces in the manner of chimps, in what they seem to perceive to be some power struggle for the hearts and minds of followers and obedient devotees. What a presumption if you think about it, as if our opinions will affect in any way what is coming down the path, with the inevitability of history behind it.

I suspect that agility, flexibility, and the ability to learn and adapt are critical skills if not requirements for the next step in the evolution of this crisis.



01 February 2011

SP 500 and NDX March Futures Daily Charts


"People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome. Advertising [perception management] is the rattling of a stick inside a swill bucket."

George Orwell

Watching the commentary on the stock market and Egypt on US financial television today was an exercise in cognitive dissonance.

See, there are no problems in the world, because the Dow has hit 12,000.  All is well,  and now is the time to buy these shares from us, so that we can unload this misvalued paper just like we sold slop buckets full of collateralized debt obligations to the institutions and foreign banks, in celebration of the deregulation which we bought from the politicians, causing this financial crisis in the first place.

The hubris and arrogance of Wall Street is almost shocking if one does not realize that these fellows are very afraid, and probably trying to bluff their way out of this latest crisis. They are whistling past the graveyard, treading lightly over the bodies of their victims, keeping one eye on the exit and one hand on your wallet.

There may be a bull market in Swiss chalets and South American villas coming, depending on how steadily the winds of change sweep across the globe.




Gold Daily and Silver Weekly Charts



"It is not necessary for the politician to be the slave of the public's group prejudices, if he can learn how to mold the mind of the voters in conformity with his own ideas of public welfare and public service. The important thing for the statesman of our age is not so much to know how to please the public, but to know how to sway the public. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country."

Edward Bernays

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

Charles Mackay




US Dollar Index Is At Key Support


This index is particularly odd, if you take a look at the weighting of it as shown by the graphic on the chart.

It is difficult to imagine the euro continuing to strengthen against the dollar without howls from the German exporting companies. And the same can be said of the Yen.

FX trends often notoriously overshoot targets, since trading in forex, like so many other financial asset markets, a matter of the biggest boys sloshing the water around in the tub.

However, a break of this support could trigger another leg down. It will be interesting to watch the existing negative correlation between the dollar and US equities.