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Foreword
For greater insight into our
publication, have a look at the Overview of Tedbits. It
helps current and potential subscribers understand our mission in serving you.
It also gives a broad description of what's unfolding globally and what you
can expect from Tedbits as a regular reader.
In This Issue
First Stage in motion, with small signs of wake up!
Ethanol Blow Back
CRACK-UP BOOM, part II
In this edition of the "Crack-up
Boom" series, we will begin to discuss more in depth how the CRACK-UP
BOOM is principally dollar-based now and we will show its fingerprints in
US-based money flows, both into and out of the United States, as investors
begin to take the actions necessary to protect themselves from the ensuing
tsunami of inflation which can be expected. This week the Global bond
market had its biggest breakdown in years as the realization of the
inflationary consequences in the pipeline is beginning to be realized by the
participants. First, let's take a bigger look at Ludvig
Von Mises' description of the behavior
that emerges during CRACK-UP BOOM episodes;
In Human Action (4th ed., B.B.
Greaves, ed. (Irvington: Foundation for Economic Education, 1996), Ludvig von Mises described the
"crack-up boom" that marks the denouement of all great monetary
inflations (pp. 427-428):
This first stage of the inflationary
process may last for many years. While it lasts, the prices of many goods and
services are not yet adjusted to the altered money relation. There are still
people in the [p. 428] country who have not yet become aware of the fact that
they are confronted with a price revolution which will finally result in a
considerable rise of all prices, although the extent of this rise will not be
the same in the various commodities and services. These people still believe
that prices one day will drop. Waiting for this day, they restrict their
purchases and concomitantly increase their cash holdings. As long as such
ideas are still held by public opinion, it is not yet too late for the
government to abandon its inflationary policy.
But then, finally, the masses wake up. They
become suddenly aware of the fact that inflation is a deliberate policy and
will go on endlessly. A breakdown occurs. The crack-up boom appears.
Everybody is anxious to swap his money against "real" goods, no
matter whether he needs them or not, no matter how much money he has to pay
for them. Within a very short time, within a few weeks or even days, the
things which were used as money are no longer used as media of exchange. They
become scrap paper. Nobody wants to give away anything against them.
It was this that happened with the
Continental currencies in America
in 1781, with the French mandats territoriaux in 1796, and with the German mark
in 1923. It will happen again whenever the same conditions appear. If a thing
has to be used as a medium of exchange, public opinion must not believe that
the quantity of this thing will increase beyond all bounds. Inflation is a
policy that cannot last. Thanks, Ludvig. Now let's
take a look at:
First Stage in motion, with small signs
of wake up!
Today we are going to examine RATIONAL
investor behavior in the face of US Government fiat
money and credit creation. Last week we looked at the global rush into
equities as the beginning of the unfolding "CRACK-UP BOOM", as huge
amounts of cash in the hands of investors worldwide
exchange FIAT CURRENCIES for units of production. The world is awash in cash
and credit of all stripes, and oodles more are in the queue, ready to roll
off the presses as money and credit creation is "OUT OF CONTROL". But
the broad US
population is still waiting for inflation to recede, and believe the fake
inflation numbers and jawboning out of the Federal Reserve and Treasury.
One needs look no further than the
ballooning balances in money market accounts, now approaching 2.5 trillion
dollars, to see very little concern with runaway inflation; these balances
have continued to explode higher, up over 25% since 2002. These money market
accounts pay virtually "NOTHING" in relation to current inflation
rates. They are losing purchasing power at an enormous rate, yet the BROAD
public is generally not paying attention, YET! I still remember Sue Herrera
and Maria Bartiromo of CNBC wondering when this
money was going to come off the sideline and buy the stock market when we
were on the late 2002-03 lows. They are still waiting!
SMART US investors, such as the type
that read this newsletter, are voting with their feet and
"SCHIFF"TING (aka as the Peter Schiff prescription for investing,
as we will see business must be good for Peter) their dollars into units of
production that are denominated in foreign currencies. Conversely, foreign
dollar holders are doing this in reverse to lessen the pile they now hold in
the bank. Let's take a look again at the description of the first stage from
above;
This first stage of the inflationary
process may last for many years. While it lasts, the prices of many goods and
services are not yet adjusted to the altered money relation. There are still
people in the [p. 428] country who have not yet become aware of the fact that
they are confronted with a price revolution which will finally result in a
considerable rise of all prices, although the extent of this rise will not be
the same in the various commodities and services. These people still believe
that prices one day will drop. Waiting for this day, they restrict their purchases
and concomitantly increase their cash holdings. As long as such ideas are
still held by public opinion, it is not yet too late for the government to
abandon its inflationary policy.
It is obvious that the public at large
does not understand what is transpiring but at the edges/margins, the process
is well recognized. And you can see the fingerprints of the migration. First,
let's look at the flow of funds of US-based investors to countries where they
believe the policies of confiscation through inflation are less aggressive
than the domestic variety practiced by the Public Servants in Washington DC.
 
Wow, looks like a lot of very informed
people are voting their investments with their feet. Last month's net outflow
was the second biggest in over 5 years, at over 40 billion dollars. Of
course, in the big picture of "Supply of Dollars" it is but a very
small teacup. But this teacup can be seen clearly as having a major influence
in the value of the dollar. As regular readers know, trends are established
at the margin. Many trends emerge as very small drips before they morph into
something larger.
Let's take a look at the value of the
dollar as these outflows have grown:
As the "Schiff'ting
has unfolded, the dollar has reflected the change in domestic investors'
sentiment toward US investment markets. Of course, the chart for gold is the
mirror image of these charts, moving from lows seen in 2002 of $250, to
recent highs above 700 dollars an ounce. Little reported in the mainstream
media is the fact that US investors for the most part haven't invested a dime
in US stock and bond markets for over a year. Foreign stock markets have been
far outperforming the US
markets for years as the smart money is always the first to the party. The
broad public in the United States
and Europe for the most part are on the
sidelines; so far these BULL markets have been a professional affair, as the
big and smart money have gotten in on the ground floor for the coming
"CRACK-UP BOOM".
One of the primary reasons I illustrated
the world stock markets' simultaneous confirmation of the coming global
growth scenario is that the public for the most part is not yet in the stock
markets or any markets for that matter. China
is the exception with the public piling in at this time, but in Europe and
the US
the principal participants are institutions, public and private investment
banks, hedge funds and large private investors. The little guy is nowhere to
be seen in the stock markets, buying gold, or forcing their money into the
markets yet. That happens near the end of the market runs, so we are nowhere
near the end yet.
This week bond markets worldwide
broke down hard; stocks had a bout of indigestion and everybody
started talking about the end of the world. WOW, that was fast. We are a few
percent off the highs and its now all over. I DON"T THINK
SO. Markets were "AHEAD OF THEMSELVES" as excellent fundamentals
and TOO much liquidity pushed them too far to the upside. A five week or five
month pullback is to be expected, stocks have been up 11 of the last 12
months, they have to back and fill, correct, and take out the weak hands, and
markets are not one-way affairs. A "Finger of instability" (see
Tedbits archives at www.Traderview.com) has emerged as fire hoses of hot
money rotate around the globe to seek alpha.
The markets could get
"Cracked" good and hard here and it would only be a healthy event
as mentioned in the missive. A buying opportunity! Assets on sale for the big
and smart money during the "finger of instability" (see Tedbits
archives www.TraderView.com). During the inflationary boom
that is unfolding the yield curve will try to NORMALIZE, not stay flat as it
currently is. REAL interest rates are nowhere near tight; in fact in REAL
terms they are still quite NEGATIVE. The banks are still paying you to
continue to borrow. They can't withdraw the stimulus of money and credit
creation EVER. They can raise rates, but real rates will ALWAYS be below
neutral, or they risk the implosion of the fiat monetary and credit systems
they have implemented. Asset-backed wealth creation is here to stay.
The reason the US and European yield
curves are flat is because their economies have been STRUCTURALLY crippled in
a process lasting over the last 50 years as creeping socialism and the
welfare state have slowly but surely destroyed the capitalism and wealth
creation that were once the bedrocks of these once great economic powers. The
public servants and financial authorities have substituted money and credit
creation for growth policies. A good deflationary crack will serve as impetus
for the next round of reflation by government
financial and banking authorities worldwide. Of course, they will give the
newly minted cash to their campaign donors first, so these donors get to buy
the assets that go one sale during the deflationary SCARE. Keep in mind, when
they print money it's the guy that gets it first that is the big winner.
This will be driving us to the ultimate
"CRACK-UP BOOM" we can expect sometime in the future. This will
unfold over a number of years and is an investment theme for the next 5 to 10
years at least. Thank God for the slow motion, I am not ready yet personally!
LOL.
So, what is driving US markets higher
and underpinning the dollar? Offshore dollar holders, what else? They
consist mainly of two groups:
First, foreign central banks are still
repatriating dollars into the interest rate markets, to defend the value of
their existing holdings, only now it is more slowly as they try to steer the
ever-growing, enormous amounts of dollars they are receiving into more
productive assets through their newly born, government investment vehicles. Buying
units of production, assets, raw materials and energy investments rather than
the certificates of confiscation that continually eroding US treasuries and
dollars have evolved into.
Secondly, the private holders of dollars
and US treasuries are quietly buying US assets for the same reason and the
flow from this group has increased dramatically over the last several years,
rising to over 160 billion dollars last year, a rise of over 76% from the
previous year. To put this number in perspective, at the height of the dot
com boom, foreign inflows amounted to $335 billion. Before the "CRACK-UP
BOOM" is over, you can expect this number to climb to over a trillion as
dollar holders seek the shelter provided by the indirect exchange embodied in
buying an asset, which can just reprice in the fiat
world the unit of production or asset exists in.
Is anybody noticing the enormous
amounts of gold that's been sold into the markets by the Central
Banks in Europe over the last 120 days? They
should have been able to force the price much lower with the sheer scale of
selling. They publicly threw in the towel about a week ago, having been
stymied in their manipulative efforts. The worm is turning.
Something or someone has been gobbling
up the gold: my bet is that the crack-up boom syndrome is emerging, as emerging
world central banks and their citizens take it down without saying a
word, quietly slipping dollars, which they are choking on, to the big Central
Banks in Europe. Letting those socialist fools and "WOULD BE
DEMI-GODS" exchange their best central bank reserve
holdings for ultimately worthless ones. The emerging world's banking systems
become more solid by the day as they slowly but surely remake the composition
of their reserves. Remember, the IMF and the World Bank are children of the
G7; in order to be a member of these organizations you MUST run a fiat
currency and credit creation monetary system. It is thus so they can steal
money through the printing press and infinite credit creation. The emerging
world's Central Banks have figured this out and are working toward
self-preservation. It is an interesting game of cat and mouse.
(Authors note; looking for assistance in
creating portfolio diversification that can survive and thrive in what I am
outlining? In fingers of instability? If so contact me through www.TraderView.com. Subscriptions
to this newsletter are also free at this address; send it to a friend, Thank
you)
So the smart and big money are moving
towards the exits; they are lifting us higher as asset markets accelerate
higher with "Fingers of instability" sprinkled in to make the
investment landscape a continuing challenge. Bonds are bombs and will
continue to be; some bond markets can continue to fall faster as they reside
in countries with SAVINGS and reserves. So a small nominal tightening can
still take place, all the while they let the currency and credit creation
lunge forward at an ever-breathtaking pace.
While other bond markets can be expected
to OUTPERFORM in Wall Street parlance (outperform means they don't fall as
far or fast as other bond markets, e.g. if US bonds don't fall as far as
German bunds they have outperformed), the financial and monetary authorities
become buyers to head off systemic financial Armageddon. The US Federal
Reserve is in just such a place RIGHT NOW, so expect them to support the bond
market and become borrowers of last resort with their powerful open market
operations and currency and credit creation machinery. They have to intervene
at these levels or risk the "ARM"ageddon
unfolding in the Real Estate market spreading to other sectors of the
"asset-backed" financial system. It hasn't spread yet; they have
contained the problem well to this point.
You can predict government behavior at times like these. The Europeans will not
intervene as the Fed must. Their citizens have savings which ours don't. The
2.5 trillion I mentioned above is not in the hands of the wide public; the
wide public is broke and in debt up to their ears. The US
government, along with the G7 buddies, will put off reckoning day a while
longer. These are opportunities. The dollar can be expected to rally as
flight to quality habits die hard (the dollar is no longer a quality asset
and never will be again), so ride it and get ready to short it at better
levels as they are directly ahead.
The US and Global stock markets NEED to
retreat, they NEED to revert to the mean, they need to back and fill and
correct the excesses in the prices we see. It will set the stage for the next
leg-up in the unfolding "CRACK-UP BOOM" as it works its way to the
inevitable Kondratieff winter which will unfold someday. What is unfolding
has been unfolding for decades, and you need to think of them in this manner;
weeks and months of gyrations may be breath-taking as they unfold, but are
only OPPORTUNITIES for smart money and nimble investors....
Ethanol Blow
Back
Wow, the demands on corn are now rolling
into the global wheat market as substitution is now not an option. The wheat
crops from Ukraine, Russia, China
and Australia
are all in difficulty or failed. Export controls have just been announced in Ukraine, can Russia be far behind? Wheat is up
20% in the last week and corn is poised to test its highs, any hiccup in the
corn crop and you can expect a doubling from here. Inflation is rampant in
these numbers and look for it to show up at a supermarket near you in
anything that requires GRAINS of any type. We spoke about this in the two
previous two ethanol articles in March and February. As the developing world
has emerged their incomes have soared, so it stands to reason they want more
and better caloric intake, they are competing for the food with the ethanol
producers. Inflation in the pipeline!
In conclusion,
the global bond bull market from the early 1980's is DEAD; put a fork in it. The
rise in yields will last for YEARS as we transition to a secular BEAR market.
And of course that means inflation is going to be rising. The Central Banks
and financial authorities can be expected to understate inflation FOREVER so
that they can constantly offer money below the real rates that could be
offered when we really had monetary discipline and asset-backed currencies. Commodity
and asset bull markets can be expected to continue at nominally higher rates.
Interest rates in REAL terms rates (real inflation figured in) will probably
stay negative and loose as they are now. There will be cyclical bull and bear
markets within the long term secular downtrend in bonds and increase in
rates.
We are in the ERA of STUFF, as the
emerging world builds out their economies using the savings they have
accumulated over the last decade. These savers are on the bid, as the debtor
counties are forced to sell their assets to pay their creditors. They
exported their wealth and it now resides outside their G7 homes. The
politicians of the G7 have mortgaged the future and sold EVERYTHING, and
spent it now, impoverishing future generations of children to support their
parents now.
Inflationary booms can
be expected for years to come. As financial authorities try to pay the bills
through fiat currency and credit creation for the "something for
nothing" constituencies that now employ them. Anything that can't be
printed will be expected to rise as dollar holders now, and all currency
holders later, attempt to escape the immorality of their respective
Government SERVANTS and financial authorities. Public Servants who believe
they can escape history's lessons about fiat currencies and credit creation,
and the vicious circle they have put themselves in, must be considered when
making your investments. These are opportunities or pitfalls in your future.
You get to decide. Turn volatility into opportunity as these things unfold.
By : Theodore “Ty” Andros
www.traderview.com
If you enjoyed this
edition of Tedbits, send it to a friend; visit our archives
for additional insights from previous editions, or sign up for a free subscription. Beginning next week Tedbits will come out weekly on Thursdays or
Fridays before each weekend. Thank you for reading this edition of Tedbits,
don't miss the next edition of Tedbits "fingers of instability"
series it will be a barn burner of provocative thoughts and insights on
global economics and finance...
Tedbits is authored by
Theodore "Ty" Andros,
and is registered with TraderView, a registered CTA (Commodity Trading
Advisor) and Global Asset Advisors (Introducing Broker). TraderView is a
managed futures and alternative investment boutique. Mr. Andros began his
commodity career in the early 1980's and became a managed futures and forex specialist beginning in 1985. Mr. Andros duties
include marketing, sales, and portfolio selection and monitoring, customer
relations and all aspects required in building a successful managed futures
and alternative investment brokerage service. Mr. Andros attended the
University of San Diego, and the University of Miami, majoring in Marketing,
Economics and Business Administration. He began his career as a broker in
1983, and has worked his way to the creation of TraderView. Mr. Andros is
active in Economic analysis and brings this information and analysis to his
clients on a regular basis, creating investment portfolios designed to
capture these unfolding opportunities as the emerge. Ty
prides himself on his personal preparation for the markets as they unfold and
his ability to take this information and build innovative professionally
managed portfolios. Developing a loyal clientele.
This
report may include information obtained from sources believed to be reliable
and accurate as of the date of this publication, but no independent
verification has been made to ensure its accuracy or completeness. Opinions
expressed are subject to change without notice. This report is not a request
to engage in any transaction involving the purchase or sale of futures
contracts or options on futures. There is a substantial risk of loss
associated with trading futures and options on futures.
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