Seeing Past The Hologram, by Mike Krieger of KAM LP
There is no distinctly American criminal class - except Congress.
Patriotism is supporting your country all the time, and your government when it deserves it.
All you need is ignorance and confidence and the success is sure.
It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.
There are lies, damned lies and statistics.
Courage is resistance to fear, mastery of fear, not absence of fear.
Laws control the lesser man... Right conduct controls the greater one.
- All quotes by Mark Twain
We Need Real Confidence to Return, Not Confidence in a Ponzi Scheme
Last week I pointed out that what I got from Banana Ben’s speech in Jackson Hole was that he realized any major public statement of interference in markets was too risky at this point following his announcement at the last meeting to keep the balance sheet steady by reinvesting MBS proceeds into treasury securities. The operative word in this sentence being “public.” Anyone that believes this means the Fed and government will just take a back seat and do nothing behind the scenes is deluding themselves. Washington D.C. and the Fed still fail to comprehend how to increase standards of living in the real world, rather they remain completely addicted to the short-term buzz of printed money heroin as it flows through the house of cards they have created. They also think that the only thing that really matters in an economy is “confidence.” As Madoff can attest to, that is indeed the case when you are running a ponzi scheme and since the U.S. government is basically that I can understand where they are coming from.
I agree that confidence is a huge part of any healthy economy; however, I do not define confidence in the way these arrogant bureaucrats do. They think confidence comes from rising asset prices, including stocks and homes. They think this is enough to spark growth in the real economy. This is nonsense. The confidence that is needed more than anything else today is two-fold. First, confidence that there is the rule of law and there will be the rule of law in the future. The second is that the money issued by the government will maintain its purchasing power over time. As I have made clear on various occasions, I do not have confidence in either of these things based on how the government has responded to the crisis. I do not like buying physical gold. I do not like feeling the need to write these emails every week to warn people. I wish I could employ capital into businesses and the real economy. I hope that one day I will be able to do so, but at the moment I do not trust my government and I certainly don’t trust the fascist Federal Reserve. So I will hoard what I have as the government prints and let the storm pass me by. I am not the only one. People are collectively starting to understand this. So what happens when the big, smart money takes itself out of the investment and capital allocation game because they don’t trust anything? What happens when the government’s response to this is to print money to keep up the spending habits of people with no jobs or people with government jobs that produce no goods for the economy? You get the worst case scenario and that is exactly what is staring us straight in the face.
Is a Trade War with China Coming?
The quicker the dollar is devalued the better. This is not to say that I think dollar devaluation is a good thing. It is to say we are past the point of avoiding it. We could have taken the pain in 2008, but instead it was extend and pretend all over again. Now the debt and promises are too big. The behind the scenes manipulations are too entrenched. There is no avoiding a devaluation relative to things people need (food and energy) and capital goods that are imported. The best thing would be to get it over with and then change policies and restore the rule of law. The problem with this is that the main currencies the dollar needs its major adjustment against are those in emerging Asia and China. What has prevented the realignment from happening in a quick and healthy way is China’s refusal to allow the yuan to appreciate. This creates a situation where Central Banks throughout emerging Asia take steps to prevent their “free-floating” currencies from adjusting either. If China does not change its policy I fear that what we are looking at a trade war with China after the November elections. I think Congress and the Administration will start to introduce aggressive policies to discourage Chinese goods and encourage goods made at home. Think it can’t happen? We are a lot closer than you think. This all goes back to my “think local” theme. While I am inherently a fan of free trade we do not have free trade in any sense whatsoever. We have policies that are geared to advantage the multi-national corporations at the expense of the U.S. citizen. The U.S. consumer has merely been spending borrowed money. This gave an illusion that the U.S. was benefiting from the global multinational corporate rigged market whose model mainly thrives on companies moving abroad to exploit the labor arbitrage caused by a combination of what was a labor surplus (no longer it seems) and a rigged currency. As more people realize this, more pressure will be placed on politicians and ultimately this will overpower the corporate lobbyists and a trade war of sorts will begin. Then the chaos could really ensue as we engage in a trade war with our biggest creditor!
Seeing Past the Hologram
The past couple of weeks have been extraordinarily interesting and some of the moves appear to be extremely important. Although a lot of people like to point to the treasury market and then extrapolate out as to what this means to equities and the ability of the government to increase spending, I think this is the most USELESS market in the world to watch. If anything is a hologram and a PR tool it is the U.S. treasury market. How can people with a straight face come out and extrapolate anything from a market where the Federal Reserve is buying the debt of its own government! The Fed is merely the fiat drug dealer to a government addicted to spending and false promises. The equity market is the second most useless market in my opinion. There is no doubt in my mind that a huge part of the government’s “strategy” to build confidence is to keep this thing from doing what it should be doing. Thus, I am not surprised at all that since I last wrote the S&P500 was +1.6%, -1.5%, flat, and then +3.0%. So what you have seen is high volatility with no real direction. How can anyone have confidence this that thing is for real?
So what markets do I watch? I get the most from the FX markets and the commodity markets. While these markets are no doubt manipulated heavily as well, I think this is where the players that really understand the macro are playing. The first currency I check in the morning is the dollar/yen. The reason for this is that the yen is back to the highs of 1995 and if it does not stop appreciating around this level I think the Bank of Japan is going to absolutely panic. While the yen has not broken higher yet as market participants are afraid of such intervention, unless the BOJ does something extreme soon the market may test their resolve and push this thing further. I guess the main point I am trying to make is that with the Chinese yuan NOT strengthening and the yen threatening to break out we could be in for some major fireworks. Meanwhile Japanese 10 year government bond yields have really started to spike lately (chart GJG10 Index on Bloomberg). Something big is happening in the land of the rising sun. In the back of my head I think that any panic move from the BOJ could be the spark that breaks government bond bubbles globally and ushers in a period of massive global commodity driven inflation as every country tries to devalue their way to prosperity. Essentially, a fiat money version of the 1930’s beggar thy neighbor policies. When this begins the rush into gold and silver that we have seen thus far will look like a trickle. I don’t think people will be able to find supply anywhere near the quoted price on comex (or as some like to call it “crimex”).
This brings me to silver which potentially experienced a game changer last week. I can’t remember the last time silver bounced back almost immediately after every attempted raid. I am starting to wonder how much physical silver is available. What we do know is that Central Banks do not store silver to manipulate markets. Even if it doesn’t break out right now, there is no asset in the world that has more upside than silver. Don’t buy SLV either. Buy physical silver not something with JPM as a custodian.
I also continue to watch food prices very closely. Wheat, which has come off of its high now seems to have found a base at a price that is 50% higher than the end of June. Corn prices are threatening to break above resistance at levels 30% where they were at the end of June. Rice looks like it could have a long way to go on the upside as it is only 20% off of its June low. If I were a foreign government I would be using this opportunity to buy every single grain of rice I could in order to feed my people when things get dicey in the months ahead. After strong performance in recent months lean hogs and live cattle also look set to make another push to the upside. How people in the investment world still focus on the government inflation statistics is beyond me. It was the rampant commodity inflation, trucker strikes and food riots that played a key role in ending the game in 2008. This is because it forced the emerging markets to raise rates and cool growth as the Western world imploded under a pile of debt. It seems the whole play is starting again and people remain focused on deflation. Deflation in some things yes I agree (discretionary things like homes, technology, stock prices, etc), but not in the things you NEED to buy!!!
Onto oil which is also exhibiting some strange moves. The Asian benchmark Tapis has not experienced the recent volatility and weakness that WTI has and is currently trading at $80/b. The Asian price is the one I really pay attention to since that is where the demand growth resides. The spread between the two now is back above $6/b, which is toward the high end of the range for the past two years. This tells me that one price is wrong and the spread should narrow. Given what I think about currency debasement and lack of appropriate investment in the space I think WTI should rally. We shall see…
A Primer on the Federal Reserve
For those that read my commentary on the Federal Reserve as an immoral an fascist institution and think to themselves “what is this guy talking about,” I have attached a video from G Edward Griffith (the author of The Creature from Jekyll Island). It’s a great description of how the Fed was formed and who it answers to when push comes to shove. http://video.google.com/videoplay?docid=6507136891691870450#
Also in case you weren’t aware of the power grab that the “Financial Reform” legislation allowed the Fed, read this Bloomberg article.
All the best,