Mike Krieger Deconstructs Commodity Inflation: "You Ain't Seen Nothing Yet"

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Submitted by Mike Krieger of KAM LP

Commodity Inflation: You Ain't Seen Nothing Yet

Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.

- Norm Franz, Money and Wealth in the New Millennium

As soon as your born they make you feel small,
By giving you no time instead of it all,
Till the pain is so big you feel nothing at all,
A working class hero is something to be,
A working class hero is something to be...
When they've tortured and scared you for twenty odd years,
Then they expect you to pick a career,
When you can't really function you're so full of fear,
Keep you doped with religion and sex and TV,
And you think you're so clever and classless and free,
But you're still fucking peasants as far as I can see,
There's room at the top they are telling you still,
But first you must learn how to smile as you kill,
If you want to be like the folks on the hill,

- John Lennon, Working Class Hero

Thanks Ben…You Have Destroyed the Social Fabric of the World

History is littered with the carcasses of men that in their exaggerated hubris attempted to stop the forces of nature and the markets only to fall flat on their faces.  We tell the stories of these men in history books and myths from prehistory, but it never stops men of successive generations from trying it all over again.  What the current political class the world over (at the behest of Wall Street financial terrorists and other big corporate interests) are doing falls into the same exact formula of prior historical failures.   Some of the historical figures that attempted to beat back nature were great warriors or kings that just reached too far.  Some of them were evil megalomaniacs whose desire was nothing short of absolute power in their hands over any of the unfortunate human beings that happened to be in the way.  Ben Bernanke is neither of these.  He is a just a little dweeb with an electronic printing press.  Tragically, because of modern technology and the way the monetary system works today he has the ability to cause more damage than any other one person in the history of mankind and he is doing it.  I shudder to contemplate the ultimate effects of the inflationary holocaust he has unleashed on the six billion mesmerized and helpless souls present on earth at this time.  The signs are starting to show up again just like in early 2008.  Food is becoming scare at a “reasonable” price in many parts of the globe and the symptoms of this are starting to bubble up to the surface.  For example in recent days we have witnessed food riots in Algeria and Tunisia where at least 14 people are reported to have died in each country.         

These types of events were easily predictable and have been predicted by people like me and many other whose views will never be seen in the mainstream media.  Fortunately, the alternative media is taking over (which is why the Obama administration is certain to increase its crackdown on the internet) and people are becoming very informed and linked all over the world.  The divide and conquer strategy that has worked so well for millennia will be much harder to pull off this time around.

Inflation:  There is No Putting this Cat Back in the Bag

Probably the most misleading thing Bernanke said in his sixty minutes interview was that he could snuff out inflation in 15 seconds (this was the most misleading thing not the biggest lie, which goes to his “I’m not printing money” statement).  This statement is so misleading because it is true he can do what he says but he never will because at this point the effect of raising rates or tightening credit would immediately bankrupt every single part of the gigantic TBTF banker run ponzi scheme also known as the global economy.  The world’s Western governments are loaded with more debt that before the crisis and many of these including the U.S. and Japan could not handle even a moderate increase in interest rates let alone what Volcker had to do in order to end the inflation of the 1970’s.  Think about it.  Other nations own our debt and currency in the form of their FX reserves.  China just came out with its latest FX figures and guess what?  You go it, a new record!  $2.85 trillion to be exact, which is up 19% year-over-year.  I want to reiterate a point I made earlier in the year on this.  With their FX reserves up 19% year-over-year they needed to boost gold reserves 19% just to keep their puny 1.6% of gold at a steady percentage.  If they actually want to increase the share, which they do, they need to buy far more.  This goes for every other nation as well since FX reserves have been exploding across the emerging world. 

You see this is the great game.  The West and Japan and major debtors that know they can never pay it off and have no intentions of trying.  The West keeps stuffing the emerging economies with their toilet paper currencies in exchange for real goods, which then fuels massive inflation and makes it virtually impossible for them to ever get their gold reserves up as a percentage of FX reserves.  We just keep diluting the hell out of them!  The Asians-ex Japan (they are a U.S. colony) and the BRICs certainly know this which is why they are buying resources around the world, strengthening their military and forming economic alliances with each other.  A great example of this is when the Chinese and Russians decided to transact in their own currencies rather than the dollar http://www.chinadaily.com.cn/china/2010-11/24/content_11599087.htm. Also, there was this story about how India may pay for the oil it gets from Iran with gold as they try to hammer out another currency system http://economictimes.indiatimes.com/news/news-by-industry/energy/oil--gas/india-iran-mull-over-gold-for-oil-for-now/articleshow/7238760.cms.     

So far, the official policy out of China has been to raise bank reserve requirements as well as interest rates in an attempt to cool things down slightly and instigate a soft landing where inflation cools but economic growth stays robust.  NOT GONNA HAPPEN.  While the initial reaction by a lot of talking heads has been to sell commodities and buy U.S. equities, the Chinese have already failed in their attempt.  Asia Tapis crude oil (the WTI equivalent in Asia) just hit a new high last night at $104.78 per barrel, corn and soybeans are at new highs, as are cattle and hog futures.  Coal prices have been going parabolic as a result of the flooding in Australia.  If you think inflation is bad now you haven’t seen anything yet.  As much as they do not want to use currency strengthening in a more aggressive way they will be forced to, which will mean huge increases in commodity prices in dollars.  There have been reports that China has been releasing commodity stockpiles to keep things under control.  This begs the question.  How much have they released?  How much is left This is about to get crazy and not in a good way.   

Asia Tapis Oil Chart

Corn Chart

Soybeans Chart

Lean Hogs Chart

Live Cattle Chart

 

Banana Ben Will “Fight” Inflation by Printing MORE Money

As I have said since the Fed started its QE policy the global monetary and financial system will end in a holocaust of commodity price inflation.  The mainstream media has only started to notice (I guess when people starting dying in food riots they can’t just totally ignore it anymore).  That said, as I mentioned in last week’s piece I do not think we are anywhere near the end of this.  While in 1H08 there was the commodity surge and banking system collapse that was then followed by a soaring dollar and deflation, this time when the collapse comes it will be seen in the destruction of purchasing power of Western fiat currencies.  So rather than seeing the U.S. dollar limit up and commodities plunging, this crisis when it really starts kicking in will be characterized by commodity prices limit up and ultimately a crash in treasuries.  We are starting to see the commodity moves in earnest, but the treasury collapse may take some time and here is why.

The consensus view of the market remains that if inflation gets truly out of control, the Fed will raise rates and then treasuries will get bid as everything else craters.  I completely disagree.  Ben Bernanke is no Paul Volcker, and I doubt even Paul Volcker would have the nerve to raise rates like he did with the U.S. government just having levered its balance sheet so extraordinarily.  Thus, counter intuitively what do I think Banana Ben will do when prices start soaring?  He will print more money.  He will justify this by saying we need to get more “money in the hands of the people” so they can buy food and energy.  Barrack "I am incapable of telling the truth about anything” Obama will also lead the propaganda charge on this front.  They will demonize speculators.  They will take no blame.  They will be in a corner.  They just saved the richest 0.1% of America from taking any losses on their investments and ensuring that Wall Street firms that are nothing but wards of the fascist state can make record payouts.  They will have to print to “help the people” who’s future they just completely decimated.  Let’s never forget who did this…

You will know the episode is over when there is a “new (or devalued) dollar” and indeed possible new currencies across the Western world.  Not before this happens will it end.  I still sometimes hear this argument that the U.S. dollar is a claim on the assets of the United States of America.  Really?  Last I checked it says “Federal Reserve Note,” which to me sounds like a liability of the Federal Reserve, which itself is a private banking cartel.  Hmmm…dollar holders as far as I can tell have no claim on U.S. assets but rather claims on the assets of the Fed.  Have you looked at the junk they own recently?  

Conclusion

I could write for hours and hours on this topic but at some point I need to just say enough.  That time has come.  I just want to make a few final thoughts on two areas of the markets.  First, copper.  While I am not necessarily advocating people short it given my view on Western fiat money, to me this is the most overhyped elevated commodity out there right now.  It is not strategic like oil, precious metals or agriculture are and it is really at the very bottom of any list of commodities I would buy.  The other one I want to mention is the long GDX/short SPX trade.  As many of my long-time readers know, I think this is THE macro trade.  From time to time this spread goes the other way and macro investors are presented with a rare opportunity to put it on more aggressively.  I think that time is now with this thing going the other way by 14% since the gold stocks peaked on December 6th.  Be aware that like anything this can continue to go the wrong way just as it did for two months from December 2009-early February 2010 but if you start putting this on now I think you will be greatly pleased a few months from now.

Best of luck in the Fourth Turning!
Mike