Purchasing Power

By ending its three year currency peg to the weakening euro Switzerland has become the first major economy to surrender in the international currency war, and in so doing has given a long-delayed victory to the Swiss people. Contrary to the indignant reaction by the media and financial establishment, the decision is not a disaster for Switzerland, but may be looked at in the future as the first significant counter-attack against our current global system of monetary insanity.

That the global Status Quo is terrified of deflation is the background of every policy decision and official PR sound-bite. The reason behind this unremitting terror: deflation is the Achilles Heel of the global Status Quo. Rather than being the Monster Under the Bed in central bank nightmares, deflation is the natural result of a competitive economy experiencing productivity gains.

Here is why I think the BRICS challenge is eroding. 

... things like a 50%+ drop in oil prices happen. Which at some point will lead more people to wonder what the real numbers are. For emerging nations, those numbers will not be pretty for 2015. They’re going to feel like they’re being thrown right back into the Stone Age. And they’re not going to like that one bit, and look for ways to express their frustration. Volatility is not just on the rise in the world of finance. It also is in the real world that finance fails to reflect. At some point, the two will meet again, and Wall Street will mirror Main Street. It will make neither any happier. But it’ll be honest.

If we review the events of 2014, it seems the situation has intensified: governments are still overwhelmed with debt, our fiat money system is unsupported, our central banks insist on accumulating debt and making money valueless. Will someone realize we have to pull the plug? And when we do, because it will happen whether we want it or not, how can we hedge against the damage that we will all be exposed to? Owning physical precious metals stored outside the banking system is a proven and essential form of monetary insurance against the uncertainties and negative surprises we see in our world today.

If you want to know where the global experiment in massive money printing is heading - just take a look at the monetary madhouse in Europe. And that particular phrase has full resonance once again as it becomes more apparent by the hour that Europe and the Euro were not fixed at all. Indeed, beneath the surface of Draghi’s “whatever it takes” time out, the crisis has been metastasizing into ever more virulent deformations.

“Don’t look back - something might be gaining on you,” Satchel Paige famously warned. For connoisseurs of civilizational collapse, 2014 was merely annoying, a continued pile-up of over-investments in complexity with mounting diminishing returns, metastasizing fragility, and no satisfying resolution. So we enter 2015 with greater tensions than ever before and therefore the likelihood that the inevitable breakdown will release more destructive energy and be that much harder to recover from.

And they are picking up shares in all kind of (precious metal) miners...

Hugh Hendry's Eclectica Fund has had a great Q4 (up 3.3%, 4.0%, and 5.0% in the last 3 months) despite portfolio risk being quadruple his 'old normal'. How did he achieve this? He begins... "There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully. The good news is that mankind clearly has the ability to suspend rational judgment long and often... He who hangs on to truth has lost. The economic truth of today no longer offers me much solace; I am taking the blue pills now."

Ah Moldova... the poorest country in Europe, which just so happens to have had a Communist party majority in its parliament since 1998. These two points are not unrelated.

The fate of countries like Japan is really in the hands of central bankers. However, central planners are not able to manipulate markets infinitely. At a certain point, something has to give. That is when the markets will give up and disbelief will replace trust. In such a bust scenario, people flee down the Golden Pyramid of asset classes to their safe haven, being gold.

The World Gold Council’s recommendations are far from crazy...

The mainstream economics narrative is so far down the monetary rabbit hole that the blinding clarity of the chart below has no chance whatsoever of seeing the light of day. That’s because it dramatizes the real truth regarding all the Fed gibberish about “accommodation” and “stimulus”. Namely, that what lies beneath its “extraordinary measures”, such as ZIRP, QE, wealth effects and the rest of the litany, is a central banking regime that systematically destroy savers. Period. TARP wasn’t “repaid” with a profit. It was simply perpetuated and  morphed into a new form of destructive state subvention and malinvestment.

"Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder." So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.

Virtually every day there is an eruption of lunacy from one central bank or another somewhere in the world. In short, the central banks of the world are embroiled in a group-think mania so extreme and irrational that it puts one in mind of the spasm of witchcraft trials that erupted in the Massachusetts Bay Colony nearly four centuries ago.  As a practical matter, this mania amounts to a race to the currency bottom and the final extinguishment of the price discovery mechanism in every financial market on the planet. Flying blind, the financial markets are thus bubbling - in the delirium phase - like never before. That is, until they don’t.