January 14, 2009
– Comments (24)
Excellent work ... You are doing a great job ... Where did you get this data?
It says on the pictures: Treasury Bulletin for the first and NBER, federalreserve.gov for the second.
Amen on the excellent work. When the obvious inflation we are facing finds its way to gold and silver prices, GMX and his ilk won't be laughing about your CAPS rating anymore.
The credit for these images doesn't belong to me... I should have mentioned that. They were pasted from here:
I came across them through this website:
jsmineset is an amazing source for insight into the gold market and the macroeconomic factors driving gold now and into the future. A big chunk of what I know about gold I learned from Jim Sinclair.
Jim Sinclair is primarily a precious metals specialist and a commodities and foreign currency trader. He founded the Sinclair Group of Companies (1977), which offered full brokerage services in stocks, bonds, and other investment vehicles. The companies, which operated branches in New York , Kansas City, Toronto , Chicago , London and Geneva , were sold in 1983.
From 1981 to 1984, Mr. Sinclair served as a Precious Metals Advisor to Hunt Oil and the Hunt family for the liquidation of their silver position as a prerequisite for the $1 billion loan arranged by the Chairman of the Federal Reserve, Paul Volker.
He was also a General Partner and Member of the Executive Committee of two New York Stock Exchange firms and President of Sinclair Global Clearing Corporation (commodity clearing firm) and Global Arbitrage (derivative dealer in metals and currencies).
In April 2002, shareholders of Tanzanian Royalty Exploration (formerly Tan Range Exploration) approved the acquisition of Tanzania American International, a company controlled by the Sinclair family, for shares in Tan Range . Following this transaction, Mr. Sinclair became Chairman of Tan Range and now leads its efforts to become a gold royalty company.
He has authored numerous magazine articles and three books dealing with a variety of investment subjects, including precious metals, trading strategies and geopolitical events, and their relationship to world economics and the markets. He is a frequent and enormously popular speaker at gold investment conferences and his commentary on gold and other financial issues garners extensive media coverage at home and abroad.
I sense those guys respect me sufficiently so as not to laugh about my CAPS score. :) My CAPS score is a statement in and of itself... I have never red-thumbed a stock, because in real life I have never shorted a stock. Every pick in my CAPS profile is directly related to my investment thesis, and contains no hedges. I maintained this process even through the worst of this correction because I think it offers fellow players a valuable glimpse of how that investment thesis is faring at any given point in time. I have zero doubt that commodity-related equities will prove to be the only relative safe haven among equities over the next several years, and until then my low score lets Fools know they have an amazing entry point into these sectors.
I will be back up to the top of the "Yes" list, which tracks only those members that have never red-thumbed. That's the only list I care about.
I don't do this for ego ... I certainly don't care about being vindicated or anything like that. I do this so that others may find protection from the ravages of this depression. The protection has proved illusory for now, as the gold and silver equities in particular have been driven to the brink by manipulation of the futures markets, failure to anticipate the coming inflation, and frozen credit. The breakout in gold and silver prices will ameliorate those obstacles. As investors are driven out of Treasuries in droves, watch how these equities recover.
To be clear, I never get excited about this scenario, because it coincides with a fairly complete destruction of our financial system and a frightening run on the USD. This is good for nobody, and any "gains" that are to be made will be lucky to match the coming rate of inflation.
Obviously, if I had it to do over again, I would have foreseen the continued manipulation of the precious metals markets and the USD and remained in cash in real life until sometime in late November... which I sensed was a buying opportunity that could scarcely be improved. Instead, my portfolio has been on a wild ride. No regrets, though ... it's been very interesting along the way!
Good luck to us all, and here's hoping I'm wrong about it all!
Chris.....Excellent charts....Can you humor us a little and give a some more color on your line of thinking?
Here is my interpretation - specifically on Chart # 2
(1) Free Reserves = Excess reserves - Borrowed ReservesI am guessing at times of recession, where we have seen negative Free Reserves - there has been more borrowing.
(2) The reversal of the ratio is/has been a long-drawn recovery process
(3) Your point I guess specifically is by a 3 month reversal - Fed CREATED this excess reserve/potential supply. Hence as this number migrates back to the the historical - around zero line - this will be released back into the system causing EXCESS LIQUIDITY
Point of the first chart is obvious ( I wish the log scale could be altered - to see a little more granularity) - if the Budget deficit remains high, its not good for the long term currency outlook.
If this is the logic of these charts- there's a few questions I have to ask.
(1) Hyperinflation: The only time it happened/close in the US was in the 1970s. And in all the mass production alstry has - there was one thing he had yesterday - real wages. That was one period where it went up I believe. Has been retracing since - ie although there is a tremendous amount of liquidity created - this will not find ready access to the general populace - thru wages. This is defnitely a barrier to Hyper ( not a show-stopper but a barrier)
(2) Of course,you have to understand that the FED is TRYING TO BE PROACTIVE/ANTICIPATORY ( God only knows whether they are succeeding!) in terms erring on the side of inflation to stave off a Deflationary spiral. The Mega-$TN question is - are they behind the curve/underestimating.
(3) Actually KEY is: Are they overestimating? If they have correctly estimated - they really the effects balance out and there would be minor inflation coming out of this. Of course - Bernanke will be relentless ( incidentally, the man is dead set on his course of action - just read his paper and commentary given in 2003-04 , I think) and predictable in his measures to stave off deflation.
Would someone please elaborate on what a layman should be seeing in the first chart that points to inflation?
The first chart plots the size of the annual government budget deficit against the dollar index. I don't eyeball any strong correlation between these two plots; prior to 1992, there appears to be an inverse correlation, which is then reversed post 1992, but resumed in 2008. Intuitively, I would think that larger annual deficits would weaken the dollar rather than make it stronger, but the chart does not provide much support to my reasoning.
With regard to the second chart, I gather that the point the chartist is trying to express is that free reserves at the Federal Reserve banks dropped very low during the month of September relative to historical norms, indicating that many commercial banks needed to borrow money through the discount window. Reserves were then replentished beyond their normal ratio through the sale of treasuries.
Is there a conclusion that follows from these combined graphics that points to hyperinflation? Spell it out please, I'm too dense for innuendo. ;)
In brief, monetary intervention and budget deficits of this unimaginable scale makes the U.S. Dollar the most unattractive currency on the planet after the Zimbabwean dollar.
What the Crashing Dollar Means for You
The fact that the Fed/Treasury has carved a reversal in free reserves of capital among banks in 3 months that's far greater in scale than the reversal seen in 7 years during the Depression ... that is the potentially lethal blow here. As Anchak alludes in his point #3 above... that spike in free reserves from an unprecedented low makes it highly unlikely that they will be able to manage the impact of all that capital coming into circulation... they have erred towards inflation intentionally to deal with the credit crisis, and in so doing they have built the nastiest financial beast the world has ever seen.
In comparing the dollar to a harare special, are you (we) being fair? The world does not function using zimbabwe's dollar, but the US's. So it makes it much more difficult (if not feasibly impossible) to stop using it. By feasibly impossible I mean it would cause excessive pain to drop it. And in this global downturn will any major player add another burden to their troubles?
That alone makes it at least attractive enough to date (in dimly lit bars where your friends will not see you), until something better looking comes along?
Can anyone elighten me as to the plan, if there is one to remove the excess liquidity once it seeps into the lower levels of the system?
I was being a bit tongue and cheek obviously by throwing the two together, but I believe both currencies are structurally impaired to the point that future viability is drawn into question.
It is 100% inevitable that some countries will begin to reduce their USD holdings IMO. They may try to help it to happen in a controlled descent, but there is also a risk for a firesale decline if just one major holder takes the plunge to divest.
China, as the largest foreign holder, is the one we have to watch most carefully, and they have not exactly been kind with their rhetoric towards the greenback of late. You won't see a Peter Schiff of a Jim Rogers sitting with the USD in that dimly lit bar, but you will find the hoards of Treasury holders who are thinking 0% is just dandy for now. :) That will change, and change in a hurry. The panic of 2009 will be the flight from Treasuries, IMVHO.
No specific plan has been alluded to by Bernanke or Paulson to draw in those USD once velocity picks up, and I defy anyone to spell out precisely how that can be done in a brisk and yet orderly fashion. The collateral exchanged for all those Fed loans has to end up somewhere, and as I've been saying for months the ultimate value of most of the toxic derivatives will prove to be zero, especially considering that the deleveraging which must occur before an appetite for risk can return some value to those instruments has been blocked by the interventions.
We need to delever our financial system, and that STILL has not occured to anywhere near a sufficient degree. You can eat your brussel sprouts now, or you can eat them later once they're moldy and rancid... but either way we're going to eat them.
Just keeping you honest. I agree that the US dollar is impared, still being so necessary is however its saving luxury.
I defy anyone to spell out precisely how that can be done in a brisk and yet orderly fashion.
The Fed has the power to raise bank minimum reserve requirements in proportion to the amount of M2 that has been introduced into the system.
I somehow forgot to rec the post - error rectified!
Chris....can you please answer some of these questions....being asked by laymen!
just rec'd this...great finds and thanks for the very helpful comments all!
Okay, replace hyperinflation with hyperstagflation, and really we don't have any precedent in this country to draw from that shed's significant light on the present situation. This is a currency issue before it's an economics issue.
They are definitely behind the curve. We have barely begun to see the lengths to which they will go to try to absorb these losses on OTC derivatives. They've budgeted $8.6 trillion thus far, but from what I can gather we still have massive amounts of derivatives exposure on the books of companies that they won't want to let fail... so I will not be surprised to see the scale of the intervention triple from here before they are either stopped in their tracks by an untenable level of public ire or ... more likely, IMO ... that run on the dollar by international entities I remain wary of.
I disagree. Even if the $8.6 trillion were somehow the magic number that was needed, and from here we move back in the other direction (not happening, BTW), we would still see unavoidable inflation coming soon. There is no magic scale by which to balance out an intervention like this... every intervention has consequences, and this being the biggest monetary intervention in history by far .... exploding the balance sheet of the nation and swapping fresh dollars for permanently toxic debt... there is really only one outcome, and it's inflation.
Because I've been considering getting into this deflation vs. hyperinflation debate with you Fools, I'm curious about what all of you inflation bulls consider "hyper" in your hyperinflation arguments. Most sources I've found don't subscribe to any particular number, just calling it "really bad" or "extreme" inflation. The one source that did put a number on it indicated greater than 50% monthly depreciation of the currency. Most simply put it in the context of the 1920's German hyperinflation, where at the end of the period the currency was worth something like one billionth of what it had started at.
So my question to you is what amount of annual inflation defines hyperinflation? Anyone? Anyone?
Personally im a gold bull but NOT a hyperinflationist. Hyperinflation is adding zero's to your currency every month like Zimbabwe. 1000% of percent a year.
We are just going to see the 70's again in my opinion and gold will reach its inflation adjusted equivalent of the early 80's $850 in 2010-2011 dollars which is much greater than $850. High single digit to low double-digit inflation with a bad job market…. Hopefully not disco again as well..
Thanks for your interpretation RVAspeculator. I don't see the "adding zeroes" scenario either. The "70's scenario" seems to be the worst case possible IMHO.
Anyone who's a hyperinflationist want to define their idea of hyperinflation? Is anyone expecting something significantly worse than the 70's?
"worse than the 70's" yes! Inflation does not have to be worse than the 70's to make the results worse. Volker took rates up to 20% (almost) to kill inflation. If you think he could do this because the FED is independant of the Executive Branch you are truely Foolish. He could do this because the majority of the public debt at the time was financed long term. Now the majority of debt is financed short term so if a FED chief takes rates to 20% he will BK the US.
I posted a question about the exit strategy for the FED earlier this week. I cannot see any good results coming when the FED, Treasury, and FDIC stop backing debt and printing money.
I have also read how the government is turning into a hedge fund by financing short term to buy long term debt. We know how that works out now don't we.
The "70's scenario" was a walk in the park with birds chirping and apple blossoms blooming compared to the imminent currency crisis ahead of us.
I won't speculate on a given rate of inflation that we'll see, but the charts at the beginning of this post demonstrate that this is an event so much greater in scope than the 70s as to make their comparison virtually meaningless.
Brace yourselves ... if 1970's is the worst you're expecting, then I fear you will be taken by surprise.
Well, if I end up being wrong and it ends up being hyperinflationary I am still in the right stocks except I make even more money… :)
Good post. Thanks. Keep up the analysis. Sometimes Sinclair doesn't provide enough detail for us Sunday morning stockpickers and your insight fills in the gaps.
At the end of the day it all depends on china.
If they keep propping up, then the dollar will have a long time till it crashes. Most products are chinese. (excluding cars)