388: Fiat money and the commodities bull run
07-21-2011
www.google.co.uk
· Peak Oil – inability to raise oil production levels to match demand causing oil prices to rise to levels that stifle western economic growth
· Japan Tsunami – the after affects on manufacturing and loss of nuclear power along with western nuclear power bans
· European debt contagion roles onwards
· US debt ceiling and debt concerns – the elephant in the room - with $14.3 Trillion of borrowing
· “Arab Spring” – wars rage in Libya with turbulence in Syria/Yemen/Bahrain – troubles are likely to escalate in October as daytime temperatures cool
· Heat wave in USA, floods in Pakistan/Australia, drought in Ethiopia all putting pr
essure on food supplies
Inflationary Spiral: The USA and UK meanwhile keep base rates at about 0.5% whilst inflation rages between 3 and 5%. The US is considering printing more money, so called QE3. Both the dollar and Sterling continue to decline in value. Inflationary pressures are building as commodities prices rise and more money is printed. It’s a vicious circle as this cheap printed money is then used by the wisest investors to purchase oil, coal, gold and silver – and all commodities - as a hedge against inflation and the declining dollar.
Commodities Bull Run: What this means in simple terms is – the commodities bull run we entered in 2000, of which we are about 60% of the way through, will rage onwards and upwards. Property prices will decline – if they do rise, it will be at a pace less than inflation (e.g. 3% rise if inflation is 6%). Property could still be a good hedge against inflation as equity values will rise. But the real returns in the next six years will be in commodities:
· Oil, gas, coal, wood
· Food
· Water
· Farmland
· Potash-fertilizer
· Gold, silver, platinum, lead, iron ore, all metals
Fiat Money and a Bubble: The only reason why the US stock market rallied from their shock end 2008 lows was because the US government start printing huge quantities of money and kept rates unsustainably low. The money was used to buy the US’s own debt – to prop the markets up – make things look good. This money had very little positive impact on the fundamentals of the US economy. Unemployment has continued to rise. House prices keep falling. Business confidence is low. And frankly no-one trusts the government on the economy. Market traders use the cheap money to boost returns and ride this debt bubble. But they all know it will fail eventually – and everyone has their finger on the trigger to get out and head for the hills as soon as the meltdown starts. The current stock market is a bubble inflated with fiat money waiting to pop.
Banking Wows: Most banks are still in bad shape despite lending at 6% but taking the government money at 0.5%. If base rates rise – they will surely go under rapidly. 2011 is a temporary goldilocks period for them, and the bankers can draw record bonuses before heading for the hills end 2012. We find it difficult to imagine that many of these banks will be solvent in a few years time. If a western government cannot afford to bail itself out, what chance is there for a failed bank when rates have to rise and business and public sector insolvencies increase. It really will get far worse towards the end of this stock market bear run – as inflation takes off. The only winners will be people that get into oil, gas, coal, gold and silver – preferably in currencies of nations that export such commodities like Canada, Norway and Australia. All countries with massive commodities import bills as a proportion of their GDP will suffer hugely – examples Greece, Portugal, Spain, Italy, Ireland. This is no coincidence – the real reason for Euro-contagion is high commodities prices making these countries insolvent. And it’s just about to get even worse.
60% Through The Bear Market: As described in previous special reports, we think the US stock market will correct downwards by about 25% or more in the next 6-12 months. The only th
ing that could save it is more printed money – though this would only be a temporary propping up – like a drug addict getting its last fix. It will almost certainly end in a run on the dollar, massively spiking interest rates and likely debt default. Yes, we are serious. The US economy is now in a precarious state and the real trouble will likely occur just after the 2012 US elections, when the Fed will massively increase interest rates chasing the tail of rampant inflation and the debt bubble created by fiat money to tempt people to vote for the Democrats.
Position for Debt Crisis: So what can US investors do to position for this debt crisis? A few strategies:
· Buy physical gold, silver, oil – store outside the USA in London or Geneva
· Buy gold and silver mining companies
· Buy stock in oil exploration, development and production companies
· Shift cash into a safe currency – Canadian dollar, Norway Kronor, Swiss Frank
· Shift money out of the USA into a safe haven – London property, cash into large Swiss banks
· Buy Canadian oil, oil sands, gas and mining stock on the Toronto stock market in Canadian dollars
· Buy Canadian farmland and forestry
· Short US banks, car companies, tour companies and airlines
UK Investors: For UK investors, it’s a very similar strategy – one needs to s
hift into commodities preferably into a stable currency and within stable commodities exporting nations.
Fed’s Fiat Money: We are completely underwhelmed by the financial and economic strategy of the current US Administration. Lessons from the last 120 years strongly suggest massive inflation is now just around the corner and the printing presses will accelerate in the lead up to the US 2012 election. As inflation takes off as money supply has tripled – gold, silver and oil prices will skyrocket – in a final blow-off period when the most highly skilled investors will make serious money and the average person will lose their savings as banks fold, the government tries to inflate it’s way out of debt and stock markets crash as the final down-leg of the bear market that started in 2000 takes its toll.
Prices Rise: By mid-end 2012 we see oil prices rising well over $125/bbl, with gold rising over $2000/oz and silver rising over $60/oz. These should be about the only things rising by then – apart from inflation and unemployment. If you have stocks in US banking, autos, airlines and/or retail our guidance is simple. Dump them as soon as possible – then short them. It’s the final down leg of a 17.5 year bear market that will end as a whimper in 2017. Watch your cash, because inflation will erode it massively starting end 2012 as inflation gets out of control. Why does anyone think this will not be the case after the government has tripled money supply but the economy is the same size? Stagflation if we are lucky, recession if not and depression is certainly quite possible.
Peak Exports: Peak Oil for conventional crude oil was 2005 - fact. Total oil production continues to rise very gradually only because of unconventional oil like oil sands, natural gas liquids and bio-fuels, but its falling far behind demand now. Production is 88.5 mln bbl/day. Demand is close to 90 mln bbl/day. By Q3 2011, there will be a net deficit of 1.5 mln bbls/day of supply compared with demand, and it will only be a question of time before oil prices sky-rocket again. The EIA released 60 million bbls of extra light crude oil over the summer driving season. It made very little difference to prices. Meanwhile Saudi Arabia unilaterally increased oil production by a whopping 0.75 mln bbls/day last month – they are producing at a 5 year high – but they used half of this increase for their own domestic power production – they burnt an extra 0.35 mln bbls/day of raw crude to power electric generators. That’s equivalent to the total daily oil consumption of Ecuador. We are about the only ones that have put an accurate oil forecast together for Saudi Arabia – yes, their production rises, but my god, their exports are falling continuously. The reason is 45 million energy hungry citizens burning massive quantities of electricity to keep themselves cool in 45 deg heat – this is not a short term phenomena – it’s a long term requirement to keep the social order. We call it “Peak Exports”.
Saudi Oil Production Export Decline and Consumption Increase, "Peak Oil Exports"
Developing Nations Thirst for Oil: Anyone that thinks developing nations will lead the way in conserving oil have another thing coming. Developing nations subsidize oil (not tax it) and they need all the oil, gas and coal they can get their hands on to industrialise, build offices, homes, roads, sewers, rail, ports and all the things the US built in the 1950s-1970s. As western countries increase tax on oil, this will reduce western consumption and the developing nations will take this oil for their own developments. But according to our modelling, this western drop in demand just won’t be enough to prevent oil prices rising as eastern demand sky-rockets. And the Fed’s printing of fiat money will just make matters worse. The Middle Eastern nations want oil well over $100/bbl to pay for social programmes - to ensure political stability and counteract the declining value of the dollar, and their poorly performing dollar investments – bonds and treasuries. As long as the Fed keeps printing fiat money, you will see oil/gas/gold/silver prices continuing to rise sharply as inflation gets out of control. Surely the Fed must be able to see this as well?
Underlying Issue: The British Empire ended in 1945 as an indebted Britain ravaged by WWII costs shift money and power to the USA. The USA global financial empire is just about to pop as the ravages of Peak Oil, a debt bubble and Chinese competition for resources will shift powe
r to China and India. The new growth engine is China – and this should shift to India by 2020 if our demographic analysis is correct. The great US democracy has proved recently that the inter-whined government, politicians, Fed, banks and vested interest groups are unable to make tough decisions to reduce debt and are living in the past still driving gigantic 6 litre gas guzzlers demanding cheap oil. The $350 Billion annual oil import bill has not had any impact on consumption or expectations as the US thinks it can borrow and print its way out of trouble on the rather arrogant assumption that the US dollar will always remain the world's reserve currency. But western and eastern foreign investors are becoming tired of the declining dollar, failed promises, gigantic government, increased regulation, lack-lustre economic growth and increasing debt default risk. There is little objectivity to economic decision making and the top echelon of powerful leaders continue to shift from government to banks - rather incestuous governance to put it mildly. Nothing is being done to control inflation. The Fed looks like it wants to support an inflationary economic growth spurt and debt bubble peaking at the next election 2012. When foreign investors finally wake up to the changed US dollar risk profile, there will be a big run on the dollar and a crisis will break out as trust in the US as a safe haven breaks down. At this point, gold, silver and oil prices will sky-rocket in a final big blow-off shock. Big US business has already shifted trillions of dollar away from the US because of fears of taxation and regulation and it only needs the Chinese and Middle Eastern countries to lose heart in the dollar to create a massive run and slide -after all, its fiat printed money not backed by resources so who could blame them.
Act Now: Our advice is – don’t allow this to happen to you – start acting now – otherwise it will be too late.