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November 17, 2008

Fast Forward
by Gary Tanashian

Excerpted from the November 15 edition of Biiwii.com's Notes From the Rabbit Hole

Oz

Every week brings new financial and economic chaos and further cementing of perceptions (that should have been adopted years ago) that all is not right in Oz. The wizard is simply human and he is not an evil overseer. He is worse than that. The wizard is incompetent and that is what scares the hell out of people, or at least it should.

There is no master plan coldly implemented by secret illuminati, banksters or any other global fascist alliances. The truth is worse; the people in control do not know what they are doing. They are simply the latest generation of bureaucrats unquestioningly operating the controls of a doomed system. At the moment they are being presented a canvas (deflation) on which to paint their policy (inflation policy, same as it has been throughout the history of the current system).

If policy works yet again, it will manifest itself in rising prices, again. But prices will not rise equally. They are likely to rise based on the real value they provide to real human beings. Yes, food, water, energy and materials in the practical world and precious metals in the monetary world. If policy makers are successful yet again, it will come at the expense of societies" faith in paper money created out of thin air and backed by confidence in the wizard, or the government he represents.

Think of modern day Oz as a bunch of stage props from the original production sitting out on an old abandoned Hollywood lot that is now used by junkies as a place to shoot up and nod. Yes, I suppose there is some value left here, but it is seriously diminished from the heyday when the original production premiered and enchanted millions. The current boom-bust-boom system is fated to continue delivering ever diminishing real returns until the day comes when it just rusts up and ceases to function, gets cast out to the back lot and is inhabited by said users on the nod.

Is that day here? Deflation proponents claim it is. The system of inflate... bust... inflate... ends here and now with this final bust. Inflation proponents say there is another round left in the chamber and this is the round the system will use to blow its head off (hyperinflation). Given policy makers" gargantuan efforts to fight the current deflation impulse and with nearly a century of history under its belt, I am inclined to think the current system will grind on to - as most trends do - a final blow off. This blow off would take the form of the most intense inflation problem to date and could ultimately break the system.

Recent Past

As my wife and a few friends and acquaintances know, I had a bee under my bonnet for several years (the bee has always been there but it was aggravated by my then-"guru"), looking forward in dread at what I knew was coming. I am personally relieved that it is here because the manufacture of ill-conceived and unsustainable credit systems is and has been real, which means it would eventually be dealt with. The reckoning has been and will continue to be severe, but I am glad to simply not have this thing hanging over my head any longer. I review the recent past because when I write about the present and potential future, this provides perspective.

Present

Deflation is everywhere. Confidence is lost. People have been scared back into the "safe" paper issued by those in whom confidence has been lost. Think about that. In the short term, in the present, safety means liquidity and refuge from price destruction. This is a necessary refuge. But the same crowd that could not wait to get aboard the commodity mania now lusts after worthless paper. Are they suddenly right in the big picture? I know I am like a broken record with this theme, but you have simply got to consider a way to establish a contrary focus if you want to survive financially in the future.

Fast Forward

How many people were worried about inflation in late 2001 and 2002? Relatively few, that"s how many. Die-hard gold bugs, the Austrians http://mises.org (who understand the dynamics of money creation) and a thoughtful few others. Fast forward from 2002 to 2007 and you have manic hysteria and the "resources" trade going full steam. This trade seemed more valid then the previous mania in revenue-free dot coms. In fact, many commodity companies appeared to be undervalued even at the height of the boom. But were they? No, they were not considering that the entire commodity bull train was steaming down a track that ended at a cliff. But investors did not see a cliff out on the horizon. They saw a China growth story. They saw an ascending India and developing world. They saw what they thought was an unstoppable global apparatus being constructed. But it was an illusion. The illusion was built upon a foundation that really was never there to begin with; this foundation was the idea that America could keep borrowing its way to prosperity and fueling the global system. Sober, forward-looking people knew this had to end.

But what are we here for at NFTRH? We are here to do what we have always done; look ahead once again. My personal belief is that the new unsustainable story is that people can hide, en masse, in various global paper, the only value of which is the value that respective governments say it holds. Therefore, I am an "inflationist" as some people have described me because when I look forward I see a realization out on the horizon - perhaps as faint as today"s deflationary crash episode looked to most in early 2007 - that the current rush to cash will have been only a knee jerk race for short term liquidity even as global authorities did all they could to destroy the units in which this cash was denominated.

So, with the same hazy timing (it took longer than most of we doomsayers expected for the current crisis to arrive) I look forward and NFTRH assumes the stance of balancing short term needs for "safety" with long term needs for a very different kind of safety; protecting oneself from the devaluation of global currencies. Understand that the stance is monetary first and foremost and while I can see a new commodity boom well out on the long term horizon, I remain focused on the producers of the monetary metals first. The great commodity boom, part II will have to wait until still declining economies experience their next upturn due to today"s policy now being carpet bombed globally, 24/7. As for the economies themselves and associated stock markets, the returns are likely to be diminishing indeed. But there could be select opportunities there as well.

Only a few are watching for this today. It is as it always has been and tomorrow"s counterparty remains secure in its conventional wisdom.

More analysis, including a technical status update on global markets, gold fundamentals and a look at a trading opportunity in a uranium producer follows in the November 15 edition of Notes From the Rabbit Hole (NFTRH8).

Gary Tanashian
http://www.biiwii.com/

Disclaimer: biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.

Copyright © 2005-2009 Gary Tanashian

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