Below is an excerpt from a commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, March 19th, 2007.
Many of you will have either read the book or seen the movie starring Robin Williams through which the great John Irving attempts to stimulate alternative thought. And although the dry nature of financial matters will not allow us to employ the same comedic license Irving utilizes in bringing the more profound messages in his work to life, the words on these pages are designed along similar lines - to stimulate the mind. What's more in this regard, our story is also not isolated to suburban USA. No - what we are talking about here is 'The World According to Garp' seen through the eyes of Goldman Sachs (GS), because what they are not running in the financial world already, they will be if allowed. Let's hope the Chinese see the light before it's too late.
Why is this happening? Well, according to them, and like T.S. Garp, they simply know better through 'hard experience', along with having our best interests at heart. In this respect, more recent 'pearls of wisdom' espoused by their unbiased experts who are now running the financial world have centered on the unfolding sub-prime lending debacle that according to them is 'manageable', and 'largely contained'. Of course what Paulson (a GS kingpin), is really saying here is 'don't worry - be happy' because 'hell or high water' we will find another bubble for all those fiat dollars. And as long as I am in charge of the Treasury no measures are out of the question in ensuring all the balloons remain in the air. Oh - and again, don't you worry about the sub-prime mess, even if it spreads a bit more as we attempt to take commodities down in coming weeks, because we'll find other balloons to blow up in front of the election next year. Don't you worry about that! As a side note, and out of character for a supposedly unified price management group, we find it interesting not all share this view. But of course Fed Governor Susan Bies is retiring next month for some reason.
And in knowing politicians and confidence men specialize in distraction, it's obviously not a stretch to also deduce there must be a bigger problem without even checking, but this does not mean they won't get prices rising again next year no matter how bad they botch things up now. That's right - don't you worry because remember from above, they know better. Unfortunately for us however, their idea of 'knowing better' is just a more extreme version of what the 'do nothing' politicians and bankers do best, that being printing money in what has now morphed into the most sophisticated Ponzi scheme in history. And it gets better if you can find any degree of humor in this situation; with the feds telling us regularly inflation is the primary concern on the agenda of problems to deal with. And although I do not agree with his conclusions in terms of what to expect in coming days, the quote cited below from Adrian Ash's most recent publication does a very good job of shedding an informed light (we have shared for some time) on the degree of complexities now involved in the larger system, as follows:
"The global money supply has come to have little to do with interest rates, or so it would seem. Some three-quarters of all liquidity comes in the form of derivatives and securitized debt, as the analysts at Independent Strategy have observed. And if raising rates did nothing to slow it, the bubble in money might just start to deflate even if short-term rates now get clipped back towards zero."
Is the monetary base set to begin contracting, as suggested by Mr. Ash and his friends? Not in my books if this chart is any indication. And of course let's not forget why, with all the backdoor inflation coupled with what foreigners are doing, which is further evidenced by both raw commodities and input prices remaining stubbornly resilient, effectively sponsoring the most pronounced case of stagflation since the 70's. Of course this will need to be pushed in one direction - recession / depression - or the other - that being hyperinflation. Gee - let me think. Which alternative will the banker boys choose - inflation - meaning they continue to live fat for as long as possible - or deflation - where they will be forced to answer a bunch of questions from some very upset people? If one has to think about that question for long you have not been doing your homework, because history has taught us if bankers only know how to do one thing well, which is in fact the case, it's debasing the currency. They are experts at that, as proven time and time again. Just ask Garp (GS). They'll tell you how it's to be.
And this is why the more likely resolution to the current stagflation picture is not the same as the 70's, as some people think. Nope - we are not in a situation like that of the 70's at all. Back then people had savings, debt payments were manageable, and real wages were enjoying the fruits of newly accelerating inflation at the time. So you see the economy back then was actually very strong in relation to our present credit based / bubble experiment. And it's because of this authorities are in no position to dish out the hard medicine (think 20% interest rates) seen back then in order to regain the respect of credit markets, whatever that means today. Be that as it may, this is why one should expect continuously rising inflation no matter what the Fed heads are talking about in the media. They are simply attempting to jawbone out of control commodity markets with words, but all the while, they continue to provide plentiful liquidity hoping it doesn't spill over into rising costs. Unfortunately for them, this is not the case of course, where at some point both the feds, and unfortunately all of us as well, will get caught for allowing such lunacy. But for now however, it's very important for you to understand that anyone talking about deflation and falling prices of any kind, including that of the stock market, as per our comparative analysis sited here many times now, should be ignored. These people simply no not of what they speak. How's that for some 'proper English'?
But, what if inflation efforts fail? Is this what will be necessary for precious metals to take off? Will the panic associated with such a development mark the 'official turn' into hyperinflation? The answer to the second and third questions is 'yes' in my opinion, where the reasoning behind the logic is found in answering the first. Here, if for some reason prices begin to fall, and threaten a sequence much like that seen in the year 2000 with the unwinding of the tech bubble, while scary at first, until proven otherwise, the educated investor must assume monetary authorities will attempt to stay ahead of the curve. In this respect one should note nothing meaningful has happened yet to the aggregate credit bubble associated with real estate, but that when it does, rates will drop quickly in response. What's more, if the wider measures of prices were to unexpectedly begin to fall, because up to this point authorities have been attempting to avoid this while at the same time attempting to knock select input prices down, they would be forced to hit the gas pedal hard, completely reversing current policy measures, perfidious as they may be. And it could be argued we are very close to this point now, where the possible 'island bottom' put on the 'yield curve' (just click the icon labeled Yield Curve) would be a first indication monetary policy is expected to return to 'easy street' soon. Here is the current snapshot of the long-term chart we are running on the yield curve, where as you can see odds heavily favor the next move of consequence being higher in what we will label wave III of a larger sequence. (See Figure 1)
Figure 1
And this is not the only chart showing 'easy money' policy is likely a lot closer than some may be thinking. Of course if you are in the sub-prime mortgage business, you probably think the Fed is behind the curve. Unfortunately for these people, they fail to realize they will be labeled another 'failed experiment' in Fed annals, with the result being hyperinflation. Here, the thing to realize is the NASDAQ bubble was small potatoes compared to the developing real estate debacle. This is of course why more and more ratios, which indicate the markets see the need for easy money, are already showing 'the need for speed' in monetary debasement rates, effectively giving monetary authorities the nudge to react accordingly with official policy. The yield curve pictured above is key in this respect. And there are many more both officials and investors watch for policy clues, with this next one being of particular interest to the latter group in attempting to jump ahead of official policy. (See Figure 2)
Figure 2
The key variables here appear to be whether diamond support on RSI or Fibonacci / flag resistances give first, which in turn will determine whether precious metals shares breakout against the broads (an important inflation signal), or not. This is obviously an important ratio to keep our eyes on then, because a bullish resolution here would signal the inflation cycle is set to heat up, possibly marking the beginnings of a resolution to the stagflation problem plaguing mature western economies these days. And the list of important ratios in this regard go on and on, but with due respect to our subscribers we will not be covering them here on these pages today. If you are interested in a more detailed ratio related study of the markets we cover is suggesting at present however, we would be happy in welcoming you into our subscriber ranks. If interested, just follow the cues provided below.
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