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Stagnation, Inflation, Deflation, Dis-Inflation – and more – Hyper-inflation?

Back in 2010, in October, William H. Bonner of Agora Financial, a Baltimore based Financial Publishing house and regular commentator on the Financial Markets, released the following piece. Since then, the markets have boomed in some areas, and bust in others. But the real value of many of life’s essentials: Food, Clothing, Shelter and the basic necessities of life, and many of life’s “nice to haves” – Copper, Tin, Zinc, Nickel, Iron, Gold, Silver and of course Oil and Gas, have all experienced significant price changes. But are the prices accurate? Do they reflect the effort and cost of capital needed to extract them, or of their true value, if we run out of them? We may live to find out…

That’s the trouble when you start printing money for nothing, the people who get it first make the most profit, and the further it spreads out from the central bank, the less profit it appears to make. But the good Central Bankers, will do everything they think they can to make things better. The only question is: “For whom?”
Read on to find out.

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Plaza II Accord

Bill Bonner – Friday, October 15, 2010

Keynes was right about one thing…

Peace talks broke down last weekend. Observers had expected the IMF meeting on the weekend to result in the equivalent of the Peace of Amiens or the Surrender at Appomattox. But Treasury secretaries and central bankers went home, unpacked their bags, and resumed their premeditated mischief.

The dollar went down. Why would anyone pay 100 cents for an old, worn out greenback when the Fed promises to create trillions more of them, brand spanking new? Europe and Japan resumed firing with their new QE guns. Asian nations sent out snipers to intervene in the currency markets directly. And China and the US resorted to “trench warfare,” reported The Financial Times, neither apparently ready to give up an inch; that is, neither was prepared to allow its currency to buy more today than it did yesterday. In America, China has become an election-year bogeyman. The electorate seems convinced that any nation that stockpiles $2 trillion worth of America’s I.O.U. greenbacks must be up to no good.

So, the war goes on. But it is an ersatz war. All the combatants really want the same thing – to debauch their currencies at the expense of savers and creditors. Sooner or later, they’ll conspire to get the job done. A full 93% of US financial professionals believe the Federal Reserve Bank is on the case. It is expected to launch major debauch in November. Investors have run up almost all asset classes in anticipation. The Dow passed 11,000 on Friday. Soft and hard commodities hit new highs. And if, on a given day, gold does not set a new record, it is probably because the markets are closed.

What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this:

There is no subtler, surer means of overturning society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose.

And we get to see it live. And probably dead. The US dollar fell under the control of the debauchers, partially, in 1913…when America’s central bank was formed…then fully, in 1971, when gold backing for the dollar was completely eliminated. In the 100 years before the Fed was formed, the dollar lost not a penny of its value. In the almost 100 years since, it has lost almost all of them. If the greenback were to lose another 5% of its 1914 value, there would be nothing left at all.

Such slow larceny bothered no one. As long as the dollar slid gradually, and peacefully towards worthlessness it seemed almost natural, even healthy. Central bankers could mix with polite company and hold their heads up. None was arrested, as far as we know. None was so tormented by his crime that he had to be restrained or sedated. But now central banks are committing their felonies in broad daylight. Economists argue for more. But investors are confused and worried. Today, they buy gold. Tomorrow they may buy shotguns.

But what else can the managers do? After increasing for 61 years, the volume of credit in the US – and hence, the volume of sales – is no longer expanding. This leaves householders with debt to pay down and exporters with no alternative but to fight for market share. What to do about it? Lower the value of the currency! But in a correction, the natural thing is for prices to go down with a decline in demand. So, money tends to become more upright just when the managers would most like to see it slouch.

The poor central bankers. They are victims of their own delusions of competence. They have never actually managed anything successfully. When the economy is expanding, they exacerbate the boom. When it is contracting, they slow down the correction. And now, they fight a currency war not of their own choosing, but of their own making. The war is their response to the correction, which results from the bubble, which was caused largely by the managers themselves.

And now they’re looking for a hotel where they can do it again. It was at the Plaza Hotel in New York in 1985 that they managed their Treaty of Versailles. It ended the currency war of the early ’80s…and prepared the way for an even bigger war later on. Back then, Japan was the go-go economy. Like China today, Japan was the world’s leading exporter. It wanted to keep the yen low. The US meanwhile, was losing market share. James Baker and the other US managers threatened sanctions. Japan gave in. By early the following year, the yen was 40% higher against the dollar and Japan’s GDP growth rate had been cut in half. But the managers fixed that problem as they fix them all. In Japan, they cut rates 4 times in 1986, creating a flood of hot money. Four years later, Japan was the envy of the entire world. In January of 1990, the Nikkei Dow hit a new record – 4 times higher than it was when the Plaza Accords were signed. Then, the bubble popped. You don’t need to be reminded of what happened next. The Nikkei crashed. Real estate crashed. Everything crashed. The economy went into a 20-year tailspin, failing to create a single new job in two decades. Neither stocks, nor real estate, nor the economy ever recovered.

No one wants to follow the Japanese down that road. Ben Bernanke manages the dollar, desperately trying to avoid it. And Premier Wen of China said it would be “a disaster for the world” if Western nations tried to force China in that direction. He’s right. But he needn’t worry about it. Disaster is coming anyway. The managers will make sure of it.

Regards,

Bill Bonner,
for The Daily Reckoning
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And once more, the Banks are mired in controversy. Late on 12th June 2014, we heard that the UK., Chancellor of the Exchequer, will outline new laws to regulate the largely unregulated Foreign Exchange markets (For-Ex).
Every day, over $4 TRILLION changes hands globally in these markets, but several Big Banks – those closest to the Central Bankers, have been allegedly manipulating these markets for their own ends.
The Chancellor will make manipulating these markets a criminal offence.

I welcome the attempt to rein in the worst effects of the bankers actions, but it is a brave policeman, or Financial Conduct Authority, who will apply the new legislation, as Bankers have historically threatened governments of all political persuasions with dire effects if they apply regulations too rigidly.

If you don’t believe me, after the scandals that have come to light in the last five years, including LIBOR, Silver, Gold and other events such as the London Whale, then perhaps you need to read my free E-book, all 633 pages of it – “The Coming Battle”, which documents the worst excesses of these “Wizards of Oz” who pull the political strings from behind the curtain. These bankers who threaten governments, who manipulate stock-markets, Foreign exchange markets, Precious metals markets, and use their financial muscle, to wreak havoc when they fail to get the outcomes they feel they deserve.

But who can take them on?

The latest news from Iraq is ISIS appears to have taken control of parts of Western and Northern Iraq, and Eastern Syria.

Their goal it appears, is to create an Islamic Fundamentalist State. Part of me feels they deserve everything they get. BUT I should point out to all, and any who think that we ought to intervene again in the Middle-East, that our last attempts probably created this hotch-potch of anti-western sentiment – rapidly becoming a “Holy War”.

Besides just by ignoring the problem, these radicals will burn themselves out. Apart from the oil-fields in Northern Iraq, what do they have to sell? Oranges? Lemons? Mangoes? I am at a loss to call to memory anything that is exported from the middle-east apart from oil and/or gas. And therein lies the crux of their problem.

A modern economy has to pay for things that others have to sweat to build. German Engineering comes at great expense, and organisational and engineering expertise. British know-how in Financial Markets comes from a few centuries of having travelled the globe, and of having access to a large capital base, and expertise in how to make use of that. (And maybe that’s another topic of discussion for the future). Jamaica has the right climate for sugar cane, and so uses it to make Jamaican Rum. Mexico, has Silver mines, America has its software and computer hardware. Kenya has its tea and coffee plantations, and Japan, its electronics businesses. Each taking advantage of that country’s strengths.

Adam Smith the father of all economists, called it “comparative advantage”. What he meant was that each country should learn to make the best of its natural resources, and use its natural advantages to their fullest.

But as the world becomes more intertwined, the fruits and bounty of this planet will have to be paid for with real money, not money you can just print up at will. Money (Gold and Silver) has to be dug from the earth, smelted, refined into bars and coins, and thus the labour stored up in them – the knowledge, skills, ore, blood, sweat and tears, becomes a tradeable and valuable commodity. Pieces of paper with pretty pictures on, printed in their billions will not.

Education, research, and expertise gained over long periods gives countries an advantage in particular spheres. And asking the Lord Almighty, in whatever guise you see him, will not cut it anymore.

The Lord helps those who help themselves is a phrase I was brought up on. It is time for the middle-east to wake from its 1500 year slumber, and broaden its economic base through acceptance of certain verifiable truths.

Men are the captains of their own destiny not an all seeing prophet, or god from on-high. Such thinking should be reserved for the home and hearth.

Science, and the application of science – truths in physics, if you will, will improve the lot of the many. A country of fundamentalists, however ruled, who do not realise that they can only pay their way in the world by exchanging things of value, will, if ignored, like grapes of wrath, wither on the vine.

Forcing people to live a particular theocratic life in poverty, will mean they will take the first opportunity to leave. And the oil and gas will stay in the ground if others refuse to buy from these tyrants.

In the meantime, those oil and gas producers outside the middle-east, will be reaping the rewards as the oil price rises once more. Two small producers, I have had a smallholding with for over a year, for just such reasons are: Lenigas and Oil (AIM:LGO) and Sound Oil (AIM:SOU). Both have had good news of late and I believe are multi-baggers from here.

LGO operates in Spain and Trinidad and Tobago, and SOU operates in Italy.
As the world price of oil and gas rises due to the increasing political risks, these small businesses will find their product adds increasing amounts to the bottom line, and thus their prospects will rise alongside it.

Eventually, the public will wake up to the fact that the notes and coins in their wallets, and their bank accounts don’t represent real wealth, and demand alternatives to the currency dictated by governments. Alternatives that have stood the test of time, such as Gold and Silver, and newer alternatives such as the crypto-currencies, I’ve mentioned many times will stand out as value and wealth preservers – Bitcoin et-al, and Gold and Silver, will achieve their true place in the realm of matters economic just as they have always done when governments do stupid things like debauch the currency.

If you liked this post, please like it or even just copy and paste saying where from.

W.

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2014 – New Year’s Resolutions (New Year’s Revolutions?)

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So, 2013 is over, and it’s back to work for most.

As I’ve previously stated, I would be introducing a few investment areas for further research.

Over in the U.S., their economy grew at its fastest pace for a few years in 2013.  The stock market grew at over 30%, and the pull-back expected by many didn’t appear.

Gold lost over 20% of it’s value, and Silver too, had a big sell-off. No surprises from me there.

Early reports suggest it has been a mixed picture for Britain’s High St. retailers during the Xmas period – Debenhams and M&S having a difficult time, while House of Fraser and John Lewis were  up by substantial margins.

On the wider front, RT’s Max Keiser interviewed David Blanchflower on his show this morning, David (Danny) Blanchflower used to be one of the members of the Monetary Policy Committee, at the Bank of England – now he lectures at one of the US’s premier universities – Dartsmouth College, and declared that the QE programme as it was implemented in the UK., could have been improved, by buying Business assets and instigating a Bond to back business lending to small and medium sized Businesses.

As it was, BoE Governor, Mervyn King had other ideas.

Britain’s Daily Telegraph seems to think that 2014, will be a year of good economic numbers – especially if you’re invested in FTSE100 companies. The FT has not fared as well in the last two years as both the Euro-zone, and the U.S. which had relaxed monetary limits with the Fed’s QE programme and the ECB’s LTRO programme. Also the FT100 index has a higher complement of Mining outfits with Antofagasta, BHP-Billiton, Fresnillo and Randgold Resources to name but a few.

The argument therefore goes that, a recovery in these which form a large part of the weighted index, would raise the index to a new high. The previous peak in 1999, as the millenium approached 7,000 has not been bested, but is likely to be this year, with suggestions this might be as high as 7,500 or even one optimistic report of 8,000+.

That said, a great deal will depend on events in the US, Europe and middle and far-east.

China, and Japan are getting closer to a military struggle as resources are competed for beneath the South China Sea, and Japan’s debt to GDP ratio of 270% by year end, will add to problems for the world’s third largest economy. China’s lax financial regulations mean that some large corporations do not have the financial exactitude that we expect in more western regulated markets, and thus it is difficult to ascertain a complete financial picture of those corporations. That said, China’s stock markets seem at low levels compared to the west, and thus a small investment in some of these larger corporations, might be a prudent move.

Fed tapering which is expected shortly might be the catalyst that leads to higher interest rates, and this ultimately might lead to lower market valuations.

Europe is still mired in difficult financial conditions, as the Greeks are still existing on essentially the largesse of the German people.

In Greece, several extreme right-wing groups are regularly protesting at the conditions imposed from outside by the “Troika of the EU, ECB and IMF.

Oil prices which are still high for several reasons are unlikely to fall much though, as increased production from the US, as fracking production has risen five-fold in recent years, is off-set by rising demand in OPEC exporting nations, coupled with a fall-off in supplies as Libya, Syria and Egypt suffer because of rising tensions there.

This changing supply/demand dynamic though will benefit the dollar which may begin rising in value as the Fed’s QE programme gets withdrawn, though it is expected that Janet Yellen will stand by the currency if interest rates begin to rise precipitously.

Which brings me to some of the research I’ve been doing into companies that are likely to benefit over the next few years.

Commodity Companies

Sempra Energy  listed in the U.S., owns a subsidiary, called Cameron LNG, who back in 2005 began production of a LNG import facility close to the national pipelines in Louisiana, and which it is now known has been retro-fitted to enable it to export the glut of Natural Gas to the emerging markets of China and India, via the soon to be opened, enlarged Panama Canal.

Another such organisation is Cheniere Energy who last year signed an agreement with British Gas to supply it with LNG for the next 25years. Cheniere is the owner of one of just 4 LNG terminals, that have the authority and capability to export when they finally get full approval.

Though both these companies’ prices have risen substantially, I expect them to rise still further over the next 5-10 years as the fracking revolution expands in the U.S.

On the minerals front, demand for copper and Precious Metals is still strong in the East, but especially both India and China, with China importing over 1,000 tonnes of the yellow metal in 2013, and with their goal to have a fully tradable currency by 2015, they will I suspect still continue to be big buyers in 2014.  This together with the recent report of a flight from UAE into India, in which almost every passenger on the flight had 1 Kilo of Gold on their person, suggesting India’s love affair with Gold will continue despite attempts by their Government to reduce consumption. Though rising silver demand suggests some of their money is now going into Silver too.

In Mongolia, a mining outfit bought by Rio Tinto and re-named Turquoise Hill Resources (traded on the Toronto Stock Exchange) is primed to supply its Chinese neighbour with Copper, Gold and Silver and has 45 million ounces of Gold and over $300BILLION worth of Copper at its Oyu Tolgoi mine.

Only Mongolese Government incompetence and/or Chinese economic collapse will likely stop this from being a huge success story.

Over in Mexico, a company I’ve mentioned before is currently installing a newly refurbished mill and is likely to be producing at the cost of less than $15/oz by late 2014. As it has already delineated 130million ounces of silver, and I expect a small rise in silver prices by year end, it will be profitable providing it can free itself from its debt facility at some point this year. With as few as 50million shares in issue, each share currently at less than 25p, has the rights to 2-4 ounces of silver per share, depending on a 5th round of exploration slated for this year with expectations to extend their reserves to in excess of 200 million ounces when fully delineated.

Technology Companies

In the technology sphere, two companies producing Graphene, with one of them a sizeable outfit by British standards, and who developed the heat-shield that served to get the Mars lander safely onto the Martian surface last year, will be successful over these next few years. Graftech International is currently below $10, and holds key patents in this emerging technology. They have also recently signed agreements to work with Samsung and Apple who will take advantage of their technology in the near future.

Graphene-Nano-chem, a British listed company is a company which will produce Graphene based chemicals from waste materials at its Malaysian facilities, which will provide graphene enhanced lubrication drilling fluids, used in the Oil and Gas sectors among others.

That just about wraps this post up for today.

W.

Anyway, just for the FCA compliance, Any mention of the companies named above is not a solicitation, but is for education and general informaton only. For the record I am a holder in Arian Silver.