Monday, October 31, 2011

What's in Your Wallet?

If you have not heeded our warnings to flee the the following asset classes you deserve what is coming to you:
  • Savings accounts
  • Certificates of deposit
  • Cash (Beyond a reasonable stash)
  • Government bonds
  • Municipal bonds
  • Currency markets
In 1944 world economic leaders met in Bretton Woods New Hampshire to structure the post war monetary system.  Upon the conclusion of World War II the United States possessed 22,000 tonnes of gold.  This put the US in an incredible position of strength.
In liberal classrooms students are taught that fairness and equality are to govern society.  In real life, strength, power and force determine direction and more importantly who gets to drive.

The dollar would now be the denominator currency with respect to settlement of world trade.  At any time, $35 could be exchanged for one ounce of US gold.  This would allow other currencies and commodities to trade off of this standard.  Pseudo-intellectual know-it-alls call this a "Gold standard" but they are once again wrong.  This is an exchange standard.

By the late 1960's the US was committed to the great society and to a complex military effort in southeast Asia.  Many veterans are unwilling to study what was really happening in Vietnam but sometimes the truth hurts.  This effort was not winnable and financiers funded the opposition.  There was tremendous wealth to be made from the US spending required to continue fighting.  US politicians were determined to please voters receiving new domestic entitlements while at the same time defending positions in the Asian jungle.  Some money would need to be printed in order to prevail on both fronts.

Merchant bankers were delighted to assist the political class in this effort.  Freshly printed dollars were then quietly taken back to the gold window and exchanged for bullion.  This continued until the US was left with 8,200 tonnes of gold.  Richard Milhous Nixon announced that as of August 15, 1971 the exchange window would be closed.  He was also kind enough to explain to an unaware populace that the speculators had caused this problem.

Now the currency was floating freely with no formal denominator.  The problem with this structure is that leaders never met to discuss this arrangement.  The US positioned itself inside the Saudi government in order to create what we call the "Petro dollar."  This was an effective strategy for many years.  Oil trades would be required to settle in dollars.  The Saudi's could control OPEC and we could control our chosen puppet leaders.  What many readers do not know or accept is that the US Treasury has significant operations within Saudi Arabia.  This presence was required because we forced the Saudi's to funnel their petro dollars though the treasury auction system.

In an effort to keep your attention, we will fast forward to the present.  Governments are facing the reality that they have leveraged their societies to unrealistic levels.  There is simply no way of cutting back sufficiently without destroying growth.  At the same time, there is no way to grow out of the hole.  Like a band-aid applied to a severed artery, politicians seeking job security have chosen to print additional currency in "moderation."  While this allows them to avoid pain they are using the citizens as human shields.

Countries must maintain a weakening currency in order to prevent their economies from seizing up entirely.  Japan has tremendous issues in this realm and was sustained by a weak yen for nearly two decades.  Now that other developed nations are rushing to devalue their currencies, the yen has strengthened making Japanese exporters drastically less competitive.  The Japanese government has established a fund to help companies that are suffering under the burden of a stronger yen.

Last night the Bank of Japan intervened in the currency market in order to weaken the yen:
Take special note of the time that this occurred.  Now notice the corresponding impact on the gold price in dollar terms:
When we specifically point out that this gold chart is in dollar terms we are trying to illustrate that the Bank of Japan acting to weaken the yen strengthens the dollar.  For new readers, currencies are only trading against one another in the form of a cross trade.  If you are long yen you must be short dollars, euros, francs or any currency of your choice.

This concept is critical to understand because the currency market is one massive pile of worthless paper.  When paper is rising or falling in value against other paper you must zoom out and see the entirety of the market.  In this case, would acquisition of a tree farm not be the proper course of action for a savvy investor?
These and other actions are occurring with increasing frequency.  Central planners are responding like junkies to the problems created by years of manipulation.  The problem with synthetic addiction is that increasingly large quantities of substances must be ingested in order to maintain or even achieve a high.  In the beginning the drug serves the user but in the end the user serves the drug.  We can only picture the offices of central planners beginning to look like this:
So what is the solution?  We urge readers to consider The Art of War by Sun Tzu.  Chose the battles you wish to fight as each one requires energy.  This is one where we urge you to consider abstinence if possible.  Purchasing precious metals and hard assets using soon to be worthless paper currency is our recommended strategy.

Talk it over with your stock broker but please force him to comment on the world's debt load.  Force him to answer the question of how the debt will be repaid.  If he admits that they will likely devalue the currency to accomplish this insist that he outline an investment strategy that considers this fact.

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