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Wow! What A Week! Last week we talked about the possibility that the long U.S. Bond was on the verge of heading for a long-term bear market and that if that happens, we could be much closer to a breakdown of our entire financial system either through a devastating deflationary collapse or, more likely in our view, a hyperinflationary event, at least as long as the current line of thinking personified by Ben Bernanke remains the dominant modus operandi at the Fed.
Indeed, our Trader Tracks partner, technical analyst Roger Wiegand believes we may have a very big opportunity to make big profits by shorting the 30-year U.S. Treasury. Roger notes how this most important U.S. funding instrument is breaking down longer term (above left) and how it has also broken down in the shorter term (above right) Roger thinks a short of the 30-year Treasure could present us with huge profit making potential later this year and into 2009. As inflation continues to rear its ugly head and as the establishment finally catches on to that fact, it hard to see how savers in the world won’t demand much, much higher yields in the future, which means the bonds will have to fall dramatically in price. In the past we have used the Rydex Juno Fund (RYJUX) to short long U.S. Treasuries. That would likely be our choice again for this letter, so we will keep you posted when Roger believes it time to short Uncle Sam’s long term promise to pay with printing press money. Long Bond Weakness Has Fed Worried It was obvious to me early last week that the Fed was becoming very concerned about the decline in the bond market, because for the first time in a long, long time, the Fed began to talk about the need for a strong dollar. Wall Street was so gullible that Dennis Gartman and other anti-free market Keynesian/communists who make up the ruling elite immediately became bullish on the dollar and declared the precious metals and commodity bull market to be over. What a joke! I am amazed at how Wall Street naively believes what the head of our Fed says. Like pawns on a chessboard they are thrown about and used to serve the ruling elite. As we have been noting repeatedly, the Fed is an instrument of inflation, not price stability. The excuse for its creation was price stability and a reduction of the wide swings in the business cycles. In fact exactly the opposite has happened, as witnessed by the more than 97% decline in the purchasing power of the dollar since the Fed was created in 1913 and by the fact that we had the biggest business downturn in history in the 1930s. The Fed has been a huge failure by every measure, at least in terms of its stated objectives. In terms of the real reason the Fed was created—to make the rich richer—it has been a huge, unqualified success. Through its inflation it has made its Wall Street bankers hugely rich at the expense of the common man—the miner, manufacturer, farmer, inventor, etc. So the Fed wants to inflate and keep doing it because it makes its own stockholders – large global banks—rich. But The Fed has political, economic, and psychological problems on their hand with its continuous inflationary behavior. As von Mises noted, as long as people think the inflation will end one day, the Fed can continue to inflate. That is why Mr. Bernanke started spinning propaganda about the dollar this week. With the Bond markets showing signs of weakness with rising inflation in the U.S., and with the U.S. the biggest debtor nation in history, it is evidence that some real fear has begun to creep into the hearts of these greedy bugger policymakers who pull Mr. Bernanke’s puppet strings. What if the rest of the world sells down the dollar and we can’t sell any more bonds? The Fed would then have to begin its hyperinflationary process. That clearly has some Fed officials very worried. On Tuesday, Bernanke began to spin the phony story that he and the Fed really care about inflation and the dollar. The market believed it for a day or two until the European central bank called Ben’s bluff. The Europeans, who still remember the hell of hyperinflation, are much more concerned about inflation than we are. They know that increasing the money supply (reducing rates) will ultimately lead to higher and higher prices. So the Europeans anti-inflation fighting polices are much, much more credible than the Fed’s. So when Trichet suggested on Thursday that the European bank may raise interest rates next month, the dollar fell like a led balloon, canceling “strong dollar” the spin put out by Bernanke on Tuesday. Because of the horrendous state of America’s credit markets (which keep getting worse), Bernanke could only talk about a strong dollar. But the markets have a much higher level of confidence that the Europeans mean business about inflation because they have been more inclined to back their words with action. So, on Friday, the dollar tanked while oil and gold rose dramatically. Where Do We Go from Here? It is interesting that Bernanke is starting to get some real flack from some of his fellow central bankers who are questioning: (a) continuous interest rate cuts (increase in money supply), and (b) bailouts of firms outside of the commercial banking circles, such as Bear Stearns. It seems there are some folks still within the Fed that do not believe all the fairy tales told by Ben Bernanke. We are thankful there are some doubts by Fed officials about the ability of the Fed to print infinite amounts of money and drop it out of helicopters so as to avoid pain and to create infinite levels of wealth. We think we are approaching the point in time when things are getting very dangerous in terms of a tipping point for our IDW, with opposition to infinite amounts of inflation creation by the Fed, such as that expressed by Jeffrey Lacker, president of the Richmond Fed, and Charles Plosser, president of the Philadelphia Fed. Why is opposition to Ben’s endless helicopter money potentially dangerous? Because what it is going to take from now on is more and more money creation at a faster and faster pace to keep us from rolling over into a deflationary implosion, the likes of which my good friend Ian Gordon has been warning. In fact, I would prefer that to happen rather than see us head into a hyperinflation. Either way, we will face extreme economic pain in America. But at least in a deflationary collapse, those who have lived within their means will be rewarded, and those who live beyond their means will be punished. In a hyperinflation, everyone is wiped out except, perhaps, those who are fortunate enough to own gold and to be able to hang on to it in the midst of social chaos.
The two charts above (gold on top, dollar on bottom) depict this long-term dollar weakness trend. There are hugely powerful forces causing this long-term breakdown of the dollar and rise of gold. The U.S. government continues to fund its empire with borrowed and printed money and now it is trying to mask the real pathology of its financial system by printing hundreds of billions more dollars to try to keep Wall Street’s ruling elite wealthy and to keep politicians in elected office. The continuation of these policies are at odds with a strong currency because the political and economic fallout by discontinuing these dollar destructive policies are beyond comprehension. Therefore, until we see something more than mere jawboning by the fed like some real hard-nosed monetary restriction and rising interest rates, we continue to bet inflation will continue to be the dominant symptom of the current U.S. and global monetary pathology. June 8, 2008 |
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