Contracting Credit Cycle and Monetary Debasement During 2008 Equals Commodities Super Cycle
Commodities / Money Supply Dec 26, 2007 - 03:48 PMBy: Captain_Hook
The Need For Speed – Part Deux : The credit crunch continues to worsen , where very soon attempting to paper over all problems with more derivatives and bailouts will no longer work, and authorities will be compelled to increase currency (just another derivative) debasement rates to higher thresholds around the world. Correspondingly then, and as was the case in the early to mid-80's to stimulate the US economy, expect Money At Zero Maturity (MZM) growth rates to top 40-percent in coming days as authorities are forced to monetize increasing bank failures and facilitate ‘price stability'. The technical underpinnings associated with this condition can be viewed here in Figure 6 , where if history is a good guide, year-over-year growth should continue to accelerate higher in coming days. As mentioned the other day, they are not alone in this regard either, that being accelerating currency debasement policy. As a matter of fact, and contrary to claims by Goldman Sachs asserting the reason the dollar ($) will rally next year is because credit markets will be improving, the bailouts abroad are accelerating to the point money supply growth rates in the Eurozone are now outstripping those in the States as ‘the race to zero' ratchets up a notch or five. This is why the $ is in rally mode, and also why gold should not suffer as much as bearish speculators think at present. You see they are all looking over the deflation cliff, but what they fail to realize is that authorities still have the hyperinflation card to play.
Some of you may be thinking the above ideas are ‘fine and dandy', but with the reservation some empirical evidence to support this hypothesis would be better. And we could not agree more. So, we intend to do just that for you now, where the idea is to provide you with enough empirical evidence to make one feel comfortable about holding precious metals investments in coming weeks and months in spite of the fact deteriorating liquidity conditions and investor panic could erode prices considerably from current levels under the right conditions. What kind of conditions are we talking about? How about a good old fashioned panic, something we have not seen in quite some time as investors were lulled to sleep in this regard long ago with the protection of hedging related derivatives. Too bad these markets don't work when the chips are down however, no?
Anywho – and to the chase now, you may remember our article entitled The Need For Speed from earlier this year, where we first hinted at a contracting credit cycle , and that monetary debasement rates will need to accelerate at some point in the not too distance future in order to keep the USS Titanic afloat. Fast forward to today and here we are in exactly that situation, where monetary authorities are now debasing the currency at just shy of a 20-percent clip , and rising, in an ongoing effort to extend the larger credit cycle. And as alluded to above, there are numerous ways one can measure success in this regard, from currencies to asset bubbles, where to kick things off in terms of our examination of such variables, a look at the Swiss Franc is likely as good a place to start as any. Not talked about as often as it could be, as it stands today, the basic trading modus operandi behind movements in the Swissie is a function of perceptual pressure in the global economy's pipe, where the mere hint of deflationary forces coming down the pike can cause it to back off in short order, as it's doing right now. (See Figure 1)
Figure 1
And in looking above it's not difficult to see that in fact technical conditions appear stretched to the upside and at a minimum in need of consolidation, which appears to be exactly what is happening, we hope. Because if this is not the case, where the count indicated is correct, then this could be a far more profound end to the rally in the Swissie (and possibly the larger credit cycle), at least on the basis of a more healthy global growth metric. Here, and as you can also see above, we are placing both gold and commodities ($CCI) in the same camp as the Franc considering the extremely tight correlation between the three, where again, reversals here would indicate the larger credit cycle is failing, and that present day currency mechanisms are beginning to reflect this condition in deflating asset prices.
So, the question then arises (and many an informed observer is asking this exact question right now), ‘is this the way it is – deflation right now – or is there more inflation yet to come?' Answer: We know from our discussion above concerning official efforts to keep the money supply growing (which is happening by the way – but it's the pace that needs to keep accelerating), that as long as monetary authorities have blood coursing through their veins, they will inflate or die. And in fact if history is a good guide, they should be successful at least one more time, perhaps as MZM growth rates search for the highs seen back in the mid 80's, discussed in our opening. Of course you may remember prior to this we had a little problem in the stock market in the early 80's that prompted such a response, with the big question here today being, ‘do we repeat in this respect as the final justification in going to light-speed in monetary debasement rates?'
This is a distinct possibility in my books, that being a short but sweet stock market scare, where as with the echo-bubble top back in 1937, the market peeled off 50-percent of it's gains in approximately six-months. (See Figure 1 ) What's different about today is it's not likely World War III will come along formally to create the conditions (death and destruction) for another growth sequence like the one that's ending now, but without a doubt some like George Bush and friends will try. Of course the absence of a formal world war will not stop monetary authorities from accelerating currency debasement rates either, not with all the $50,000 hammers and $50 million war-planes to pay for these days. So you see we don't need a world war to spend this money. What we do need however is at least a few more years added to this commodity cycle if it is to match the 70's experience, which as you can see below lasted approximately nine-years as opposed to the seven we have seen thus far in the current commodities bull market. (See Figure 2)
Figure 2
Source: The Chart Store
What's more, in terms of the current commodities bull market it should also be noted that along with the time element being deficient on a comparative basis to previous cycles, prices would also be deficient in just reflecting past inflation if they stopped here as well, never mind the future. This can be seen below on a CRB plot adjusted by the Consumer Price Index (CPI), which of course is deficient in its own right in terms of reflecting actual inflation / price increases over the past 30 to 40 years with official rates far removed from reality. That understood – it's interesting to note we're not even at the halfway point in terms of official price; and that if history is a good guide the next few years should see some quick catch-up in this respect. (See Figure 3)
Figure 3
Source: The Chart Store
So why are precious metals doing a terrible job of discounting such an outcome? This is a valid question considering for example the Gold / Crude Oil Ratio is much closer to historic lows than highs. In this respect it had better get going if it's to signal higher prices down the road. And we expect this occur in coming days, even if nominal prices fade in coming months. As Einstein would say, ‘it's in the relativity you know.' So don't be fooled by falling nominal prices in coming days, it's the relativity that's projecting future outcomes, where as long as gold is outperforming commodities, higher prices should ultimately be anticipated down the road. Thus, after a brief respite which could last as long as spring of next year possibly taking the Reuters/CRB Precious Metals Index (and gold) lower, I would also expect to see prices take off here first in discounting a return to pricing power as another wave of accelerating inflation takes hold. (See Figure 4)
Figure 4
Source: The Chart Store
And while some will see this as an election ploy, in actuality efforts to revive the economy should be seen on a higher level, where future attempts in this regard might not be so successful as Super-Cycle Degree forces continue to conspire in shaping conditions for Grand scale change. That is to say eventually considerations such as availability of increasingly scare resources (pertaining more to developing countries) and demographics (pertaining more to developed countries) are forecast to limit population growth, meaning the demand for increasing currency will wane both naturally and beyond the ability of bankers to circumvent via increasingly complex derivative schemes. In a nutshell, and unlike Einstein, they will simply be unable to split fiat currencies (derivatives) any further or manufacture sufficient new takers. Largely, this would be the reverse of both the ‘oil age' and the US Dollar ($) empire fostered in carbon based technology.
Again however, these are considerations for the future, and views that are subject to change in measuring man's ingenuity. That said, and in returning to the focus of today's study, along with measuring the impact of past monetary policy on present and future commodity pricing, as purported above such realizations should first be witnessed in precious metals prices, gold first, followed by silver. What's more, and contrary to the view a period of price weakness lies directly ahead signaled in ratio reversals across the equity complex discussed in our last meeting , it should be pointed out that if nominal precious metals pricing is to catch up to inflation adjusted values, this process should accelerate forthwith, not hesitate, which is the view most investors have today with all the deflationary forces coming down on the system at present. (See Figure 5)
Figure 5
Source: The Chart Store
As can be seen above for gold and below for silver, as inflation works its way into the larger system in official measure precious metals prices respond by rising, but that even back at the top of the 1980 cycle nominal pricing failed to capture real values, which is a condition still with us today. Of course it's always been this way, as it's the inflation that leads prices higher, even if official pricing measures (CPI) are flawed. That being known, at some point you would think the market should reflect even these flawed numbers, where again, in order to do so in terms of 1980 $'s, the nominal price would need rise to almost $2500, and silver $150. (See Figure 6)
Figure 6
Source: The Chart Store
So, the question arises ‘what's holding this whole process back if monetary growth rates are accelerating higher , which of course is the definition of inflation ?' Well, for one thing officialdom attempts to have you believe their lying about actual price increase rates, as measured by CPI, is in everybody's best interest. (i.e. this is of course better for the bureaucracy than the public.) Corresponding then they feel justified in publishing bogus pricing data , which in turn apparently keeps a lid on inflation expectations as institutional managers play the game. This is the way it's been for some time now, living in our ‘Goldilocks economy', but could it be that an outside factor like ‘peak oil' comes along to prick our collective (monetary) bubble? Would crude oil at $200 finally create enough panic in the financial system to break precious metals free of paper pricing related constraints ?
Without a doubt, and for one thing, it wouldn't hurt to finally see the Gold / Crude Oil Ratio attached above move higher on a sustained basis, perhaps returning to historic highs after plumbing new lows recently. But if not this – what? You know what? It's not important to know what factor(s) are going to prick our current monetary bubble. What is important to know however is it's going to happen, and that it will likely occur in conjunction with a period of extremes in pricing such that the public finally awakes from slumber to realize ‘the system' was not created to serve their needs, but to reward the ambitious and corrupt. This is when gold pricing will break away from management attempts to keep it ‘just right' as per the ‘Goldilocks economy'. That's when it will finally break above Grand Super-Cycle Degree sine resistance seen below. (See Figure 7)
Figure 7
Source: The Chart Store
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Merry Christmas all, and Happy New Year.
By Captain Hook
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