East of Eden

"Gentleman, you had a helluva first day."
--Viper (Top Gun)

One of the first official statements out of the new treasury secretary's mouth was that the Obama administration believes that China manipulates its currency. In fairness to Secretary Geithner, officials linked to previous administrations have voiced concerns about the yuan's value as well, although their words were less edgy. Chalk it up to a rookie mistake of the tongue.

But singling out China is amusing because all countries manipulate currencies through both words and deeds. For instance, U.S. officials have chronically jawboned a strong dollar policy (while in the background enacting policies destined to weaken the USD). Some countries 'peg' their currencies to others in an attempt to mitigate market forces. Overt manipulation comes in the form of currency market intervention, which by definition changes the monetary supply/demand dynamic to something other that established by market forces.

In a global economy of fiat currencies, the preferred choice of policymakers over time is to weaken your currency versus others, thereby increasing the attractiveness of your products in the eyes of foreign buyers. Such a policy encourages exports.

As China's export industries have grown, more outsiders have accused them of artificially weakening their currency to support mercantilist export policy. Of course, determining just what constitutes 'artificial' is in the eyes of the beholder. After all, how do you objectively value pieces of government-issued paper, particularly when all nations are engaged in similar programs aimed at devaluing their currency--the so called 'race to debase?'

In China's case, American bureaucrats should be careful for what they wish. The day China decides to let the yuan substantially appreciate, there's a real chance of capital flight away from, and perhaps out of, the U.S. towards Asia. Many smart cookies are getting long the yuan because they think such a trend is likely regardless of whether the Chinese government intentionally moves to strengthen it. Moreover, fewer cheap Chinese goods coming into the U.S. would put upward pressure on domestic prices, which could fan inflationary flames currently simmering under $ trillions of government sponsored economic stimulus programs.

The correct policy, of course, is to get our own house in order. The fact that we continually look outside our house for causes and remedies speaks volumes about our internal capacity for effective problem solving.

no positions

One Honest Man

I'm not expecting to grow flowers in a desert
But I can live and breathe
And see the sun in wintertime
--Big Country

Once again, Ron Paul frames our situation. Many people take issue with the hands off solution, claiming that many people will be hurt. As Congressman Paul notes, however, failure to properly cope with the problem now leads to more pain, perhaps even fatality, down the road.

Due to ignorance, politically driven greed, or perhaps reflexive response to threat, we're placing a gigantic bet with our childrens' future on what reasoned analysis suggests is a long shot bail out attempt.

Mr Paul continues to be the only elected official in Washington who can clearly articulate this position and back it with action. While numerically not much, he provides a beacon of hope for liberty.

Freeze Frame

I could see it was a rough-cut Tuesday
Slow-motion weekdays stare me down
--J Geils Band

Not a bad portrayal by Glenn Beck of what's being done to our currency. To increase credibility and legitimacy, I would have cited the specific data series I was working with, as monetary measures exist. I believe he's using the adjusted monetary base kept by the St Louis Fed.

Central to this situation is the Fed's exploding balance sheet. The current data suggest no end to the money printing trend any time soon.

My memory's prolly failing, but this presentation is the first I can recall where a mainstream media talking head has voiced concerns about the inflationary basis of the Fed and its consequences.

Hopefully it won't be the last.

Perhaps more people are catching on, as gold is back on the move. It's trading at $925 this am, and approaching an important level technically.

position in gold

Search Party

"What is this madness?"
--Arthur (King Arthur)

Mainstream media discussions where panelists interview Ron Paul resemble some weird plot where no matter how plainly the interviewee answers a question, the panel just doesn't seem to get it.

In reality, of course, the panelists just don't like the answers they're getting.

Pay down debt, save, cut taxes, reduce government spending, protect liberty. If we continue to put off such actions? Borrowing from straight shooter Tristan, then we'll never make it.

Tickle Me Elmo

We always wish for money
We always wish for fame
We think we have the answers
Some things ain't ever gonna change
--John Waite

Not sure I've ever felt this bullish on energy--the commodities more so than the stocks. Couple supply destruction with our increased propensity to blanket the globe in fiat confetti and the secular story seems quite bullish from where I sit.

While the time horizon for my thesis is measured in years, it does appear that crude's trying to put in a bottom around these levels.

A technical tell of a change in tone would be if/when price decisively creases near term resistance at about $50.

position in oil

Seismic Moment

I've been feeling so much older
Frame me and hang me on the wall
I've seen you fall into the same trap
This thing is happening to us all
--Crowded House

Nice missive by Andrew Jeffery on the urban myth surrounding central banking. Perhaps the greatest misperception of all is that central banks impart stability to the financial system.

On the contrary, over the long haul, central bank interventions impart tremendous stresses on market landscapes. At some point, the potential energy built up by these distortions turns kinetic. We're experiencing the energy release from one of these policymaker-induced earthquakes currently.

For perspective on just how extreme central bank intervention has become, check out this video.

We'll need to recalibrate the Richter scale for this one.

Consumption Function

I must've dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street
--Genesis

Increasingly policymakers spin current and future economic stimulus packages as 'investments.' As part of his recovery plan, for example, President Obama proposes that we invest in modernizations that would make three quarters of all federal buildings more energy efficient.

Spinning government expenditures as investment is not new; it can be traced back to at least the original New Deal. 'Investing' has a durable, learned ring that helps policymakers and citizenry rationalize the spending.

But spending is what it is, as government expenditures represent consumption. Investment comes from voluntarily allocating a portion of savings towards capacity for producing more resources tomorrow. Currently, of course, we have no savings to allocate. Moreover, government spending results from a process of obtaining resources from citizenry in a coercive, rather than voluntary, manner.

The appropriate solution to a debt and spending problem is to reduce debt and save. Such a solution, of course, is lost on policymakers.

Rather than investing in federal building improvements per President Obama's plan, we would be better off divesting the government buildings themselves. Proceeds could be applied towards reducing the deficit. Size of government (read: capacity for further spending) would shrink. And resources would return private hands where, over time, they are more likely to be productively put to work.

Not likely, I know, as our course seems fixed on achieving a destination of squalor.

Fantasy Farm

Well I came across a child of God, he was walking along the road
And I asked him tell where are you going, this he told me:
Well I'm going down to Yasgur's farm, gonna join in a rock and roll band.
Got to get back to the land, set my soul free
--Crosby, Stills & Nash

Jim Rogers lays out his case for commodities once again, and the negative drag likely to be imparted on paper financial assets (i.e., stocks and bonds) by monetary and fiscal policy.

Peter Schiff adds the inflationary ramifications of current policy on gold, oil, et al (bullish) and the US dollar (bearish).

Sprinkle in current optimisim with the incoming administration, and it sure feels like conditions are forming for a big 'reflation trade'--particularly in 'stuff.'

positions in gold, oil

Yippie Kai Yaye

"The only thing better than blowing up 100 billion dollars worth of gold is making people think you did."
John McClane (Die Hard With a Vengeance)

Strong $40 move in gold today, which puts bullion right around $900. Things look very nice technically after today's quadruple top breakout in PnF land.

Should the yellow dog clear $935, then an assault on last spring's $1000 high would be in sight.

position in gold

Head Start

Make it up as we go along
Feet on the ground
Head in the sky
It's ok I know nothing's wrong--nothing
--Talking Heads

Want to evaluate how sharp mainstream media talking heads are? Get them yapping about economic issues and listen to most reveal just how ignorant they really are.

One who, in my view, passes this acid test pretty well is Glenn Beck. Considers both sides of the trade, studies history, conclusions driven more by reason than by politics. Also very grounded in the principle of liberty.

Two recent interviews of interest: with Peter Schiff, with Ron Paul. Both raise the spectre of extreme inflation, perhaps a la Weimar. I've been allocating more attention in this direction as well.

The proposed mechanism: Large industrialized debtor nation needs money>>taps credit markets in huge size>>foreign lenders load up on debtor country bonds>>economic and fiscal conditions worsen>>as foreign lenders increasingly perceive risk of not getting paid back, debtor nation is cut off from credit markets>>debtor nation begins to 'monetize' debt (read: printing money)>>currency gets devalued>>creditors dump debtor nation's bonds>>monetary printing presses shift into hyperdrive>>currency craters>>real interest rates and prices rocket.

Given our massive debtor status, current economic trajectory, and political resolve to do 'whatever it takes' to 'save' the economy via stimulus, it's difficult to ignore the extreme inflation possibility.

I've been assigning higher probabilities to this scenario by the day. And positioning accordingly.