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The U.S. economy is still the largest in the world, though the economies of China and India are growing more rapidly. The U.S. Dollar is still the world’s Reserve Currency, though its dominance is threatened. Thus, understanding the true state of the U.S. economy (as opposed to the illusory one painted by bogus Agency statistics) is essential to understanding stagflationary realities and how to cope with them. Contrary to the massaged figures emanating from Washington, DC agencies, the U.S. GDP has been a negative number for several months*. This negative GDP reality is the “stagnant” part of the stagflation. Regarding the ongoing monetary inflation, independent and credible calculations of M3 (which The Fed no longer publishes) show it rising at a 13% annual rate*. This means monetary inflation is proceeding at an extraordinarily rapid pace. It means that the U.S. Dollar money supply is increasing at a rate which would double it every 5.5 years. Of course, with such rapid monetary inflation, the purchasing power of that inflating fiat currency, the U.S. Dollar, must perforce be expected to continue to decrease dramatically. And consumer price inflation in the U.S. is running at about 10% per year, contrary to government figures*. That is, it is increasing at a rate which would double it every seven years. Thus monetary and price inflation threaten U.S. Dollar purchasing power - - a most crucial “asset.” [See Deepcaster’s May 24, 2006 Report in our “Alerts Cache” entitled “The Golden Rule: Maximizing Real Gains.”] Therefore it is purchasing power that we want to protect and enhance when coping with the monetary and price inflation characteristics of a stagflating economy. Of course, such a steep annual increase in the U.S. Dollar money supply comes at a huge price. It puts the World’s Reserve Currency, the U.S. Dollar, at great risk. And, regardless of the market intervention and data massaging shenanigans of the U.S. Federal Reserve-led Cartel of Central Bankers**, monetary and price inflation ultimately create a threat to purchasing power. Another, and equally ominous, form of (hyper) inflation which we are now witnessing is credit (i.e. debt) inflation. The U.S. government budget deficits, already at record levels, showed a staggering increase from $3.5 trillion in 2005 to $4.6 trillion in 2006. That is nearly a 30% increase in only one year! Moreover, downstream U.S. government unfunded liabilities are now approaching $55 trillion and are thus not foreseeably payable without a massive U.S. Dollar devaluation. The U.S. government is thus effectively bankrupt. Understanding the magnitude and consequences of monetary inflation and credit (debt) inflation is essential to understanding how the U.S. economy has been artificially “juiced” higher with the “liquidity” provided by both in recent years as a result of deleterious Federal Reserve policies. Liquidity increases via credit (i.e. debt) increases and money supply increases are both unhealthy and unsustainable forms of liquidity increases. The eminent economist Dr. Kurt Richebacher explains why credit (i.e. debt) financing, or “borrowed liquidity” as he calls it, is so pernicious: “Available liquidity is, of course, most important. Nevertheless we find it most important to distinguish, first of all, between two different sources of liquidity: borrowed and earned liquidity. Present excess liquidity in the United States and several other countries is of a peculiar kind. It does not come, as would be normal, from unspent current income – in other words, from saving. In the absence of any new savings, all the liquidity creation occurring in the United States is borrowed liquidity. Generally, borrowing against rising asset prices is in diametric contrast to earned liquidity from savings out of current income. By definition, this is liquidity from credit inflation. One thing is certain about borrowed liquidity; it depends on rising assets prices. Once asset prices stop rising (see current U.S. housing prices) this liquidity suddenly evaporates. Moreover, ever larger credit injections are needed to keep asset inflation - - like any other inflation - - rising. Nevertheless, there inevitably comes a point in which assets prices, for one reason or another, refuse to rise further and then the big selling without buyers begins. Never before in history has there been an exception from this disastrous end of asset inflation.” Strategic Investment, February 2007 Thus it was not surprising that, when the over-leveraged credit markets received a bit of bad news from the housing market in the form of the “Subprime crisis,” they “seized up” mid-August. The credit markets began to seize up when asset prices (primarily home prices) plateaued and subprime loan default rates rose. This led to a dramatic drop in the equities prices of those over-leveraged mortgage lenders. To save the lenders, albeit temporarily, The Fed began pumping more “liquidity” into the market in the form of lowering the discount rate. But lowering the discount rate is just another instance of creating a “borrowed liquidity” fix rather than an “earned liquidity” fix. Thus it should be clear that facilitating more borrowing, on whatever terms, and whatever the discount rate, does not solve the increasing crisis of borrowed liquidity. Considering together the two kinds of liquidity excesses - - borrowed liquidity and money supply inflation liquidity - - we understand why the deepening stagflationary syndrome has vigorously begun, and why it is likely to be with us for some time. So what strategy and what assets are appropriate to achieve wealth protection and enhancement in the face of stagflation? 1) Acquire tangible assets for which there is great need (i.e. those with a relative inelasticity of demand) is important. Essential Food Assets are one example of these. Consider recent corn, wheat and soybean prices which are at or near record levels. And an investment in the most essential asset is currently reflected in one of the selections in our Deepcaster Fortress Assets Letter Portfolio. 2) Sell short assets which are subject to suffering from the stagflationary syndrome we described above (e.g. home prices). Deepcaster DHPS Speculators recently were able to take a significant profit from a short position which Deepcaster recommended a few weeks ago in real estate industry equities. 3) Select assets not easily subject to price manipulation. Normally, gold and silver would be the assets most resistant to stagflation (i.e. most resistant to deflation or inflation and/or a stagnant economy). Indeed, normally they would be the assets which would appreciate most in fiat currency terms in a stagflationary period. And in the long run they will be. But in the short run they are quite subject to the manipulative price suppression policies of the Fed-led Cartel, whether one likes this or not. But these price suppression attempts may or may not be successful in the future. Thus timing and an evaluation of “The Interventionals” are the keys. Thus far The Cartel has been effective in not only capping but also in taking down the prices of these monetary metals. On the other hand, the magnitude of credit market, budgetary, geopolitical and other challenges are unprecedented as well. And, increasing demand for the physical metals puts significant upward pressure on monetary metals prices. Deepcaster has evaluated these competing forces, and has just issued a Forecast and investment recommendations regarding Gold and Silver. Moreover, there is one in the Gold and Silver subsector which should prove relatively immune to any price suppression attempts. Deepcaster has published a list of companies in this subsector in its April, 2007 Deepcaster Fortress Assets Letter. 4) Since the interventional tendencies of The Cartel are still strong and effective, attempt to determine key interventional tendencies, trends and patterns. Deepcaster does this regularly, and determining the “interventionals” (as well as the fundamentals and technical) is key to Deepcaster’s recommendations. 5) Consider Investing or trading with the Interventional Trends, even if one finds the interventional policies and practices of The Cartel odious. That is because The Cartel Intervenors (via their Primary Dealers) are the largest players in the markets in which they seek to intervene. Given that the largest players in any market are more likely to be able to determine market prices, then it behooves those who wish to preserve or increase their capital to “go with the Interventionals.” And that is why it is essential to monitor the Interventionals and to determine whether one thinks the Interventional Actions will be successful. 6) Finally, certain sectors in certain Asian economies should be relatively insulated from the coming American and European economic woes. Deepcaster has listed these in its recent Letter posted at www.deepcaster.com. A stagflationary syndrome is upon us and employing the aforementioned strategic and tactical approaches make it possible not only to preserve purchasing power but also to profit in these increasingly challenging times.
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DEEPCASTER FORTRESS ASSETS LETTER The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
Protecting wealth and profiting in the Stagflationary Era just beginning
require understanding the primary causes and scope of the stagflation.
Such understanding should enable investors and traders to employ the
strategies and tactics suggested below for protection and profit.
