Never mind global warming; is the Kondratieff winter on the way ?..................
"Greenspan was more than any other human alive responsible for turning our stock market into one gigantic socialist endeavour."
Emerging Hyperinflation Insanity?
We grunted and groaned our way for all of 2005 to eek out a 10% gain, then, during the first week of 2006, our Model Portfolio rocketed to an enormous 12.35% gain the first week! Mrs. Taylor works for Wachovia in New York, and we almost always talk about the markets over dinner. As we discussed in general the market action for the first week of 2006, Mrs. Taylor remarked, "Everything I own went up like crazy this week. It's kind of frightening. It's kind of nuts." How can you not agree? I have to think back to the time when, during the Clinton years, Alan Greenspan's Fed would bail out one disaster after another with mountains of new money created out of thin air, as all fiat money is created. I still remember Kathleen Hayes at CNBC posing the question about "moral hazard" to Treasury Secretary Robert Rubin. I don't recall Rubin's unconcerned response, but the important thing is that once upon a time we thought there might be serious repercussions to government, and the central bank that controls it, bailing everyone out. Communist countries do that. Fascist countries do that. Free market countries do not. So much for the notion that we are a free market economy.
Having lost any concern about "moral hazard" or the idea that monetary bailouts would cause problems and hence should not be engaged in, fear has been greatly taken out of the markets, which no doubt explains record lows in put/call ratios. One commentator on Bloomberg noted that it is at times when complacency is at its highest that we are at the highest levels of risk. Indeed, despite Bernanke's helicopter technology, we do think the day of reckoning when we get the next leg down in the equity bear market could come any time. Hence our continued inclusion of the Prudent Bear Fund, the only item in our Model Portfolios to post a loss during week one of 2006. Even Alan Greenspan complained about a lack of risk premium built into stocks. Of course, by bailing every problem out with mountains of new cash created out of thin air, Greenspan was more than any other human alive responsible for turning our stock market into one gigantic socialist endeavour. Come to think of it, seems like the Fabian Socialists are doing a pretty good job of quietly turning our nation into a communist/fascist state, rather than using the more brutal means advocated by their Bolshevik peers who did it the hard and violent way in Russia in 1917. We are simply turning "red" peacefully, and barely a soul seems to have taken note.
So our stocks are up 12.35% so far this year in one single week. Why are we complaining? Shouldn't we be happy? Of course I am pleased that we were on the right side of the markets during the week one of 2006. But as my wife said, "This is crazy! This is nuts!" By that she means it is unstable and not sustainable. And who needs or desires instability unless you have a destructive nature? Unless you wish to stage a revolution, for example?
Posting a slightly less insane but still stellar performance for a single week was our Low Budget/Low Maintenance Model Portfolio. It gained 3.92%, beating out the S&P 500 during week one which, in advancing 2.98%, gained virtually the same as it gained (3%) all of last year.
What is going on here? Actually, on the first day or two of the year, the markets did not look all that good. Then information came out from the Fed that suggested rate hikes were nearing an end. Euphoria broke loose and everybody partied. Meanwhile, gold is showing strength that defies most technical analyses. Gold rising rapidly is always a sign that all is not well in the world. But we knew that already. The important thing is that, as gold begins to rise, it is a sign that the basic fundamentals we have been harping about year after year are now starting to come into the conscience of a larger universe of investors. And that, my friend, is just the beginning. Gold is still very, very cheap when measured in terms of the stock market and fiat money creation over the years. China last week suggested again that it would reduce its percentage holdings of the dollar. That along with indications that the U.S. may be ready to stop raising interest rates while Europe may retain a more hawkish monetary stance sent the dollar down sharply this week.
Actually our Inflation/Deflation Watch is pointing toward accelerating rates of inflation. We were glad to see at least one economist last week suggest agreement with our rising inflation thesis. She noted that import prices are rising sharply and intermediate goods are also rising sharply. And last week, up went oil prices sharply too.
Inflationary Pressures Build
This inflationary measure is not far off from U.S. Dollar Global Liquidity growth rate of 10% over the past 52 weeks. We find it important to note that with each attempt to tighten monetary conditions, the level to which money growth can be restricted before deflationary trouble begins to rear its ugly head continues to rise, as you can see from the chart on the next page.
Note on the far left on the chart on the next page that during the Asian Crisis, when the world was facing prospects for a global deflation, this Global U.S. Dollar Liquidity actually contracted nearly
5%. No matter how you define deflation, everyone agrees that when the money supply contracts, you have deflation. Following this global monetary scare, the Fed and other central banks started pumping new money into the system like mad, which led to the stock market insanity and bubble mania that peaked in 2000 when tightening began.The moderate tightening that was begun by Greenspan to try to tame the stock market bubble continued to shrink the annual growth in money until U.S. Dollar Global liquidity briefly touched zero during the fall of 2000. The carnage that followed that slight tightening included trillions upon trillions of stock market losses. But the pain of that carnage was greatly reduced-for the time being, by artificially stimulating the real estate bubble. To do so, a mountain of liquidity was created that revealed itself by an amazing growth rate of over 20% in 2004 as seen in the chart on your left.
Greenspan's most recent tightening has resulted in a reduction in the rate of U.S. dollar liquidity down to just under 10%. We suspect the Plunge Protection Team knows full well that to restrict money growth any further could well lead to the beginning of the Kondratieff winter freeze-up. And so, they are sending signals out to everyone not to worry and to be happy because Bernanke's helicopter is here and the Fed will always create enough money to bail you out of all your problems. Remember the K-winter is Bernanke's greatest fear and he has written papers with all manner of totalitarian policies aimed at stopping it including taxing your savings. By that I mean not interest on savings but on savings itself to force you from saving, if we begin entering another depression.
It is our job to alert you to the dangers of buying into the complacency that U.S. propaganda artists are selling us on an ongoing basis. In fact, I believe we are facing some enormous problems, and the mere fact that U.S. global liquidity cannot be restricted more than 10% before setting off big problems in the financial markets is evidence of trouble. As Paul van Eeden so correctly said in San Francisco, the U.S. has been a debt-driven economy over the past few years. Prosperity we see is not real and it is for sure not sustainable. In addition, we are seeing a massive transfer of wealth from the West to India and China and other countries in that part of the world. Overall on average, American living standards are in sharp decline. The direction of our prosperity vis-à-vis the rest of the world is heading inexorably lower. How that plays out remains to be seen. If current policy makers have their way, it seems it will be through inflation. Your income will simply slip severely behind the cost of living. Or it could and I think eventually will come from a devastating deflation, massive debt defaults, and massive unemployment and plunging incomes. The only question in my mind is how far can policy makers inflate before we get the big "D."
So we continue to watch our Deflation/Inflation Watch. For now it's all inflation with little signs of deflation on the horizon. But keep in mind that it is not a matter of one or the other. Though deflation may appear to be in remission for now, remember that the seeds of deflation are sewn with inflation, because with increased money creation we also get increased debt and debt by its very nature is deflationary. Moreover, debt is growing far more rapidly than income owning in large part to the power of compounding. Since it is never paid off, it just keeps multiplying exponentially and as such continues to present a bigger and bigger emasculation of effective economic demand. Note once again the picture debt growth relative to income growth in the picture above. In my view, the handwriting for a deflationary collapse is on the wall. It will happen sooner or later. But for now don't worry! Be happy! Party on! Its inflation time-at least for now.