Inflation, deflation, gold and currencies

[vincecate]

I can liquidate my investments on computerised stop losses and still make a profit, but I am too cautious for new investments at this stage.

People believing this is what makes flash crashes work. People have stop losses and then there are no buyers and there are huge gaps down. So they don't sell anywhere near the stop loss price. And the further it goes down the more stop losses are triggered. The number of sells generated in a few minutes is far greater than the number of new buys generated in the same time. One should not count on this as protection.

[richard5za]

One should not count on this as protection.

Yes, Vince, outside of normal circumstances I can see that you are absolutely right. And we live in dangerous 'non-normal' times
Richard

[gerald]

The Chinese buying of gold

May be the Chinese learn from their history. Suppose the Chinese government lets their people buy gold and silver, and when appropriate they confiscate it and use this to back their currency and make it "sound".
A variation of this was done in the 13th century for their paper money. If one did not accept paper currency, the penalty was death.

http://www.computersmiths.com/chinesein ... rmoney.htm

Would the US do the same? FDR did,-- well he did not execute anyone.

President's Executive Order #6102
http://www.the-privateer.com/1933-gold- ... ation.html

Section 9. Whoever willfully violates any provision of this Executive Order or these regulation or of any rule, regulation or license issued there under may be fined not more than $10,000, or,if a natural person may be imprisoned for not more than ten years or both; and any officer, director, or agent of any corporation who knowingly participates in any such violation may be punished by a like fine, imprisonment, or both.

[richard5za]

Would the US do the same? FDR did

The point that John makes in todays weblog that the world is heading in directions that are not yet understood is very valid, in my opinion. I do think that democracy is going to be at least a partial victim over the next decade or so, if not a substantial victim; which may be very hard for Americans to get their minds around simply because of the massive emphasis that the American ethos places upon freedom. (You need to bear in mind that some other cultures are different and place emphasis upon other things; for instance human dignity and not freedom has priority in some other cultures)

I suspect that there will be an over reaction in bringing in regulations needed to create order within the banking and financial sectors. I am suggesting that the free market has been discredited because of removed and very lax regulatory and if the free market survives it will be in a 'straight jacket' for at least a period of time.

As I have said before I don't believe that one can predict the detailed outcome to our current crisis and thus one needs highly flexible investment strategies which are reviewed very often. For instance I am doing well on gold and gold miners at present but I anticipate taking profits well before year end. After that I will see. The time will come when the now 10 year upward gold trend reverses and we will need to find the next up trend in some other asset class.

[vincecate]

As I have said before I don't believe that one can predict the detailed outcome to our current crisis and thus one needs highly flexible investment strategies which are reviewed very often.

I think hyperinflation is a very reasonable prediction at this point. Gonzalo Lira lived through Peru's hyperinflation and has written well about how hyperinflation happens. A few days ago he wrote a post advocating that the EU Central bank buy up lots of Italian debt and against the German position. To me this is interesting. Someone who understands hyperinflation much better than most still thinks the central bank should print money like crazy. If this guy, one of the ones who understands hyperinflation the best, is pushing for money printing then I really think there is no hope. Hyperinflation will come to the Euro, the Dollar, the Pound, and the Yen.

http://gonzalolira.blogspot.com/2011/11 ... risis.html
http://gonzalolira.blogspot.com/2010/08 ... appen.html
http://pair.offshore.ai/38yearcycle/#hyperinflation

[richard5za]

I think hyperinflation is a very reasonable prediction at this point.

Yes, Vince, it is reasonable in that it is both possible and, I suspect, has a probability well above 50%. But, and this is the important point in my investment strategy, I don't want to get locked into anything, such as inflation hedges, before I have to. I want to be highly flexible for as long as possible.

The classic inflation hedge is quality residential real estate. I had my school years in Zimbabwe and whilst most well educated youth scattered out of Zimbabwe to the 4 corners of the planet a very long time ago (including me) I still have a few school friends in Zimbabwe and have closely followed events in Zimbabwe all my adult life. The hyper inflation in Zimbabwe was even greater than Germany's. The hedge that held its value was quality residential real estate. Its been the same elsewhere where there has been high inflation: Top quality real estate is a proven hedge.

In current circumstances precious metals also appear to be anticipating inflation and have been a wonderful investment over the past 10 years. In the event of hyper inflation I have no doubt that metals will also be an inflation hedge.

Getting to my point, I am happy at present to be buying and selling precious metals and their miners because its so quick and easy to buy and sell. There's a big highly liquid market. But I don't want to get into real estate because in the event that deflation takes over I'll get out at a loss because of the time (and relative complexity) it takes to buy and sell. I'll buy more real estate (in addition to the house I live in) once its clear we are heading the inflationery route.

So whilst I buy and sell gold and gold miners I watch and analyse carefully and wait for a direction.

[vincecate]

The Euro and ECB are not exactly like a normal national currency where once debt is over 80% of GDP and deficits over 40% of spending you can count on hyperinflation. The ECB is not supposed to print money to fund governments who spend too much at the expense of the stability of the currency. There are treaties against this. To me the flaw in the design of the eurozone was the expectation that government deficits would be within limits or they would be kicked out of the eurozone. I think a much more reasonable and stable system would have just planned that sometimes governments will default on their debt. In the Caribbean we have a monetary union without any fiscal union (East Caribbean Dollar) and it has worked fine for a very long time. But if some government defaults they are not kicked out of the union.

However, the pressure is mounting on the ECB to monetize and they are doing some buying, so it is not clear to me which way it will really go, hyperinflation or default. If Greece defaults and the world does not end then they may let Italy default, etc.

Doug Nolan has an interesting article on this topic. He has a number of quotes from the Bundesbank President Jens Weidmann. For example:

"That assumes that you can address the issues in Italy with liquidity and that's not the case. This whole debate completely blurs responsibilities. Furthermore, monetary financing will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the credibility and trust in institutions. You won't solve the crisis by reducing incentives for the Italian government to act. It's really an absurd debate in which we are telling institutions: don't care about the law."

http://www.safehaven.com/article/23331/ ... the-rescue

It seems like the Bundesbank President may be one of the few people who really really gets it. If he were running the ECB I would predict no hyperinflation for the Euro. As it is, I don't know which way it will go.

Update: Hussman also has an article on this and also does not think the ECB will print:
http://www.hussmanfunds.com/wmc/wmc111121.htm

[richard5za]

so it is not clear to me which way it will really go, hyperinflation or default

Its not clear to me either. However, for either Europe or the USA to undergo a deflationery end result will be economic suicide which will may make John's predictions look a trifle optimistic. The deflationery end result may be forced upon the Europeans or Americans, or both, but I would think that behind the scenes they are looking for an inflationery way out, even if this means hyper-inflation.

[vincecate]

so it is not clear to me which way it will really go, hyperinflation or default

Its not clear to me either. However, for either Europe or the USA to undergo a deflationery end result will be economic suicide which will may make John's predictions look a trifle optimistic. The deflationery end result may be forced upon the Europeans or Americans, or both, but I would think that behind the scenes they are looking for an inflationery way out, even if this means hyper-inflation.

While Europe is not clear, I think the USA is. There is no chance of any significant deflation in the USA as measured by CPI because at the slightest hint of deflation they will print and spend money like crazy. Japan unwound their quantitative easing and they are the only example of even a slight bit of deflation under fiat money. Japan could borrow from their citizens. The USA will not unwind their quantitative easing. The USA will keep printing more.

Update: If the Dollar, Yen, and Pound get hyperinflation I expect people to flee the Euro also,
even if they are not yet printing like crazy.

[richard5za]

While Europe is not clear, I think the USA is.

This is the nub of the financial debate: Will there be significant (even hyper) inflation going forward, or will there be deflation?
Get this right and there is the potential to make a lot of money. Call it wrong and you could become impoverished.

I also think we need to think outside of the box. Take the USA: I have no doubt that you are right that the current leadership will print money to stop deflation. But what if there is a change of power and new leadership make some very bad decisions that lead to a deflationery spiral downwards? Its possible.

The next few years is not for sissies!