According to Bernanke, Congress better lift the debt ceiling or the US will default. Yet if the only way you can make payments on your debt is by borrowing more money, you are already in default. So far, the US government, thanks to Mr. Ben and his QE1 and QE2 and his seemingly endless loans to the US treasury, has staved off “default”. In China, the largest foreign creditor to the United States, financial experts are saying that the US is already in default because of intentional dollar devaluation which erodes the wealth of creditors. Apparently, China reduced its net ownership of US treasury notes over the last quarter. Expect that it will be harder to find lenders, and Ben will be the only one left in the treasury auction room. That’s when QE3 will start. Or riots in the streets, take your pick, Congress. Eventually, the pressure to raise the debt ceiling will be too much for the politicians in Congress, and it will be business as usual–money creation ex nihilo, and the Bernanke put will save the stock market.
Monty Pelerin makes some interesting observations about Gary Shilling’s investment advice, saying that it works when things are normal, but the global financial situation is anything but normal today. Indeed, I believe that the signs of hyperinflation are now here, and I’m not the only one. Even some of the mainstream papers are starting to see it (e.g., the Globe & Mail). Indeed, I have virtually no fear now that my portfolio is going to plunge like it did in 2008–I have the Bernanke put to count on. If asset prices go down, he’ll just monetize more debt and it’s back to races.
So I made this comment on Monty Pelerin’s article:
I follow a blog whose author likes Gary Shilling. His portfolio was static in 2009 and he didn’t bother telling us his returns in 2010. By contrast, our own portfolio is up high double digits (See DIY 2010 summary). Whose advice am I following? Jim Rogers, Marc Faber and Peter Schiff–long commodities, esp. gold and oil. This is an anti-inflationary portfolio and it is already up handsomely. I don’t think we have to wait for high inflation or even hyperinflation. I believe that hyperinflation is already here.
Look at the international situation. (BTW, I loved the video of Jim Grant that you recommended.) The Chinese and others who hold US treasuries are scared to death of the devaluation of the dollar, but they can’t dump them all at once or their hyperinflationary fears become instantly realized. So they are buying up assets, diversifying their holdings. Billions of Asia dollars have been sunk into the Canadian resource sector, while the Chinese have essentially ended their net purchases of US treasuries. So how does the Fed react to this? Buy, buying the debt, and monetizing (pun intended).
When the bubble finally hits the commodities market–and I don’t think there is a bubble yet by any stretch of the imagination since Americans can still afford gasoline and food–I think I will dump the commodities and purchase a farm. But until them, I’m still very long on Canadian resource companies, especially junior oils. The Chinese want what Canada’s got, and they are the most liquid players in town.
Today oil is above $90. Last night I paid $1.119 (CDN) per litre for gasoline to fill my wife’s RAV4. Unlike most people, I actually have a smile on my face when filling up.
I really owe a debt of gratitude to Ben Bernanke; you see he told 60 Minutes that he won’t stop with QE2–600 billion. Quantitative easing is a fluid concept. It is really as much as you need to make everything happy again. And this is really like pouring money into my portfolio: my positions are short the US dollar. I’ve sold put options in US dollars against Barrick Gold (ABX), Gold Corp (GG), New Gold (NGD), Penn West (PWE), Pengrowth (PGH): gold and oil. I hold long positions in most of these companies too. Thanks Ben. You have provided me with the Bernanke put so that I can invest in these companies virtually risk-free; if the economy sucks, you have decided to poor gas (QE) on the fire, and they are assured to explode in price. Dear Ben, have I told you recently that you’re my best friend? Now I know you think you can control inflation. As long as you believe you can, you will continue to put money in my portfolio. So please, by all means, just keep it up.
Nota Bene to my esteemed readers: I may be just a little ironic in my tone above–I’m yanking Bernanke’s chain–not that that important man has either the time or the inclination to read my humble blog. What I actually believe is this (does this scenario seem unreasonable today?):