inflation

The dollar has no intrinsic value II

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A year ago I mentioned that my in-laws were in India November and unlike previous trips, the U.S. Dollar was no longer accepted by vendors.  About a year ago, my next door neighbor was in his home country of Burkina Faso.  In previous years, the premium for exchanging US dollars for CFA (the Franc of French Africa) was reasonable.  But when he was there last summer they started with 16% premium and negotiated from there.

Jim Rogers is right–the US has already lost its AAA credit status.  When vendors and money changers overseas have rejected the reserve currency status of the dollar, small players, then the rest of the world will not be far behind.  My utter rejection of dollar began in January 2009, as documented here.

thanks to Zerohedge

Bernanke the almighty and What are oil stocks worth anyway?

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Andrew at City of God has posted that the Watcher called into question Sue Richard’s calling the Silver Surfer all powerful:  “‘all-powerful? There is only one who deserves that name! And his only weapon… is love’ (Fantastic Four #72; Mar. 1968).”  Well for us investors, we worship at the feet of one and only one, his high and mightiness, Benjamin Bernanke, the chairman of the Federal Reserve Bank.  He is the one who determines what our assets are worth and he wields a weapon called “QE” and another called interest rates  with which he increases our power, our net worth, and we become mighty warriors of investing–but when he refrains from wielding them, suddenly we are all grovelling in the dirt like worms eating skubala (a.k.a., the margin call).

So I wrote to my good friend Mich at Beating the Index, who is fretting about running out of powder for his battle on the investment front:

Bernanke is the first cause of everything in the market today. He is exercising his omnipotent power as head of the Federal chair to influence risk appetite. Well, there will be either more monetization soon or watch hundreds of thousands of government workers in Washington not get their pay cheques and be sent home crying. My Schadenfreude would be so high at that point, it would almost be worth a 50% cut in my portfolio to see it. But it ain’t never gonna happen! Believe me, by August or September, the pols in Washington are going to lose nerve and there will be new debt ceiling (and QE3), based upon a compromise between the left-wing republicans and the democrats in the House.

Meanwhile, fear is palpable.  The companies  in which I am invested have increased their asset values through the development of oil fields but their share prices are way down because the lack of QE3 has diminished risk appetite.  People are rightly afraid to be caught with their margin pants down, like what happened to silver investors when the margin requirements were magically increased.

Devon Shire chides Petrobank (last $14.30)/Petrobakken (last $13.63) for not having a share buyback at these low prices, which puts their market capital at serious multiples below the Net Present Value.  Shire wants them to reward shareholders with a buyback of shares, but of course the management spent that cash on PBN shares starting at $21 and who knew that the price would plummet to these levels? These prices  are not only at multiples below NPV but well below book value (=shareholder’s equity).  I wrote to Mr. Shire the following response:

Net Present Value for other junior and intermediate companies is also currently at extremely high ratios to market value. Midway Energy is reporting NPV10 of 1.7 billion while its market capital is 274.9 million.

Some are angry with Petrobakken for continuing what they consider to be an ill-advised dividend program. Evidently, the buy back of shares is an equivalent use of cash as a dividend–I suppose that the real need is to spend money on developing their resources in order to deliver growth. The sad part is that PBN started the repurchase program at $21 while the price was so high vis-a-vis the current price.

At some point either you and I are going to be considered really stupid for thinking we had found value in the Canadian oil sector, or there is going to be a major correction drastically decreasing the NPV/market capital ratio.

Yet Mich warned me about taking the NPV10 that Midway had presented as a serious indicator of their value and I reproduce here our dialogue:

Continue reading →

Weimar America: I. It’s starting

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I have been flabbergasted by the lag between the price of crude oil, now at $108, and the cost of certain Canadian junior and intermediate oil companies, whose share prices have not kept up with commodity prices.  The market seems to be saying, “Hey, I’ve seen this trick before.  I buy the oil companies, thinking I can take advantage of oil prices, and then the price goes down and I am left holding a bag of money-losing companies.”  Well that could be true.  But then again, this could be the start of Weimar America.

In Weimar Germany, when hyperinflation started, people initially slowed down their buying of consumer goods because they felt that the prices weren’t normal, and that they should soon fall back to some level of sanity.  But instead, prices continued to rise.  Thus, they were forced to pay higher prices.  They soon learned that the time to buy was immediately after receiving money.  One of my professors who was a boy during Weimar Germany recounted how, the moment his parents were paid, he had to rush with their money to the market before the prices went up.

Now this is happening all around us.  I know that Ben Bernanke is saying that high prices are due to commodities, and that they will come back down.  But I doubt that you can come up with a single time that he’s ever made an accurate prediction. Here are some signs that Weimar America is now here.

(1) Car prices:  I bought a RAV4 in February because the price hadn’t changed in over a year and because Toyota Canada offered me free 36 month financing.  I felt that car prices would be going up because of commodity prices.  The earthquake in Japan has shut down parts factories and now production will cease in Toyota’s North American plants.  Similar shut downs will likely occur to other manufacturers around the world who depend on parts from Japan.  Supply will go down and this will cause car prices in the near term to increase steeply.  But don’t expect prices to go down once those Japanese factories are back online.  This is a catalyst for pushing prices steeper, where they must go.

(2) Oil prices:  The crisis in Libya and in other oil producing countries has lead to $108 WTI and $121 Brent.  The crises are not going away, because many are caused by instability due to food inflation.  Don’t expect crude to come back down in price.

(3) Precious metal prices:  Despite those who call gold a bubble, gold seems to have found support at $1400.  Silver has been experiencing unreal gains.  Investors who want to have some exposure to physical metal would do well to establish a starting position lest prices don’t come back down.

(4) Flight of capital:  Wegelin & Co., a Swiss bank that caters to wealthy clients with beaucoup bucks to invest is leaving the United States and has written up a eight page, double column, writ of divorce, entitled, “Farewell America“, explaining that the new bank regulations that the Obama led government has put into place are not worth the trouble.  Besides, they say, the USA is now in a major debt situation that it can’t get out of because (1) Foreign creditors are now decreasing their net debt to the US; (2) the US is running its entitlement programs as a ponzi scheme; and (3) Federal Reserve Bank is monetizing the Federal debt.  They are recommending that their clients completely leave the United States.  They won’t be coming back until things are fixed, if then.

Here is a salient excerpt from “Farewell America”:

The sensibilities of their own capital market: this is what the smart guys in the IRS have very probably failed to take into account. Their onesided regulatory proposals, focused on maximizing the tax take, are based on the entirely unproblematic and undisputed attractiveness of the USA as a place of investment for investors from all over the world. We believe this assumption to be utterly wrong. Why?

A glance at the USA’s debt situation suffices to show that apart from oil, there is really only one element of strategic importance that the USA will need in the coming years: capital. The (declared) public debt – national, state and community – amounted to some 70 percent of GDP in 2008. With the absorption of further debt in the wake of the financial crisis, by 2014 the level of explicit debt is likely to be significantly above 100 percent of GDP. By then the interest will have doubled from around 10 percent of total public revenue to around 20 percent, on moderate assumptions.

This is generally well known. What is generally less well known is that in the USA too, as in so many ailing European states, this explicit perspective reveals less than half the truth about what has been implicitly promised by the state in the way of future benefits. Correctly accounted – that is, as probable future payment flows discounted to present values – the picture would look a good deal bleaker. There are studies, such as the one by the Frankfurt Institute in November 2008, that reckon with a total level of debt for the USA of up to 600 percent (!) of GDP.

April 7 is my “Farewell America” date.

The Secret of Oz: Anti-central bank, anti-gold standard

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This film was certainly interesting and well-made.  It is in favor of fiat money which is controlled not by central banks but by democratic government.  The title is based upon Hugh Rockoff’s allegorical interpretation of the 1900 children’s book Wizard of Oz, setting the story in the political controversies at the time of the author, L. Frank Baum (1856-1919).  According to this interpretation, the silver slippers are representative of silver money in competition with the gold standard, the Scarecrow, who is actually smarter than people think at first, is the American farmer who is destroyed by deflation, the Tin Man is the American industrial worker, who is in need of liquidity (oil), who comes along side the farmer in common cause and the cowardly Lion is William Jennings Bryan who was in favor of silver money and the US government issued greenback.  The wicked witches of the East and West were two major banks, and the water that kills the witch is the easy liquidity of the government’s own ability to create fiat currency which is not debt-based.

In my opinion the films successfully show how the gold standard can be manipulated by big banks and can have depressive effect on money–which can (1) stifle the growth of an economy and (2) create serfs out of people who cannot pay back their debts because of inadequate liquidity in the system.

The film fails to show how giving control of fiat currency to government can stop the government from politicizing the money supply and ultimately from creating hyperinflation.  The film also mistakes fiat money creation for wealth creation:  While it is true that wealth creation requires liquidity, it is a mistake to confuse wealth creation with the creation of fiat money.

I would conclude that restrained form of monetarism could be the best system in that it would grow the money supply in conjunction with economic production–but that all systems of money are open to manipulation and greed–and this is why the Austrians point out that all paper currencies eventually become worthless.  The advantage of a system of money which is based on precious metals is that neither a central bank nor a government can steal people’s wealth through the excess creation of money.  A stable currency would also encourage saving, as currency would be store of wealth.  The disadvantage of the gold standard is that liquidity can be dried up and there can arise situations in which money becomes too scarce.

Hyperinflation is now here: throwing gasoline on the fire

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Kapitalcon cited my post discussing the $223 billion dollar US Federal deficit in February, and then went further to predict QE III:

Important to note is the Federal Reserve’s recent announcement that it may have to begin its third round of QE in response to sky-rocketing oil prices.  Atlanta Fed President Dennis Lockhart stated at the National Association of Business Economics in Arlington that “If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation.”  As oil increases, so too does the cost of most, if not all, goods and services. This includes anything that requires petroleum in the production process, not to mention increased transportation costs for moving the product to market.  Such is the rationale for QE3.

Do I fear my commodity stocks going down like they did in 2008-9?  Not with people like Mr. Lockhart running the Federal Reserve Bank.  The problem of the commodities is too much liquidity chasing too few goods.  If the Federal Reserve Bank’s solution is to just throw more fuel on the fire, then I’ve nothing to fear.  QE, which I affectionately call the Bernanke Put, will be the ultimate cause of hyperinflation.  It is as though they are trying to fulfill this prophetic video that the National Inflation Association created a few months ago: