QE Carney: Loonie monetary policy

Mark Carney Leaves Canada With ‘Stealth QE’ Rising At Fastest Pace Since 2009

Carney has much practice devaluing the Canadian loonie.  He is perfectly suited as the new head of the Bank of England.  From Zerohedge:

As Mark Carney steps aside from his role at the Bank of Canada to undertake all manner of easy money in the UK, we thought a reflection on the ‘stealth’ QE that he has been engaged with, very much under the radar, in the US’ neighbor-to-the-north was worthwhile. It seems quietly and with little aplomb, Carney’s BoC has grown its balance sheet by over 21% YoY – the most since 2009. If that was not enough to make someone nervous, the quantity of Canadian government bonds on the BoC’s balance sheet has grown at a remarkable 46% YoY! All of this has taken place during a time when ‘supposedly’ the Canadian economy has been reasonably strong and foreign demand for debt high. With Canada’s CAD267bn debt due in 2013, we suspect this ‘stealth’ QE will continue to rise.

Where is this easing reported in the Canadian news media?  Inflation in Canada is rampant–that can be seen in the price of housing alone.  But who is covering the monetary expansion of the loonie?  So now we Canadians who have Canadian dollars suffer the abuse of both ZIRP (zero interest rate policy) and QE.

It’s all monopoly money.

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Weimar America: I. It’s starting

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.

Hyperinflation is now here: throwing gasoline on the fire

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:

Why I think QE will create inflation and why it is qualitatively different than credit expansion

Meredith Whitney has come down hard on the municipal bonds and she is getting a lot of heat from others, including David Rosenberg.  But even if she is wrong, bonds of all sorts are bad investments because the US dollar is going to hell in a hand basket.  But what about shrinking credit which causes deflation?  I am no economist but here is why I think QE causes inflation while credit expansion is less inflationary:

Inflation is caused by too much money supply chasing too few goods.  Money supply can be created through credit expansion or through QE.  Credit expansion results in the creation of goods and services such as building of houses and manufactured goods, for every time a business borrows, its creates more real wealth in the form of its products.  Every time a home owner buys a house with a mortgage, the demand for new housing goes up and it results in larger supply of homes, i.e., more goods.  Thus, though credit expansion can obviously create bubbles, it also results in the increase of goods and services.

QE, quantitative easing, or the monetization of debt results in a disproportionate demand for goods and service without the creation thereof.  This is because the US federal debt is being monetized, and the US government in turn gives the money to government workers, pensioners, social security, welfare, food stamps, etc.  I.e. to people who increase demand without increasing the quantity of goods and services.  This increased demand, too many dollars chasing to few goods, devalues the dollar.

And this is why I think that QE leads to inflation and why it is much worse than credit expansion.

Aggresivity or Gold: what is needed in the current investment climate

These are difficult times for investors. They are wonderful times for speculators. Speculators will make (and lose) a lot of money over the next couple of years. In my opinion, investors are likely to lose. Prudent investors might better avoid financial assets for awhile. Traditional wisdom is apt not to apply to what is coming.  Monty Pelerin, “Speculators Only”

There is the saying, “Those who remain calm while others panic, don’t know what the hell is going on.” It is a troubled time and I genuinely feel bad for what central banks are doing to people’s savings. But as Pelerin says, speculators will make and lose a lot of money. The biggest winners today are those upon whom Bernanke shines his favor, such as the big banks that borrow money from the Fed and lend it back to the US federal government, which is perhaps the biggest Sopranos-type racket going: but it’s not some kind of under the table payoffs, but it’s being done right in front of all of us and with impunity.

The 2008 market crash has been particularly devastating on people’s savings. They were forced by inflation to buy so-called “risky” instruments, esp. stocks. Then that bubble burst twice in less than a decade. Stung by this double whammy to their savings, many are still too scared to bet on the market again, and so Bernanke, and the other sovereign banks around the world are robbing them blind through their loose monetary policies; the euphemism for excess money creation is “Quantitative Easing”–it used to be called just simply “inflation”.

Loose money is also created by low interest rates.  In Canada, for example, there has been something like a 20% increase in the cost of houses since the summer of 2008, due to the Bank of Canada keeping the rates at ridiculously low rates. So you can’t sit on cash–because the riskiest investment in an inflationary environment is cash in a savings account that pays 1%. Here in Canada since the nadir of the stock market crash, such cash has lost about 19% against real estate and much more against stocks and gold.  Commodity prices on world markets are rising rapidly too.  Or rather, fiat currencies are losing their symbolic value quickly.  A interest bearing GIC, savings account or bond is recipe for a portfolio with a rapidly declining buying power.

I’ve devised an aggressive and flexible investment style to beat the coming inflation, if possible.  The stock portfolio I manage is now almost all commodities (oil and gas, gold mining), 100% Canadian-based (as I live in Canada), and I am shorting the US dollar to buy these companies. I am selling cash or margin covered puts on oil and gas, gold-mining companies (etc.) for income (which gives from 5-10% downside protection) and, because I can’t trust my margin to stay high in market downturn, I am accumulating unused lines of credit (notably my HELOC) as my hedge against deflation,with the view of seizing the day if there is a market crash. I believe the investor must be aggressive and engaged–you can’t have a “lazy” portfolio today (John Mauldin said the same in his most recent interview with Steve Forbes). The goal must be to beat inflation, and the higher that goes, the more aggresivity is necessary. Or if I had to sit out as you suggest, then I would put most of my funds into silver, gold, non-perishable foods, or other commodities–things with durative and intrinsic value (gold and silver are liquid and so are excellent choices, but you have to have a safe place to put it).

Most people’s best hedge against inflation is still their mortgage, as Bernanke’s devaluation of the dollar will also reduce everyone’s debts. It’s the Year of Jubilee, when everyone’s debts will be canceled, especially the Federal government’s. Or as Dickens says, “It was the best of times, it was the worst of times … ”

This post is a revised comment that was featured today at Monty Pelerin’s blog, “One man’s approach to investing in dangerous times“.  Thanks Monty!!

Please read my financial disclaimer, if you haven’t already.