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.

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