I am long overdue with this installment of the promised investment series. The holidays obviously got in the way.
In Part 3, I detailed what I was anticipating with respect to the economy. Most of you know there is no guarantee with respect to the future, so these musings refer to what I intend to prepare for, rather than what may actually occur.
My best guess is an environment bordering or reaching hyperinflation. That is also the judgment of Matterhorn Asset Management:
We now live in a world where governments print worthless pieces of paper to buy other worthless pieces of paper that combined with worthless derivatives, finance assets whose values are totally dependent on all these worthless debt instruments. Thus most of these assets are also worth-less.
So the world financial system is a house of cards where each instrument’s false value is artificially supported by another instrument’s false value. The fuse of the world financial market time bomb has been lit. There is no longer a question of IF it will happen but only WHEN and HOW. The world lives in blissful ignorance of this.
The world has reached the end of a multi-decade bacchanalian credit romp made possible only because of fiat money and irresponsible governments (dare I suggest that this last phrase is redundant?). Around the world, governments are applying the same medicine that created the mess as a cure. It is all they know, and we are past the point of a solution. In typical fashion, “doing something” is perceived as better than doing nothing, even if the “something” creates more harm.
Despite what is obvious to clear-thinkers, the world mostly seems oblivious to what is about to happen. According to Matterhorn, there are several reasons for that:
- Firstly, because this is what totally clueless governments are telling everyone and this is what investors want to hear.
- Secondly, whether governments apply austerity like in parts of Europe or money printing as in the US, investors want to believe that any action by government is good, however inept.
- Thirdly, market participants are in a state of false security due to shortsightedness and limited understanding of history.
- Fourthly, as long as they can benefit from inflated and false asset values, the market participants will continue to manipulate markets.
- Fifthly, there has been a very skilful campaign by the US to divert the attention from their bankrupt economy and banks `to small European countries like Greece, Ireland or Portugal. These nations, albeit in real trouble, have problems which are miniscule compared to the combined difficulties of the US Federal Government, states, cities and municipalities.
Ben Bernanke worries about deflation as a risk to the economy. That “worry” is nothing but cover for his need to print money so that the government can continue paying its bills. It is an attempt to dampen expectations regarding inflation. People hold less money or no money at all when they expect inflation to steal away their purchasing power. In economic terms, this behavior drives the velocity of money skyward and is the precursor to hyperinflation. Thus, Bernanke must convince you that the risk to the economy is deflation. Yet, Matterhorn describes reality:
Commodity prices have increased 26% in the last 12 months and 77% in the last 24 months based on the Continuous Commodity Index (CCI). So whilst most economies publish inflation rates of 1-3%, the real cost of food and energy is surging. The US government, which doesn’t eat or use energy, recently published the adjusted 12 months’ Consumer Price Index (ex food and energy) of 0.8% per annum. Whilst most people are struggling with a massive increase in their cost of living, the US government is continuously adjusting and manipulating the published figures. There are lies damn lies and US government statistics. Who are they fooling!
I encourage you to read the fine Matterhorn report. It provides detailed information to support their belief that hyperinflation is coming. It also provides a strong case for owning gold.
In the next part of this analysis, we will expand on other investments in addition to gold. Two important points will be stressed:
- Keeping Score – Because the numeraire (the dollar) is becoming worthless, nominal valuations measured in dollars (or other fiat money for that matter) are becoming meaningless. We could very well be entering a period where your investments produce a 100% return in nominal dollars, yet lose purchasing power. The new way to keep score will be in purchasing power, not nominal fiat currency.
- If the dollar is going to lose value, then dollar-denominated contracts are going to be diminished to the extent of loss of purchasing power. This fact has serious implications for pensions, fixed income investments, social security, debt, etc.
More shortly.
