Familar themes, and a sales pitch (not mine!)

This is NOT a recommendation, but you may be interested in the general trend of thinking it reveals: The Daily Reckoning features a sales spiel for a newsletter from Tim Price, which passes on pessimistic comment on the near future of the markets, and indicates four areas for investment:

"Portfolio insurance"
Infrastructure (e.g. roads, railways)
Gold
Oil

We are seeing these themes crop up again and again among the contrarians. Though I'm not quite sure what is meant by the first - unless it's futures and options, which make me nervous.

More on US Treasury bonds

Another concise overview by David Galland in today's Daily Reckoning Australia. Part of it goes like this:

Make no mistake, we are in uncharted water; it is unprecedented that the claims represented by the fiat currency of one government - that of the U.S. - have been accumulated in such massive quantities for the reserves of other governments. And we're not just talking China but virtually the world. And the world is getting nervous.

To quote Thai Finance Minister Chalongphob Sussangkarn in his recent address to the annual meeting of the Asian Development Bank in Kyoto:

"Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies."

This is why I am theorising that the UK's massively increased support for US Treasuries may be an emergency measure by the British Government. Though it has been pointed out to me that this money may have also come from hedge funds and conventional funds - the Treasury stats don't say that the purchases are official.

Another country that has significantly increased its US bond holdings is Brazil (145% up, from $33.3 bn to $81.6 bn). Maybe that's to do with its increasing oil exports. According to the US government's Energy Information Administration, Brazilian production is projected to rise long-term.

Coming back to the Treasury bond stats: of those who previously held at least 1% of total foreign-held US Treasury debt, the top five reductions are:

Caribbean Banking Centres
Mexico
Korea
France
Switzerland

The top three in this list account for almost $50 bn of the total $72 bn that foreigners withdrew. I thought the conspiracy theorists believed Caribbean Banking Centres were part of the US government's secret plan for supporting the dollar? Perhaps somebody would kindly pay for me to go on a "fact-finding mission" to the Caribbean. Please.

Open secrets about banks, credit and inflation

There are things about money that are well-known to some, but not known and understood by all.

• In the USA (and the UK, I understand), notes and coins represent only 3% of all money; the rest is, in effect, various types of IOU.
• Most money is simply created out of nothing, by private banks, as bookkeeping entries.
• Banks lend out money, and also charge interest.
• Since the banks haven't created enough money to cover the interest, they demand it from the borrowers.
• If the total amount of money in the economy stays the same, and banks always charge enough interest to make a profit, then someday banks will own all the money in the world.
• So banks create and lend even more money. Some of this new money is to provide for the interest they have charged on earlier loans.
• Therefore, banks have caused inflation, and as long as they create new money, they will create more inflation.

This is so simple, but so hard to believe. It's like standing up from a game of Monopoly to find that you've been playing for real. And when you read others who explain the money system in these terms, you get the same emotional sequence:

1. amused, complacent toleration
2. a growing sense of unease
3. dawning, half-incredulous understanding
4. appalled outrage

So it is with one of the latest of these explainers, Ellen Hodgson Brown. But there is a world of difference between diagnosis and prescription. Here is hers, and halfway into here is a riposte from Richard Daughty, aka The Mogambo Guru.
Please note that Daughty is not contradicting the diagnosis, only the proposed solution. He is permanently at stage (4) in the above sequence.
Now, what do we do about it? Daughty's usual response "We're freakin' doomed!" reflects his pessimism about attempts to save the system as a whole, but is generally accompanied by recommendations for individual financial survival, namely, investment in commodities such as gold, silver and oil, merely to protect against end-stage inflation.

The Mogambo Guru agrees with Jim Puplava

Richard Daughty submits another gonzo rant to GoldSeek, coming to the same conclusion as Jim Puplava at Financial Sense: buy gold, silver and oil.

Puplava on inflation, commodities

Financial Sense, July 14: Jim Puplava discusses inflation figures and the management of our perceptions of inflation.

The effects of expanding the money supply must, he feels, eventually spill over from assets to consumer prices. He sees three scenarios:

1. A credit contraction, leading to recession.
2. An inadequate credit expansion, resulting in consumer price inflation.
3. A change in public perception of inflation. If people expect their money to become progressively worthless, they will eventually try to get rid of it as fast as possible, in exchange for tangible things.

Conclusions:

• Cut unnecessary living expenses, shop smarter.
• Avoid bonds.
• Because there is no sign of (1) or (2) above happening, we are heading for a US hyperinflationary depression, perhaps starting around the same time as the oil crisis, i.e. 2009. So invest in tangibles: gold, silver, oil.

By the way - some thought-provoking replies to listeners:

• Puplava agrees that Israel may be sitting on a valuable oil field!
• He says creditor nations in Asia may have a deflationary depression, while ours will be inflationary.
• He notes that Iran now demands payment from Japan in yen, not US dollars.

Puplava on the coming oil crisis

Jim Puplava's Financial Sense, 14 July (3rd hour transcript): this leads with the coming energy crisis, especially in oil. Puplava's programme features an interview with Basil Gelpke, who has made a documentary on oil called "A Crude Awakening".

Demand is rising, and will continue to do so even if there is a world economic slowdown, because the developing world aspires to Western standards of living; supply is not keeping pace, as exploration and extraction become more difficult and expensive. R&D in alternatives has been inadequate. The crunch could start as early as 2009.

Jim draws two broad conclusions:

1. Prepare to live in a world where energy is much more expensive. There are obvious implications for your transportation and housing.
2. Invest in energy stocks.

Puplava on value investing

Jim Puplava's Financial Sense Newshour, July 7: to get rich slowly but surely, invest in companies that pay high dividends.

Puplava quotes research showing that over 100 years, the stockmarket has grown by 5.4% per annum, but reinvesting the dividends raises the return to 10.1% p.a. Over a long period, this margin compounds up impressively.

Features he suggests you look for:

• a low P/E ratio (i.e. a high dividend proportionate to share price)
• essential industries - companies that make things people need constantly or frequently (e.g. energy, consumer staples)
• companies that have a record of increasing dividends over the years
• larger, more mature companies - ones that have gotten past the stage of having to plough back most of their profits into R&D
• strong cash flow and earnings growth
• good management and solid corporate governance

In response to a listener's question, Puplava opines that the utility sector is currently "grossly overvalued", but says there may be reasonably-priced shares available in oil and consumer product companies.

Peak oil, commodity prices, globalisation, back to the land

An interesting article from Tom Stevenson in Britain's Daily Telegraph, on oil. He reaches two conclusions:

1. it's good news for the commodity investor
2. when supply hits its limit, demand will have to change, and so will our lives

The second is far more interesting. I think we will eventually start listening to the dreamers who are even now formulating new currency systems for localised commerce. And we'll need to unwind our dependence on the car. Think of the implications.

Energy crunch = higher food costs

Continuing the theme of energy demands, the Contrarian Investors' Journal comments that the search for alternatives to oil is causing inflation in food prices.

More on Marc Faber

I missed this article from May 23 about Faber's recent recommendations - some on currency, but also some on commodities, e.g. gold versus oil.

The natural resources chorus

Doug Casey at "Financial Sense" today reviews asset classes and considers all of them over-valued, excepting natural resources. On Monday, The Mogambo Guru repeated his refrain of "gold, oil and silver", and in an old article of 2005 maintained that even though there may be fluctuations, gold will win against paper. A couple of weeks ago, Antal Fekete noted that physical gold was disappearing fast into private hoards, as it did before the fall of the Roman Empire. Today's Daily Mail article already cited re Diana Choyleva, quotes Julien Garran at Legal & General saying that the "infectious growth environment" of Russia and the Middle East "will, in due course, strain the world's resources and cause inflationary pressure to build."

So how should we bet? Can we beat the mathematics-trained investment gunslingers who are superglued to their computer screens and supported by their massive commercial databases? Perhaps we shouldn't try to get the timing perfect, and instead, work out what asset/s are likely to preserve the value of our savings in the medium to long term. But the answer may not be entirely conventional, in these interesting times.

To sum up... from India

A chartered accountant from India today summarises the general bear case about USA trade deficits and the future of the dollar. Mr Venkatesh apportions some blame to Asian countries, for choosing to keep their currencies weak in order to sustain their trading advantage.

The article is well worth reading in full, in particular the comments on oil and the threat of trading crude in Euros rather than dollars. It is also worrying that...

On March 28, 2006, the Asian Development Bank is reported to have issued a memo, advising members to be ready for a collapse of the US dollar. [see the International Herald Tribune report here.]

Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money [...] This is the worst possible signal that the US Federal Reserve could have sent to the world.

[The rise in commodity prices] has led to inflation across the globe. No wonder countries are forced to increase their interest rates to fight inflation. This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.

The author says that the US can neither raise interest rates much further, because of the cost of servicing debt, nor lower them, because that may deny it fresh supplies of credit.

Either we are witnessing a global meltdown of the US dollar, or a controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.