Via Quantitative Easing (Monetization of Debt) the Federal Reserve has continued to delay the inevitable Deflationary Collapse. Every week, the Fed enters the market to buy Treasury bonds and thereby incentivize speculators to take more short-term risk. Bernanke is the prototypical Baby Boomer - willing to propagate any mechanism of instant gratification, regardless of longer-term consequences and inevitable consequences.
Welcome to the Hotel California
Similar to the Nasdaq in 2000, Housing in 2005 and Commodities in 2007, the additional Fed liquidity is funding speculation, which by definition disconnects prices from their underlying fundamentals. Any time the price of an asset, financial or tangible is inflated beyond its intrinsic value, then the day of price "re-adjustment" becomes inevitable. The Fed has absolutely no exit strategy for all of this liquidity. When the inevitable moment arrives when the last fool has bought the last share, then everyone will be exiting out the same door at the same time in a stampede to take "Risk Off". Hedge funds don't care, because their incentive is to take risk with other people's money. They don't get paid to sit in "cash" earning 0% interest.
The latest manifestation of speculation is in precious metals - gold and silver - as gold is at a historic high and as I write, silver is closing in on its $50 all time high (~$44 currently). Some commodities have also hit new all time highs (e.g. cotton), but most are below their 2008 highs, when they were also driven by speculation and loose monetary policy. Amazingly, crude oil (WTI) is still well below its 2008 high of $147/barrel despite
spreading unrest in the Middle East and ever-tightening supply/demand dynamics that become progressively worse over time. Last week, the Saudis announced they are cutting oil output and the price of oil DROPPED
on the news - showing the huge disconnect between supply/demand fundamentals. Essentially, the Saudis were calling the market's bluff and the market folded. i.e. due to futures arbitrage there is a tsunami of crude waiting to come onto the spot market. Of course stocks (S&P 500), in their own mini echo bubble - and despite all of the CNBS hyperbole, are still only at prices first crossed 12 years ago back in April 1999.
We already know how this all ends, because we've been through several iterations. The cycle of stupidity is repeating in an ever-tightening noose - each iteration shorter and shorter in duration.
Current events are eerily similar to the events leading up to the 2007 market peak and 2008 crash.
, I said that the inevitable credit/price deflation was temporarily pre-empted by a bout of stagflation. Then as now, Federal Reserve machinations had caused a spike in commodities and interest rates that was strangling the Middle Class:
"It seems that my Liquidity Trap scenario has already been preempted by a transitory Stagflation scenario, which has rendered the Fed's latest round of rate cuts impotent..."
"These higher borrowing costs in combination with higher costs for food, energy, clothing, medicine, tuition...i.e. everything, is putting the squeeze on already highly leveraged consumers."
"As a post script, I would add, don't worry about this recent bout of stagflation. The deflationary spiral will soon enough obliterate commodities and any other bloated remnants of the great credit bubble."
Hindsight being 20/20, we now know the economy was already well into recession. We also know that inflation/stagflation was as indicated, very much transitory soon to be followed by the hyper-deflationary 2008 credit collapse.
I expect the exact same sequence of events this time around, except the Fed will not be able to re-instantiate the illusion of solvency i.e. banks and brokerages will be obliterated with no attendant bailouts.
Road Map Revisited
A few months ago I published my roadmap for Deflationary collapse. This model is still very much intact. Below is an updated version showing our progress to date we are at step (3), as interest rates have indeed risen, albeit nowhere near the extent to which one would have expected:
So the next likely set of events is a wave of sovereign defaults, as interest rates across Europe continue to rise, increasing the debt burden on struggling economies (Greece, Ireland, Portugal etc.). This wave of defaults will make 2008's credit crisis seem like a picnic.
Contrary to my prior concerns, I now see the prospects for an outright U.S. debt default to be essentially zero. These newly minted Tea Party politicians have now proven they cannot even cut $60 billion out of a $3.7 trillion budget i.e. a mere 1.6% ! Outright default means foregoing that portion of the budget (~$1 trillion) funded by the deficit i.e. 30%. How the hell are these politicians going to part with 30% of their beloved Special Interest feed bag (aka. budget) when they can't even scrape together 1.6%?
All of this budget hand wringing is strictly political posturing. The continued Fiscal Stimulus paired with Quantitative Easing is in place for the foreseeable future, especially when the "Big One" takes us back into the realm of Extreme Deflation, as indicated on the roadmap above.
Threading the needle
There are NO 100% SAFE INVESTMENTS at this juncture. There is no guaranteed store of value. The dollar as we know is worthless paper that can be printed at will. Gold and silver have whatever value the next fool is willing to pay for them - they have no intrinsic value or utility (silver has some industrial use, but not enough to justify current valuations). I see silver and gold being the new Nasdaq, circa 2000 i.e. we don't know when they will crash, only that they WILL crash and that most greed-addled speculators will lose their money. If/when hyperinflation becomes a true concern, then gold and silver will be key assets for wealth preservation, however, per the model above, we first need to dispense with all of this debt (via credit deflation) because it is weighing down the economy and making sustained hyperinflation essentially impossible. Farm land, assuming you know how to farm (I don't), has perhaps the best enduring value, but that does not mean its price can't fluctuate wildly, or that you want all of your money tied up in an illiquid asset, or that you want to live in the sticks surrounded by demented hillbilly Militia Men.
Treasuries are the nearest form of cash short of dollars buried in your backyard
Treasuries which also can be printed in seemingly "infinite" supply are still the most liquid investment, and in a credit deflation, liquidity and nimbleness will be critical. From an institutional standpoint, U.S. treasuries are still the only viable safe investment. Institutions cannot "go to cash", because taking $400 at a time from an ATM machine is not an option. Most people who think they are "in cash" in their retirement accounts are actually holding Money Market funds which consist of a variety of short-term credit instruments, many of which have inherent, if not acknowledged, default risk. There is no option to hold physical cash in a brokerage account i.e. no stash of dollars sitting in a vault with your name on them.