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In This Issue
First Stage in motion, with small signs of wake up!
Ethanol Blow Back

CRACK-UP BOOM, part II

In this edition of the "Crack-up Boom" series, we will begin to discuss more in depth how the CRACK-UP BOOM is principally dollar-based now and we will show its fingerprints in US-based money flows, both into and out of the United States, as investors begin to take the actions necessary to protect themselves from the ensuing tsunami of inflation which can be expected. This week the Global bond market had its biggest breakdown in years as the realization of the inflationary consequences in the pipeline is beginning to be realized by the participants. First, let's take a bigger look at Ludvig Von Mises' description of the behavior that emerges during CRACK-UP BOOM episodes;

In Human Action (4th ed., B.B. Greaves, ed. (Irvington: Foundation for Economic Education, 1996), Ludvig von Mises described the "crack-up boom" that marks the denouement of all great monetary inflations (pp. 427-428):

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the [p. 428] country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currencies in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last. Thanks, Ludvig. Now let's take a look at:

First Stage in motion, with small signs of wake up!

Today we are going to examine RATIONAL investor behavior in the face of US Government fiat money and credit creation. Last week we looked at the global rush into equities as the beginning of the unfolding "CRACK-UP BOOM", as huge amounts of cash in the hands of investors worldwide exchange FIAT CURRENCIES for units of production. The world is awash in cash and credit of all stripes, and oodles more are in the queue, ready to roll off the presses as money and credit creation is "OUT OF CONTROL". But the broad US population is still waiting for inflation to recede, and believe the fake inflation numbers and jawboning out of the Federal Reserve and Treasury.

One needs look no further than the ballooning balances in money market accounts, now approaching 2.5 trillion dollars, to see very little concern with runaway inflation; these balances have continued to explode higher, up over 25% since 2002. These money market accounts pay virtually "NOTHING" in relation to current inflation rates. They are losing purchasing power at an enormous rate, yet the BROAD public is generally not paying attention, YET! I still remember Sue Herrera and Maria Bartiromo of CNBC wondering when this money was going to come off the sideline and buy the stock market when we were on the late 2002-03 lows. They are still waiting!

SMART US investors, such as the type that read this newsletter, are voting with their feet and "SCHIFF"TING (aka as the Peter Schiff prescription for investing, as we will see business must be good for Peter) their dollars into units of production that are denominated in foreign currencies. Conversely, foreign dollar holders are doing this in reverse to lessen the pile they now hold in the bank. Let's take a look again at the description of the first stage from above;

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the [p. 428] country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

It is obvious that the public at large does not understand what is transpiring but at the edges/margins, the process is well recognized. And you can see the fingerprints of the migration. First, let's look at the flow of funds of US-based investors to countries where they believe the policies of confiscation through inflation are less aggressive than the domestic variety practiced by the Public Servants in Washington DC.

Wow, looks like a lot of very informed people are voting their investments with their feet. Last month's net outflow was the second biggest in over 5 years, at over 40 billion dollars. Of course, in the big picture of "Supply of Dollars" it is but a very small teacup. But this teacup can be seen clearly as having a major influence in the value of the dollar. As regular readers know, trends are established at the margin. Many trends emerge as very small drips before they morph into something larger.

Let's take a look at the value of the dollar as these outflows have grown:

As the "Schiff'ting has unfolded, the dollar has reflected the change in domestic investors' sentiment toward US investment markets. Of course, the chart for gold is the mirror image of these charts, moving from lows seen in 2002 of $250, to recent highs above 700 dollars an ounce. Little reported in the mainstream media is the fact that US investors for the most part haven't invested a dime in US stock and bond markets for over a year. Foreign stock markets have been far outperforming the US markets for years as the smart money is always the first to the party. The broad public in the United States and Europe for the most part are on the sidelines; so far these BULL markets have been a professional affair, as the big and smart money have gotten in on the ground floor for the coming "CRACK-UP BOOM".

One of the primary reasons I illustrated the world stock markets' simultaneous confirmation of the coming global growth scenario is that the public for the most part is not yet in the stock markets or any markets for that matter. China is the exception with the public piling in at this time, but in Europe and the US the principal participants are institutions, public and private investment banks, hedge funds and large private investors. The little guy is nowhere to be seen in the stock markets, buying gold, or forcing their money into the markets yet. That happens near the end of the market runs, so we are nowhere near the end yet.

This week bond markets worldwide broke down hard; stocks had a bout of indigestion and everybody started talking about the end of the world. WOW, that was fast. We are a few percent off the highs and its now all over. I DON"T THINK SO. Markets were "AHEAD OF THEMSELVES" as excellent fundamentals and TOO much liquidity pushed them too far to the upside. A five week or five month pullback is to be expected, stocks have been up 11 of the last 12 months, they have to back and fill, correct, and take out the weak hands, and markets are not one-way affairs. A "Finger of instability" (see Tedbits archives at www.Traderview.com) has emerged as fire hoses of hot money rotate around the globe to seek alpha.

The markets could get "Cracked" good and hard here and it would only be a healthy event as mentioned in the missive. A buying opportunity! Assets on sale for the big and smart money during the "finger of instability" (see Tedbits archives www.TraderView.com). During the inflationary boom that is unfolding the yield curve will try to NORMALIZE, not stay flat as it currently is. REAL interest rates are nowhere near tight; in fact in REAL terms they are still quite NEGATIVE. The banks are still paying you to continue to borrow. They can't withdraw the stimulus of money and credit creation EVER. They can raise rates, but real rates will ALWAYS be below neutral, or they risk the implosion of the fiat monetary and credit systems they have implemented. Asset-backed wealth creation is here to stay.

The reason the US and European yield curves are flat is because their economies have been STRUCTURALLY crippled in a process lasting over the last 50 years as creeping socialism and the welfare state have slowly but surely destroyed the capitalism and wealth creation that were once the bedrocks of these once great economic powers. The public servants and financial authorities have substituted money and credit creation for growth policies. A good deflationary crack will serve as impetus for the next round of reflation by government financial and banking authorities worldwide. Of course, they will give the newly minted cash to their campaign donors first, so these donors get to buy the assets that go one sale during the deflationary SCARE. Keep in mind, when they print money it's the guy that gets it first that is the big winner.

This will be driving us to the ultimate "CRACK-UP BOOM" we can expect sometime in the future. This will unfold over a number of years and is an investment theme for the next 5 to 10 years at least. Thank God for the slow motion, I am not ready yet personally! LOL.

So, what is driving US markets higher and underpinning the dollar? Offshore dollar holders, what else? They consist mainly of two groups:

First, foreign central banks are still repatriating dollars into the interest rate markets, to defend the value of their existing holdings, only now it is more slowly as they try to steer the ever-growing, enormous amounts of dollars they are receiving into more productive assets through their newly born, government investment vehicles. Buying units of production, assets, raw materials and energy investments rather than the certificates of confiscation that continually eroding US treasuries and dollars have evolved into.

Secondly, the private holders of dollars and US treasuries are quietly buying US assets for the same reason and the flow from this group has increased dramatically over the last several years, rising to over 160 billion dollars last year, a rise of over 76% from the previous year. To put this number in perspective, at the height of the dot com boom, foreign inflows amounted to $335 billion. Before the "CRACK-UP BOOM" is over, you can expect this number to climb to over a trillion as dollar holders seek the shelter provided by the indirect exchange embodied in buying an asset, which can just reprice in the fiat world the unit of production or asset exists in.

Is anybody noticing the enormous amounts of gold that's been sold into the markets by the Central Banks in Europe over the last 120 days? They should have been able to force the price much lower with the sheer scale of selling. They publicly threw in the towel about a week ago, having been stymied in their manipulative efforts. The worm is turning.

Something or someone has been gobbling up the gold: my bet is that the crack-up boom syndrome is emerging, as emerging world central banks and their citizens take it down without saying a word, quietly slipping dollars, which they are choking on, to the big Central Banks in Europe. Letting those socialist fools and "WOULD BE DEMI-GODS" exchange their best central bank reserve holdings for ultimately worthless ones. The emerging world's banking systems become more solid by the day as they slowly but surely remake the composition of their reserves. Remember, the IMF and the World Bank are children of the G7; in order to be a member of these organizations you MUST run a fiat currency and credit creation monetary system. It is thus so they can steal money through the printing press and infinite credit creation. The emerging world's Central Banks have figured this out and are working toward self-preservation. It is an interesting game of cat and mouse.

(Authors note; looking for assistance in creating portfolio diversification that can survive and thrive in what I am outlining? In fingers of instability? If so contact me through www.TraderView.com. Subscriptions to this newsletter are also free at this address; send it to a friend, Thank you)

So the smart and big money are moving towards the exits; they are lifting us higher as asset markets accelerate higher with "Fingers of instability" sprinkled in to make the investment landscape a continuing challenge. Bonds are bombs and will continue to be; some bond markets can continue to fall faster as they reside in countries with SAVINGS and reserves. So a small nominal tightening can still take place, all the while they let the currency and credit creation lunge forward at an ever-breathtaking pace.

While other bond markets can be expected to OUTPERFORM in Wall Street parlance (outperform means they don't fall as far or fast as other bond markets, e.g. if US bonds don't fall as far as German bunds they have outperformed), the financial and monetary authorities become buyers to head off systemic financial Armageddon. The US Federal Reserve is in just such a place RIGHT NOW, so expect them to support the bond market and become borrowers of last resort with their powerful open market operations and currency and credit creation machinery. They have to intervene at these levels or risk the "ARM"ageddon unfolding in the Real Estate market spreading to other sectors of the "asset-backed" financial system. It hasn't spread yet; they have contained the problem well to this point.

You can predict government behavior at times like these. The Europeans will not intervene as the Fed must. Their citizens have savings which ours don't. The 2.5 trillion I mentioned above is not in the hands of the wide public; the wide public is broke and in debt up to their ears. The US government, along with the G7 buddies, will put off reckoning day a while longer. These are opportunities. The dollar can be expected to rally as flight to quality habits die hard (the dollar is no longer a quality asset and never will be again), so ride it and get ready to short it at better levels as they are directly ahead.

The US and Global stock markets NEED to retreat, they NEED to revert to the mean, they need to back and fill and correct the excesses in the prices we see. It will set the stage for the next leg-up in the unfolding "CRACK-UP BOOM" as it works its way to the inevitable Kondratieff winter which will unfold someday. What is unfolding has been unfolding for decades, and you need to think of them in this manner; weeks and months of gyrations may be breath-taking as they unfold, but are only OPPORTUNITIES for smart money and nimble investors....

Ethanol Blow Back

Wow, the demands on corn are now rolling into the global wheat market as substitution is now not an option. The wheat crops from Ukraine, Russia, China and Australia are all in difficulty or failed. Export controls have just been announced in Ukraine, can Russia be far behind? Wheat is up 20% in the last week and corn is poised to test its highs, any hiccup in the corn crop and you can expect a doubling from here. Inflation is rampant in these numbers and look for it to show up at a supermarket near you in anything that requires GRAINS of any type. We spoke about this in the two previous two ethanol articles in March and February. As the developing world has emerged their incomes have soared, so it stands to reason they want more and better caloric intake, they are competing for the food with the ethanol producers. Inflation in the pipeline!

In conclusion, the global bond bull market from the early 1980's is DEAD; put a fork in it. The rise in yields will last for YEARS as we transition to a secular BEAR market. And of course that means inflation is going to be rising. The Central Banks and financial authorities can be expected to understate inflation FOREVER so that they can constantly offer money below the real rates that could be offered when we really had monetary discipline and asset-backed currencies. Commodity and asset bull markets can be expected to continue at nominally higher rates. Interest rates in REAL terms rates (real inflation figured in) will probably stay negative and loose as they are now. There will be cyclical bull and bear markets within the long term secular downtrend in bonds and increase in rates.

We are in the ERA of STUFF, as the emerging world builds out their economies using the savings they have accumulated over the last decade. These savers are on the bid, as the debtor counties are forced to sell their assets to pay their creditors. They exported their wealth and it now resides outside their G7 homes. The politicians of the G7 have mortgaged the future and sold EVERYTHING, and spent it now, impoverishing future generations of children to support their parents now.

Inflationary booms can be expected for years to come. As financial authorities try to pay the bills through fiat currency and credit creation for the "something for nothing" constituencies that now employ them. Anything that can't be printed will be expected to rise as dollar holders now, and all currency holders later, attempt to escape the immorality of their respective Government SERVANTS and financial authorities. Public Servants who believe they can escape history's lessons about fiat currencies and credit creation, and the vicious circle they have put themselves in, must be considered when making your investments. These are opportunities or pitfalls in your future. You get to decide. Turn volatility into opportunity as these things unfold. If you wish to turn them into opportunities in your own portfolio, give me a call or contact me through www.TraderView.com.

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