Dollars to Dimes

By: John Mackenzie | Fri, Apr 23, 2004
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The Central Banks of the globe have placed a very large bet on a bankrupt monetary "theory" and it's relation to debt. While our nation continues its "free lunch" the regulated supply of credit appears to be naked and devoid of principle. The concept of "something for nothing" is merely a mirage.

Placing our faith in debt is going to swallow us whole as the entire financial system has mutated into nothing more than a very large debt kiting scheme. The most disturbing aspect has been the credit facilitators willingness to oblige rampant consumption. Debt must be repaid or destroyed. There is no free lunch and although we appear to be feasting upon prosperity, the reality is far removed from view and even more removed from the truth.

I have closely followed Doug Noland's "Credit Bubble Bulletin" for several years and amazed at the undercurrents that have begun to move to the surface over the past few months. Mr. Noland appears to be suggesting we are heading for a "worst case scenario", a catastrophe unseen in human history. His fascinating account of how monetary policy would be shifted into high gear was exceptionally accurate 18 months ago.

To believe monetary & fiscal policy would become as reckless as he projected was difficult to accept, this lesson in denial has served to further widen my field of view. The new paradigm appears to be a utopian concept whereby we can remain prosperous indefinitely. Or, is it simply that debtors believe low rates will continue to present further appreciation of assets and using them for collateral is without risk? The Federal Reserve appears to be backstopping the later.

The daily sound bites from Alan Greenspan and the various Federal Reserve Governors are beginning to take on an air of desperation in their frequency and with good reason. The Federal Reserve has grossly overinflated the banking system without a corresponding demand for commercial debt. The excesses within the banking system have been parlayed into speculative positions across equities, bonds and commodities. The resultant bubbles are now so unwieldy, they are at far greater risk to liquidation than previously assumed by the small speculator.

Silver in an excellent example of just how distorted a commodities rise can become. I remain very bullish on silver over a longer time frame, but for now believe it is best to step aside and acquire the metal itself and not the silver sector equities. They are at risk as they are merely a paper promise as well. The very same can be said for gold and gold equities. Own the metals first, the paper second as we may have entered the very environment that would be, at least initially, bearish for these sectors. A race for liquidity will certainly concentrate a demand for dollars. How it plays out will be telling and may suggest serious correction in precious metals.

The Dow has historically led the metals complex lower, we are seeing a very different and distinct pattern now. One that should raise concern for investors in mining equities. Is this a "False breakdown"? No one really knows... yet.

For investors it would be prudent to play the break and let the market lets us know what it intends to do rather than begin to look for re-entry on a speculative basis as we have made a very impressive move over the past year. The risks to a systemic failure are quite large in my opinion. The mining sector will be sold along with everything else paper. The rate environment, although intermediate in view at this point, is unfriendly to precious metals. There appears to be a concerted effort to reduce alternative investment prospects with blatant intervention.

Exercising caution makes sense now and although precious metals remain one of the safest investments, they are subject to volatility. Richard Russell's position eloquently states the proxy for those seeking safety: "In a bear market everyone loses, and the winner is the one who loses the least."

It is important to recognize that "Dollars" are a debt based instrument, merely a commodity used for consumption and savings. Precious metals represent an escape from the saver's paradox in which hard earned savings are loaned as debt. Our debt is going to be very difficult to service, if not all but impossible.

In the interim, the Federal Reserve will attempt to hyper-inflate credit facilities in order to maintain the debt pyramid. I expect this to kick into an entirely new level of the absurd sometime late this summer, most likely by July or August. Precious Metals should begin a very powerful move higher at that point. How the mining equities will behave is difficult to forecast and it is best to keep an open mind to all possibilities.

That which cannot be serviced will be destroyed and the race from Dollars to Dimes will be upon us all, deflation will have taken hold and there will be very little monetary theory can do but take lessons from it's own shortsighted hubris.


 

Author: John Mackenzie

John Mackenzie

John Mackenzie manages private capital.

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