Hillbilly News

By: Rodney C. Cook | Mon, Jun 9, 2003
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I took several days over the previous weekend to do some remote construction on the family cabin. Six whole days isolated from the information age with only a few moments of scrambled television signal at sundown. My last sojourn to this remote place was last summer. Precisely the dates when gold and its shares were taken out and shot. Still suffering post traumatic stress from this event, I was expecting the worst. So upon my return to civilization, I bravely took a glimpse at gold. It was up in price! Well, err, not down.

Gold is holding the line. I must admit that I am a bit surprised. Pleasantly, of course. And this week's action hints that gold shares are becoming a bit more robust, especially relative to the metal. Perhaps gold has something to say. At least it seems to be clearing its throat.

Deflation, the Real Terrorist
The monetary authorities of our great nation have announced their resolution of the conflicting intellectual subtleties of inflation and deflation. How nice of them. All so we needn't worry our silly little heads about something as trivial as financial Armageddon. Further interest rate cuts are coming as an insurance policy against deflation. Time to refinance once again. And tax rebates are in the mail. And retirement accounts are up as institutions buy stocks for our collective good. It is so very nice to have such wise men in charge of my financial well-being.

After all these great minds have provided us with a feast of breads and Martha in the center ring. But aren't those dancing bears in the wings? While my view from the peanut gallery is obscured, the insiders in the front rows can clearly see them warming up. But what's this? They seem to be putting on their winter coats and easing toward the exits. Don't they want to stay for the next act? I guess someone forgot to tell them about the free peanuts.

Reflation is now out of the closet. And downright respectable. Just a couple of weeks ago moderation of the strong dollar policy was voiced by our wise economic benefactors. And with this week's public relations spiel about fighting deflation, it seems the gloves are off. But bare knuckles boxing is ill advised. Especially when your opponent is the bear of deflation. An angry circus bear, tormented and humiliated for many years, whose chains have slowly rusted away.

So the insiders have noticed that this bear is loose. Before the bear itself has noticed, it seems. And these insiders are moving toward the exit. Because should this bear rampage, exiting will be a hazardous adventure at best. The astute are aware that the institutions of man have never defeated deflation. Just destroyed currencies in the attempt.

Bear Necessities
But a currency in moderate decline is not generally noticeable to the masses. Moderate inflation feels good. Like the sun. Makes me feel rich and tan. Everyone in America views their wealth in terms of dollars. Well maybe their credit rating, measured in dollars. Only we hillbillies include chickens on in our personal financial statement. So it is politically expedient to inflate. In the short term. But then, all electoral politics is short term. However eventually the crowds will begin to notice the effect. The political pressure will re-surface when prices of every day necessities go up and strain the budget. If I were cynical I would guess that this will not take place to a significant degree before the next election.

But even from my remote mountain setting this weekend, the dollar's distortions are evident. In the realm of lumber, we have a hint of the events that will punctuate the next phase of deflation. Trade wars. Arising from dispute, there are tariffs on Canadian lumber. And this is where much cedar is produced. Together with the decline in the dollar, cedar commands a nice premium of late. A budgetary strain, if I weren't using gold as portable real estate. Selling gold purchased at a much lower price to pay for the lumber. But one of those unanticipated compensatory mechanisms came into play. California Redwood is now cheaper than Canadian Cedar. So dollar politics a seeming world away changed the wood on the family cabin's deck. And you can feel the reach of monetary policy. Even where television reception is difficult, at best.

Frequent Liars
When I get away from the blue bloods in the blue zones, the honesty is palpable. So it was quite enjoyable spending time doing hard labor in honest company using tangible assets purchased with honest money. So maybe it is just me, but the steady stream of elitist corruption seemed to assault me when I returned to the red zone and plugged the news feeds into my thoughts. Sosa and Martha had even tainted baseball and apple pie. The hyper inflation of lies must be in blow-off phase. Deflation here would be a good thing.

It was nice being in the mountains where my news selection is limited to the surface issues. The facade that can be smoothed to allay my anxieties. Like the nice airline story I watched. About Frequent Fliar Miles. Evidently trillions of them have been issued. And folks are having a hard time using them. More blackout dates. Lead time requirements. Expiration periods. I had to laugh. How could all these miles be honored? Trillions? Isn't the sun only 93 million miles away? Talk about a failed private currency. Imagine if we had dunces like this in charge of our monetary system.

Might as Well be Flyin' to the Sun
But amazing things can happen while you are away for a few days. When I left, our national debt was 6 trillion and change. When I came back, folks are talking 44 trillion. Who put the airline executives in charge of the monetary system while I was gone? Oh, but these are just unfunded liabilities. That can be inflated away. As these liabilities become due, and back on the balance sheet, we can pay with the printing press. Just don't do the math if you want to sleep at night. It would imply much more than a moderate inflation at some point, and it won't feel good. More like a bad sunburn than a tan. A sunburn where you can't get away from the sun.

So I guess we know what gold and its shares are trying to tell us. But is anybody listening?

History tells us, in a deflationary down cycle, debtor nations have suffered the same fate: totalitarianism. So will deflation be defeated with a neo Keynesian hyperinflationary monetary policy? Will a command economy be offered as the necessary solution? In the opinion of George Soros, the dollar may be overvalued by 70%, so he bid his Russian waifs adieu to come and rescue us from our fate. And champion a retro Socialist solution. How sweet of him to offer to fix our frequent fliar program. Before we crash into the sun.


Author: Rodney C. Cook

Currently Rod is the founder and manager of Bull Trout Capital, a boutique investment company, and author of the FishWrapper, a private investment newsletter. Bull Trout Capital was founded to maximize returns based upon long cycle dynamics and Austrian economic principles. Dr. Cook uses internet based methodologies to identify sectors, strategies and shares that will most likely outperform at the current point in the cycle whilst maximizing upside exposure to potential economic dislocations. The FishWrapper features Dr. Cook's personal investments, methods and strategies where he has demonstrated extraordinary returns. Before Bull Trout he founded Sightward and authored patents (now owned by InfoUSA) to forecast human behavior on the internet; co-founded Ark Interface (now owned by xSides) to develop and patent innovative computer user interfaces; founded Optimas (now owned by Media Cybernetics) for medical and scientific image processing systems; and founded BioSonics Imaging division and developed their Optical Pattern Recognition System. Dr. Cook began his career as a Biometrician for the International Pacific Salmon Commission applying his doctoral dissertation in applied pattern recognition from the University of Washington College of Ocean and Fisheries Science.

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