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Dudes, You Are Not Getting It

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Fiat money is losing value in the psyche of the users at an accelerated pace

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Central banks are not mopping up liquidity, they are simply not printing ever more money fast enough.

Over the last couple of weeks, TV and print media has been badgering us with the idea that worldwide markets are weak because central banks around the world have decided that it is time to pull back on the easy money policies of the last five years. In turn, various pundits are arguing that the economy is already slowing down, inflation is peaking – or has already peaked - and additional rate increases will result in the familiar overshoot and a recession. This weekend's edition of John Mauldin's Thoughts From The Frontline, pulls together in clear and concise terms most of these issues.

Fully cognizant that I may be sticking both feet in mouth, my response to those arguments is "Dudes! You Are Not Getting The Point!!"

IMHO, the conclusion that markets, commodities, etc. are in a synchronized slide because central banks are mopping up excess liquidity is wrong. Financial markets of all types are "unhappy" because central banks are not accelerating the growth in excess liquidity. I believe the distinction is very important.

Just like consumers have come to view 0% financing on autos, consumer electronics, furniture, etc., etc., etc., as a birth-right, so financial markets – and the U.S economy - have come to expect, and rely on an ever growing flow of fiat money to inflate their nominal values. Anyone with a pulse knows and feels that inflation is not running at the reported 2.3% core level or the 3.5% composite rate. And many cynics in our business (myself first) are of the belief that while the Fed has been raising rates on one end, it has been monetizing the debt on the other. (Of course, given our trade imbalance, and through a myopic point of view, monetization may not be very appetizing to our sellers but makes perfect sense for us). The thing is, despite the public protestations to the contrary, neither the Fed nor the economy gives a rat's derriere about 4%, 5%, 6%, 7% . . . or 11% inflation. As in the case of a junky, getting lots of free money to inflate our assets and to make us feel like we can spend to no end, the "money drug" feels good; and the more we get the more we need to have. IMHO, all things being equal, Boom Boom literally would go on a joy ride in his chopper.

What I believe to be the true worry of central banks and the real reason behind the current spate of coordinated rate increases is an inkling that the consequences of debasing fiat currencies worldwide are moving from the academic/economic discussion arena to the real world. Whereas 10 years ago, for example, people would say ". . . eh, no big deal, it's only $20", and 5 years ago they would say "no biggie it's only $40", today they are saying "no worries, it's only $100 bucks." Fiat money is losing value in the psyche of the users at an accelerated pace, and as that happens, central banks are slowly but inexorably losing the cornerstone that allows them to prop up and control the underlying economies.

Since I have no hard studies to back up the argument in the last paragraph, you ought to treat it as such – just an argument, my point of view. So, while at it, I would submit to you that the fact that the debasing of currencies coincided with people recklessly throwing money first at stocks, then at real estate, then at commodities and now at corporate bonds and private equity is not just a mere coincidence, but a subconscious reflection of the attitude that cash is only a piece of paper with a wasting intrinsic value.

So now that many of you probably think that Fil has gone over the deep end, let me give you one last piece of ammo. There are several reasons given for the rise in precious metal prices over the last several years: demand/supply imbalances, geopolitical tensions, inflation fears, even pure speculation earlier this year. But, IMHO, the key reason is that people in countries such as India – a huge country with a developed economy, but which has suffered through a number of currency devaluations – are familiar with the concept of devaluing paper money, and they "see"/"feel" what's going on around the world. That's why they are hoarding gold as fast they can. As other developed economies will face currency debasement, those citizens will likely join the gold party as well. That's why I believe the price of gold will rise far beyond current beliefs, and why Miami will be willing to pay Shaq $200M paper dollars to shoot 46% from the free-throw line.

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