George Santayana who is most famous for the quote “those who ignore history are doomed to repeat it”, provides the title quote; which was found in his book “Dominations and Powers: Reflections on liberty, society and government”. The point Santayana was making is that just because we don’t recognize the order of something(s) our brains automatically label the situation as disorder. Part of the reason I have taken to writing these blog posts is to help me look for clues to make order out of chaos. It has been apparent to me for some time that we are living through both a shift of paradigm and balance of power. The news and events come so rapidly at this point it is almost impossible to keep up with everything of importance that occurs. The key is to try and filter out the noise and focus on the items and issues that alter the existing structures of the economy or politics; because just as plate tectonics broke apart Pangaea and created the land masses we recognize today other forces are realigning the world’s economic “plates”.
Some politicians and economists are calling the current situation a war, not a hot war but a form of cold war. It is a war but 0f restructuring mainly due to the West’s greed and abandonment of the principles that made Western societies prosperous and great, rather than a war of armies, bullets bombs and missiles. I don’t care if you are of the liberal or conservative bent as both have left their fingerprints at the murder scene of our way of life. We live in a world where we pretend markets are free and trade is fair and maybe it was so once upon a time but today is no fairy tale.
Today’s world is an epic struggle of bureaucrats and politicians versus the natural order of things. Instead of free trade and markets we have governments intervening and in some cases controlling many aspects of the markets, trade and daily life, not just here in the US but around the globe. For example, the Chinese have their currency pegs, the FED has QE ad infinitum the Aussies were threatening a mining super tax and I am sure there are thousands of other examples if you look (like the whole EU nuff said).
The bottom line is that all the players of the game are managing things from an “ethnocentric” vantage point. What I mean by ethnocentric is that policy makers who are a product of their cultural and moral up bringing make decisions based upon that criteria. We here in the West particularly in the US have a tendency to believe that everyone thinks the same way we do and therefore will respond like we do; but nothing could be further from the truth. I hate to pick on our friends the Chinese but they demonstrate my point very well. The Chinese as you know, dear reader, have what one would call a centrally planned economy and not everyone in China likes it I am sure but it is what they know and as a result they work with it. Part of Chinese culture and practice is to plan in advance and stick to a plan to achieve the end goal. As a result of this mindset the Chinese government sets out 5 year economic plans and they recognize that to achieve their ultimate ends may take longer than that but it is accepted and incorporated in to the next 5 year plan. Now contrast this to the mindset of the US where we can’t even formulate a national energy policy for the next five years or longer and this has been going on for almost the last 40 years since the oil shock of 1973. In other words they plan and we react.
I used to think that we were constantly getting bombarded with news because CNN gave birth to the 24/7 news cycle. It seemed like the media always had to go find what every meaningless trivia about Michael Jackson, Kim Kardashian, Lindsay Lohan, Tiger Woods, OJ Simpson or the Octomom so they could to fill all the air time. Then even when there was a news event of some sort the media would fill hours rehashing the same old news and having discussions until the cows came home. Now it seems that the media is not having any problems locating material to report on, of course we also are not privy to the items that are being spiked and never make it out of the news room.
Everyday there are multiple major events transpiring and at times it seems like the world is going to spiral out of control almost like some crazy 2012 prophecy. This is when you need to take a breath, and go out and play with the kids or just take a long walk to clear your head. I know it seems like chaos but realignments of wealth and power always do, the difference between this period of time and say the Fall of Rome or even the decline of the British Empire is the US fall from grace is being televised; and you are living in the 24/7 reality show “Benny’s Real World”. This real world comes at you in a non-stop fashion via TV, Radio, Newspaper and the internet so it appears like there is no escape unlike the past. Items whether truly news worthy or not are blasted around the world in nanoseconds as oppose to what used to take weeks in the Roman period or even days for the British decline.
This morning I am looking at the proverbial tea leaves and cow entrails known as the news media reporting reading between the lines searching for the big picture puzzle pieces. The first item of interest is yet another shot across the bow for the US and the FED in particular. In a Bloomberg article the Chinese reveal that they plan to tighten control of capital inflows to their markets. This is a response directly to the FED’s QE2 and an effort by the Chinese government to keep as much of the newly created hot money from invading their markets and further driving inflation as was the result for them of QE1. Yesterday I had thought that “Benny” was covertly giving the Chinese a “face saving” way out of US treasuries, but apparently the Chinese view things through a different prism. Instead I believe the Chinese are reacting to what they perceive as “Benny” trying to make Yuan pate by allowing the “hot money” to be forced down the gullet of the Chinese economy forcing the Chinese to either revalue the Yuan or have rampant inflation. Of course this being a nonlinear period of time the Chinese reacted to preserve their best interests and who could blame them as that is basic human nature.
It will be interesting to see if other emerging markets follow suit with capital controls of their own, because this would cause an unexpected outcome for “Benny and the boys”. If nations around the world do begin to adopt capital controls you would more than likely see a race not to the bottom but to the close, as in closure of capital markets. The end result would be that the dollars created by QE2, POMO and general liquidity would end up remaining inside the US; this in turn would accelerate the pace of inflation domestically and result in yet another bubble or bubbles. In addition to the bubble(s) you would see dramatic price rises in things especially imported items since our inflation would not be driving inflation in markets where we get “stuff” from but our own; the countries that export to the US would be demanding more dollars for the same items to compensate for the devaluation.
So again before the G20 leadership meeting, China is posturing, in part to draw attention away from the fact that they are still contributing to the global imbalance by maintaining their currency peg. Of course they are maintaining the peg because as human nature would dictate it is in their interest as it gives them an advantage. It would be my contention that the Chinese will maintain the peg until it no longer suits them and the idea of capital controls just says to me that they are not through with us yet. The Chinese have used their cheap currency and lived with the inflation it creates because as I said before they are planners. It would be priceless to be a fly on the wall in top level Chinese government economic planning sessions. I believe that the Chinese have allowed us to delude ourselves in to the paradigm of we will do the thinking, designing servicing and you will do the manufacturing as a model for long lived prosperity. This is a dangerous trap as wealth and security for that matter are a direct result of manufacturing not servicing. If America had the same economic model in WWII as we have today the world would probably be speaking German, because we could not have ramped up manufacturing even close to the needed level to overpower our enemy.
I would contend that the Chinese are more than happy to trade trinkets for dollars of little value so as to acquire infrastructure, technology and knowledge. At the end of the day the Chinese end up holding all the solid capacity and we end up with a society that has lost 8+ million manufacturing jobs and has a lack of production capacity to make the things we need and or want; but at least we have lots of shiny I-pads and LED TVs. When the point comes that either we make it to difficult for the Chinese or we are no longer willing to build and essentially give them our technology they will be done with us; they will move on just like the “Goldman Vampire Squid” and suck the life blood out of the next victim economy whether that is the EU, Brazil, Canada or Australia I cannot tell you as they are investing or should I say divesting themselves of dollars in those countries already. The difference thus far is the aforementioned countries are allowing their resources to be scooped up to feed the Chinese dragon, where as America pretended to be so advanced “investing” in China all the while slowly draining the life blood from the economy.
The argument goes that China cannot and will not do anything to upset the apple cart since they need our market; a fact that is rapidly changing. To start with China is establishing itself as the Asian hub for business and the local hegemonic power, which gives China markets locally. The second is a simple matter of demographics. China has a population of 1.3 Billion and let’s say only ¼ of the population becomes middle class with disposable income that is about 325 Million people a market bigger than the whole population of the US and almost the entire population of the EU; that is a lot of people with a demand for improving life styles. Additionally, the notion that the Chinese would not make a short term sacrifice and essentially “screw” the US is another demonstration of an ethnocentric view point as I believe if it fit in with the Chinese longer term plan they would do what it takes to accomplish the end goal. Their central control allows them to do things to offset the loss of that capital and they would view it as a cost of doing business.
Dovetailing in with the idea that if it was in the best interests of a nation they would act in a manner that might not benefit the US is another headline form yesterday. On the Business insider website an article brings forth thoughts from Citibank’s Steven Englander who contends that Central Banks are going to start to dump dollars in the weeks ahead. He believes that QEE2 will prompt central banks to diversify out of dollars since the flood of newly printed dollars will only serve to create a further imbalance of dollars in central bank portfolios. Of course this assumes that these countries don’t follow China’s lead and impose their own capital controls. Either way it looks to me that “B52 Ben” will get his inflation wish and the world will do his bidding to devalue the dollar. If there is no catalyst we will see an orderly decline in the dollar; who knows maybe “Turbo Timmy”, who has been remarkably quiet since his “Bitch Slapping” from the last G20 meeting is out selling a coordinated effort to devalue the Dollar. It is also possible that neither “Turbo Timmy” or “B52 Ben” have even thought about it and we are in for an uncoordinated steep drop due to a wave of dumping, regardless the message is the Dollar is going lower even with a small rally here and there.
Our closet neighbor joined in the fray to defend “B52 Ben” and the dollar while rejecting Zollenick’s idea of introducing precious metals back in to the currency mix. The Canadian Central Banker Mark Carney sides with “B52 Ben’s” decision and goes on to praise it in an article that appears on canoe.ca website’s money section. He states unequivocally that “Our view is that gold has no monetary role to play in the international monetary system”. The article then goes on to make the point that Carney said, “it would be up to the private sector to impose market discipline on banks…Ultimately the private sector will remain the first line of defense”. Mr. Carney appears to be a very confused banker and does not truly grasp what is happening as he appears to believe that we can just slap a new coat of paint on the banking system and return to the bye gone days of yesteryear. Newsflash… Mr. Carney the private sector is trying to impose discipline and ring the alarm bell as they continue to discover and move in to tangible assets outside the banking system; so you the oher “smartest guys in banking” can delude yourselves but the masses are starting to speak and they are voting with their feet.
So with these news items out there in the public sphere you would think that Gold and particularly silver would still be moving up knowing that the Dollar is toast over the longer term. It would appear that the “Metal Boys” aka bullion banks were at a point of screaming uncle and their losses especially in Silver must have been getting pretty large even for them. Silver has been on a tear and was up about 60% year to date while there are incredible short positions held by a tiny handful of players, connected players mind you. It is just coincidence I am sure that we get the headline in the Wall Street Journal “Precious Metals Watch: Can You Say Margin Calls’?” At the same time that the CFTC has been telegraphing to the Bullion banks that it is going to supposedly do something about the unfair trade practices by the bullion banks and their excessive shorts the silver price goes in to overdrive; most likely because of a combination of QE2 and the CFTC announcement emboldening buying on the long side. The “Metal Boys” have been taking it on the chin and the COT (commitment of traders) reports have shown some declines in short positions and no new net increases indicating a belief that metal prices were not going to correct yet. I believe that the same “Metal boys” went to the CME and convinced them to up the carrying costs by raising the margin requirements 30% in one shot. Raising the margin requirements is something that occurs to slowdown a bull market especially when the big boys cry foul because the market is over running their rigging the game. Changing the rules of the game can have a short term negative effect, but a move like this will ultimately make the bull stronger because the more it costs to carry it will contain some of the MOMO(momentum money) and keep the metal in “strong” hands. It will be interesting to see in the current COT report if the “Metal Boys” were able to cover to slow down the hemorrhaging and get out of the freight trains path.
So as you can see dear reader there are telltale signs buried in the chaos that are sign posts to lead us to whatever the new order will be. Just for the record I am not talking about the conspiracy theory “new world order” as perpetrated by the Bilderburgs and Tri-lateral commission, but instead an economic new order that we have brought upon ourselves with lack of foresight and poor policies. Reading the tea leaves is a tough task but it is the only way to see what the future may hold. If you can piece together the information you can profit and thrive. To do this is kind of conjecture for investing is to try to do what the “great one” Gretzky said about why he was so successful in hockey. Gretzky said “I don’t skate to where the puck is but where the puck will be”. I hope that all of us are skating to where the puck will be, until tomorrow I return to the “cone of silence” to try and make order out of chaos.