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June 21, 2012

The Great Asset Grab Part 2 - What's the Score?

In a Marketwatch article this morning, Caroline Henshaw provided a tally of the score in the Great Asset Grab between the East and West (see http://www.marketwatch.com/story/asia-millionaires-outnumber-now-us-peers-2012-06-19).  While the Asia Pacific region gained 1.6% and the US lost 1.1%, the US is still a contender when counting assets.  The score?  Asia has 3.37 million people with investable assets in excess of $1 million while the US has 3.35 million.  The overall wealth pool fell to $42 trillion (from the $45 trillion I referenced in my previous posts) and is split as follows:

North America - $11.4 trillion

Asia Pacific - $10.7 trillion

Europe (including Russia) - $10.1 trillion

All others (South America, India, etc) - $9.8 trillion

As all hope for a New World Order fades these are the numbers to keep an eye on as nations create alliances that offer the greatest advantage to them on a go-forward basis.

In a recent Inflation/Deflation debate between Jim Rickards and Harry Dent, Rickards proposed that a one world currency/ one world government is still on the table.  He sees the mechanism for this to be the IMF and the currency to be the IMF's special drawing rights.  I hold out little hope for the success of such a plan, even if TPTB are still trying (halfheartedly) to implement it.  Here are my reasons:

1) SDRs are unfamiliar.  To date they have only been used three times in very limited quantities, most recently for approx $200 billion in 2008.

2) SDRs represent a claim on all member nation assets.  As such, successful implementation would require wealthy nations to support profligate nations (and we've all seen how successfully this is going over in Europe!)

3)  The IMF has had little success raising core capital.  At the G-20, the IMF announced that it had successfully raised $456 billion (with a measly and hardly ratable commitment of $43 billion coming from China)  http://www.marketwatch.com/story/germany-to-allow-europe-funds-to-buy-debt-reports-2012-06-19-1410372

4)  While the IMF could take this core capital and use fractional reserve banking to lever it up, it is difficult to imagine China and Russia agreeing to participate in such a scheme when push comes to shove, no matter what noises they make in order to get along right now.

5)  As Chris Duane so astutely pointed out in his most recent interview with Kerry Lutz, national memory is long and strong.  Just as Europe remembers WW2 and Germany is leary of any alliance with Russia because Russia still remembers WW2, too, Michael Cembalest in his most recent Eye on the Market states:

'Any discussion of China’s engagement with the world needs to factor in China’s troubled relations with the West during
the 19th century. Kissinger (Cembalest had dinner with H.K.) spoke about the impact this era continues to have on China’s political consciousness, which you can grasp by looking at some data and charts: opium imported into China which addicted up to 25% of its adult population, the exodus of Chinese silver to England and India to pay for it, and the collapse in China’s trade surplus. The Chinese Imperial
Commissioner sent a letter to Queen Victoria asking her to cease the opium trade, which was banned in China in 1729 and again
in 1836. Britain ignored the request. After a Chinese blockade of opium ships, the British invaded in 1840, and easily defeated
the Chinese. China was forced to sign the Treaty of Nanking, one of the more one-sided treaties in history. The opium trade then
doubled, leading to another war (and Chinese defeat) 20 years later. The Opium Wars played a large part in the collapse of the
Qing Dynasty and subsequent occupation by foreign powers. This is not seen as ancient history in China.'

What does this mean for you?

Today the Fed extended Operation Twist, which as I pointed out in a post I wrote two days ago, is a sanitized operation, meaning they sell bonds they have that are short-dated and buy bonds they want that are long-dated.  Because this results in no balance sheet expansion, it is not inflationary.  For this reason, PMs as measured by the market may go down as recession hits.  Likewise, many people in Europe and even in the United States will get flushed out of their metals (as austerity hits Europe and those persons unemployed for more than 99 weeks in the US sell anything they can lay their hands on simply to eat).  Additionally, market traders may pile in to drive prices down so they can pick them up cheaper.  (When I speak of people being flushed out of metals, it is these people of whom I speak, not readers of DTOM who know better!!!)

As recession hits, if assets get cheaper this is simply a huge buying opportunity.

How low could metals go and should you wait?  Chris says "I'd rather be seven years too early than one year too late." and I agree.   The election in November, the need to increase the debt limit again this fall, and the fiscal cliff are all reasons to be buying while others are selling.  Dollar cost average in if you like, but don't go into 2013 sitting on piles and piles of cash.  There is a reason why major changes happen immediately after an election cycle...it is easier to get stuff done when the pesky electorate is powerless to stop you (ex. Obamacare)

I welcome all questions and comments.  In keeping with the memory of Bob Chapman...I answer every one.

Multigenerational Homes Coming to a Neighborhood Near You

First a little history.  One of the reasons WW2 fueled such a boom in America was that while the men were at war (and earning GI pay), women were at home (earning labor pay).  Since everything was being rationed, there weren't a whole lot of Michael Kors handbags being sold, and so the money these duel income families had saved was able to be used after the war to fuel investment - primarily in housing - and America was soon off to the races again.  The men worked, the women mostly stayed home, but there was full employment and America was able to grow its way out of its war debts.  When the US debt to GDP ratio once again got out of control in the seventies and inflation began to bite, the solution households themselves implemented turned out to be the thing that made the most difference - namely that women went to work.  The cure for the seventies was not just Reaganomics, it was sharing the bite of inflation between two workers in most households.

As we experience seventies-style inflation, once again households themselves are making the most important adjustment of all.  As we see savings, retirement accounts, pensions, social security, and Medicare lose purchasing power and unemployment biting the oldest, youngest, and minorities the worst (while the rich get richer), we are in the midst of a change in the number of people opting to live under one roof to make ends meet.  For this reason, I don't expect real estate to recover meaningfully.  Just as commercial real estate has suffered from the rise of online shopping, residential real estate will suffer from the coming multi-generational housing paradigm.

That this paradigm is the norm in most of the rest of the world will not be lost on many of us.  Which makes me ponder the question, when the US exports its inflation to the rest of the world, as it did in QE2, what are people in China, India, Africa and Russia going to do (other than despise America, of course)?

The Truth About Twist

When next the Fed meets on June 19 and 20 of this week, one of the items on the agenda will be the continuation and/or expansion of their "twist" program.  So what is twist, and why are they doing it?   Twist is a program by which the Fed buys long dated treasuries and sells short dated treasuries.  If they buy from the open market and sell from their current holdings, twist is, on the face of it, balance sheet neutral (meaning the Fed is not increasing its balance sheet to do it) and therefore not additionally inflationary.  It is what is commonly referred to as a "sanitized"operation.  The publicly stated purpose for engaging in operation twist is to affect interest rate reductions, particularly in the ten year treasury rate (from which all mortgage interest rates are derived). This is critical to a recovery in housing as low interest rates, particularly when ARMs are involved, allow housing to be more affordable.

The other benefit, not talked about in the media, is that Project Twist, when combined with additional treasury purchases results in the Fed owning the long dated maturities and the foreigners and the public owning the short dated treasuries, which is exactly what you want when you are getting ready to rapidly inflate away your debt. 

June 16, 2012

The Great Asset Grab is Almost Over

I have spoken before about the $210 trillion in paper money circling the $45 trillion in worldwide investable assets (PMs, real estate, equities).  The situation is much like the scene from the movie Far and Away, which depicted the Oklahoma Land Rush of 1893, where thousands of people lined up to race against each other to get a piece of land for free.  Then, as now, the unscrupulous found a way to beat out their competition, thus earning the nickname “Sooners”.

Where are we in the Great Asset Grab of 2008-2012 and who owns anything that matters?  If you haven’t had a chance to listen to Michael Hudson speak on the subject of neo-feudalism, you should.  It is the key to discerning the goal, the end game, of what is happening to the world’s economy.   (See Hudson’s interview with Max Keiser here:  http://youtu.be/RD3O8OJuKWk)  Many people have it wrong.  They are too far down on their own level and fail to see the forest for the trees.  The real economic war currently being waged is not about the 1% vs the 99%.  It is about concentrating asset holdings and forming alliances, West vs East.  It’s about who gets stiffed for the bill of the West’s profligacy for the past 40 years and whether the West can hold onto enough assets to reconstitute itself powerfully enough to remain a force to be reckoned with after the global currency reset.

The fact the China has abandoned all patience in its recent purchases of physical gold (http://www.zerohedge.com/news/hoarding-continues-china-purchases-record-100-tons-gold-april-hong-kong), that they are purchasing not only hard assets but also miners geographically situated in the Eastern hemisphere (http://www.zerohedge.com/news/are-chinese-buying-dips-gold), that they are buying farmland in New Zealand  (http://www.aljazeera.com/video/asia-pacific/2012/04/2012420141723456740.html), that they creating trade alliances that don’t require USD to settle, even with JAPAN (http://news.in.msn.com/exclusives/it/article.aspx?cp-documentid=250160300) all stand as proof of intention and the rapidity with which events are unfolding.

Likewise, in Europe, on Thursday we saw Germany tip its hand.  Simon Hobbs of CNBC reported that the structure of any new bailout packages for Spain and Italy will include a pledge of their gold reserves as security for the 25 year loans.  Greece has sold or pledged all of its productive assets, not to get more money to assuage the plight of its people, but simply to make the most recent payment due to its loan sharks.

Yes, I understand that the main thrust of this site is about buying physical silver and forgetting about the rest.  But it is important to understand that the real game isn’t even about us, the small fry.  In all likelihood most of us will get flushed out of whatever silver we do have long before we can actually use it to invest with once the new paradigm comes into play.  The real game is not about us.  It’s about aligning massive amounts of real, investable wealth, East vs West, until all there is no more real wealth to be gotten at any fiat price, even by hook and by crook.

There is no country on earth where the poor (those who live paycheck to paycheck and have no savings) are not mere pawns in this grand global chess game.  The poor aren’t even direct serfs, they are merely the serfs of serfs and as such are completely irrelevant.  But now the middle class is rapidly also being diminished to pawn status.  There is just one event left to secure global neo-feudalism and that is….drumroll please….letting the system collapse.

Dollars to donuts, your parents and grandparents are afraid of holding any real asset whatsoever (other than maybe their house).  They have heard the term “return OF capital, not return ON capital” so many times that they now sit on piles and piles of bonds.  “But I have cash in the bank!” they say.  Guess again.  What do you think the banks have done with all that idle cash?  They’ve been buying bonds and lending it to themselves and their friends to buy real investable assets, that’s what.

I don’t normally like to predict timing events but I must say I see little point left in delaying this game past the election in November.  Whatever title the banks needed to perfect (and could) in the aftermath of the 2008 debacle has been perfected though low interest rate refinancings.  There is no significant wealth left to grab.  All that is left is the final chapter in the game, the one in which the paper wealth of the elder middle class evaporates as a casualty of the move in which the knights, rooks, and bishops take the board and inflate away China’s FX holdings which form the backbone of its economic might.