 | | The Daily Reckoning | Thursday, February 17, 2011 |
- Commodities go boom!...All the way back to the bust up of 2008,
- The ongoing fiat disaster and why a nickel saved is two pennies earned,
- Plus, Bill Bonner on "$1 in, $1.80 out," the genetics of democracy and more...
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|  | | | Inflation is Already Here | | Examining the effects of rising food prices on the “Man on the Street” | |  | | Eric Fry |
Reporting from Laguna Beach, California...
"Warning: Inflation may be closer than it appears," your co-editor, Joel Bowman, cautioned yesterday.
In fact, inflation has already arrived. Just look at the stock market. The S&P 500 Index has inflated almost 6% since the New Year began...and nearly 100% during the last two years. But not to worry; that's the "good" inflation - the kind that thrills Federal Reserve Chairmen and causes the Man on the Street to celebrate.
Meanwhile, however, inflation is also evident in the non-Wall Street portion of the global economy - that's the kind of inflation that troubles Federal Reserve Chairmen and causes the Man on the Street to riot...or at lest to grumble.
"Wholesale prices jumped 0.8% in January," Joel reported yesterday. "The producer price index (PPI) has now jumped 3% over the last four months. And no, that's not an annualized figure." Note that the PPI headline number is for "finished goods" - stuff that's ready to be sold direct to consumers. In the category of "crude goods," the figures are far worse - up 3.3% in January, and up a staggering 15.8% over the last four months.
These numbers are a little worrisome, but they're just numbers...and not life-altering for most of us...at least not yet. Of much larger concern are the much larger food-inflation numbers around the world.
"Global food prices are rising to dangerous levels and threaten tens of millions of poor people," says World Bank chief Robert Zoellick.
"The World Bank's latest data on food prices reveal an overall 15% increase from October through January," our colleagues at The 5-Minute Forecast relate. "Its index now sits just 3% below the 2008 record. (A separate index maintained by the UN's Food and Agriculture Organization has already surpassed 2008 levels.)
"Last August, I was a guest on Russian TV, warning of another food crisis," recalls Chris Mayer. "Asked by the host which countries were most at risk, I gave him two: Egypt and Pakistan. Getting Egypt right was easy. It was and remains the world's largest buyer of wheat. Pakistan has a big import bill, too. Over the summer, massive floods destroyed many crops, quadrupling prices for staples like potatoes, onions, squash and tomatoes."
"There are two investment conclusions I draw from these trends," Chris says. "The first is that many emerging markets are on borrowed time. Egypt, for instance, grew 4-6% per year over the last several years, even through the financial crisis. It's hard to imagine anything like that continuing when food prices are where they are.
"All of the emerging markets are struggling with suddenly surging prices for many commodities. As they are still in the commodity- intensive phase of their growth curves, this means, at the very least, the arc of their economic growth rates ought to flatten out for a time."
Recent price trends in the global financial markets seem to corroborate Chris' thesis. As the chart below illustrates, the Emerging Markets have been slumping for several months, even as the S&P 500 has advanced to new 32-month highs.
"The second conclusion about the unfolding food crisis," Chris continues, "is that it is not an isolated incident. Rather, food prices are rising in the context of the broader sweep of rising commodity prices. Everything from oil to corn seems to be making new highs.
"The danger is that we have another 2008 situation," Chris warns. "Prices got so high that demand dropped. Oil, for instance, hit an all- time high of $147 per barrel in July. Not too many industries can shrug that off."
Still, not every commodity is topping 2008 levels. Chris points to this chart from UBS - which suggests that prices reached in the second half of 2008 may represent some kind of upper limit, after which demand falls:
"This table might suggest where commodity prices may still have room and where they may not," Chris says. "All the agricultural commodities, along with copper, seem in danger of running against some kind of wall akin to 2008.
"Oil and natural gas, on the other hand, still look reasonable compared to the run-up in 2008. Food and energy share a link in that we burn energy to make food (and sometimes we burn food to make energy - think: ethanol). But food prices have made their highs this time without new highs in the price of oil. So while food riots may continue, some commodity prices may well be nearing a short-term peak. Oil and gas, though, seem to have lots of room on the upside yet."
Nickel, too, might have lots of room on the upside...or, at least, nickels. Gary Gibson, the head honcho at Whiskey and Gunpowder, explains why a nickel saved is two pennies earned. Confused? Read on...
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| | The Daily Reckoning Presents | | Today’s Best Investment...Rhymes With Pickles | |  | | Gary Gibson |
A huge opportunity to hedge against both inflation and deflation is lying out there in the open. There are no transaction costs and right now there's even a built-in discount. But most people will never realize any of this.
In 1933 President Franklin Delano Roosevelt signed Executive Order 6102, which made it illegal for US citizens to hold gold bullion.
Prior to that order, the $20 bill was essentially a warehouse receipt for a one-ounce gold coin. Prior to the Federal Reserve Act of 1914, the $20 bill actually told you this.
After Executive Order 6102, $20 notes weren't allowed to be exchanged for gold anymore. Americans couldn't legally own or trade gold as money and savings, only as jewelry or collectible coins.
A year after making monetary gold ownership illegal, FDR revalued gold from $20.67 per ounce to $35 an ounce with the Gold Reserve Act. The Act also required all gold and gold certificates to be turned over to the Treasury.
The dollar was debased. Instead of "containing" 1/20 an ounce of gold, each dollar now only contained (or represented) 1/34 an ounce. And of course you couldn't actually own the gold itself. In 1971 Nixon severed the last official ties between gold and the dollar. The dollar quickly sunk to its real value, which had been debased by years of money supply inflation.
By 1975, Americans were allowed to own bullion gold again, but during the roughly 40 years bullion gold ownership had been illegal, the dollar had been drastically debased. At its former lowest point in the summer of 1980, the dollar was worth only 1/850 an ounce of gold. It regained some value for a while, but right now a dollar gets you less than 1/1300 an ounce of gold.
That was the story with a piece of paper that was merely standing in for a monetary metal. But what happens in the case of circulating coins actually composed of monetary metals?
Let's look at quarters, dimes, nickels and pennies...
- Prior to 1964, US quarters and dimes were 90% silver. From 1965 to 1970 they were 40% silver "clad" over a copper-nickel or "cupronickel" mix. Like the paper dollar, quarters and dimes were debased in two stages. Now quarters and dimes have no silver in them at all. They are now entirely copper and nickel, but only enough to get a little more than 1/4 their face value.
- Prior to 1983, US pennies were 95% copper and 5% zinc. Pennies minted after that are 97.5% zinc with only 2.5% copper plating.
- The US nickel has been cupronickel since 1946: 75% copper and 25% nickel with trace amounts of manganese. But that's probably about to change...
Why are quarters and dimes no longer silver? Why is the penny no longer mostly copper? And why will the nickel likely follow suit fairly soon?
Because the amount of silver and copper and nickel in each case came to exceed the face value of the coin. The debasement of the US currency over time has required the metal in the coins to be replaced with a cheaper substitute.
The average American has no idea what inflation really is or why currency debasement is a problem at all. He figures one metal is as good as another in minting of the currency...that when the face value of a coin falls below the value of the metal in the coin, it's nothing more than a curiosity. Substitute a cheaper metal, they think. Problem solved.
And indeed the problem is solved for the government, which mints the coins made of real money at a loss after the effects of bouts of the inflation started by monetization of government debt. For savers and the overall economy on the other hand...their problems are just beginning...
But that is a story for another time. For now let's look at the opportunities to be had when the government makes metals available for a fraction of their market price via coins...And let's see if there are any opportunities left (Hint: there are!).
If you had seen the writing on the wall in the early 1960s and started hoarding quarters and dimes while they still were almost wholly silver, you would have found that your dimes were worth a high of $3.57 each in 1980 and your quarters were worth $8.93 each.
In fact, these 90% coins still trade just like regular silver bullion bars and rounds. They were taken out of circulation - "hoarded" - by those savvy to debasement (Gresham's Law tells us that good money will be hoarded when bad money floods the market). These coins were collected without any transaction costs. They were bagged up with different face value totals: $1,000 bags, $500 bags, $250 bags, $100 bags and $50 bags.
Each of these bags traded for over 35 times their face value because of the silver in the coins. At least they did at silver's peak in 1980. Even during the ensuing 20-year slump in silver prices, the value of silver bullion coins never dipped below three times face value.
And now, thanks to waves of money and credit expansion from the Federal Reserve, silver is pushing back toward its old highs. These bags of silver coins are trading at more than 20 times their face value. They may hit 30 times face value again...and beyond...
Silver probably has another trick or two up its sleeve. But let's turn our attention to the humble nickel...
Every single circulating nickel still has 3.75 grams worth of copper each...along with 1.25 grams of nickel. Copper is currently about $4.46/lb. Nickel is currently about $12.97/lb. So if you do the math, each nickel is worth about 7.3 cents.
120 nickels pieces is worth $6.00 at face value. Those 120 coins contain about a pound of copper and 1/3 pound of nickel. That's about $8.76.
You can't cash in on this arbitrage directly (anti-smelting laws for pennies and nickels were introduced in late 2006). But the bullion market for cupronickel coins will develop, just as it did for silver US coins. This will happen once the government starts minting five-cent pieces made out of cheaper metals.
To those who doubt this will happen, I refer you to the bags of silver coins trading as bullion for over 20 times their face value. You can easily order such a bag right now by going to any of a number of online bullion dealers. These bags of coins sell right alongside silver bars and rounds.
Right now, the government is subsidizing your copper and nickel purchases...and cutting out the middleman. As much as we complain about government, we ought to stop and offer them a little thanks for this one.
What's even more interesting is that hoarding nickels provides an imbedded hedge against deflation. That's because a nickel will always be worth a nickel, at least. So if the dollar strengthens and copper, silver, and gold all get cheaper in dollar terms, you can still spend your nickels just like any other money. Your purchasing power stays the same, maybe even increases.
But if the dollar declines, then the value of the cupronickel in the currency will rise against the face value. Eventually - at two or three times face value - these five-cent pieces will trade as bullion just as 90% silver quarters and dimes did and still do.
Again, there is currently no transaction cost to saving in nickels and no risk from plummeting metal prices. There is literally nothing (in case of deflation) to lose and everything (in case of inflation) to gain.
Your only real problem is storage; a few thousand dollars of nickels takes up a lot of space...and it's heavy. But people had the same problem with silver when it was cheap. I doubt they're complaining now.
Having "too much" cupronickel won't seem like much of a problem if inflation continues to drive the cupronickel in five-cent pieces far in excess of face value. The cupronickel is America's last piece of honest currency.
Regards,
Gary Gibson,
for The Daily Reckoning
Joel's Note: In addition to heading up the Whiskey gang, Gary is also managing editor of Agora Financial's newly acquired Laissez-Faire Books. Founded in 1972, Laissez-Faire Books is a treasure trove of required reading for anyone serious about discovering liberty. And, the best part is, many of the titles tie directly in with the editorial themes you read here inThe Daily Reckoning each and every day. So, if you wanted to learn more about the mortality of fiat currencies, as Gary touched on in today's essay, a great place to start would be by grabbing a copy of When Money Dies by Adam Fergusson. In it, Mr. Fergusson explores Germany's hopeless (and very costly) experiment with money printing in the 1920s Weimar Republic. Aside from providing some rich historical context to the great currency debate, When Money Dies also offers a warning for over-zealous central bankers today.
If you haven't yet visited our Laissez-Faire Books website, be sure to check it out here. And, if you're interested in any of the titles - like When Money Dies, for example - just punch in your Daily Reckoning discount code [E401M202] when you check out and get 20% off the retail price. Easy.
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| | | | Bill Bonner | | Government Spending to Perpetuate Fiscal Insanity | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Gold up a buck. Dow up 61.
Housing still going nowhere...NAHB index flat for 4 months in a row.
Food imports inflating at a 30% annual rate over the last 3 months. Fuel going up at a 60% rate. The World Bank says food stocks at "dangerously low" levels...
"Manufacturers squeezed," by rising metals prices, says a headline.
Retails sales in January below expectations.
What can we say? Mixed signals. Confusing outlook. The underlying economy is in a slump. But the feds are putting out more and more hot money to try to fix it. It's a Great Correction, in other words.
So, let's step back one more time and take a look at the big picture...then we'll return to our day by day reckoning tomorrow.
Steven Rattner, writing in The Financial Times, says we're headed for a "fiscal nightmare."
He puts the unfunded obligations of Social Security and Medicare at $50 trillion. Which is a lot of money. Even in this day and age.
And he notes, as we did, that Obama's deficit cutting initiatives are puny and pathetic. In a nutshell, the Democrats don't want to cut discretionary spending for infrastructure, education, health and other seemingly laudable goals. The Republicans don't want to cut any money destined to maintain the security of the United States - also a worthy goal, if you put it that way.
Nobody wants to cut Social Security or Medicare entitlements.
That doesn't leave much. It is as if the feds were trying to butcher a wicker chair. There's no meat on it to cut.
By our reckoning, the feds collect about $2 trillion in taxes. They spend about $3.6 trillion. That is how we get a record budget deficit of more than $1.6 trillion this year.
They spend about $1.80 for every dollar in revenues, the greatest imbalance since WWII.
During wartime we can understand going deep in the hole. "Buy Bonds," say the posters. "Support our Troops," say the slogans. Lending money to the feds seems like a good thing to do; the alternative - defeat - would be such a drag.
But what is the emergency now? If the feds slow down their spending machine, what calamity will be upon us? What evil is so great that we should put the financial integrity of the nation at risk? Will foreign soldiers fill our bars and brothels? Will we have to surrender Bush and Cheney as war criminals? Will we have to pay reparations and lose Alaska?
Nah? Then what is it?
As near as we can figure, if we cut the deficit now we risk a return to sanity. That is, without the boost from government's very stimulative fiscal deficits, the economy would have to operate on a more sensible basis. The feds could spend only what they could afford. People who rely on money from the feds would have to get honest jobs...or cut their own spending to bring it in line with their real incomes.
People could not spend money they got from the feds...after the feds borrowed it from someone else. So, there would be less money in the consumer economy, leading to all the big D problems - deflation, de- leveraging, defaults and depression.
In other words, without the feds' activism, things might do what they ought to do. Debts would be written off, paid down, or restructured. Companies that depend on debt-fueled demand would go out of business. People who couldn't make ends meet without some extra twine from the government wouldn't be able to get their ends together; they could finally go broke and get on with their lives.
That's what a correction is for - to fix the mistakes of the past...notably the mistakes caused by too much easy credit.
Instead, the feds seem determined. They're doing the most remarkably imbecilic thing, no matter what we think here at The Daily Reckoning. Rather than let the private economy adjust to new circumstances...they will bankrupt the US government trying to keep the craziness going.
But we are libeling imbeciles, aren't we? Stupid people would never think of doing such a thing. It takes a smart person with a lot of education. Because it's not that easy to overcome common sense. You need a lot of brainpower to do something that stupid.
And more thoughts...
The world took a big step forward - on the road to perfection - last week. At least, that's what you'd think if you watched TV or read the paper.
To hear the press tell it, when a mob upsets a dictator, it is because they "yearn for freedom." They can hardly wait to get into the voting booth so they can pull the lever for truth and justice.
Martin Wolf, writing in The Financial Times, and recently listed by Foreign Policy magazine as one of the world's 100 best thinkers, says the move in Egypt was a step in the right direction. How does he know it is the right direction? Because that's the way the rest of the world is going!
He provides figures showing that there are many more democracies today than there were in 1945. The reasons he gives for this shift? Economics. Education. Richer, better educated people are less inclined to leave all the power in the hands of an autocrat, he thinks.
But there's another reason.
"The most powerful reason for believing in democracy's future, however, is that it responds to something deep with in us."
Yes, dear reader...it is in our genes. Our inner democrat just needed about 2,000 years after the birth of Christ to express himself. And now he's mouthing off everywhere.
Or... Is it possible that democracy is just the flavor of the month...an evolutionary development, like all the forms of government that came before it? Is it possible that it succeeded in the 20th century because it was much better adapted to leeching out the wealth and complicity of the average man? It gave him a stake in the system - like getting some prisoners to guard each other, or bribing taxpayers to rat out their neighbors to the IRS? Isn't it possible that by giving the masses a "voice," the elites who really control government are better able to take his money...and, if necessary, his life?
Soldiers will do their duty to a dictator, if the price is right. They will do their duty to the government they helped elect for less. And they will more willingly submit to government's taxes, too, if they feel they are its masters, rather than the slaves. The real difference may only be an illusion, but it is an effective one. In practice, the individual may have less ability to influence the large pool of voting numbskulls than he does to influence a single knuckleheaded autocrat. But heck, we're all democrats now.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Deferring Recession: A Short History of the “Age of Bubbles”
The feds created a bubble in the ’90s – a bubble in tech stocks. That bubble was driven not just by the US feds…but by the Japanese feds too. The Japanese were in a major correction. They tried to get out of it using the same old tricks – cheap money, deficit spending, massive borrowing and even QE.
So Much Stimulus. So Little to Show for It.
Revolution in Egypt and Where to Be When Black Swans Appear | Why You Should Be Using Gold to Buy Your Groceries
On a hunch, I look at his $2,100 “fair market” price of gold and compare it against the current $1,365 price of gold a few times, and after a few hints and a couple hours to think about it, I realize, “Wow! He’s right! This would indicate that gold should appreciate by about 50% to achieve its fair market value! Wow!”
Why Silver Sales Demand Excitement
Why Increasing Bank Credit Can Only End in Catastrophe | US Economic Data Sends Mixed Signals
Worries about STAGFLATION have started to pop back up, and the recent data have certainly increased the risks of this for the US. Prices are definitely on the rise, with commodities leading the way; and unemployment is staying stubbornly high. The Fed could get caught keeping the printing presses on overdrive...
Why You Should Be Using Gold to Buy Your Groceries
Egypt Welcomes the New Boss, Same as the Old Boss | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. | |
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