we have been and shall continue to be blessed with both inflation and deflation, at different times, in different geographies, on different services and goods and assets, and we must dance with feet encased in cement shoes and navigate across the dance floor.
the one last standing with the most, having lost the least, would be declared the winner, and axed as a member of the 1%.
while money is effectively free, most things money can buy are volatile per zero interest rate policy and roving pools of money trying to pick each others pockets, and so free money can maim or worse, and
for most and nearly all, inflation of all we need especially anything global needed in the east, such as energy, gold, all manner of other metals and such, and deflation of all we have, especially anything we may have in western oecd world.
in the mean time, just in in-tray, per 13d
1. Is gold the best asset to own in a global reflation? We think so. When we recommended gold in March 2001, our recommendation carried the following headline--"Buy Gold Before Central Banks Are Forced Into Major Reflation". Here it is 10.5 years later--and amazingly--the same theme applies. "Plus ça change, plus c'est la même chose." As we discuss in sections 2 and 3, the coming reflation by the Fed and ECB will likely be historic in its magnitude. The resulting dollar weakness could shock many people. In the meantime, all asset prices, except U.S. Treasuries, will participate. How long will the rally last? How much of the benefit is already discounted? Will the economy respond? What will QE3 do to inflation in China and other emerging markets that are still experiencing high inflation rates? As investors become more cynical of such programs, should investors sell into the rally? We will do our best to answer these questions as events unfold.
2. Reflation in the U.S. and the investment implications. Over the past two weeks, Federal Reserve officials have been "talking up" the prospects for QE3, which has contributed to a surge in equity and commodity markets. Concurrently, market sentiment about a forthcoming short-term resolution to Europe's banking crisis has improved, as well. Altogether, these events signal that the secular bear market in the U.S. dollar will most likely resume its course--after a temporary hiatus--as recently highlighted by the technical analysis of Morris Hubbartt (WILTW September 15, 2011) and Dan Norcini (WILTW October 20, 2011). As a result, in addition to gold and gold shares, we would want to own the equities and currencies tied to the major developed commodity-producing economies of Canada, Australia and Norway, as well as other back-door commodity plays, such as pipelines and railroads.
3. Is the ECB heading toward a major reflation to save the eurozone banking system? Over the last two months, we have hypothesized that the turnover at the ECB--with Italy's Mario Draghi taking over for outgoing president, Jean-Claude Trichet, combined with the resignations of Germany's hawkish Axel Weber and Jurgen Stark from the Bundesbank and ECB Executive Board, respectively--could herald a more dovish monetary policy stance at the central bank. However, until this week, there had been few clues as to just how Draghi--former governor of the Bank of Italy--would perform in his new role, which he takes over next Tuesday, November 1st.
Yesterday morning, we caught an early glimpse of Draghi's thinking when Reuters released the following quotation from a recent speech by the incoming ECB head: "The Eurosystem (of central banks) is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission."
Not only did Draghi signal the ECB's intent to continue buying troubled eurozone sovereign debt, but perhaps also a willingness contemplate additional forms of monetary easing to help ease the eurozone's banking crisis--an apparent pushback against Germany, whose policymakers are loathe to bankroll yet another bailout, either directly or via money printing.
4. Gold miner mergers and acquisitions are poised to accelerate. As we discussed last week and in related reports, increasingly violent opposition to major new gold mines and their expansion is making small gold producers with depressed share prices ever-more attractive acquisition targets. Last week, mid-tier producer New Gold acquired two companies to expand control over its Blackwater project in Canada and adjacent properties, while Iamgold announced stakes in two Colombian explorers yesterday. Ernst & Young reports that the value of mining acquisitions soared from $79 billion in the first nine months of last year to $132 billion this year. Strong cash flow and relative outperformance of larger gold miners compared to smaller miners further prime the pumps for acceleration of mergers and acquisitions.
5. Another aftershock of easy credit and government intervention: the student loan calamity. As the stagnant U.S. economy continues to falter, colleges and universities are trying to make up the difference by raising tuition. The increases, which far outpace inflation, are driving students to borrow more to pay for college. By some estimates, the total amount of outstanding debt from student loans will eclipse $1 trillion this year. Many of these debt-laden graduates are not just unemployed--they are unemployable--too many have no marketable skills. Representative Hansen Clark's (D-Michigan) bill to forgive outstanding student loans resonated strongly with young people who want their voices heard. Thousands of young people protesting the bank bailouts are now thinking, "I Want Mine." President Obama threw them a bone last night with a plan for repayment reductions and debt consolidation. But the underlying problems remain. College tuition is too expensive and the U.S's educational system is out of synch with the economy.
6. The fragility of Asia's coal supply. Are record-breaking coal imports becoming the norm? We think so. Following China's record of 17.5 million imported tons of coal set in July, September exceeded it totaling 19.1 million. Accordingly, Chinese coal prices rose to a three-year high this month after a hot summer depleted inventories. Meanwhile, India is faced with significant challenges to its planned power capacity expansions due to shortages of thermal coal--prompting expectations that imports could more than triple within five years. China and India both face winter power cuts in the months ahead. Although Indonesia's "coal rush" has made it a low-cost supplier to the region's surging demand, upcoming reforms and accelerating domestic use are set to limit future export growth. Mother nature is now dictating between a tight market and one in deficit as looming rains threaten production again this year, while droughts in China affect hydroelectric power, exacerbating its power crunch. Asia will continue to need everything to go right in order to balance its fragile supply with relentless demand. Coal companies supplying Asia, while still beaten down, are reporting record earnings.
7. The intensifying impact of accelerating climate change on agriculture. Thailand's worst floods in 50 years are just the most recent example of how climate change can affect crop production, with 13% of the nation's rice crop areas damaged from recent storms, in addition to 6% in the Philippines, 12% in Cambodia, and 7.5% in Laos. The release last week of the most comprehensive study of historical weather records confirms the Earth's temperatures have risen since the 19th century. Glaciers, which support 40% of the world's irrigation, are also melting faster than ever. Several other recent studies provide new evidence about how a warming planet is impacting crop yields, through more extreme storms, changing precipitation patterns, spreading drought, and the rise in daytime, and especially nighttime, summer temperatures. The hope that rising carbon dioxide levels would act as a powerful plant fertilizer, offsetting many of the ill effects of climate change, is not working. A 30% or more drop in global crop yields may now be a near certainty, even though food demand is poised to double. Agricultural commodity prices may reach new highs sooner rather than later.
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