Unas Palabras con Respecto a La Inflación

A Few Words Regarding Inflation

Inflation is the most misrepresented phenomena in Economics. Today, it’s most often considered a rise in prices, specifically those used in the measure of inflation: CPI. Most of the population of modern day economists are Keynesian in nature, and this definition allows them to validate easy money policy to fight deflation, no matter the circumstances. This, however unfortunately, confuses cause and effect.

Rising prices is the effect of inflation, the cause being an increase in money supply. Let me be more specific: Inflation occurs when the increase in money supply is too rapid, unsupported by the specie backing the money or productivity in the economy. That is to say that inflation is not always bad. For example, should the amount of USD circulating the economy increase, backed by an increase in gold (if we were on the gold standard), then inflation is good. Likewise, if the increase of money supply is concurrent with productivity (and thus, demand), then inflation is good. This misunderstanding is why Milton Friedman proposed that inflation is a phenomena constantly occurring. That we no longer operate on the gold standard, and thus have money backed by nothing but faith, nor do we respect when demand is not increasing, still raising the supply of money, is why inflation’s presence is permanent.

If the assumption is accurate that inflation is always present, then it’s simply a matter of diagnosing where it’s currently being exhibited. This is another reason why the CPI is a misrepresentation of inflation. Inflation can be seen in arenas of the economy not taken into account by the CPI. Likewise, it can be exported outside of the country, where CPI would ignore it again. Indeed, as America’s productive capacity has dwindled over the last half century, the supply of money has not. This lead to Americans looking to purchase goods produced outside of our borders, exporting inflation (more money) to the nations that produced the goods we purchased. Moreover and more recently, as of today, I reckon that inflation is still present and higher than ever, thanks to recent monetary policy. The malfunction of the CPI would never report it, but take a look at this chart (and recall that yields move inverse to prices):

It is my belief that inflation is present in unprecedented amounts, being exhibited in the fixed income markets. As it’s hidden afar and domestically in treasury markets, the CPI may not acknowledge it. But the potential energy of the money created over the last half century is high, and inflation is ready to pour out all over the economy. The worst part is, the federal reserve is continuing the same policies that have led us down this path of dollar devaluation, despite the dollar being worth 4.6% of its value in 1913. It is of my opinion that the Fed caused the dot com bubble by positioning interest rates too low around 1999. To cure the recession (read: bust) caused by malinvestment and misallocation of resources, they lowered rates even more. This caused the housing bubble, another recession (read: bust). As a side note, I’d like to state that I believe the housing bubble is one thing, the near full collapse of the financial system was an exaggeration of the housing bubble caused by immoral behavior. Getting back to my point, the Fed has since decided to attempt to fix the housing bubble by lowering rates, yet again. Unfortunately, the increase in money supply goes hand in hand with lowering rates, as they’re both “easy money policy.” As I’ve already explained, this is inflation at its very core (no pun intended). Likewise, inflation is always present, it’s just about determining where it’s present in the economy. The final frontier is when inflation presents itself in the value of our currency, perhaps forming a bubble, but definitely destroying whatever faith still exists in the USD.

Why I’ll Buy Gold
I believe that gold is a quality hedge of inflation. However, I do not believe it should be bought frequently or with a limited time frame. I do not believe it should be compared to, nor is it a substitute for equities or treasuries. Gold does not pay an income, like fixed income or a dividend does. Rather, I will invest in gold due to the central bankers around the world’s war on their own value of currency. Gold is the perfect substitute for fiat currency, because the assumption is that they’re both monies. Let’s recall the definition of money and its four qualities:
1) Medium of Exchange
2) Unit of Account
3) Store of Value
4) Standard of Deferred Payment

I don’t think anyone would argue as to the validity of any fiat currency, or gold, in qualifying as a money with respect to qualities 1, 3 and 4. But with regard to store of value, there are lots of arguments to be had. The key aspect of a store of value is that it must remain stable over time. In reference to fiat currencies, I believe that recent central bank policies make my argument for me. The example is simple: if at point x in time, there are y monies, and at point x+n where n is some amount of time there are >y monies, then that money’s stability is questioned. If this scenario recurs constantly throughout history, then that money’s store of value is severely diminished. Should anyone question my argument, then allow me to present another chart:

How stable does that look to you?

I’ll approach my investment in gold logically. That is, I have decided gold a quality investment based on how I’ve decided to profit from the possible choices policy makers have and the costs & benefits of each. My investment in gold has no timeframe and uses two assumptions as the principal foundation:

1) Past policy action: As explained above, the supply of money has been increasing far too long, and there exists an abundance of dollars around the world ready to drive up the prices of goods and show the true strength of inflation they possess

2) Future policy action: As explained above, Keynesian economists wearing central banker clothing have made it fully clear how they intend to battle recessionary forces; they intend to print, print and print. Helicopter Ben to the rescue, and his imitators world-wide that follow.

In my best Jim Rogers impersonation: “I don’t know when gold will trade higher, I just know that it will.”

I’d be happy to further argue my point of view or have any worthwhile discussions in the comments section, so please, let’s converse!

http://www.chivotrades.com @chivotrader facebook.com/chivotrader

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Do not be scared by this deflationary vortex commentary, rather understand the true form of inflation. Do not confuse cause and effect, rather take advantage of the root foundation.

Inflation is simply an increasing money supply. This is believed by every heterodox economist in the world; that is, all the economists outside of Keynesian economists. Keynesians will tell you that inflation is simply rising prices, as measured by the CPI. However, rising prices are simply an effect of inflation. When money is created, too few goods are being chased by too much money, thus price goes up based on simple supply v. demand.

Right now, inflation is being exhibited in treasuries, mainly domestic. But when the extra created dollars start to flow into the economy elsewhere, true inflation will be felt. Whether they further contort CPI to conceal it is anyone’s guess.

I’m dip buying commodities as fund managers blow out. GLD, SLV, SLW, RGLD are #1, 2, 3, 4 in PM’s. Also look towards Oil stocks, as my next little blog will be about whether oil or gold is a better inflation hedge.

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I’ve been kind of back and forth today, contemplating what to do. On the one hand, I don’t want to sell into such oversold levels, preferring to sell into a bounce. On the other, I wrote last week how much I wanted out of my longs and was never given the chance, leaving me with today. Luckily, I had 50% cash so the pain isn’t too bad. I covered my CRM short for +10% and lost 2.75% on my VXX intraday short. The reason I covered VXX is because it looks ugly as fuck. I’m not about to fall victim to major funds selling no matter the price, just to avoid potential ’08 losses. The fear is still fresh in the minds of managers from that time period. That said, I do have some positions performing nicely. ARUN is down less than 1% and FFIV/GSVC/MU are in line with the Naz, despite the beta. I’m still holding this garbage CENX, and SCHN, two plays I’m not going to sell down here, but would first buy more. Today I added AGQ and UUP. They kind of compete with each other, but the AGQ is small, able to be built upon, and the UUP large, thus my interests lie with an increasing dollar.

Do not expect this to be a 1 day event. Should a rally even occur, it will be sold into by lots of overhanging supply, including mine. I’m interested in getting out of some of these longs, but only at better prices, for I cannot envision selling these stocks at these valuations.

I’m also interested in shorting stocks. Namely, insurance companies unable to achieve pension plan required results, banks with poor balance sheets, companies dependent upon EPS numbers and companies with poor debt situations. CRM is obviously on my list, as is MET, M and ALL. While you may be interested in names heavily owned by institutions, looking to capitalize on forced liquidations, be weary of those with high short interests, as you’ll be shorting someone else’s cover.

In the end, I don’t feel like writing the 58,784th blog about the headwinds and tailwinds and the positives and the negatives, etc, etc, etc. All I care about is putting a plan into motion.

SELL INTO RALLIES, SHORT INTO STRENGTH, CREATE A BALANCED BOOK. LONGS AT ATTRACTIVE VALUATIONS, SHORT THE COMPANIES WHO WILL SUFFER FROM ECONOMIC DOWNTURN THE MOST.

Today I’m down 1.3%. I sit at 37% cash, 15% UUP, 48% Long (MU, GSVC, SCHN, FFIV, ARUN, CENX, AGQ)

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2008 was a matter of poor balance sheets. It was a matter of assets being inflated in theoretical price, only to realize that their real value was but a fraction. It was about BV’s higher than they should be, and funding that was unavailable.

Today we have more liquidity, better balance sheets and assets being inflated at but a fraction of what they used to.

This is a demand crisis, rooted in fear, through and through.

UPDATE: And as everyone is already pointing out. A destruction of commodity costs and a rising dollar are exactly what the Fed needs to fire up the presses. Let Oil come in below 75, below 70, see what kind of “tax cut” that is. The real QE = cheap gas. A dollar that recoups some of its lost value, a dxy around 80, see how many more dollars are printed into THAT monetary base.

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I’ve been awake for an inordinate amount of hours the past couple days, constantly pondering what the fuck is going on in the markets. I like to argue like a lawyer, so it’s no surprise that my favorite economic theories belong to a heterodox school of thought, Austrian Economics. I can pose well-thought hypotheses to anyone, with more abstract thought in substance than empirical data, which is only a function of the Austrian school of thought, one that believes empirical data is often useless due to complexities in the economy. I typically side with Jim Rodgers or Peter Schiff, two bigger names that consider Ben Bernanke a fool, tossing good dollars after bad. I perceive gold and oil as real goods, compared to the valueless paper money we use today. I’d like to think demand comes from supply, that spending happens after saving and that the few in government planning for the many in public is a fool’s errand. I enjoy reading about and watching videos of Murray Rothbard and the “Fight Of The Century” video (link here) was a delight.

It’s a wonder to me, then, why I’m sitting here stunned by a stock market on the edge, struck in the face like a Tyson punch by the macro economy, despite various efforts by Ben Bernanke and company. I care not to speculate why I’ve made the grievous errors that I’ve made, but rather collect my thoughts and put together an actionable thesis for the future, in order to climb back to the peak of the mountain, where I can again relax in my beach chair, beverage in hand and attractive woman by my side. (That’s right, a fucking beach on top of a mountain)

But first, if you will, allow me to put some of my thoughts into words, in an attempt to convert Keynesians but more so to expedite the thought process…..(more to come)

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