Paradigm Shift for me on Economics 101

Talk about a paradigm shift for the econ 101 guy here. Man here is another reason to invest in commodities. Just this week the Japanese said they’re going to devalue their yen as it appreciated to record post World War II highs against the dollar.


GOLD AND THE ONGOING CURRENCY WARS

by Jeff Nielson of Bullion Bulls Canada

We live in a world almost entirely populated by economic charlatans. Nowhere is that indictment more blatantly apparent than in the world of international trade. For proof, look no further than the ongoing attempts by governments to win export market share by devaluing their currencies - also known as the "Currency Wars."

To see why these measures hurt all involved, the reader must understand why countries (and individuals) trade. It is elementary economics that profitable trade is founded upon a single principal: the doctrine of comparative advantage. It states that nations produce what they are especially adept at producing, and then trade those goods to other nations for the products which they can produce with greater efficiency.

Put another way, if Nation A can produce computers 10% cheaper than Nation B, but Nation B can produce automobiles 10% cheaper than Nation A, then both nations will be better off if they begin trading computers for automobiles. If we assume two equally-sized economies, and balanced trade, we essentially multiply our efficiencies by a factor of three: each nation produces twice as much of what it is good at, while also avoiding squandering resources by producing goods it is not efficient at producing.

Governments have throughout history attempted to interrupt this mutually beneficial arrangement in order to "protect" local industries from competition. While the old weapon was the tariff, the new weapon is competitive devaluation - and like the atom bomb, it's destructive power is orders of magnitude larger than the old weapons.

"Devaluation" means to drive the value of one's currency toward zero. "Competitive devaluation," then, is a race between governments to see which one can drive its currency toward zero the fastest.

As a result, instead of nations only producing goods which they are efficient at producing, and trading those goods for the efficiently produced goods of other nations, we have an entirely different paradigm. We have nations driving the wages of their workers toward zero in order to export goods at which they are entirely inefficient at producing.

And they're competing to see who can get to economic ruin first!

It gets worse. To maximize our losses on this inefficient trade, much of what is produced is heavily subsidized - meaning even before we factor in the damage of falling wages, we are selling these goods at an economic loss. We are totally impoverishing our own populations in order to inefficiently produce goods, which we then sell for a loss.

Among the infinite list of negative consequences from this economic folly are a steadily declining standard of living and vastly increased demand for government entitlements. Transforming the US middle class into the working-poor has resulted in close to 50 million Americans relying upon food stamps, and the numbers continue growing each month. Meanwhile, these subsidy-dependent, unprofitable businesses are very vulnerable to any downturn that might hurt their bottom line. There is no cushion of profitability to prevent massive layoffs at the first sign of trouble.

Meanwhile, with less and less real wealth off of which to leach, Western governments are making themselves more insolvent by the day. Thus, the only question which bond-holders should be asking themselves is: what will drive the value of government bonds to zero first, competitive devaluation or formal default? Yet, despite this very real and indisputable threat to investors, the media seems obsessed with speculating whether precious metals - perhaps the only constant in a world gone mad - are in a "bubble."

To understand the lunacy of the Currency Wars is to understand why gold and silver prices are skyrocketing. Driving the value of a currency down means exactly the same thing as driving-up the prices of real assets denominated in that currency. So, as governments engage in competitive devaluation, of course gold is going to rise in price. The new price just reflects that there is still the same amount of gold floating around while there are tons of new dollars/euros/yen.

Even absent competitive devaluation, there are a plethora of fundamental reasons for investors to hold a significant allocation of precious metals in their portfolios. With competitive devaluation, I find it difficult to get myself to hold anything other than gold or silver. And to the hordes of bond-lemmings out there, I can only say, "caveat emptor."

Jeff Nielson studied economics and law at the University of British Columbia, obtaining his degree in 1989. He came to the precious metals sector in the mid-'00s as an investor and quickly decided he wanted to make it the focus of his career. He is the co-founder of Bullion Bulls Canada, a precious metals website with a global audience which provides economic analysis, commentary on precious metals, and detailed information on more than 100 North American-listed mining companies.

Since starting Bullion Bulls Canada, Mr. Nielson's work has been widely published on sites such as Seeking Alpha and TheStreet, along with dozens of precious metals websites. For more of Jeff's insights and analysis, visit www.bullionbullscanada.com.

Video Games and Rated R Movies

Ah yeah its time to talk about video games if only briefly though. The other day my wife, my brother, and I were driving to watch the 7th game of the World Series and we were talking about stuff when my brother said he was impressed about me returning a certain game due to the amount of cussing in the game. I said I couldn’t take all the recognition as my wife had gently guided me in the right direction. What followed were lame excuses from yours truly for why it was fun and ok to play those games. My wife then said that the games were worse then rated r movies cause they have more violence and more cussing and hot chicks with big boobs then rated r movies. The logic was and is undeniable and has officially been duly noted.


Why this even matters is cause I am a Latter-day Saint and don’t watch rated r movies. I was being a hypocrite by playing those games. That is why it matters. The point is…this story is just another example of why it is a good thing to be married. I get free coaching from a beautiful girl.

Commodities and Bubble Mania

Commodities started a bull market in the early 2000’s to 1999 timeframe. China and India are both going through their industrial revolutions and as such the demand for commodities from that region will be high for the foreseeable future. Countries that export large quantities of commodities will fare better than those who do not in the upcoming downturn, but make no mistake that they also will feel the pain of a global economy in turmoil. The key is finding who is going to e hurt the least if you’re looking for something or somewhere to invest your money. Reason I even mention somewhere is because the US is uniquely positioned to be completely stripped of its title of THE world superpower due to its excess and from my studies I’m finding that commodities in all its forms are what are going to do well in this coming downturn.


Countries that have a strong export presence and low unemployment will be good places to look at. Recently Peter Schiff and Axel Merk did an interview where they commented on their five favorite currencies to invest in. That is a good place to start if you are planning on investing abroad as they give insights to not only economic issues, but political issues, which as we can see with the Eurozone and Greece right now is a big deal for investors domestically and abroad.

I love Peter Schiff’s commentary on bubbles. If you notice on any of the news agencies they call bubbles all the time. Lately it is more prominent in commodities due to their meteoric rise over the last decade. What’s sad is that there are those who correctly predicted and profited off of the last bubble bursts of the last few years and they’re saying that we aren’t close to popping in commodities.

For example, throughout time the gold to silver ratio is around 12:1. Now it is about 51:1. Over the last century, when we were on the gold standard, the ratio was around 47:1. Historically the Dow to gold ratio has been about 4:1, but right now the Dow is overvalued at a ratio of about 7:1. If you are familiar with statistics and means this means that gold is undervalued and the Dow and even real estate are overvalued. To get back to the mean we have to shoot past the mean in either correcting direction in order to get back to the mean (average).

An interesting sign with bubbles is the speculation that occurs with companies involved in the underlying asset that is in its bubble mania. For example, the Internet was invented/gained traction and revolutionized communication. The Internet didn’t really hit a bubble though, as far as investing in companies on the web is concerned at least because certainly it is still growing, until people started speculating on the companies involved in the Internet, hence the dot.com bubble and subsequent burst.

We’ll know we’re in bubble territory for commodities once speculators start going nuts for commodity producing companies. This means for gold specifically we’ll know that it is in a bubble when people are buying into gold stocks just like they bought into dot.com stocks in one of the last bubbles that occurred in the stock market. People will speculate on the different types of gold mining stocks and some will be good bets and others not so much. When taxi drivers and the average joe start buying gold and silver you’ll know it is in a bubble and that is far from the case right now. Central are barely becoming net buyers instead of net sellers of gold right now. What would be interesting to find out is if those big investment banks ever offer any CDS on the speculative or even large gold mining companies.

Specifically with gold and silver these still have a ways to go till they top off because of demand. Silver is the most widely used commodity in the production of goods with thousands of different uses, some of which will continue indefinitely as some are related to medicine, batteries, and mirrors. As the BRIC countries continue through their industrial revolutions demand for all commodities are going to continue up. To ramp up production though requires a lot of capital-intensive investment, which takes time. Limited supply of a commodity then will lead to increased prices in the underlying asset, which in turn leads to more demand, which leads to more investment in production until demand falls, at which point production capacity will have been over extended and some of those companies that were great will turn out to be duds and the bubble will start to fall for the equities and commodities involved.

This blog post makes me want to learn more about oil. Peter Schiff says that oil should be about 1/10th the price of gold. Well gold is about 1750, but oil is only around 90 bucks a barrel. We also know the 7 billionth baby was born recently and so demand for oil is going to go up. I wonder what huge macro economic consequences are going to result from HUGE increases in the price of oil. To be continued…