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Currency Collapse Rioting & a Gestating Nuke = All the Markings of a Full-Blown Crisis

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Posted by Various Writers

on Tuesday, 09 October 2012 08:30

Note: "Hyperinflation is essentially a political event. Weimar Germany was triggered by war reparations, Zimbabwe by confiscation of property accompanied by capital flight (including human capital), and Iran by US and European embargoes (a clear act of war)" - via Hyperinflation Hits Iran; Monthly 70% Inflation Rate; Reflections on Economic Warfare by MISH'S Global Economic Trend Analysis

Ed Note: You'd think that a Government of a Hyperinflation hit, rioting populace might be eager to to distract their population with, oh..... say a Nuclear Bomb? - THINK TANK: PATH TO IRAN NUKE WARHEAD 2-4 MONTHS

Currency Collapse Has All the Markings of a Full-Blown Crisis

by Dr. Kent Moors, Global Energy Strategist

Matters are beginning to come to a head in Iran.

Iran's currency, the rial, has collapsed. 

Riots have begun. Its government has rapidly lost its authority. And the Iranian economy is unraveling.

This has all the markings of a full-blown crisis. 

It will have an uncertain impact on the region and the wider oil market. This could get very unpredictable and very nasty. 

Iran Takes Defensive Action

While attention is currently focused on the recent sharp drop in the rial's value, the problem has been recurring for over a year. To combat it, Tehran established a Forex Trade Center (FTC) on September 23 to prevent a continuing drop against foreign currencies, providing dollars to importers of essential foodstuffs, medicine, and fuel at a fixed price. 

In less than the first week of FTC operations, the currency's effective market rate declined by more than 30 %.

......let Dr Moors explain further HERE

Hyperinflation Hits Iran

by Steve Hanke, Professor of Applied Economics at Johns Hopkins University

Hanke has also been following the Iranian currency crisis. He wrote these thoughts yesterday:

"For months, I have been following the collapse of the Iranian rial, tracking black-market exchange-rate data from foreign-exchange bazaars in Tehran. Using the most recent data, I now estimate that Iran is experiencing a monthly inflation rate of nearly 70%, indicating that hyperinflation has struck in Iran."

Here is a chart and commentary from his blog Hyperinflation Has Arrived In Iran

"Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (8-10 September 2012). The free-fall has continued since then. On 2 October 2012, the black-market exchange rate reached 35,000 IRR/USD – a rate which reflects a 65% decline in the rial, relative to the U.S. dollar."

Screen Shot 2012-10-09 at 4.33.05 AM

The rial’s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices – hyperinflation.  As Nicholas Krus and I document in our recent Cato Working Paper, World Hyperinflations, there have been 57 documented cases of hyperinflation in history, the most recent of which was North Korea’s 2009-11 hyperinflation. That said, North Korea’s hyperinflation did not come close to the magnitudes reached in the recent, second-highest hyperinflation in the world, that of Zimbabwe, in 2008, nor has Iran’s hyperinflation – at least not yet.

 

 

 

 

 



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Currency

Arm Yourself To Fight & Win The War Against The Money In Your Pocket

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Posted by Axel Merk - Merk Funds

on Friday, 05 October 2012 07:30

Investors are concerned about inflation. But how can investors attempt to inflation-proof their portfolios? Buy TIPS? Short Treasury bonds? Stocks? Real Estate? Commodities? Gold? Currencies? Or should investors regard those warnings about inflation as fear mongering?

merkdollar

Indeed, as the Federal Reserve (Fed) announced its latest round of quantitative easing (“QE3”), gauges of future inflation expectations spiked. In our assessment, the market reacted strongly as it became apparent that the Fed is moving away from its focus on inflation to a focus on employment. We believe the Fed wants to raise the price level so as to bail out millions of homeowners that are ‘under water’, i.e. owe more on their homes than they are worth. Fed Chair Bernanke considers a healthy housing market to be key to healthy consumer spending (see our Merk Insight Don’t worry, be Happy).

Judging from the market reaction to QE3, fears about future inflation are warranted. Having said that, market fears about looming inflation have calmed down a bit since the initial flare up. Could it be this calming of the market is due to the fact that the Fed is intervening in the TIPS market? TIPS are “inflation protected” Treasury securities that are linked to the Consumer Price Index. Investors buying TIPS do so in the hope that their purchasing power might be protected. When the Fed intervenes in the market to buy TIPS (or any other security for that matter), such securities are intentionally over-priced, raising doubt as to whether investors are truly “protected” from inflation. It’s not just investors that now have more limited access to measuring inflation expectations – it’s also the Fed itself. By managing the entire yield curve (short-term through long-term interest rates), we believe the Fed has blindfolded itself, as it has taken away one of the most important gauges about the health of the economy. Aside from the Fed’s intervention in the TIPS market, the government is free to change the inflation adjustment factor employed in TIPS before the securities mature. TIPS payouts are adjusted using the consumer price index (CPI), which has seen methodology changes many times. When the recent debt ceiling impasse was discussed, both Republicans and Democrats talked in favor of changing the CPI definition so that it would nominally live up to inflation linked entitlement promises while clearly eroding the purchasing power of such payouts. Even without such gimmickry, the CPI may not be reflective of the basket of goods and services consumed by investors as they approach retirement given, for example, that healthcare may comprise an ever-increasing part of one’s spending. Alas, much of investing is about trying to preserve purchasing power and, alas, buying TIPS may not provide adequate protection.

If one is negative about the inflation outlook, why not simply short Treasuries, either directly or through ETFs? While we are pessimistic about the long-term outlook of Treasuries, it can be very costly to short them, given that – as a short seller – one has to continuously pay the interest of the securities one shorts. If one buys an ETF shorting Treasuries, the cost of the ETF is to be added. Shorting Treasuries might make sense for investors that are good at market timing. However, calling the top in major bubbles is rather difficult, just reflect on former Fed Chair Alan Greenspan’s “irrational exuberance” speech years ahead of the stock market collapse in 2000; similarly, those that saw the bubble in the housing market coming didn’t necessarily get the timing right.

If TIPS don’t provide enough bang for the buck, and shorting Treasuries can be costly, what about buyingstocks? Bernanke appears to use every opportunity possible to praise the benefits QE has on rising stock prices. While we agree that QE has pushed stock prices higher, it may be dangerous for the Fed to praise this link given that it raises expectations of more Fed easing whenever the markets plunge (see Merk Insight: Bernanke Put). For example, how many investors buy Cisco 1 shares because of the great management skills of CEO John Chambers as compared to those who buy because of QE3? We pose this question because stocks are rather volatile; not only are stocks volatile, but the volatility of stocks can be all over the place. Historically, the annualized standard deviation of the S&P 500 index hovers in the mid 20% range, with outbursts into the 40% range in 2008. So why are investors taking on the “noise” of the stock market, when the reason they invest is because of QE? Indeed, our analysis shows that investors appear to be ever more chasing the next perceived intervention by policy makers rather than investing based on fundamentals. That’s not only bad for capital formation (these misallocations are summarily referred to as “bubbles” these days), but also suggests that we might want to look for a more direct way to take a position on what we call the “mania” of policy makers.

Talking about policy makers: you might not agree with them, but if there is one good thing to be said about our policy makers, it is that they may be quite predictable.

What about real estate? In the U.S., depending on where one lives, the real estate market has bottomed out or appears to be bottoming out. With what appears to be the Fed’s razor sharp focus on real estate, it might be foolish to bet against the Fed. Indeed, yours truly bought a property in Palo Alto in late 2009. Unlike other real assets, keep in mind that real estate is often purchased with borrowed money; as such, it is prone to speculative bubbles such as the most recent episode. Investing in REITs might allow one to allocate a smaller share of one’s portfolio to real estate; a downside of REITs is that they tend to be highly correlated with equity markets. As policy makers steer equity prices, everything appears to be ever more highly correlated, investors may want to look for something that offers low correlation to other investments.

That brings us to commodities. In a world where policy makers appear to favor growth at just about any cost, commodity prices have been beneficiaries. As we have seen in recent weeks, it is not a one-way street, as dynamics within the market can be rather complex. The dynamics for commodities within agriculture differ from those in metals or energy. There are special considerations in storing and delivering many commodities, creating challenges for investors. We agree that commodities might do well in the long run, but urge investors to consider all the risks that come with investing in commodities. Notably, commodities can have stretches of low volatility, luring investors to jump in, only to be greeted with a jolt that can be rather hazardous to one’s wealth. As a simple rule of thumb: if you can’t sleep at night with your investment, you own too much of it.

Gold is worth singling out as the one commodity that has arguably the least industrial use. Rather than writing gold off as a barbaric relic, we like gold: its relative simplicity might make it the investment purest in reflecting monetary policy. In the medium term, we believe gold may be a good inflation hedge. But, again, keep in mind that price movements can be rather volatile. Even staunch gold bugs rarely have all their assets in gold.

This leads us to currencies as a potentially attractive way to diversify beyond gold. The Chinese have long diversified their reserves to a basket of currencies, in an effort to mitigate their U.S. dollar exposure. Some say currencies are difficult to understand. We argue that it is far easier to understand the dynamics of ten major currencies, as well as others worth monitoring, than to understand the dynamics of thousands of stocks. Importantly, we believe the currency markets might be an ideal place to take a position on the mania of policy makers. Indeed, as we believe that the Fed might want to debase the U.S. dollar (Please see Fed may want to debase dollar), why not express that view in the currency markets? Unlike their reputation, currencies are far less volatile than equities: if one does not employ leverage, a move in the euro by 1 cent is rather small on a percentage basis. The U.S. dollar index has historically had an annualized standard deviation of returns in the low teens; in 2008, that volatility rose a tad, approaching the mid-teens. For investors looking for predictability on the risks in a portfolio, the currency markets have historically shown a far more consistent risk profile than equities or many other asset classes. A corollary is that during market downturns, unlevered currency strategies may offer some downside protection given the lower risk profile. This clearly doesn’t mean an investment in currencies is safe; but managed currency risk can be seen as an opportunity given the purchasing power risk taken by holding U.S. dollars.

If investors agree that the Fed: a) may want to have – or at least accept - higher inflation; and b) may not readily see the warning signs of higher inflation, then it appears to us prudent to take the risk of higher inflation into account. Indeed, for those managing money on behalf of others, it might be their fiduciary duty to take that risk into account. Those that ignore the risk of inflation might do so at their own peril. Many investors might feel they can take action once inflation is obvious. “Obvious” is in the eye of the beholder: just as we preferred to be early in warning about the crisis in 2008, it appeared rather challenging to reposition one’s portfolio in October 2008. Gold has gone up by a factor of about 7 since its lows. The dollar has fallen relative to a basket of currencies over the past 10, 30 and 100 years: in our assessment, we simply have the better printing press. Hedging inflation risk isn’t about being right about the future; it’s about the risk of being right.

Axel Merk
Axel Merk is President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds

Coming soon: Axel Merk discusses 6 reasons to buy gold: register to be notified when the report is available



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Currency

The World at a Glance

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Posted by Martin Armstrong - Armstrong Economics

on Thursday, 04 October 2012 09:07

worldatglance

One of the primary mistakes that the Federal Reserve is making has been to follow the same policy of Japan with exceptionally low interest rates. While the theory that lower interest rates will stimulate borrowing, the false assumptions are many. (1) banks will pass on the savings, (2) they ignore the devastation imposed upon the retired community who have saved all their lives only to see fixed income collapse, and (3) interest rates must naturally compensate the lender for the loss in purchasing power created by inflation.(Ed Note: Martin on Gold Today)

Look closely at this table. The two countries with negative economic growth are those with the lowest rate of interest. Inflation will rise not by lowering interest rates, but when people resume a normal life posture. That includes spending as well as investment. That cannot be stimulated by lowering interest rates which sharply reduces the fixed income for savers. If they feel their income is reduced, they correspondingly reduce their spending and that lowers GDP diminishing the optimism that the economy will recover. On top of this, as long as government continues to raise taxes, they will further reduce the incentive of small business to hire and this merely fuels the rising unemployment. Government does not further GDP or create meaningful economic jobs by raising taxes or hiring more public servants that drain the economy producing NOTHING for society. The youth today coming out of school even in the United States are finding it hard to obtain meaningful employment. In Spain, unemployment among the youth has exceeded 60%.

Inflation will rise not with QE1,2,3,4,5,6, … or 2000. It will rise when government stops lining the pockets of the bankers and just for once understand that the best solution is a free market that stops exploiting the savings of people for the benefits of the special interests. Stop the rhetoric that is fueling hatred of the so called “rich” as the problem when in fact it has been a political problem of complete fiscal irresponsibility. Obama blames the rich while behind the curtain taking 747s full of cash from the banks and what may appear to be even foreign sources as do the Republicans. Obama should win, but at what cost to civil unrest by 2014?

 

Gold

 

Gold is still in a position to press higher. Next week remains a target for rising volatility and the week after a turning point. The numbers are the numbers. We need a weekly closing ABOVE 17997 to signal a retest of the old high. But gold is not yet ready for the breakout. That appears to be next year and 2014 will mark the beginning of civil unrest on a more global scale. As long as gold failed to break above the 2011 high this year, then the pause (correction) is intact and that extends the cycle for a final high off in 2017 with the potential to go to 2020. Things start to come unraveled next year after the summer and a Phase Shift appears likely within the economy between 2013 and 2015.75.

 

 



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Currency

A Look At Reality...... Understanding What Is Coming Next

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Posted by SHTF & C. McGrath

on Wednesday, 03 October 2012 08:16

Everywhere we look the masses are hurting. Whether it be the 100 million Americans dependent on the government safety net to survive, or the millions of Europeans rioting in the streets of Spain and Greece, a sense of serious crisis is in the air.

Over the last four years, slowly and without abatement, the economic outlook across the globe has worsened significantly.

In France, a new 75% income tax on individuals earning over a million Euro ($1.2 million) per year was announced today. Incomes of $150,000 will be taxed at 40%. French business owners and citizens are scrambling to leave the country to avoid the new legislation. This has been done to offset the billions being used to bail out failing banks and reckless government spending.

Similarly, in the United States next year, individuals and small business owners will be hit with massive tax increases as universal health care is implemented across America.

Last week the Spanish Congress had to literally barricade themselves behind police and locked doors as thousands of protesters stormed their Congressional hall demanding the resignations of every representative.

The austerity sledgehammer is coming down hard, and everyone is starting to feel it.

The response from the political and financial elite has been to continue doing what they’ve been doing, because somehow the same financial and economic policies they’ve implemented over the last four years, those which have done nothing to increase jobs or economic growth, are going to make a difference now.

The decline is happening before our eyes. Millions of people in once stable economies have been impoverished by job losses, taxation and out of control price inflation on essential commodities like food and energy.

Charlie McGrath, of Wide Awake News, warns that what’s coming next is a catastrophic implosion – and none of us will be spared:

Screen Shot 2012-10-03 at 6.27.53 AM

 

Europe, Japan, China, and the United States are in serious trouble. It may not happen next week, or next month. But, you can be assured, just as 2+2=4, that a financial and economic collapse is coming.

It will be (is) unprecedented in size and scope.

Tens of trillions of dollars in monetary printing in the US, Europe and China has not been enough to stave it off, and all signs indicate that the next round of multi-trillion dollar infusions will do nothing but extend the game just a bit further.

trillionz

We have long since passed the point of no return and are rapidly approaching the breaking point.



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Buy Gold, Sell Oil

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Posted by Chris Mayer via The Daily Reckoning

on Friday, 28 September 2012 07:46

Yeah, yeah, I know…gold and oil are both hard assets, but that doesn’t mean they will both provide a reliable hedge against the inflationary trend Ben Bernanke is creating.

In short, I like gold much better than oil…at least for the next couple of years.

The best reason to own gold is also the most well-known reason. The US government prints a lot of money, as the nearby chart plainly shows.

DRUS09-27-12-1

In round numbers, the Fed conjures about 55 million fresh dollars into existence every hour. By contrast, the entire world’s gold mines only manage to extract about $15 million worth of gold from the earth every hour and US mines only extract $2 million worth of gold per hour. In other words, Ben Bernanke creates US “money” about 27 times faster than US gold mines.

Wild stuff.

It is hard to fathom a readjustment of gold to keep up with the amount of money created. But that readjustment seems inevitable.

Obviously, inevitable is not the same thing as imminent. But there is good reason to think the gold price will top $2,000 fairly soon. The Deutsche Bank report shows how the gold price has pretty much marched in step with the Federal Reserve Bank’s money printing since 2000.

Based on all this kind of statistical analysis, even the mainstream Deutsche Bank predicts gold will top $2,000 in the first half of 2013.

The obvious take-away is to own some gold. Second, look at gold stocks — which have lagged the metal for some time and seem to be showing some life finally. The GDXJ, which is an exchange-traded fund made up of small gold stocks, is up over 25% since early May. It remains a good way to play a gold stock rally if you don’t want to take on the risks and frustrations of owning individual gold stocks.

Meanwhile, the outlook for the price of crude oil seems much less upbeat. In fact, I think the price of crude is likely to tank over the next couple of years.

I have said before that I think the oil bull market is on its last legs. In this, I’m just playing the odds. History and economics dictate what those odds look like.

For example, we know stock markets don’t trade for 30 times earnings — as the US stock market did in 2000 — for long. That was a figure far above the long-term average for stocks. And stocks subsequently crashed.

We know housing prices can’t sustain a price of 32 times the cost to rent them — as they did when housing prices peaked in 2006. That was again far above the long-term average of just 20 times. Housing prices later crashed.

Similarly, we can conclude that the current oil price — which is currently 230% above its long-term inflation-adjusted price — won’t last either.

The current bull market began in 1998. The average oil price in 1998 was just $11 per barrel. So the current bull market is 14 years old. And the US oil price is nearly nine times what it was in 1998. It’s been a great run.

Just how great you can see by looking at the previous chart. Crude oil is 230% above its long-term average in inflation-adjusted terms.

Besides, it is not as if we can’t see what will slay the oil price. There are many sharp swords all over the place.

Let us consider demand. The biggest economies on the earth — the United States, Japan, China and the EU — are all slowing down or contracting.

Let us consider supply. New technology continues to unveil giant sources of supply once thought uneconomic. David Fingold, a portfolio manager at DundeeWealth, writes:

More oil? It turns out that on top of US oil shale, Alberta oil sands, West Africa and Brazil there’s yet another massive source of oil that may be coming to market. It’s called the Bazhenov Shale, it’s in Russia and it’s big. I’m no geologist, but I’ve been told it’s similar to the Cardium in Alberta. Exxon starts drilling there next year. The energy boom of the 1970s ended when the North Sea and Alaska North Slope came on line at the same time. It seems likely more than two major fields will hit the market this decade. It’s hard to see oil becoming relatively scarce anytime soon.

The Bazhenov shale could be another game-changer for the oil industry. It is yet another massive oil source to add to a list that keeps getting longer as new technology cracks open sources once thought unreachable.

People will come up with all kinds of reasons to discount the new oil supplies. But history shows that human beings are creative and tenacious.

I was among the early investors in the Bakken in 2008. I recommended Kodiak Oil to the subscribers of Mayer’s Special Situations. The stock subsequently doubled. Back then, I remember hearing some geologists scoff at the Bakken and its potential to produce significant amounts of oil at low costs. Yet, here we are. Even now, I think people still underestimate the amount of oil the United States could produce.

On oil, I must disagree with my friend Byron King, who writes Outstanding Investments and (in a revision to his older “Peak Oil” views) now says we’re at “peak cheap oil,” or the end of cheap oil. I could not disagree more.

So one thing is certain; one of us is correct.

I say it is also a certainty that oil will be cheap again. And then it will get expensive again. Then, cheap again. And so on. In other words, just like any other commodity, it will continue to boom and bust and go through cycles. Timing is the great uncertainty.

I am interested in putting my money in areas where the odds favor me. Increasingly, I don’t see the odds favoring me when it comes to oil prices. To me, oil is much like stocks in 2000 or housing in 2006. It’s overpriced and due for a sizeable selloff.

Regards,

Chris Mayer
for The Daily Reckoning

 

About Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012 Chris will release his newest book World Right Side Up: Investing Across Six Continents

Special Video Presentation: Urgent Message About Your Net Worth The single, solution-packed book that could... literally... mean the difference between growing wealthy or suffering an ugly, vicious decline in your net worth. Discover how to claim a FREE copy of this book, right here.

 

 



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