Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.
– Attributed to Pericles, ca 430 BC
Suspicion towards a currency, once awaken, develops insomnia.
– James Dines
Addressing the Commodity Chatter
In the waning days of 2010 and the first week of 2011 it seems everyone under the sun has decided to weigh in on commodities general and gold specifically. Although I disagree with the conclusion of many of these notes, several of them are very well thought out and bring up excellent points of debate. I will address one note in particular in this email and others possibly in the future.
Dylan Grice of Societe General is in my opinion one of the best big picture guys on the sell-side today. I find him to be intellectually honest and someone with a deep sense of human history, which is the crucial component of any successful analysis of global macro trends. History is in effect an intricate model of human nature. Since human being are the components of both civilizations and markets, what ultimately drives the big dynamic shifts that change the world forever is human nature itself. In the period that we are told is the whole of civilized human history (I have serious doubts about this but that is for another time), human nature has clearly not changed although our toys and weaponry have. All you have to do is study history to see this. If you don’t understand human nature or and the intricate but volatile web of events we call history you have no business being a macro investor.
Ok, so back to the Grice piece. In his Popular Delusions piece from December 15, 2010 he talks about how commodities are a horrible investment in the long-run and that you are much better investing in growing businesses. I am not going to argue with him here although I just want to make two points. First, is commodities have powerful secular bull markets and having exposure to this asset class is absolutely crucial to a macro investor such as myself that plays these big secular trends. I have not succumbed to a delusional love affair with this asset nor am I buying into some long-term Malthusian nightmare. At some stage investors will get this way (it happened in 2H08), commodities will rise to far too fast, and it will be time to get out. The attitude toward commodities in early 2011 is nothing like it was in 1H08. It is much more restrained and in fact more investors like equities than commodities today. I was there in 1H08. I called it a bubble then. I have a track record. This is not 2H08 from a sentiment perspective. This run has a long way to go in certain commodities (precious metals, agriculture and oil) from where I sit. A long way.
The more important point Grice makes is one I am hearing repeated by parrots on television that don’t have half the brain power or understanding of Grice. As such, I want to address this point of view once and for all. In his note Grice writes:
When you buy commodities, you’re selling human ingenuity. Why bet against human ingenuity by buying physical commodities when you can bet on it by investing in the enterprises whose task is to remove the bottlenecks and lower commodity prices? As a strategy, this is something I will focus on in later notes. I think there are more efficient ways to gain exposure to commodity markets and I will write in more detail about them after Christmas.
While I think this statement on its face it correct, it is misleading and subject to poor interpretation by the weak minded. Yes, it is true that when you put capital into commodities you are betting against human ingenuity, but human ingenuity can be stifled by outside factors such as government and corruption. So in buying commodities, and precious metals in particular, I am in fact betting against real GDP growth and human ingenuity…in the SHORT-RUN (this can be described as several years or more when you look at markets from a truly long-term perspective as I do). Longer-term a bet against human ingenuity has been a disastrous bet and I believe it will be again. Nevertheless, the state of corruption and incompetence embedded within the current leaders of the United States and the Western World in general (and our Asian soft-colonies) is of such a magnitude that they are stifling human nature, its ability and desire to innovate and yes, ingenuity itself.
Shorting Corruption in 2011
While many will say I am a perma bear and just see everything as half full, I cannot wait until the day that I can sell all of my precious metals and commodity exposure and start to invest in non-mining and commodity businesses and equities generally. I have no doubt that this day will come but this is all a process and we are very, very far away from that day from a price perspective. A large part of my intent in writing these notes is to catalyze the change so that it happens as quickly as possible. The quicker we can change the guard within the elite class on Wall Street and Washington the quicker we can get on with human ingenuity.
Very early on I noticed that what Aldous Huxley and others have called the “power elite” have almost total political and economic control of the system. Remember the quote attributed to Mayer Rothschild over two hundred years ago that perfectly and simply states: “Give me control of a nation’s money and I care not who makes the laws.” Combine this quote with Lord Acton’s: “Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men” and you can start to really put all the pieces together on how money power works and how it has taken the entire world hostage to its selfish ends.
The founding fathers of the United States of America were very well aware of this aspect of human nature when they framed the constitution which is why they made money gold and silver coin and also why they were obsessed with the idea of a division of powers between the executive, legislative and judicial branches. It is also why states rights was such as big issue. Unfortunately, what we have today is almost the worst case scenario. While under a gold standard the politicians will cheat and print and then default (like the United States did in 1971) at least there is the legal framework of moral money during that period. Under a completely fiat system where money can be created to infinity and that power is granted to a small group of unelected academics (the Fed) that answer to the banks…well you get what we have today. A society where all the wealth has become concentrated in the hands of a very small, corrupt and unenlightened elite. Once their greed has collapsed the system they then scramble to secure their positions using their political connections (see the period from 2008-today) and in the process destroy the middle class. To protect themselves from the “people” they then try to put in a police state or a more authoritarian government. This has happened over and over and over in history and is happening again right now. This is pre-1789 France make no mistake about it.
So when the masses of a formerly free people figure out what has happened to them it is not pretty. My whole hope is to avoid the masses turning violent. There is no need for it. The system has an Achilles heel and it is precious metals. People must become educated on money power, how it works and then use the system against itself. The entire power of the elite resides in fiat money creation. Buy physical gold and silver and take delivery if you want to short corruption in 2011. Take that away and they go away. Enter human ingenuity.
George Soros and the New World Order
Many people hear the term “New World Order” and immediately shut down. They think conspiracy theory. The truth is this is a term the elite themselves use all the time in describing what they want (see Soros interview here http://www.dailypaul.com/node/153418?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+dailypaul%2FFClq+%28The+Daily+Paul+-+Continuing+the+Ron+Paul+Revolution+Ron+Paul+for+President+2008%29). What we have the is second worst possible outcome in the U.S. dollar currency system. The absolute WORST outcome for humanity and freedom is the New World Order outcome, which in a nutshell is a global government and a one world currency. Think about it. It is bad enough to have the U.S. fiat dollar but at least you can flee to another nation. If there is one currency that must be used everywhere and it is managed by some power hungry maniac in Brussels what kind of world do you think that will be like? I’d rather not.
I personally think there will be no New World Order because people are waking up and becoming educated on how things work and they are doing it fast. The smartest of the elite are in their old age and we will be rid of them soon enough thanks to natural causes. My observation of their progeny is that they are much less intelligent, motivated and forward thinking than their ancestors. I can’t wait until the day I don’t have to listen to the dangerous fantasies about how civilizations should function from the like of George Soros or Warren Buffet. You guys had your day. Go away please you have done enough to ruin the future of my generation.
All the best as always,