The Bubble In Money

Includes: DIA, GLD, SPY
by: Russ Winter

In this Thunder Road (TR) report, I am particularly interested in the first twelve pages. This sets the stage for the next money printing playing with fire orgy from the likes of the U.K., U.S., ECB and Japan. TR calls it a money bubble on top of a bond bubble, essentially debasement at a rapid rate, and a huge incubation of inflation. It will not be the standard demand-pull inflation, but more of a "paradoxical" loss of confidence in money, a crack up boom. This is followed up by a Minsky moment associated with an enormous credit revulsion and a rate back up largely centered on phony AAA rated credits and by extension the whole bond spectrum.

Even beforehand, emerging countries in particular, have been trying to accumulate some survival gold. There is a bit of a scramble on that I think will turn into a stampede. Latin American central banks - of all places - have caught the gold bug, with Brazil, Paraguay, Argentina, and Colombia joining Mexico in adding to their reserves of the metal. Brazil seems to be the best candidate for significant future purchases, with its gold stash at just 0.8% of reserves. South Korea's central bank said last week that it increased its gold reserves in November for the fourth time since the bank bought gold in July of 2011 for the first time in 13 years. The 14 tonne addition brings their holdings to 84 tonnes, or just one percent of their foreign exchange reserves.

Overall, central bank holdings have just started to scratch the surface, and now we have a money bubble. China has dumped $160 billion in Treasuries since July, 2011, and now that the confetti stage is underway, what will they do as their gold is still a low percentage of overall reserves? The BRICs have already set the stage by trading in their local currencies. India and Russia already have decent gold backings. The Russian ruble might benefit from this and energy, but the ruble is impossible to buy. The Brazil reais is backed by energy and food production and a decent interest rate and might do well against the money bubble rabble. This trades in the futures markets.

Monetary metal in this phase will outperform virtually all currencies and most certainly developed country fiat. Inflation should be looked at in terms of gold. I have established a gold differentiation (in the right jurisdictions) relative to other commodities here (Differentiation Among Commodities Bullish for Gold Developers). Essentials such as food and energy will maintain well, and I am especially interested in potash and uranium.

As far as stocks in general, they will be volatile and inflation will empty the wallets of gents worldwide. The days of accepting student loan proceeds for shaved coin products is passing. There was an incredible pulling forward of consumer demand that peaked before Sandy and the election. And incubating serious inflation now makes things worse. In the very short run, shorts might be hazardous, but the problems from the money bubble will be quickly evident. I still think the US consumer in particular is a huge short. This is not a two or three year process, but more like two or three months. Housing uses leverage which ultimately makes it problematic if money runs out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.