Agency conflict in financial markets can be described as the conflict of interest between corporate managements and their shareholders arising from pay schemes that are not tied to long term performance. If you view America as the shareholder, and the fractional reserve banking system as the management team, it's easy to postulate that agency conflicts are essentially the root of our economic problems and not "deflationary pressures."
Asset prices are skyrocketing and paper currencies are being torn apart with the realization that a conflict of interest exists between the public at large on one hand and banking profits on the other. Silver is up 1.5% this morning as oil spiked over 9% in overnight futures trading, which points to a dislocation between the suppossed need for liquidity pump priming and the side effects of inflation.
Most economists, stock brokers and financial professionals will have to tell their clients "why" oil and other commodities went up and are most likely to use the Middle East unrest as the excuse for the rout in equities and the spike in commodities today. What they won't tell you, is that it may be time to reduce equity exposure and buy commodities or farmland. The reason brokers and financial advisors won't tell you to buy gold or raw land is that they are paid based on commissions that arise when you the customer buy or sell stock or pay a load fee in the case of a mutual fund. There is very little incentive for your broker to tell you to hold cash or to buy canned food and ammunition, for example.
The reason stock brokers and investment bankers can't tell you their honest opinions on markets is due to the incredible conflicts of interests and arcane mandates that exist in the fund management space. Mutual funds have grown from a few hundred in the early 1970s to nearly 10,000 today and almost all have the same buy and hold mandate -- if the market goes up you make money. If the market goes down, you lose money but the asset gatherer who sold you the product still makes money. So there really is no incentive for a vast majority of financial professionals to turn bearish on stocks or to tell you that now is the time to sell.
The only mutual fund manager I can think of who would actually tell a client to sell stocks and hold cash was Bill Ruane, who told a dear friend of mine to hold cash in the summer of 2008. A pretty incredible call in hindsight, and one reason I strongly recommend investors buy SEQUX instead of the other 9,000 plus mutual funds out there today.
For investors wishing to avoid going down with the agency conflict Titanic, buy some silver or some farm land. It's going to be a very rocky road ahead in all likelihood and the idea that all we need is confidence is probably the same thing Bernie Madoff told his clients right up until the very end.
Good Hyperinflation Hedges: Here are some index funds that will rise in the event of hyperinflation (the biggest risk of trying to support home prices and Zombie banks), but keep in mind ETNs carry credit risk of the issuing institution (IE ETNs are notes, not ETFs -- basically a debt instrument issued by a bank). The alternative risk is that the U.S. does eventually head toward a debt deflation spiral like Japan, but the current trajectory favors inflation, in my opinion.
(PSLV) -- The Sprott Physical Silver fund is likely the best investment alternative for investors looking to hedge against Wiemar style hyperinflation as Eric Sprott holds the silver in the fund in physical bullion in a vault in Canada.
(SLV) -- The "paper silver" offering from JPM is still better than owning the (IWM) and SLV is has so far been a good way to gain exposure to the Poor Man's Gold.
(RJI) -- The broadest index for commodities in the world started by investment legend Jim Rogers, who has been right on macroeconomics for over half a century and does not think MBAs, CFAs, PHDs, or CMTs are important factors for investment success.
(PAAS) -- Ross Beatty is a serial entrepreneur in the mining space whose track record is second to none. Pan American Silver should benefit from higher silver prices, which are a direct beneficiary of hyperinflation. In Wiemar Germany, for example, investors who sold stocks and bought gold did very well -- meanwhile the rest of the country went absolutely broke.
(VALE) -- One of the largest miners in the world with massive Iron Ore deposits, silver reserves, etc... Hard asset investments are usually the only thing that preserves capital when a currency collapses.
(FCX) -- Freeport's Gold and Silver Reserves are large enough to justify the current market cap without adding in the 4 billion pounds of copper they have in reserves. So FCX is a good play because the assets are increasing at a parabolic rate while the assets are undervalued at current prices by the stock market.
(TOT) -- Total is cheap on earnings and cash flows and pays a nice dividend. Rising oil prices should increase earnings and cash flows for the integrated oil and gas names.
(CVX) -- Chevron should rise with skyrocketing oil prices as their reserves rise in value and their margins expand with higher oil prices.
(RJA) -- Rogers Agricultural Index is a good play on grains and agricultural commodities are arguably the cheapest in the commodity space because of underinvestment in farming. In 1920, 40% of the U.S. work force worked on farms -- today fewer than 2% of U.S. workers are employed in agriculture, which means there could be supply shortages coming very soon in all types of agricultural commodities.
(DBA) -- The Deutche Bank ETF is a good place for Soft Commodity exposure and consists of a basket of agricultural commodity futures contracts in Sugar, Wheat, Soybeans, Cotton, Cattle, etc.
(GLD) -- The oldest form of money on Earth is only gaining traction. Gold is the only real safe haven investment in a world where central banks have decided their only option going forward is to debase paper currencies by printing vast amounts of money.
Wall Street wants everyone to believe the fairy tale that the economy is improving and that stocks can only go in one direction, which is up (at least until they go short the market with firm capital, but that's another story for a later date). The reason that Wall Street is always perma-bullish is that their compensation is tied to rising stock prices from prop trading to investment banking. The Mubaraks of the Western Countries are likely seen by most citizens as the big banking institutions, the Tim Geithners, and the Ben Bernankes of the world. Their time in power is likely limited, so I will not bother addressing why their conflicts of interest are causing strife and turmoil throughout the world in too much detail, but a little background information on the Fed is important for investment success in this market.
Bernanke is in charge of the Federal Reserve, a private institution that is no more Federal than Federal Express or Federated Insurance. Dr. Bernanke wants inflation to boost real estate prices, which through his CMOs he now owns and also asset prices of the other collateral owed to his buddies at the bailed out banks. As Jim Rogers put it, pretty soon he will have to fly the helicopters around to collect rents and used car payments. He is well aware that there is a conflict of interest between the solvency of his collateral and the value of the Dollar, yet he keeps his foot on the gas pedal in the name of jobs and keeping asset prices high. When the Fed backstopped the mortgage market it essentially went all in on the S&P Case Shiller Home Price Index with zero risk control.
With 1 in 5 Americans out of full time work, inflation certainly has not created the jobs Bernanke promised us with his QE so far, but it has given huge bonuses to Wall Street and the primary dealer banks who Bernanke appears to most observers to work for. All this really means is that the guy printing the currency doesn't care about you, me, or the other 290MM Americans that aren't mega-rich. He is bailing out his 12 member banks and acting in self interest in that he cannot own up to a mistake after his chips are already "all in". What this means is that investors should buy silver and gold as the loose monetary policy will likely continue until home prices rise, which may not happen for years to come.
Meanwhile QE has caused a crackup boom in asset markets, and clearly prices for commodities are not stable with oil up 9% today. Job creation has not budged even with the debasement of the currency. What needs to happen, in my opinion, is that the bad debt is written down and the people who bought bad paper go bankrupt and the Federal Reserve is wound down in bankruptcy court. Glass Steagall and the up-tick rule should also be reinstated if we truly want to "learn the lessons from the Great Depression." If we can move to the Gold standard, we can solve many of the problems we face with agency conflict right away -- the massive printing going on right now by the Fed and the gaming of the markets by member banks would end and prices will actually stop skyrocketing and find equilibrium (1,100 on the S&P seems reasonable). China would likely take a haircut of some type and the Fed would be declared bankrupt. (At 47-1 leverage isn't it already insolvent?).
In conclusion, the major canard of monetary policy is that we need to "grow" our way out of debt instead of tightening our belts and dealing with the simple reality of balancing the government checkbook. As a nation, we should be focused more on farming today then ever before due to rampant food price increases and the current oil price shock. Natural Gas is also another area in which Washington has dropped the ball -- we have enough Natural Gas reserves to power this nation for a century, yet we continue to use oil, which we have to pay high prices to despotic dictators to extract. Hopefully, someone puts Boone Pickens and Jim Rogers in positions of influence within the Federal Government, but until then expect a portfolio of commodity investments to outperform the major stock indices.
Disclosure: I am long SLV, PSLV, DBA, RJI, RJA, FCX, TOT, CVX, VALE, GLD.