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Robert Kientz
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I am an investor and author who has owned and managed real estate, precious metals, stocks, and bond investments.
  • The Final Frontier for Black Gold

    While many analysts ponder whether we are at peak energy and therefore perhaps peak production as a global society, others search in distant places for those valuable resources that we need.

    While oil may not spring up in our backyards anymore, there are certainly still undiscovered quantities of it in places we have not looked before. Many of these places are remote and undeveloped, and therefore are not at front of investor's minds. But lo and behold, those resourceful companies are actively searching these remote locations for more of the black bubbling goo we call oil.

    And when one of these companies finds it, investors have hit the jackpot. There is no finer moment than the realization that you picked a small cap exploration company when it was a penny stock, only to see it strike a large reserve and become a respectable stock play. The returns are rich, and the satisfaction is sublime.

    I am speaking of course of Africa, the final frontier for Black Gold. Specifically, this article will concentrate on Namibia, one of the countries obvserse of Brazil.


    Source: Chariot Oil and Gas

    Somewhere in our history, people laid a map of the globe flat on a table and noticed that South America and Africa look like they fit together. And sometime later, geologists looked at the same map and realized that if indeed these two continents were connected, then they must share common geological traits. In the case of Brazil and Namibia, that means oil and gas.

    So quite a few companies have made some discoveries in Africa which include offshore developments. Some of the bigger names, such as PetroBras, Hunt Oil. Exxon Mobile, and BHP Billiton have begun exploration and drilling. If you are interested in these type of stocks, then you expect to see solid returns over time.

    In other words, BORING!


    Source: Chariot Oil and Gas


    But nothing of the magnitude we are hunting for. For that, we have to dig a little deeper.

    Namibia is in the midst of great exploration and discovery. The country has some political risk, but nothing that is expected to prevent drilling. While the state oil company takes a share in licenses in exchange for exploration rights, they actively promote oil and gas discovery, especially since they have energy shortages.

    I first heard about Namibia oil a few months ago during an investor presentation. I put a note in the back of my mind to research this tiny country. And, I am glad that I did.

    I am not going to profile every country doing business off the West African coast. But I will provide information on a few potentials, with a heavier concentration on small stocks with big upside potential. That is our sweet spot, with returns potentially in the thousands of percent.

    Chariot Oil and Gas

    To understand the upside potential, we will start with Chariot Oil and Gas. This time last year, this stock was trading in the 25 GBP. Right now the stock is at 183 GBP. That is a 7-fold increase. What happened?

    Well, Chariot discovered a potential of 10 billion barrels of oil, and is partnering with PetroBras to develop the 2714 block.





    Source: Chariot Oil and Gas

    After the announcement of potential reserves, the share price shot up. This is after the price gradually declined previously.


    Don't you wish you purchased some last November?

    This is the fairy tale in oil and gas exploration. It does not always work this way, but we can give ourselves reasonable chances at success by researching other potentials.

    Tower Resources (TRP.L)

    Tower estimates 10 billion barrels in License area 010. Arcadia Petroleum, a wholesaler and trader, owns 85% interest with Tower taking 15%. Tower's interest may yield 170 million barrels equivalent. That's not quite Chariot-like, but it's nothing to sneeze at either.

    The great news about Tower is they have finished a 3D seismic imaging of the area. Processing this information should be done at the end of this year. When reserves are confirmed via this type of analysis, the share tends to move strongly with the news. Therefore, if the estimate of 170 million barrels is correct, owners of Tower could get a nice little profit. The stock is at 3.40 GBP at the moment.

    They also have tons of management experience, which bodes well for their success.

    There are a couple of downsides to Tower. They are burning about $2.5 million per year on reserves of $8.5 million ending 2009, so they probably have about 2-3 years before needing liquidity injection. They expect drilling to commence in 2012, which is probably just in time.

    What is more concerning is they have issued 1 billion shares. That's a lot, and it will mute any stock gains resulting from resource finds and confirmations.


    Source: Reuters

    Verdict:  Strong resource potential, but dilution is too high to be considered home run material

    Tullow Oil (TLW.L)

    Tullow Oil is a global oil and gas company, headquartered in London. They have 85 licenses in 22 countries and produced 58,000 BOE in 2009. Africa is their largest area, and they have a play in the Kudu gas field. Namcor gets 10% of this, but Tullow currently holds the other 90%. Tullow holds significant plays both in Uganda and Ghana. Profits come primarily from Uganda, so this is by no means a small cap.



    They are interesting, however, because of their Ghana assets which are estimated to have 1.4 billion barrels, of which Tullow owns 49.5%. And the Namibia play, located in the Kudu field, is expected to have significant oil and gas reserves. Announcements of confirmed discoveries in Ghana and Namibia could bring a nice boost to this stock, currently trading at $18.87 US.
     
    Verdict: Solid stock with nice upside potential

    Energulf Resources (OTC:ENGFF)

    Energulf is located in Houston. Their Namibian interest is in Block 1711, which contains the highly regarded Kunene Prospect.



    Tiny Energulf, trading at 49 cents at the moment, holds 10% of this block. It is estimated that this block contains 14 tcf of gas. There has been some exploration but detailed seismic mapping has not been conducted on the oil side. This is a long play stock with huge potential.

    In addition, Energulf has an inland interest in the Lotshi block in the Democratic Republic of Congo, which has been 2D seismic mapped but further exploration is necessary.

    This company has not diluted their stock as much as others, so any announcements should provide solid boosts to share price. The balance sheet is solid but they may need additional cash down the road.

    Verdict: Risky stock, but upside potential is enormous. Sell after Block 1711 reserves estimates takes the stock higher. Take a new, smaller position for the longer haul.

    UNX Energy (OTC:UPWRF)

    The Company Formerly Known as Universal Power has announced estimates of 567 million to 2 billion BOE. They have a 90% interest in 5 blocks off the Namibian coast, a 40% interest in 3 other blocks, and a 2.7% interest in Block 1711 with Energulf Resources.

    The holdings include a gas play next to Kudu gas field with potential reserves from 1.3 to 9 tcf of gas.



    This is the stock that Byron King has touted for several months. When I first heard about UNX, the stock was trading at $1.50, and it is currently at 4.13. That's a nice boost upon the reserves announcements.

    The company has recently announced a stock sale to boost cash.

    The biggest upside to UNX is their huge acreage of assets that haven't even been explored yet. Given the rate of successes in this region, it is reasonable to expect more and more BOE estimates in the future. The sky could be the limit for this one.

    Verdict:  Proven stock that should continue to grow for the next several years.



    Disclosure: UPWRF & ENGFF
    Oct 27 5:04 PM | Link | 2 Comments
  • Understanding the Quantity Theory of money and Velocity of Money

    Quantity Theory

    In a fiat (unbacked paper) money standard, the central bank controls how much money is supplied to the market. Therefore, the bankers will want to know how much to supply at any given time.

    Their aim is to control the quantity of money, and by doing so, keep a specific rate of inflation such that the economy does not enter a deflationary stage.

    Monetarists and Keynesian economists are afraid of deflation, which they believe will always spiral out of control and lead to economic depressions. (They are apparently ignoring the curative effects of limited currency in regulating the business cycle and preventing larger fluctuations in booms and busts. )

    Monetarist economists stress a theory called the quantity theory which basically stipulates that a rise in prices of goods and services will be observed proportional to the rise in the supply of money. The theory states that price rises will occur when money is supplied and in proportion to it. Therefore, if one could keep a steady low rate of increase, then a steady inflation would keep prices rising and prevent deflation.

    One of the main issues with the quantity theory, as pointed out by Austrian Economists, is the observance that all prices do not rise in an economy uniformly and that prices do not rise in the same proportion as the money supply. Therefore, it is very difficult to control inflation through this monetary policy.

    As Henry Hazlitt described on page 75 of his work, The Inflation Crisis and How to Resolve It, the German hyperinflation observed in the 1920s was not uniform. At first, the increase in the supply of money by the bank did not immediately increase all prices uniformly. What happened then is the public observed some prices rising, and simply refrained from purchasing those items with the expectation they would come down. The rise in prices was less than that of the inflation of the money supply by the German bank.

    Eventually, the price increases caught up to the increae in the money supply, and during the 3rd stage of the inflation, greatly surpassed the increase in supply of money. The German printintg presses could not keep up with the increased level of prices even at full operating capacity.

    What happened then? The expectation of higher prices by the people caused them to spend their money much more quickly. They feared that money would be less tomorrow, so it was better to spend it today to buy bread and goods. As everyone did this, the temporary accelleration in use of money caused the sellers to increase their prices very quickly as they could not keep up with demand.

    As Henry Hazlitt explains,
     

    In the late stages of the German inflation of 1923, for example, the entire stock of paper money, though with a stamped value billions of times higher, had a gold-exchange value of 1/9th of what it had before the inflation started. Of course the paper mark had become utterly valueless, as had the French assignats in 1796 and the American Continental currency in 1781.
     

    Prices rose faster than the supply of money because of the subjective view of the people of the relative worth of the current bills. The hyperinflation that occured after the currency supply had been greatly increased. And in fact, the hyperinflation stage happened so quickly as to show very little relation to any subsequent increases in money supply; it is as if the people decided that the money had less worth and therefore it would not have mattered what the central bankers had done to the supply of money at that point.

    Thus, the quantity theory of money is not accurate because the expected future value of money matters more than the existing quantity of it.

    Velocity of Money

    The velocity of money is often used to explain how a hyperinflationary event is started. Supposedly when money is turned over faster in a society, that increases the need for it to the point that all prices will rise in some proportion. The flip side of this view is that if the velocity of money is low, then the overall quantity of money supplied by the central bank does not matter – the money cannot hyperinflate without an increased velocity of usage required by increased demand for it.

    We will examine several points on why this is not logically possible. This is important to understanding that one cannot simply expect to avoid a hyperinflationary currency event by keeping the amount of circulation low, as supposedly happens in times of recession. Therefore, many Keynesian economists will therefore argue for increased inflation of the money stock during depressions as an economic stimulant, for this reason.

    The velocity of money comes from the following equation, MV=PT, as most often credited to Irving Fisher. In the equation, M = quantity of money, V = velocity of circulation, P = average price level of goods and services, and T for volume of trade for which money is exchanged. Let us examine the concept further.

    Monetarists consider MV to be the money side of the equation and PT to be the goods side. However, it is logical to say that both sides are money sides because what is paid out must equal what is received for the goods, hence the equation.

    So what about velocity? Can we increase the turnover of the money fast enough to create a hyperinflationary event? When Hazlitt examined this issue in The Inflation Crisis and How to Resolve It, he notes a simple example.

    If a family receives pay weekly and spends it all at once, the average amount of money spent is the same over a period of time for the family has not seen an increase in their income. Once it is spent, they cannot spend more until paid again. Therefore, the period in which they are paid does not matter. This means that annually, a country’s annual velocity of money cannot be adjusted much without a corresponding adjustment in production, which would balance the equation MV = PT.

    In reality, the volume of goods cannot be increased very much in a short period of time. Therefore using the velocity of money concept, in a hyperinflationary event the supply of goods would have to rise at the same measure as the purchase of them; in fact a level that would be impossible without a once in a lifetime increase in efficiency of all manufacturing and service processes across the board at the same time!

    Wht about savings? Well if we are very generous about savings habits, we could postulate that people save 10% of their earnings and do not live on credit (yeah right). Even if savings were used to speed up the velocity of money use, it would only boost temporarily the amount of money exchanged by the savings rate, in this case 10%. This is not enough to cause a hyperinflationary event.

    In Hazlitt’s examination of the German inflation event, this simply could not and did not happen and therefore does not support the velocity of money concept.

    In addition, when a good is sold, the price of that good is not suppressed due to the sale. When a good is purchased, the price is not increased, for the sale and purchase occured at the same time and must equal. And the subjective value of the good sold does not decrease upon the sale. Using houses as an example, a comparative market analysis to determine existing home values relies primarily on SALES of like homes within a recent time period as a benchmark. Therefore, the act of buying or selling does not change the value of the good itself. Therefore in a hot market, more sales des not neccessarily increase the prices. In fact, the cause of the change in frequency of the exchange of goods is a result of the perceived value of the goods paid for.

    During an inflation, prices do not rise uniformly and neither do wages. Therefore, when economists look at average prices and inflation measures, they do not see the destruction wrought in some areas and wealth created in others. This neccessarily promotes a system of unequal value and can do so arbitrarily and not in relation to the value brought by the participants.

    As an example, housing prices in many cities rose substantially during a boom phase before the crash in 2007-2008. Those who sold before the crash became wealthy, but those who sold soon after became poor. There was no difference in their contribution to society. The only factor in their wealth creation or destruction was a matter of timing.

    What about creeping inflation, or the steady rise of prices due to the inflation of the money supply? The issue here is that there is no universally agreed upon level of rising money inflation recommended by those who are implementing the policy. We can see throughout recent history of Federal Reserve Board Chairman that each had a different perspective, and none of them will end up being correct when the final nails are driven in the coffin of the US Dollar bill.

    Currency inflation rates become what Henry Hazlitt referred to as a ‘political football’. 

    The prescribed rate would become a political football. The tendency nearly always would be for the highest bidder to win. For the belief in inflation as the master solution of every economic problem is not new in this generation. Throughout recorded history it has always been latent. Whenever there has been depression and unemployment, it has always been popularly blamed on or identified with ‘not enough money’…

    The fatal flaw in the Monetarist prescription, in brief, is that it postulates that  money should consist of irredeemable paper notes that that the final power of determining ho w many of these are issued should be placed in the hands of government, that is, in the hands of politicians in office…

    The real problem today is … how to get the arbitrary power over the stock of money out of the hands of government..



    Sep 10 9:49 AM | Link | Comment!
  • Asset cycle investing in a deflationary environment

    There have been a lot of books written about investing in real estate. Having read quite a few, most if not all of them are actually very good. They represent the collective experiential knowledge of those entrepreneurs who strike out on their own to develop a portfolio of wealth building property.

    When I first started investing 10 years ago, I got very excited about the prospect of 1) being my own boss one day and 2) controlling my wealth creation despite an economic system that taxes and discourages investment. That is the environment we live in today. To combat this environment takes a willingness to take financial control and the ability to learn.

    I eagerly scooped up properties and quickly, in part time fashion, developed a burgeoning real estate business. I was still green and young in the business, so I purchased a lot of books, joined a lot of clubs, and attened many seminars on real estate investing. At some point I advanced from newbie to intermediate investor. At this stage I would not call myself advanced in that I do not have the resources to process multi-million dollar commercial properties.

    But the good news is you do not need to be Donald Trump to succeed in real estate. Most investors will never advance to the mega millionaire stage, and this is ok. As I like to say, it’s all about the lifestyle and not just the money. If you are stinking rich but don’t have time to enjoy your life and spend it with people you love, what’s the point of all the money? This is the difference between being rich and being wealthy.

    So if you have made the choice, you are ready to dive right in like most of us did. Many gurus will take you up on your offer and help you get started right away. Good news!

    There is a strong caveat here I would like to throw into the discussion. As of this writing (summer 2010), the US is in a deflationary depression. Real estate values fell in 2008 during the subprime crisis, and are expected to fall again as the Alt A crisis gets going full steam. The question being begged is, can we rely on real estate investing principles developed during the largest inflationary boom in history to make us wealthy, or do we need to adjust our strategy in an environment where real estate prices are likely to fall across the board?

    Methods of Making Money

    In Chapter 8 of the Drop Shadow book, I outlined several ways that real estate investing will make you money. I also separated them into core and secondary ways as a signal to which ones may remain constant in a changing economic climate, and which ones you may not be able to count on. Let us take a quick look back at these methods.

    Core

    -Discount you received, by doing your homework, when you purchased the property

    -Equity payments credited against your loan principal every month

    -Cash flow over your mortgage payments

    -Forced Appreciation

    Secondary

    -Depreciation against tax liability

    -Appreciation of home value

    Note that the Core methods do not rely on inflation based gains to generate income. Meaning, if the property does not appreciate, you still receive the benefits of these core methods.

    For example, if you find a home at a discount there is typically a problem with it. Problems become opportunities for real estate investors. Those investors that become adept at solving problems in real estate efficiently and quickly can generate returns. For those who do so have added value to the property and therefore have attracted the market to it.

    Equity payments are credited every month on your mortgage when your renters make their payments. Assuming you receive rent equal to the amount of your principal and interest payment, then equity is a form of savings in real estate as a vehicle. Since real estate is a tangible property and you are controlling it, I argue that it is a superior investment to alternatives such as stocks and bonds, which entail too much counterparty risk.

    Counterparty risk creates uncertainty about whether your can profit on your investments because you do not control each aspect of it. The less counterparty risk, the more you will be able to create profits through successful property management.

    If you receive rents above your principal and interest that also pay your taxes and insurance costs, then you have realized a real cashflow on the deal. Cashflow is king as many real estate investors will tell you. This is immediate profit, not tied up in property, that can be spent or saved by the investor. The more cashflow you have, the more quickly you will succeed as a real estate investor. You can reinvest the proceeds or you can spend it on living expenses; it is up to you. But once your cashflow exceeds your monthly obligations, then you are financially self-sufficient. This is financial freedom.

    Forced appreciation is a method of generating profits in real estate by finding the highest and best use for real estate. This often does not entail developing a property, but could be just changing zoning to a more dense category. Zoning changes, if met with demand from the local marketplace, can generate relatively quick returns in real estate. You have taken a piece of property and through the local municipality made the property more attractive to larger real estate investors and developers. That creates value.

    You could also change the use of an existing property. For example, if you purchase a home with a large great room, and decide to build a wall to create an additional bedroom. This additional bedroom will ‘push’ the house into a higher bracket on the local market, which generates returns often beyond the costs of construction. Think about it for a second: you put up a non-load bearing wall costing very little, and are now competing in a richer home market. Not a bad idea!

    The same can be done by adding bathrooms and expanding the kitchen, the rooms with most value in a house. The warning here is that you don’t want to go crazy.. careful research will tell you whether any modifications you make are likely to generate enough additional revenue to cover the costs of construction. Not all upgrades will result in profits, because homes are capped by local market values.

    The two secondary ways of making profits are subject to market risks beyond the control of the investor, which is why I separated them out.

    For example, if the Alt-A crisis causes overall home values to fall due to excess supply and lack of sufficient corresponding demand, then a real estate investor cannot count on appreciation of values. Depending on the level of depreciation, the investor may in fact want to factor in a percentage loss in overall value to be expected as a result of the depreciation.

    For example, home prices fell some 40% in some areas of the country as a result of Subprime loan issues. Assuming from what we know that Alt-A is larger than subprime, something similar may happen to home values again. This means that depending on where you live, and how much of a bubble real estate was in, investors may want to count a depreciation of their asset value into their buying equation. This may mean only purchasing properties well below their current valuations, which in an inflated paper money system, are illusory and are based on distorted market factors.

    In the Drop Shadow book, I used the example of REO properties as a gauge of deflation. REO properties on the market devalue the surrounding properties. Even though this is not a true market valuation, it is a clear indication of the trend and depth of real estate devaluation occurring as a result of macroeconomic factors present in the economy. Therefore an astute investor cannot ignore REO properties in their neighborhood without introducing undue risk into their purchase decisions.

    The other secondary method involves depreciation as a tax break. Depreciation is an accounting tool used to value assets over time. When assets get used, they eventually must be replaced. The cost factor of this obsolescence is factored over time using depreciation.

    A good real estate investor will use depreciation to limit current tax liability, while increasing the value of their properties through smart maintenance and investments. Therefore while the tax liability falls, the profits will gain or at least remain even.

    However, as the government paper ponzi system collapses, revenues will need to be generated to pay for existing social and military programs. Taxes are sure to rise. Taxes can rise across various rates and also through the dissolution of existing tax benefits, such as depreciation. In other words, investors relying on depreciation to shield themselves from taxes may be in for a rude awakening as the government changes existing tax laws to remain solvent.

    How Do We Value Real Estate?

    It has become obvious, as the paper ponzi system accelerates toward failure, that we can no longer use the paper as a means of valuing tangible goods. This means we must look at value of a tangible good using another measure. I think that two different methods can be used that may yield a more accurate picture of the true value of real estate.

    The first is using the world’s true reserve currency throughout history, gold. Gold has been used for 5000 years as a money. Still to this day, Central Banks of the world are buying gold to use as reserves. They use gold in swaps and leases as collateral for dollar liquidity. And they trade gold back and forth between themselves as their needs permit. Even though the peoples of the world use fiat paper currencies, Central Banks still use gold as the ultimate reserve asset; as true money.

    This graph shows how much gold would be needed to purchase the median sized house over time.

    Chart 1

    Notice that the historical average of gold needed to purchase the median sized house stood at 100 ounces. The amount has fluctuated over time as gold has been artificially valued against the paper dollar standard. When gold was depegged from the dollar in 1971 by President Nixon, the true free market price of gold shot up to $850 an ounce. At this level in 1980, we can see that the $850 price of gold required 100 ounces to purchase a median sized house. In other words, gold was trading at it’s historically correct value.

    Gold then fell after this time and more ounces were required to purchase a median sized home. We have written many articles over the causes of golds’ “devaluation”. We’ll keep it short here and just say that actions by central banks have suppressed the price of gold for two decades until gold broke out and began to rise again in 2000. This is depicted in the graph showing a decreasing amount of gold needed to purchase a median sized home.

    What we also realize on the graph is that currently it takes about 180 ounces of gold to purchase the median sized house. This means that the dollar price of gold must rise, the housing price must fall, or both for the historic average of gold to house ratio to fall back in line at 100 ounces. To reach the current inflation adjusted value of $850 gold noted in 1980, the current price would rise to about $2300. This is our target for the equilibrium price of gold.

    We think this indicates that the housing market is over valued, an gold is under valued, in real terms. Due to manipulation through paper currencies and derivatives, real estate is over valued and gold is under valued. The astute investor then realizes that the best opportunity for profit lies in precious metals and not in real estate, at this moment.

    To emphasize the inflated value of homes, we present this chart.

    Chart 2

    Notice on this chart that the price of commodities such as oil and gold have risen more slowly that corresponding prices in housing and the stock market. Because gold is the bankers’ currency, it is obvious that real estate and the stock market are currently over valued.

    The Alt-A crisis is a symptom of the reckless growth of the money supply which fueled speculative lending in real estate, and speculative gambling in the stock market. Both markets are likely to take large falls in the near future.

    To illustrate this point further, we added an M3 money supply indicator to the above chart. M3 is the largest measure of money supply in the market, and most important indicator of inflation of a currency.

    Chart 3

    Note that the money supply has grown in multiples of the various asset markets. We will get to the importance of this in a moment…

    Can you make money in real estate during these times? Yes you can, but you must build in devaluation, and not appreciation, into your real estate investing model. If you feel that your local area is relatively strong and not as bubbled up, then you may just make an allowance for depreciation at some percentage into your purchasing decision, and look for properties that meet or exceed that level of profits.

    Flipping Homes

    For flippers, who fix and sell properties rather quickly, this may not affect your day to day operations as much. Flippers tend to rely on forced appreciation and discount when selling properties. The other methods do not play as much a factor on properties held during shorter durations. Therefore while any given project may not be at risk to deflationary pressure on real estate, the overall business model of a house flipper is quite affected. Profits over time are sure to be affected.

    This may render the home flipping model both less profitable and lower growth than during the recent real estate boom. Some flipping operations may remain solvent, but likely many others on the fringes of profitability now will fail and the overall house flipping business will shrink back down to pre-boom levels.

    Bubblemania!

    Charts 2 and 3 illustrate the asset cycle. Throughout history, assets have risen and fallen at different times. Those investors that made the most money paid attention to asset cycles and profited from them. Chart 3 illustrates the point that in a fiat paper money system, asset cycles are inflated to exuberant levels. If you are on the wrong side of the asset cycle, you can lose your wealth.

    Gold will rise and the stock markets and real estate will fall, but it does not end there. Once we see the 100 ounce gold rule come closer to fruition as real estate devalues and gold appreciates both in dollar terms, we reach equilibrium. However, the trends will not stop there.

    Housing prices will continue to fall further as people frantically move their money out of real estate investments. Bandwagoners will hop into gold and drive the price up. In addition, if the US suffers a hyperinflationary currency event where dollars are inflated at very high rates (devalue in purchasing power), then the panic demand for gold will drive the cost in fiat currency through the roof. This will make asset cycle-savvy investors rich.

    At this point, before gold falls out of the bubble back to it’s median level with real estate prices, investors should flip their strategies. Real estate will eventually rise again, and gold may fall as it approaches equilibrium. When the current trends have exhausted themselves and begin to reverse, I will begin to sell my gold and silver holdings and buy real estate at below market value levels.

    By watching the asset cycles and investing accordingly, the investor can realize strong profits in any market.

    As a last note, I promised to explain how the M3 money supply could grow in ratio to many times of the asset market prices. One explanation is that there are many assets to buy with money, so the money supply growth will be a multiple of the asset value growths.

    Secondly, as Henry Hazlitt pointed out in his book, The Inflation Crisis and How to Resolve It, the money supply inflation does not cause an exactly corresponding increase in inflation of all prices in the economy. This is a fallacy of monetary theory.

    Based upon his study of the German hyperinflation, there are three stages of inflation of the money supply. The first stage is inflation of the money supply far beyond prices. The second stage is when the money supply inflation equals the inflation of the prices in the economy, and the third stage is hyperinflation of the prices in the economy well beyond any increase in money stock being printed.

    Based upon our studies here, we are in stage 2 getting closer to equilibrium. The third stage will happen very quickly and destructively. John Williams of Shadowstats has put hyperinflation at somewhere around 2015. We may see it happen more quickly than that. Time will tell.

    Happy investing!



    Disclosure: no disclosures
    Aug 06 4:11 PM | Link | Comment!
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