The Jefferson nickel, or the Cupronickel, should be considered as America's last honest currency. Your first reaction might be "only a kook cooped up in bunker would hoard nickels, right?" Not exactly. Consider this: Kyle Bass, founder of the Hayman Capital Partners hedge fund, reportedly exchanged one million dollars for 200 million Cupronickel nickels.

Cupronickels consists of 75% copper and 25% nickel. Coinflation tracks its "melt value," which is currently about 5.2 cents (3 cents copper and 2.2 cents nickel). At this level and with returns on savings nearly zero, a nickel is a open-ended call on both inflationary spikes in these metals and moves by the U.S. Mint to melt down the Cupronickels and reissue a cheaper version, thus putting Gresham's Law into play.

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Chart source: Bloomberg

On the the prospect of a new coin, the Coin Modernization, Oversight and Continuity Act of 2010 recommends in its December 2012 report that advanced notice of two to three years be given before all old nickels are removed from circulation and further study proceed. They also note that the current 5-cent coin costs 10.1 cents to produce and distribute. Once the Cupronickel metal composition changes, prices of the coins will jump because sorting will become required. Then Cupronickel investing goes from incredibly cheap to having higher costs, making your initial capital investment in nickels even greater. At that point, a secondary market would kick in, similar to what happened with pre-1964 silver coins. This will be especially true if the underlying metals in the coins appreciate in the current deluge of fiat money printing. Although one might wait for the change in metal composition to occur, realize that the new coinage will enter the banking system quickly and banks may pull the old coins just as fast. Since the banking system is the best vehicle for procuring these Cupronickels, it makes since to be preemptive.

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Image sources: Coin Modernization Report

Few investments offer a floor like this, or insurance back-up plan. Obviously, each Cupronickel holds a 5-cent face value, so worst-case scenario you can cash in on your currency for its original value as an exit strategy. At first blush, because of the weight and storage issue, this might seem to be more a working class investment. Perhaps so. Yet, even for well-to-do folks - and and particularly savers - $100 boxes or $2 rolls serve as real emergency money. One full shoe box weighing 110 pounds holds about $500. The $100 bank box pictured below is my preferred method of hoarding Cupronickels.

Many argue that leaving lots of money in so-called insured banks offering no return is the poor option. I have had little problem picking up several $100 boxes at my local bank and have queried about picking up more from others and was told to give them a little advanced notice and they could arrange it. My test sort through about $30 in nickels for older and more valuable coins yielded virtually nothing. Silver content war years nickels have been picked clean.

I've struggled with the idea of keeping gold or silver around because of potential theft. Nickels, however, are a stealth form of metal investment because it is less prone to attracting the attention of thieves. Given that $1,000 worth of nickels weighs 220 pounds, it is hard too imagine that a nickel holder would be a reasonable target. A thief would need a dolly, a moving crew and a good size truck for much of a take.

As an investment, nickel as a component has good prospects, as it is quite depressed and trading at about a third of its 2007 super spike. The simple explanation is that the price spike of 2007 brought out more production. Now, nickel is selling at or below its marginal cost of production, which is about $17,500 to $20,000 a ton across the industry. Vale, the world's second largest nickel producer, has been shutting down older mines, as has Xstatra in Australia. Nickel is primarily used in the production of stainless steel. Additionally, European distributors are maintaining bare-bones inventory, another classic sign of a washed-out resource.

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Source: Wall Street Journal

China has gone full tilt into Ponzi schemes. Now that domestic stock markets are widely considered rife with fraud (China's eleventh richest businessman jailed for stock fraud), the con men in China have conjured up "wealth management" scams to fleece the public and on a rather colossal scale. These are actively marketed by large banks.

New York Times reports: "Absent from the product's prospectus is any indication of the asset underpinning Golden Elephant: a near-empty housing project in the rural town of Taihe, at the end of a dirt path amid rice fields in one of China's poorest provinces. 'They haven't even built a proper road here,' said Li Chun, a car repairman, who said he lives in the project. 'The local government is holding onto the flats and only wants to sell them when prices go up.'

"Golden Elephant No. 38 is one of thousands of 'wealth-management products," instruments aimed at monied investors, which have shown phenomenal growth over the last five years. Sales of them soared 43 percent in the first half of 2012 to 12.14 trillion yuan ($1.90 trillion), according to a report by CN Benefit, a Chinese wealth-management consultancy. China Credit Trust Co, one of the country's biggest trust companies, has disclosed that one of its wealth funds, Jinkai #1, is at risk of default because of money it lent to coal company Zhenfu energy Group. Zhenfu's boss has been arrested, amid reports he owed a total of 500 million yuan."

Now that the country has been looted, the ultra-wealthy are clearing out of China. Of the country's rich, 16 percent have already immigrated and another 44 percent plan to do so. Where the Chinese rat-line crowd ends up is another question and story. They apparently love malinvestment and misallocations.

The following chart of helicopter flights around plutocratic haunts is an eye-opener. There are a few plausible explanations: bad economic environment certainly, but perhaps some are no longer even in China. This hot money flight is showing up in money flow data. The rest of the indicators are covered here.
source: CEIC

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What I find fascinating about China is how official functionaries often call out bad practices, and this is largely ignored. That's because in reality, China is governed by local apparatchiks. Case in point, the China Banking Regulatory Commission says banks misclassified about 20 percent of their outstanding loans to local governments, understating the risk that slowing revenue will cut borrowers' ability to repay. Chinese banks have taken their bad lending practices to the U.S. and are making loans on New York City trophy properties.

Another unheeded critique was conducted by the National Audit Office. Typical of Ponzi debt cycles, China's $2.7 trillion credit boom accounted for a third of all global banking "profits." This is classic rat-line activity, no doubt dumping the fallout on government. The report said banks:

"Lend money for land acquisition purposes to companies that aren't in the real estate business. Engage in improper funding to real estate projects, with borrowers without sufficient capital or paperwork not done properly. Improper lending to local government financing vehicles (LGFVs). Provide trade finance for companies that aren't really in the business of trading. Also mentioned: use of Enronish 0ff-balance-sheet assets and liabilities, wrong financial statements, and poor auditing of the books for banks' subsidiaries. Some bank branches have poor risk management, with some lent money being lent outright stolen by borrowers. Asset qualities are not classified accurately."

Add to this volatile mix the Republicans, who would like nothing better than to point out, disrupt and create a national poster boy for the so-called differences between the political parties. Most special interests, whether financial banksters or the military-industrial complex, involve bipartisan political corruption. Public workers (typically Democrats) are a clear-cut partisan battleground issue. Other states, like New Jersey, New York and California, are targets; but the most political advantage and leverage can be gained from an Illinois maelstrom.  Take note of the dominance of 33 Republicans governors at the statehouse level, and the remaining Democrats in the troubled states.

Image source: wikipedia.org

James Pethokoukis  recently wrote of the GOP approach.  The first step was to successfully remove Build America Bonds from the tax deal. The bonds were used heavily by stressed states for funding. Next, state budget stresses will build in the 2012 fiscal year, as contributions from the Recovery Act (stimulus) are not extended and disappear at the end of the June 2011 FY, which pulls state budget gaps wider.

A big showdown is developing around legislation requiring more realistic, rather than inflated, projections of pension returns. Public pensions allow for exaggerated expectations of 8% returns.  From the Pethoukoukis article:

Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds.

Then this week comes a strong statement from Rep. Paul Ryan opposing any form of state or local government bailout.[16 large cities facing bankruptcy].

We can’t do a bailout. If we bailed out one state, then all of the debt of all of the states is not just implied,  but almost explicitly put on the books of the federal government.   [Some states] are already telling us [about their dire circumstance]. But should taxpayers in frugal states be bailing out taxpayers in profligate states? …  Should taxpayers in Indiana, who have paid their bills on time, who have done their job fiscally, be bailing out Californians, who haven’t? No, that’s a moral hazard we are not interested in creating.

The final stage of the show down is to permit states to declare bankruptcy and then clear the way for a restructuring of pension obligations and bond-holder terms. The term for this is "cram down," and is described by David Skeel.

Setting the stage is Bernanke's Congressional hearing, where he was subjected to a round of put-him-on-the-record questions from GOP Senators about muni finance and the Fed's buying of muni issues.  Ben stated:

MIT has a daily price survey of 550,000 products from 53 stores to track this.   After erasing the "deflation" of the 2008-2009 economic crisis, this index has been grinding gradually higher since late 2009. There is now a much more pronounced upslope to it from about 99.80 in in early October to 100.54 on the 23rd. This index has closing tracked the CPI, until recently, and suggests the October CPI was grossly underreported.

China is now gridlocked with fuel and diesel shortages [UPI.com].  Further with the huge increase in input prices, and global food inflation, I can’t imagine that Chinese or Asian exporters are in any position to profit selling goods to the US short of conducting substantial price increases.  I addressed this in my post Chinese Exporters Cope.   Indeed from a recent Bloomberg story, it looks like this take or leave approach is now on the table:

• -Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30 percent more for clothes as surging cotton prices boost costs.
• -Some manufacturers aren’t taking orders for next year because of fluctuating cotton prices, J.C. Penney Chief Executive Officer Myron Ullman said Nov. 12.
• -We can give clients a price now, but it will only be valid for a week,” said Tianlong’s Hu.

There are definitive signs that the Chinese supply chain to the US is already under severe pressure. The normal seasonal drop from August to early February (ex-2008-09 crisis) is about 30%. This can be tracked by the Shanghai container index to the US West Coast which is already down 28% WITH OVER TWO MONTHS TO GO, closing fast on the 1810 low last year.