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Bo Peng
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I run a fund based on automated trading and technical analysis. But my favorite pastime is thinking and talking about political economy. I guess I'm George Soros. Writing helps clarifying my thinking. All opinion expressed here is mine, wholly mine, nobody's but mine. And all trading/investment... More
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  • World Commodity Inflationary War Will Lead To Abandonment of Dollar Reserve System 12 comments
    Feb 23, 2011 11:54 PM

    There're lot of similarity between the commodity price surge in early 2008 and the one ongoing. I call them World Commodity Inflationary Wars. Here's the jist of it.

    • As with the man with only a hammer, the Fed sees every problem as a monetary one.
    • Crisis looms. Fed prints money or otherwise flood the system with liquidity.
    • If the crisis is liquidity/capital constrained, this would work: extra liquidity turns into capital of various forms and durations through banks, goes to meet demand and creates economic growth. Like a shitstorm hitting a field with seeds planted in dry and barren soil, this is good shit.
    • Good shit not being the case, all the instantaneous "capital" can only go to short-term, speculative markets, usually equities and/or commodities. Like a shitstorm hitting a reservoir dammed 10 feet above ground, this is bad shit.
    • Food prices go up, people starve, beginning with the outmost layers of the onion -- the poorest. The Fed has to know that extra liquidity in USD leads to worldwide commodity inflation. But they didn't care back in 08. They don't care now.
    I used to snicker at those who tried to explain the bubble away with good'ol supply and demand back in 08. Sadly, some are trying the same now, except this time around it's even more pathetic. Even if supply and demand and inelasticity could explain part of the agricultural commodities surge, how could this possibly explain any part of industrial metals?

    An important exception to this bubble is precious metals, whose appreciation is deeply rooted in the declining confidence in fiat currency system and, first and foremost, the dollar. It probably won't end until Hoenig becomes Fed chairman.

    If the commodities bubble persists for much longer, US will feel the pain of higher input price along with the rest of the world. The pundits will start talking about deflation and Fed will pull out QE3, which will probably be the last time the world is willing to put up with this mockery of reserve currency.

    But there's another way, in parallel, the dollar reserve currency may unwind. This commodities inflation is inflationary only when measured in dollar or some other fiat currency terms. If we barter or trade, say, in gold or through bilateral currency swaps, voila, no more inflation, starvation, or revolution! Desperate people do desperate things. And there're lots of desperate people out there now, both common folks and those in power. I fully expect them to figure out soon that all this suffering and chaos is only because of the irresponsible, abusive custodian of the dollar reserve system.

    There's a recent survey showing a lot of Americans don't like the Fed. The Fed should savor this comforting moment because, once Americans realize what it means for dollar to lose its reserve status, the sentiment won't be expressed in surveys.
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  • Michael Clark
    , contributor
    Comments (11823) | Send Message
    Bo: I think we're going to see another version of Stag-flation, or Deflation and Inflation both, at the same time, except this version (because of our debt levels) are going to be an electrified version of what we saw in the last Night-Cycle (1965-1983). Food riots; political upheaval; how is the feeble 'recovery' going to handle $150/200 dollar a barrel oil? Huge jumps in copper, iron ore, steel, energy, not to mention grains? More defaults, more layoffs, more catastrophic social pain. Weimar anyone?
    26 Feb 2011, 01:45 PM Reply Like
  • Bo Peng
    , contributor
    Comments (475) | Send Message
    Author’s reply » Long time no see, Michael.


    There's a very easy way for most of the world to opt out of this war. There's no supply-demand factor; as soon as the world figures out that all they need to do is to abandon dollar as the trade currency, some countries will be fine. And this is the single biggest risk of Fed's policy: destroying dollar's reserve status.
    27 Feb 2011, 11:42 PM Reply Like
  • Michael Clark
    , contributor
    Comments (11823) | Send Message
    Drop the dollar and add oil, gold and copper? That's what they are doing, isn't it. But there is a limit to this also. At some point you have to take profits, then the dollar rallies, then the commodities collapse, like in 2008.


    Legendary voice-over from Mick Jagger:


    "Oh, don't play with me 'cause you'll be playing with fire..."
    28 Feb 2011, 12:21 AM Reply Like
  • Bo Peng
    , contributor
    Comments (475) | Send Message
    Author’s reply » The commodities bubble cannot possibly last much longer. It'll end when either
    1. US economy succumbs to the input price squeeze (in the form of lower earnings), or
    2. the Fed continues printing and the world says "now this is getting really stupid and let's fuck it"


    Food doesn't cause much pain in the US. Gold doesn't matter, not directly. But oil does.
    28 Feb 2011, 12:42 AM Reply Like
  • Danny Furman
    , contributor
    Comments (1029) | Send Message
    Bo & Michael,
    Sorry for chiming in so randomly here, but you two don't suffer from the preconceptions that plague most commentators so I'd appreciate any thoughts on the following:
    1. Deflation is imminent: Robert Prechter has hardly been invited to fantasyland (CNBC) since 2009, yet Marc Faber, Peter Schiff, Gerald Celente and others with negative yet inflationary views are front and center daily with the clucking chicken-heads. If you're interested, check out this 30 minute (4 part) debate between Schiff and Prechter from a few months ago ( Prechter clearly offers the more lucid analysis (on the occasion Schiff lets him speak).


    I had to think twice when recently hearing Robert Shiller proclaim that agriculture is currently the biggest bubble, though he may be right largely due to the following:
    a. Americans will eat anything. It simply doesn't matter what happens to agricultural commodities when your diet consists primarily of fast food. I'm sure GE can make sewage or concrete taste sweet or greasy or whatever people want, with some chemical additive. People maximize consumption absent of standards and given constraints (they are good slaves).
    b. Retail investors get it. As always, though, they don't care about price. Overpaying for strong fundamentals is worse than getting a deal on junk.


    2. Precious metals will not lose value: I've recently become very aware of the tremendous benefits of colloidal silver. It is recognized as a highly effective anti-viral, immunity-enhancing medicine by many worldwide institutions (besides Pfizer). Personal experience with Western medicine has been abysmal and I suspect most scumbag doctors check their trading accounts more religiously than I do. A bit of research convinced me to try colloidal silver when I recently got a NASTY staph infection. It healed in 3 days. I've also suffered from arthritic pain for over a decade and my joints now feel better than ever. Like some crazy shit hitting a pile of nasty shit, the shit's fuckin amazing!
    I won't try to predict the emergence of colloidal silver in developed economies, but emerging economies who understand the real value and many uses of silver will continue to value it higher than US speculators.


    Lastly, I see the next few days as a tremendous opportunity to buy put options (sell calls) on US consumer stocks/indexes. Thoughts?
    Thanks guys and all the best.
    25 Mar 2011, 09:01 AM Reply Like
  • Bo Peng
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    Comments (475) | Send Message
    Author’s reply » Danny, there's no question most all assets are in the bubble phase, driven by worldwide printing. Even for precious metals, the fundamental drive is nothing other than the eroding credibility of cenbanks, first and foremost the Fed.


    But, the risk of no QE3 is very high. You may be right in shorting equities over the coming weeks. But watch out for commods, even precious metals.
    25 Mar 2011, 11:50 AM Reply Like
  • Danny Furman
    , contributor
    Comments (1029) | Send Message
    Thanks for the response Bo. I certainly expect PMs to take a hit with everything else. But as energy and other costs dwindle, strong mining companies may be able to expand margins even with lower per oz sales. We saw gold stocks go to the moon in early 09 because other commods didn't participate at first. Thoughts?
    25 Mar 2011, 12:08 PM Reply Like
  • Michael Clark
    , contributor
    Comments (11823) | Send Message


    Thanks for the info on colloidal silver. I know nothing about it. But I do have arthritic pain on occasion.


    My view is that precious metals are bullish until about 2019. Don't stay in too long -- they will go down for 18 years after 2019. You can see more about these ideas if you are interested at:




    The more i read about High Frequency Trading the more I'm convinced that HFT is the mechanism for fueling a stock rally. I think the Fed, the Treasury and the president (and Goldman Sachs and others) are all pushing stocks higher. I'm eager to play the market on the downside also, but I don't see the evidence of a selloff coming yet in my own research. We know it is coming at some point. And I think we'll have a HUGE debt to pay once it does start.


    Oil prices got a lot of people scared. if oil goes up, food costs go up. If food prices go up, people get scared and mad. Social systems start to break down. The middle east is where things begin -- it's the 'yeast-system center' of the planet.


    Things are going to get a LOT worse before the get better.
    25 Mar 2011, 09:30 AM Reply Like
  • Danny Furman
    , contributor
    Comments (1029) | Send Message
    Thanks Michael, couldn't agree more. I can't see the complacency lasting much longer so I grabbed a few puts just now. These last two days have been perfectly orchestrated to get momentum traders out of metals and into stocks. Speculation is running wild as war, nuclear catastrophe and uprisings escalate worldwide. Of course I could be wrong, but one of these mornings I expect we're gonna gap down hard.
    25 Mar 2011, 11:23 AM Reply Like
  • Albertarocks
    , contributor
    Comments (2216) | Send Message
    Bo, Michael and Danny... three guys with always worthwhile points of view. Right off the bat Michael, I'll second Danny's claims about colloidal silver. He's absolutely correct. I've been aware of the incredible medicinal properties of colloidal silver for quite some time now. In fact I wrote a comment on the topic on a different website only last week. I don't think Bo would mind if I copy and paste that comment right here because it's just too important a topic to let slip past you. My apologies... normally I'd just provide a link, but it's a rather foul mouthed website and readers would have to scroll and scroll to find my comment anyway. So please forgive:




    Incredible! The U.S. gov't is also very concerned that the public is finding out about the miraculous medicinal qualities of colloidal silver. It kills every bacteria and bad virus known to man, therefore rendering the need for vaccines a moot point. The reason it kills the bad ones and not the good ones is based on the thickness of the cell wall of the bad microorganisms. Even our ancestors knew about silver's ability to kill bacteria ... that's why our grandparents and their grandparents used to throw a silver coin in the milk pail... it kept milk from spoiling due to bacteria.


    So guess what! They USDA is taking steps to have silver banned for human consumption by re-categorizing it as a... are you ready for this... a "pesticide". There are no limits to the degree of evil these satan worshiping whores will go in order to maintain control. Wikipedia offers a brief explanation of what colloidal silver does but there are dozens of proven studies available simply by googling the topic 'colloidal silver':


    The studies show that so far there are at least 650 bacteria and viruses on the list of victims to the silver atom. It's all about the fact that silver carries two extra electrons in its outer atomic ring that it's all too willing to blast a bacteria with, blowing a hole in its cell wall. So it works fast. No bacteria has lasted longer than 6 minutes in a petri dish once a drop of silver was dropped onto it. It doesn't affect good bacteria because of the structure of their cell walls. Very interesting how it works, but the fact 'that it works' is what really matters. In fact, that's why the medical community itself treats traumatic flesh injuries with a bandage that carries a silver based medication.... it's better than anything else the medical community has. So naturally, it's soon going to be considered a 'pesticide' because it kills 'pests' like the man-made birdchickenpigman concoction that likely came from the laboratory of one James S. Robertson. He just happens to be Britain's leading microbiologist in the field of viruses. And quite by coincidence, he's also the same asshole who advises the WHO what level of panic to instill in the public by issuing their equally phony level 5 or level 6 pandemic alerts. Unf...ngbelievable, yes? Fortunately this pesticide, colloidal silver, is currently only available at your local health food store.






    Bo, I respect your opinions a great deal but I want to run this idea past you. I don't think the Yen is going to collapse for quite some time. I believe it and the dollar are both almost primed for a sharp spike higher due to true deflationary pressures that are about to rear their ugly heads and cause severe credit contraction around the globe. For example, the moment the tsunami hit, the BOJ injected an immediate $400 billion worth of Yen into the system in order to flood their economy with liquidity and in doing so, attempt to hold the Yen down. It surged anyway... and mightily. A day or two later, The G7 announced that they (almost in unison) would sell Yen and thereby assist Japan to drive that currency down. IT HASN'T WORKED! True, the Yen 'did' react by erasing it's initial and immediate surge that happened almost immediately after the tsunami hit. By the way... the nuclear issues hadn't even surfaced yet. But after that initial brief and furious moonshot (and subsequent retracement), the Yen is more or less back to the level it was before the disaster struck. In other words, despite an enormous injection of liquidity by the BOJ, combined with actions by the G7 (which to this date may be no more than jawboning so far) has not been able to drive the Yen lower.


    What I'm getting at here is this: The bottom line is that the BOJ and the G7 'instantly' recognized the contractionary effects of the tsunami and earthquake and reacted by doing exactly what Bernanke has been doing for far too long now.... printing money like there's no tomorrow in an effort to stave off the coming "de"flationary spiral. Yes, in the case of the dollar, it's the scourge of the earth at the moment. But as Charles Hugh Smith said recently when speaking about the fact that bearish sentiment is running at 97% on the dollar: "Do all these players and pundits really believe the market will reward the 97% of the punters who have piled in on the same side of a trade?"


    I guess one serious point to ponder is this: "Is Bernanke really trying to inflate the world to the point where all Americans once again go stupid and drive real estate back up to the stratosphere and thereby replenish their credit cards - OR- is Bernanke trying to stave off deflation? If he were trying to reflate the world with liquidity banks would be lending. They're not lending, they're only playing with their new play money, growing it daily by trading their bags of shit back and forth between each other on a daily bais in the greatest farce of a market the world has ever known. They're not lending that money out because they're going to need it. Cash is king in a deflationary scenario, and who better to be holding all the cash than those same banks? It never ends.


    In any event, unfortunately all that new money that the FED has printed has not gone where Ben the Rat supposedly wanted it to go. So an unfortunate side effect, one which Bo correctly suggested Ben and the rest of that den of demons doesn't give a shit about, is the fact that millions of people are about to starve to death. Just a minor inconvenience. A triviality. As long as a million starvation deaths don't interrupt the record of something like 5 quarters without a losing day on Wall Street trading... Goldman couldn't care less. I wonder if they'll change their tune on that if someday there's a death inside their offices that isn't the result of starvation. They're pushing that envelope way too far for their own good in my humble opinion. We'll see I guess... people are becoming very disgruntled. And the poop hasn't even hit the fan yet stateside.


    Danny, I agree with almost everything you said. In fact, I too see a deflationary phase almost being inevitable 'before' the USD and Yen finally implode. I believe they will be the last two to crumble. And if it were to evolve that way, with a severe phase of credit contraction (disappearance of money off the face of the earth), I don't think gold and silver would fall nearly as far as most believe they will. The reason I think that is because even though gold and silver are priced in American dollars, they are sought after by investors worldwide who view them through the eyes of different currencies... currencies that will be falling relative to the Dollar and the Yen. At the very least, if all currencies other than the dollar and the Yen are deflating too, they'd most likely be deflating at a slower rate than the dollar and the Yen. If the USD and the Yen are to surge in value, gold and silver would fall in terms of those currencies but not necessarily in terms of all other currencies, particularly the yuan. IOW, I believe demand for precious metals would remain relatively strong even in a deflationary phase.


    And Michael.... nice to see you as always. lol


    I should proof-read this but it's 3:00 a.m. and my eyes are beginning to cross. I'll get around to it next week :-)


    29 Mar 2011, 04:43 AM Reply Like
  • Danny Furman
    , contributor
    Comments (1029) | Send Message
    Thanks for the comment AR, I suspect there's a little more awareness regarding proper medicine in Canada (or anywhere besides the US for that matter).
    As far as currencies go, the Swiss Franc has finally sold off 3-4% recently vs the USD and has my interest. Chile, Brazil and Russia are the only economies growing at or above rates of inflation, so investing in their ETFs (possibly currencies, perhaps Bo or Michael have an opinion there) is what I'm recommending to everyone I know with a 401K, IRA...
    We've been witnessing the ultimate wall of worry rally for many months now. The recent surge of what I see as panic buying in speculative stocks and obnoxiously priced leaders (PCLN, OPEN...) may signal that the game has sucked in the last of the fishies. Bo was right about PMs as they've already shown weakness, so I'm less confident about them short term.


    The coming weeks figure to be interesting to say the least.


    Good luck all
    29 Mar 2011, 07:34 AM Reply Like
  • Michael Clark
    , contributor
    Comments (11823) | Send Message
    AR: I can't see GS worrying even if one of their own starved to death -- unless they could not make money from it.



    Did you see where GS has told its workers in Tokyo that if they leave Japan they are fired?


    I also see deflation as the BIG MAN IN TOWN until 2019. That doesn't mean we can't have deflation and attempts at inflation at the same time. If the dollar rallies, and commodities fall, like 2008, then all the blow Bernie has been doing to avert the reign of Deflation, will come apart fast and furious. QE wants a dollar devaluation and also wants people to have to throw their saviings at commodities, stocks or houses.


    HFTrading. I don't know if you guys have been following this, but it's very interesting. I'm convinced HFT IS Plunge Protection today.


    29 Mar 2011, 10:47 AM Reply Like
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