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I am an individual investor managing my retirement funds and investment funds of other high net worth individuals from Queenstown New Zealand. I recently retired from a merchant bank in New York where I ran a macro proprietary trading portfolio for 10 years where I achieved a compound 30% return... More
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  • The Consequences of the US Monetary Base Bubble 1 comment
    Nov 9, 2009 06:31 AM
    This is more serious and depressing article than normal.

    With all the talk about money printing and buying back of treasuries we thought its time to see how the US Monetary Base is getting on. [For those to lazy to click on the the link: A countries monetary base can loosely be defined and measured as the sum of currency in circulation - depending upon who calcuated the figures it may or may not include things commodity mones (gold, silver, etc) - if you need more, look it up]. Rightyo.. where were we.. Ah yes.. We knew that it had got a little exuberant late last year but had we have neglected to look at it seriously for a few months.
     
    US Monetary Base 1998 - Present

     

    Those two little insignificant blips on the left of the graph were the Y2K thingy and 9/11. Which nobody, at the time, felt were insignificant!

    Let's get a little more historical perspective.
     
    US Monetary Base 1970 - Present

     

    I think the technical term is.. "Dude, a metric bucket load of additional capital has suddenly appeared in our circulation."

    We can see no end, or even the beginning of the end, in sight.

    If you want to know what the bubble is in world markets it is to be found in the chart above, everything else we are seeing in the world right now is merely a symptom of the Fed and/or US Treasury having gone completely mad, or perhaps desperate.

    Clearly theres a serious problem. To be honest we are having a lot of trouble comprehending the likely consequences. Can any readers state a reasonable case as to why we are not going to see inflation at levels that will make the 1970s look like child’s play? By this we mean before year end 2010 crude above $200, gold above $2000, yields on US 30 years above 8%.
     
    Yield on the US 30yr Treasury 1980 - Present

     
    We get this sinking feeling that yields on the US 30yr are going to also blow out like we have not witnessed in modern history. Goodness knows what flow on effects that will have as well. Again, any reader with a sensible view please add your comment for our against.

    After this exercise I can look in the mirror and while things may still look the same;  the way I see things has definately changed.
     
    Disclosure: Long OTM call options on DBC and OTM puts on TLT!
    Themes: US Treasuries Inflation
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This post has 1 comment:

  •  
    I cannot say that interest rates will go up. The Fed is buying and can can continue to buy any and all treasuries that the US government and China decide to sell. The Fed is already buying mortgages, commercial paper and worse. What external constraint is there on the Fed to stop them?

    However, I agree completely with your next post.

    Fiat currency is a flexible tool for governments and central banks to play the nuanced game of modern mercantilism. However, unlike printable and always renewable currencies, commodities are either in a country's hands or not. When shipped from one's ports, there is no printing press to magically produce more; there is a sobering, finite national supply which remains. Therefore, commodities will be held dear and priced dearly relative to fiat currencies.

    I think this movement to commodity as a currency starts with oil rather than a full measure of CRB, as the oil export economies completely depend on their commodity and will hold it dear. I might also consider copper to be in that club. If we are going to observe bartering, we should observe it using the most bartered and dear commodities.

    Is it any wonder that China is moving to exchange cheapening dollars for commodities and commodity producers?

    I think your insight that we monitor commodity prices priced in a strong currency is an excellent idea for observing the underlying movements during this "fiat crisis".
    Nov 14 10:15 AM | Link | Reply
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