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Selected Articles

Philosophy and Outlook

Don Yocham, CFA

Table of Contents
Store of Value Myth ..............................................................................................................................................3 September 3rd, 2009: A brief examination of the main factor impacting the value of gold. There is No King ....................................................................................................................................................7 November 4th, 2009: Effectively my take on the Knowledge Problem and the Fatal Conceit. Make Allowance for Their Doubting .......................................................................................................................9 November 9th, 2009: Declares the importance of understanding the value system of the status quo to your investment decisions while comparing it to a counterfactual based on your own or alternative value systems. This helps one to appreciate the sustainability of the system the status quo perpetuates and therefore protect oneself financially. I also manage to quote Kipling, Vonnegut and Bart Simpson in one article. A Context of Counterfeit, Consequence, Conspiracy and Confidence ..................................................................... 13 February 23rd, 2010: Puts the flight to risk in the context of easy money and moral hazard. (Support piece for subsequent Global Context Monitor) Entropy, The Long-Term Cadence ......................................................................................................................... 16 March 1st, 2010: Examination of secular forces dominating investment landscape. (Support piece for subsequent Global Context Monitor) Grains An Independent Drumbeat ..................................................................................................................... 17 March 10th, 2010: Discusses case for being long grains. (Support piece for subsequent Global Context Monitor) Global Context Monitor: 1Q 2010........................................................................................................................ 18 March 11th, 2010: Consolidation and discussion of main investment themes and portfolio positioning.

Imagine, for a moment, a penny's worth of pure gold[1]. Do you suppose anyone would leave said penny in the ubiquitous "Leave a Penny, Take a Penny" trays at convenience stores? Would people accidentally drop gold pennies and not bother to pick them up? A rationalist view would lead us to believe that a penny is worth a penny and people should be indifferent to either form of money. Therefore, they would be as likely to leave either coin in the tray. However, this view ignores human nature and the intrinsic value that human nature has accorded gold since we[2] began digging it out of the ground. While that same rationalist would claim such value as irrational and temporary, anyone that understands people, or even themselves, knows that such intrinsic value, however irrational, is far from temporary and, more likely, permanent.

Store of Value Myth

September 3, 2009

Human Nature Seeks Out Something to Trust

The aspects of human nature that drive this intrinsic value have much to do with trust. That gold cannot be counterfeit, is rare, and is permanent all contribute to this source of trust[3]. The trust that we place in gold being gold does not depend on any other entity to decree it is so; gold is what it is. That gold is rare is testified by the fact that all the gold dug out of the ground throughout human history would fit on a basketball court with 60 foot ceilings. That gold is permanent is attested to by the fact that nearly all of that gold is still around, i.e., it didn't rust, much less get thrown away. "The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called "Value in use'" the other, "Value in exchange." The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use." Adam Smith - The Wealth of Nations These factors all speak to the source of gold's value, which is not its value in use, but rather, its value in exchange. Gold's value is its utility as a medium of exchange[4]. So long as we have the propensity to "truck, barter and exchange one good for another", gold has value as a medium of exchange. Precisely because gold has so little other utility is why we can accord its value as a medium of exchange. It is ultimately verifiable, storable, portable and exchangeable.

The Myth
This brings us to the store of value myth. Nothing, not even gold, retains its value relative to everything or anything else. The supply and demand of anything relative to anything else is in constant flux, so to expect any one thing to always purchase a fixed quantity of anything, forever, is folly. However, if the supply of a medium of exchange is moderately stable, its ability to command an ever increasing quantity of goods and services over time will improve with growth and productivity. In that sense, gold, as a medium of exchange, will also provide a store of value -- provided growth is positive and productivity improves. That gold is globally recognized makes its potential as a store of value dependent on global growth and productivity, not a particular country's relative growth or productivity.

Stores of Utility, Not Value

While there is no true store of value in any and all conditions, there are stores of utility, each of which have their own particular value in use. For example, oil is a store for the utility of energy, (provided we don't tax it out of use). Your house, if you own it, is a store for the utility of shelter. Arable land, barring environmental disaster, is a store for the utility of food. This simple fact certainly hasn't eluded those in charge of the vast pools of savings around the globe. It is stating the obvious to say that excess reserves and sovereign wealth fund assets are being used to aggressively secure stores of utility wherever they can. While this

trend is clear, inexorable and secular in nature, how the competing interests ultimately resolve the inevitable constraints that will result is far from certain. In my view, hoarding a reliable medium of exchange is, or soon will be, part of the broader trend of securing stores of value. "For in every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been originally contained in their coins." "Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity." Adam Smith - The Wealth of Nations

Chinese Finger Trap

The reason why there seems to be a growing search for alternatives to the most common medium of exchange, the U.S. Dollar, is because there is a deliberate effort to debase most current mediums of exchange, i.e., the U.S. dollar and other major currencies. Whether this will result in a total collapse of the fiat currency system may not yet be a certainty, but given the desperate attempts to keep the game going for just one more turn, I would suggest it is highly likely. It is one thing for purchasing power and exchange rates to fluctuate based on the natural ebb and flow of relative productivity and terms of trade between countries. It is entirely another thing to purposefully alter that balance. Indeed, the most politically tolerable way to pay our personal, corporate and governmental debts is through inflation (i.e., currency debasement). This has been true ever since governments took over the issuance of money and is almost always the path chosen. At present, sovereign creditors and debtors are all sitting around the table staring at each other in the hopes they can maintain the current medium of exchange, status quo. However, they all know that they have competing interests and that there is no elegant end game because all parties are really out for themselves. The tricky part is understanding when the first of them will blink or what other games can be played that are not on the table. It's as though they all have their fingers stuck in a massive Chinese finger trap with 500 finger holes. If they trusted each other and relaxed all at once, they might be able to pull their fingers out. But this type of coordination, as we are seeing, is not possible when competing interests are involved. What's more, the Chinese have their fingers caught in this same eponymous trap. For creditor nations, namely China, that have accumulated too many U.S. dollars or dollar denominated debt, they are indeed in a tight spot, but not without options. For the debt they hold, their only collateral is the U.S. dollar. When a creditor suspects the value of their collateral is questionable, they typically have five options: 1) foreclose, 2) call the loan, 3) demand new collateral, 4) renegotiate or 5) sell the debt. Foreclosure doesn't really apply between sovereigns and calling the loan is not part of the deal with Treasury debt, but the last three options are possibilities. While selling the debt does not seem like an option, as they fear it will spook the market and harm the value of whatever debt they still hold, that option can certainly be used as a threat to demand more collateral, especially if selling the debt will harm the debtor more than the creditor. While this is not an economically optimal choice, in the context of global politics and relative power, such gamesmanship would be quite effective. What collateral can they demand? For an off-the-wall suggestion, the Federal Reserve holds about $1 trillion in US mortgages and will likely soon own debt backed by commercial real estate. In a world where what was inconceivable three years ago is now possible, consider the possibility that the Federal Reserve swaps their real estate secured debt to the U.S. Treasury in exchange for TIPS and the U.S. Treasury then posts that collateral with the Chinese government to keep the game going. As unusual as that sounds, it is important to remember that the Chinese government will be participating in the PPIP, (Public Private Investment Partnership). As a way to renegotiate terms, in the September/October 2009 issue of Foreign Affairs, Barry Eichengreen[5] suggests the possibility that China could demand payment of interest and principle for a fixed number of renminbi. If China aspires to have the renminbi achieve reserve currency status, the ultimate appreciation that will result from achieving that status will make this a good trade for the Chinese government.

"If Your Competition is Drowning, Jam a Fire Hose Down His Throat" - Ray Kroc
Another option would be to find a way to plough some of their dollar denominated assets into a more reliable medium of exchange, i.e., gold. Any direct currency transactions on the open market would create a dollar scare much as selling treasuries would spook a sell-off in treasuries, as noted above. However, I am confident that there are ways for the Chinese government to accumulate significant amounts of gold in exchange for dollars without drawing much attention to their activities. Whether this involves the IMF or other middle-men, I am certain the means to affect such exchange is possible. Exchanging their U.S. dollars for gold is not nearly as transparent as exchanging their dollars for another currency. Also, the Chinese do not necessarily need to only buy physical gold to effect this trade; they can also buy up controlling stakes in gold mining operations, ensuring a long-term supply of gold. Suppose they have already acknowledged that they will never receive everything they are owed in current purchasing power terms and have mentally settled for some fraction of the dollar value they are owed, they could buy a third of that reduced amount in gold and gold mining operations and wait for gold to triple when they start selling their dollars and dollar denominated assets on the open market. This would indeed be painful for the Chinese from the perspective of booked losses, but from a geopolitical power perspective, it could prove to be a winner. James Bond fans will recall that Goldfinger had a similar strategy. In this same bucket, I would throw other real assets, such as industrial metals mining and oil, natural gas and agricultural production. All of these assets provide utility to the Chinese government and are ways of getting out of the way of the U.S. dollar. While one single option may not be executable or effective on its own, a combination of all of these options is possible. While we are at it, we could imagine the Chinese government attempting to smuggle U.S. bonds into Switzerland via Italy. Wait! That was already tried, but the bonds were forged. We know that they were forged because the official statements that backed up the press reports said so. And we know that the press should only report the statements provided by governments rather than digging deeper to uncover some unsettling, contradicting facts.

To Propensity to Truck, Barter and Exchange Requires Trust in Something

We began with a thought experiment and so we will end with one. Imagine that the Fed froze the money supply at current levels and replaced all currency with bills that are impossible to counterfeit, are indestructible, and the Federal Reserve was forbidden by law from creating or destroying the quantity of money in circulation. Those bills would then possess all the advantages of gold, (could not be counterfeit, and would be rare and permanent), plus not have the disadvantage of being able to pull any more out of the ground. The supply would be fixed and certain. In this case, the U.S. dollar would actually be "better than gold" rather than simply as "good as gold", as it once was. It would not rely on the faith or trust we place in institutions; it would rely on the rule of law. The viability of this thought experiment hinges on the question of whether people would place faith in the institutions to abide by the law or whether those laws can change. That same question of trust can be applied to the topic of SDR's or some other form of global currency taking hold as a universally accepted medium of exchange. What is the likelihood of citizens of countries, particularly democratic ones, placing trust in an entity to uphold the rule of law with no accountability to them? Would countries submit to the discipline of a fixed quantity of money administered by a supranational entity? Think of trust as something that is neither created nor destroyed, but can be easily shifted from one thing to another. From this perspective, we're bullish about the long-term prospects for gold because trust in it as a viable medium of exchange will progressively increase as trust in other mediums of exchange deteriorates.

[1] Ignore, for the sake of the thought experiment, that such a coin would weigh 1/100,000th of an ounce. [2] By we, I mean human societies that have an ethic of individual property rights, not communal property rights. Indeed, the latter viewed any gold they might possess as merely a trinket with no value other than merely decorative. [3] I'll submit here that counterfeit can be more broadly defined. That gold cannot be counterfeit could include the fact that neither governments, nor any other entity, can create gold at will, (i.e., printing and distributing fiat money without an exchange of value is counterfeit money). [4] A medium of exchange is anything that can easily be exchanged for a good or service, Cigarettes serve as a medium of exchange in prison. Without a medium of exchange, we must resort to bartering, which is exchanging one good or service directly for another good or service. For example, if I have extra bread and want beer (to use Adam Smith's example, I have to find

someone with extra beer that wants bread. Otherwise, I'm stuck with bread that will eventually spoil while without any beer to drink, an intolerable situation. [5] Foreign Affairs, September/October 2009, The Dollar Dilemma, Barry Eichengreen

There Is No King
November 4, 2009

One great thing about having kids is that they provide judgment-free cover when watching movies made for children. Rather than being the weird guy in a theater watching a children's movie, I can enjoy a good movie while coming across as the dad indulging his kids wishes. A couple of weekends ago, my wife and I indulged our kids and took them to see Where the Wild Things Are. What a great film. Not only did it paint a fantastic landscape and emotional plot line with which my five-year old daughter could connect, (she was sad for at least an hour after the film), it creatively constructed a simple and deep message relevant to adults, (though both of my children were a little confused that the movie wasnt over in the five minutes it takes to read the book). Dont worry, this is not a book report, but I need a few sentences to describe the movie (spoiler alert!). The theme of the movie is that one of the Wild Things, Carol, wants very badly for relationships between him and his friends to be exactly how he wants them to be and feels that only a king with magical powers can impose the type of order he desires. When Carol inevitably becomes disappointed, and angry, in the new kings inability to deliver on his promises, a simple and deep truth is revealed by Douglas, another loyal but level headed Wild Thing, when he states at the climax that There Is No King. No king indeed! Now, I may be guilty of pulling more meaning out of a simple movie than what is warranted but, then again, simple truths can be applied to any context. Think of a simple truth as a scalable principle, much like Mandelbrots fractals are scalable over any timeframe. To my mind, There is no king has deep philosophical implications that can be applied to most any aspect of our existence in general and constitutes a perfect message for today's economic predicament in particular. Currently, we are faced with the very real consequences of decades of government and central bank decision making on our behalf; all with the noble intent of making things better. These are our kings. Unfortunately, given the deep seeded tendency of most people to look to those apparently in control to make things better, especially in times of trouble, these same sources provide us with more decisions. We hope that bailouts work. We believe that Bernanke can orchestrate the efficient pricing of money. We want government to deliver the well-intentioned ends of health care for everyone so we do not have to face the reality of the means by which it might possibly be delivered. Prior to seeing this movie, I had been working on this article for a couple of weeks with a rough title of Superman, Please Save Us, but with "There Is No King", I could at least pull relevance out a something current. Whatever the title, the point I am trying to get across is the tendency of society to look to or hope for a few, wise leaders to solve our problems -- especially when we are compelled by fear. We expect them to intervene and help us avoid the consequences of either our own bad decisions or theirs, as we hopefully rise up in a linear trajectory towards utopia. The problem is that such a trade-off tends towards oneness, where the priorities of a few inevitably trump the dynamic choices of individuals. And the solution to each failed iteration requires more centralization and control. Of course, the critical fallacy supporting this trend is that centralized decision-making outperforms decentralized decision-making; that the order imposed by the decisions of a few can bring a more optimal result out of chaos[1]. Just a couple of years ago, few questioned this premise when it came to money. They thought the price of money was an exception that needed to be managed. However, the central lesson of Austrian economics, which exposes this fallacy, is becoming understood by a much wider audience.

If you can keep your head when all about you are losing theirs and blaming it on you
This quote is the first line from Rudyard Kiplings poem, IF my favorite poem. The final line completes the above statement with and you will be a man my son. Unfortunately, as a society, we do not keep our collective heads and our politicians are much more occupied with fixing the blame, not the problem. This occurs because fixing blame provides opportunity to gain more political power, which is a result of the inexorable trend, unless constantly checked, towards centralization and oneness. We want to believe that we can avoid the consequences of our decisions; that noble leaders can show us what to do; that so long as we all believe, then it will be so. But no such person exists. It is not that there are no incredibly wise or well intentioned people; it is that no one can do the job without imposing their principles on everyone else, which ultimately requires force. And it is the competition between principles (or beliefs, morals, choices, ideas, etc.), that enable progress. No one can apply their will to chaos and get a better result for everyone, or even most. Our desire to believe in someone other than ourselves making our lives on earth better, either individually or collectively, provides the mortar for intentions to pave the path to hell.

For the moment, it may look as though Americans are getting braver and asking government to back away, but they will lose their mettle as soon as things turn really bad. When it does, they will look for someone who promises just the right thing, no matter what they give up in exchange. The Fear of the Unknown is the dominant factor, and true capitalism is the biggest unknown of all. Importantly, true capitalism does not mean no-holds-barred free-markets or anarchy just as freedom, as John Locke taught, does not mean that any man has the liberty to do what he lists. Objective laws and enforcement are the rulebook and referee of a just environment[2]. Austrian economists have tried for over a century to teach us that decentralized decision-making outperforms centralized decisionmaking (i.e., planning). The consequence of ignoring this lesson can be summed up as follows: the path to hell is paved by the good intentions of government and held together by fear of the unknown. Any system dependent on the intervention of a few to create order out of chaos is doomed to failure. That is our system. Until the power to make decisions is restored to the hands of the markets and individuals, confidence and trust in the economic system will continue to deteriorate. To remain on a prosperous path, we must learn to accept the unfortunate truth that there is no Superman to save us; there is no king!

[1] Markets are a chaotic system. They are driven by the action of millions, if not billions, of actors with competing interests. Throw in nature and you truly have a chaotic system.

[2] Contrast these criteria for just with fair, which is an individual concept dependent upon our own principles, beliefs, morals, etc.

In a previous article, There Is No King, I discussed our natural desire to believe that someone in power can make decisions to improve the well-being of society. Given this predisposition, we will inevitably empower our leaders to make more choices for us or find ourselves with less power to prevent them from making those choices. As we continue on this path, understanding the premises by which they make decisions can help us anticipate their future actions and position our assets to protect us, or enable us to profit from, the consequences. In that same article, I referenced the first line from my favorite poem, IF. The second line of the same Rudyard Kipling poem reads If you can trust yourself when all men doubt you, yet make allowance for their doubting too. To me, this line broadly emphasizes the importance of understanding the viewpoints of others. It is suggesting that if I know why someone believes something that contradicts my view, but I have taken the trouble to fully understand why what they believe is wrong, then the trust I place in my decisions is founded on something more than arrogance. This line is asking us to explore the premises upon which another's beliefs are based so that we can, in turn, use that understanding to challenge our own premises. If we thoroughly challenge the premises upon which beliefs are built, we can chip away at contradictions in our belief system and better approach decisions with confidence and humility -- confidence because we better understand why a contradicting viewpoint is incorrect; humility because you ultimately destroy many long held and cherished beliefs in the process. Investing requires not only making decisions based on what you believe to be right, but also knowing what others believe to be right. Given Kiplings advice, I find it prudent to take it one step further and understand why others believe something. It also helps to know how deep their pockets are. If you understand the premises upon which the prevailing view of market participants are based and the conditions upon which those views depend, you have a better chance of knowing how long it will be before you are ultimately proven right. If you are proven wrong, you can look forward to another humbling round of checking your premises. Today, the dominant participants in the markets are central banks. Therefore, understanding the premises underlying the belief systems of central bankers is helpful in predicting the decisions they will make. The core premise of central bankers and politicians today is that business cycles will be less severe provided we have a wise application of monetary and/or fiscal policy. This is the critical fallacy discussed in There Is No King, which was that centralized decisions of any kind outperform decentralized decisions. Upon that premise, they have determined that a currency backed by the promise of government facilitates prosperity and growth because fiat currency makes it easier to apply monetary and fiscal policy. This is the status quo that needs to withstand reality. If their premise is wrong, then the question becomes how long can they keep acting on decisions dependent on this premise before the inevitability of reality reduces the significance of central banks or forces them to change their belief system? To answer this question, we must determine if such systems are sustainable and, if not, how long can the status quo be maintained. To be sustainable, a system must rely on a premise that holds in practice, not just theory. Therefore, ask yourself the following questions to see if it works in practice: Is such a system just? If it is unjust, it will not work in practice (at least not in any way that increases prosperity). Can we consistently find wise and selfless people to administer such a system? What are the consequences if we happen to get decisions that are not wise, even for a short time? Is any system dependent upon the promises of government sustainable? Given your answers to these questions, and if you conclude such a system is unsustainable, consider what conditions allowed the status quo to persist for so long in the past and do those conditions still exist? Finally, if those conditions no longer exist, then determine how long it can be sustained before it ultimately collapses or is replaced.

Make Allowance for Their Doubting

November 9, 2009

Is such a system just?

For a system to be just implies the rule of law. The rule of law helps enforce property rights. Money is property. If money is not property, then I really have to reconsider how I spend my time. For the rule of law to be just, those laws must be objective and be defined ex-ante. Any single entity arbitrarily determining the quantity or price of property is the absence of the rule of law. But this is what central banks do. If a law that defines what the price of money will be under certain conditions exists somewhere in the statutes, then decisions based on those laws would not be arbitrary. Unfortunately, those laws do not exist (and please dont point to the Taylor rule as a law). If that entity claims that, because they take an action, it is the law[1], then those laws are defined ex-post, which is un-just. Finally, if the ultimate justification for such an un-just, arbitrary system is to pursue some higher purpose, then refer to the critical fallacy recalled above.

Can we consistently find wise and selfless people to administer such a system?
No, but fear drives us to believe that we can find such people, and thus the point that I was making in There Is No King. So the question of whether or not these wise and selfless people adhere to a system based on a fallacy is irrelevant since we cannot find someone to administer it. That they do adhere to a system based on a fallacy is not to say that they are dumb or wicked. To wit, in Kurt Vonneguts book Hocus Pokus, he discussed THE COMPLICATED FUTILITY OF IGNORANCE in the following excerpt: He was not well educated, and was more a mechanic than a scientist, and so spent his last 3 years trying to invent what anyone familiar with Newtons Laws would have known was an impossibility, a perpetual-motion machine. He had no fewer than 27 contraptions built, which he foolishly expected to go on running, after he had given them an initial spin or whack, until Judgment Day. We took 10 machines we agreed were the most beguiling, and we put them on permanent exhibit in the foyer of this library underneath a sign whose words can surely be applied to this whole ruined planet nowadays: THE COMPLICATED FUTILITY OF IGNORANCE I have discovered from reading old newspapers and letters and diaries from back then that the men who built the machines for Elias Tarkington knew from the first that they would never work, whatever the reason. Yet what love they lavished on the materials that comprised them! How is this for a definition of high art: Making the most of the raw materials of futility? It is possible that very intelligent people can build complicated and compelling logical constructs, even if they base the entire intellectual edifice on a fallacy. But the truth is that centralized decisions, whether the price of money or five year plans regarding industrial production, create more problems without really solving the problem they are intended to solve. If Tarkington's perpetual-motion machines ignored simple physics, Keynesian economics ignores human nature. So while they are not necessarily dumb, they may have invested so much in this fallacy that they are willing to take a logical construct to its inhumane conclusion by wasting massive resources[2] and further delaying the day when they must eat humble pie and check their premise. Also, it is possible that those same very intelligent people realize the fallacy upon which they based this logical construct, but the construct serves their purpose, whatever that may be, so the only way to maintain the edifice is to instill confidence in the game, or play a confidence game, (i.e., con). Therefore, if they know they are playing a confidence game, then they need a confidence man, otherwise known as a con artist. And this con artist helps perpetuate confidence in the game with a fantastic tapestry of assertions. Well intentioned or not, the result is the same; lower living standards and a trend towards oneness.

What are the consequences if we happen to get decisions that are not wise, even for a short time?
Does 2002 2004 qualify as short? Thats how long the Fed maintained Fed Funds below 2% the last time around, and the consequences are, by this time, well known. It seems to me that the time between each time around keeps getting shorter and the measures to correct, more severe. I referred to this in Still Hell to Pay?, which I wrote in October of last year, when discussing how, over the last several years, monetary bullets have been fired from increasingly lower Fed Funds levels. It's been a year since I wrote that article and we are basically in the same spot -- just worse.

Is any system that is dependent upon the promises of government really sustainable?
In my view, the U.S. government is incapable of keeping promises by design. I hold this view not because I think politicians are necessarily corrupt liars; it is the design of the system that ultimately leads to broken promises. The U.S. government has been, for many decades, an unconstrained democratic form of government. I emphasize unconstrained because the U.S. constitution was intended to limit the scope of democracy in the United States and provide us with a Republic. If it was constrained, there simply would be promises that the government, or politicians running for government office, has no authority to make. This is not a political statement[3], but an observation of conditions that I believe will have a massive impact on interest rates, investment returns, living standards, etc.


The fact is: politicians get elected based on promises of largesse to one constituency or another. They get into office and work hard to keep some of those promises and the ones that depend largely on money are the easiest to keep. The full complement of promises are inevitably contradictory, (think guns and butter rather than guns or butter), and the entitlements that result take on lives of their own. Rather than resolving those contradictions and breaking most promises by maintaining the promise implicit to a fiat currency, those contradictions are enabled at the expense of breaking the promise of what your money is worth.

In Spite of Government: Entitlement and the Rear View Mirror

The key question going forward is: Do the conditions upon which the status quo depends still exist? If we conclude the status quo is sustainable simply because this is America or based on the past, then I am reminded of Bart Simpson's plea to Homer when Homer considered using Bart as an anchor to stop Springfields newly acquired monorail Think harder, Homer. For this is America to have any validity, and ignoring the blatant arrogance of this statement, we must confirm that the conditions that made America dynamic and resilient in the past still exist, otherwise the statement is simply dogmatic. Among the various idiosyncratic conditions of the last hundred years were the collapse of the British Empire and the resulting power vacuum mostly filled by the U.S., two world wars that were not fought on our shores, but America was left in a position to sell and lend to both the victorious allies and the conquered, and the rise and fall of communism which created another power vacuum that the U.S. could again fill. Additionally, we began as a nation of savers but are now decidedly debtors, both privately and publicly. For any statement that includes based on the past to be relevant, consider first to what past you are referring. Is it the last forty, hundred or three thousand years? Arguments that come across as its different this time may not actually be claiming anything is different when placed in the proper historical context. One thing about todays status quo that is indeed different this time is the complete and total reliance on a global fiat currency system. Even though this experiment has been underway for nearly forty years, it is indeed different that such a system of money has never existed in all of human history. What would truly prove to be different this time would be that such a system did not utterly and totally collapse, and that conclusion is based on at least three thousand years of precedence. Not only are certain idiosyncratic geopolitical conditions not likely to repeat in our favor, but other fiscal considerations, that are often pointed to as justifying our debt and deficits, are not consistent with past experiences either. For example, the size of our current federal debt is indeed comparable, relative to GDP, with the amount of debt we incurred during World War II. However, what is missing from this argument is that American citizens were significant savers at that time and those savings funded the federal debt. For another example, Japan has certainly been able to sustain a massive debt-to-GDP ratio for years without catastrophic consequences. But this again ignores the fact that Japans debt is mostly funded by domestic savings and those savings were enabled by exporting goods to a rapidly growing world, fuelled by expanding trade and leverage. If you can relate how those conditions are similar to the situation of the United States today, Im all ears. Just dont include this is America in your argument.

How Long Can the Status Quo Be Sustained

One factor determining how long the status quo is sustainable depends on how long the foundation holds. That foundation is comprised of the following two elements: 1) fractional reserve banking and 2) fiat money. Fractional reserve banking begat central banking because fractional reserve banking magnifies systemic risks (basically varying degrees and types of counterparty risk, of which call risk is one) and exacerbates booms and busts. When this proved unsustainable, central banks were created. Central banks soon found that they needed the ability to print money to plug the gaps and fiat money proved to be the best tool. Now that this model is proving unsustainable, we are looking for a central bank for central banks, perhaps the IMF, and a one world currency based on SDRs; another example of the tendency towards oneness. If we get to this point, which I do not believe is possible as explained in Store of Value Myth, then what do we do when that system proves unsustainable[4]? Apply to the inter-galactic council for acceptance into their monetary regime? Another factor driving the timing is the dependency of the status quo on consumption and borrowing to fuel the economy rather than production and saving. A is A, and in order to spend you need access to money, whether from savings or borrowings. We, as a society, have no savings and we can no longer borrow (as illustrated in Show Me the Money). Current fiscal and monetary policies are pushing on a string; the consumer is tapped out and there is not another spender in the world able to fill the gap. As government, enabled by money printing, continues to grow, our ability to produce declines rapidly, as does the value of our money. Based on these factors, and others that I have pointed out before, we are rapidly approaching the tipping point, and the timing will be measured in months or quarters, not years.


Understanding how certain players will respond to particular conditions and why they will do so is my interpretation of make allowance for their doubting too. As pointed out in Show Me the Money, there is a big gap between the monetary base and the resulting credit money (M2). As credit money is destroyed via deleveraging, the Fed is philosophically bound to plug that gap by printing money. As nominal GDP falls, the government is philosophically bound to plug that gap with more government spending. More debt, more dollars and more government will crowd out productive uses of capital, destroying capacity indiscriminately and creating pockets of scarcity. One consequence of this could easily be higher grain prices, especially given persistently low levels of storage. Declining trust in the existing fiat currency system will benefit gold and other precious metals. So gold and grain prices may very well rise, and if we hit the tipping point (and just to continue the alliteration), you may also hope you have a gun.

[1] Think Nixon Frost debates [2] Money is a resource, as is the capacity to borrow money. [3] I suppose it is a political statement from the perspective that politics is philosophy in action and economics is, at its core, a philosophical exercise. [4] If we went to a global monetary system, the other participants would absolutely insist upon a massive devaluation of the U.S. dollar. Whether through inflation, devaluation or austerity measures, the result is a lower standard of living for U.S. residents.


A Context of Counterfeit, Consequence, Conspiracy and Confidence

February 23, 2010

Flight to Risk in Context

In order to find out where you are, it often helps to know where you have been. Risk markets have come a long way over the past eleven months, so taking a moment to understand the path we took to get here could very well help us understand if risk markets are on stable ground with room to run. Did we make it this far based on improving fundamentals that indicate some form of sustainability or did we run a Toyota Corolla on nitrous oxide and fry the engine? Usually, the market signals we are currently receiving such as low implied volatility, (market expectations for volatility as measured by option premiums) and a steep yield curve provide signals that indicate confidence and growth. However, given the massive distortions in the market by policy makers and the incentives those distortion create for their transmission mechanisms, (i.e., banks), there is reason to believe that those signals are false. Some of those distortions are a consequence of the legal counterfeiting that are the prerogative of central banks and the incentives those distortions create. Other distortions create confidence boosting signals.

The Glorious Printing Press

For risk assets, particularly equities, it is helpful to put the rally from the lows of March, 2009 in context. In part, the sentiment at that time was exceedingly negative so from a contrarian perspective some of the rally was not surprising. However, beyond the initial stages of the rally, a more ephemeral dynamic took hold. With a little bit of hindsight, and knowing the risk that comes with attributing anything to any other thing, I believe that dynamic can be explained in large part by the massive quantitative easing undertaken by the Federal Reserve and the subsequent actions undertaken by the recipients of that largesse. The recipients of the $1.2 trillion in base money created by the Federal Reserve were largely commercial banks, including institutions that were investment banks only a couple of years ago, (See Show Me the Money for a more thorough analysis). This money, far from flowing into new loans, was put to work in one of the following ways: 1. 2. 3. 4. 5. Simply sat on the banks balance sheets in the form of excess reserves Ploughed into treasuries for a risk free way for banks to earn their way to balance sheet repair Funneled to bank proprietary trading desks to generate trading profits Used to settle liabilities supporting assets that need to be marked down or sold at a loss Funded loans to hedge funds (warning: conjecture)

Thus, the money created from the Feds quantitative easing has been plowed into risk assets via bank proprietary trading desks and loans to hedge funds. Couple this allocation of virtually risk free money with an ability to socialize losses for large banks and successively lower stock market volumes each month, and we gain a little more perspective on the rally and can place it in its proper context. That context is free money, thin markets and a put against your own mistakes financed by taxpayers.

Quantitative Easing and the Consequence of Muted Volatility

Another factor encouraging buying of risk assets is muted implied volatility across financial assets as a result of the Feds purchase of mortgage backed securities. To understand this, lets quickly review how mortgages behave.


When rates fall, mortgagees tend to prepay or refinance, putting the principle amount back in the hands of the mortgagor, (i.e., whoever owns the mortgage), at what are now lower rates. This truncates the amount that the price of mortgages rally when rates fall. When rates rise, mortgagees are less likely to prepay or refinance, so the mortgagor expects a longer time to elapse before they receive the principle. The price of the mortgage thus falls more than it otherwise would have given that the mortgagee will likely not exercise their option to prepay or refinance. This characteristic of mortgage prices rising less when rates fall and falling more when rates rise is called negative convexity, which implies that mortgage prices do not benefit from volatility. The mortgagee owns an option to prepay and the mortgagor has sold him this option. When someone buys a mortgage, they are selling volatility in the same way that a seller of call and put options is selling volatility. Aggressive selling of volatility drives down the price, or expectations, of volatility. When a normal market participant, such as a bank or fund, buys a mortgage, they often hedge the volatility impact that arises from the imbedded optionality. However, while the Fed has been buying over $1 trillion of mortgages in implementing their quantitative easing policy, they havent been hedging out the volatility. Therefore, while they have been aggressive buyers of mortgages and consequently driving up their price, they have simultaneously been aggressive sellers of volatility and driving down its price[1]. If volatility across financial assets is correlated, and its not hard to see how they are, then muting implied volatility mutes the negative consequences of buying risk assets, thus incentivizing their purchase. Whether or not driving down implied volatility and encouraging the purchase of risk assets was a consequence intended by the Fed is irrelevant as it is a consequence nonetheless. With respect to establishing where we are, if one is lulled into taking a risk because some technical by-product provides signals to take that risk, does it matter if those signals were deliberately contrived or accidental? Not if fundamentals ultimately determine the path of prices.

Of Conspiracy Theories and Theories of a Conspiracy

In addition to the technical factors discussed above, there is another potential, but by no means certain, factor supporting equity prices. By now, many of you, like me, have learned of the Presidential Working Group (euphemistically called the Plunge Protection Team, or PPP), that was put in place by Ronald Reagan in the late 80s. In short, it is comprised of heads from the Federal Reserve, the SEC and the Treasury and who knows who else. Its existence is a fact and is not worth debating. This team was put in place to support the stock market in the event of sustained sell-offs. As a brief aside, anchoring the discussion around the word conspiracy misses the point. In the minds of policy makers, buying stocks at opportunistic times to provide confidence to market participants fits right in with their broader belief system. They believe that the government should try to give consumers confidence to spend by providing fiscal stimulus and that the Fed can encourage borrowers to borrow and, of course, spend by holding rates low. Likewise, manufacturing a rally by buying equity index futures to boost confidence via the wealth effect fits in with their entire belief system. Since the Presidential Working Group was established legally, there is nothing illegal, and nothing conspiratorial, about their supposed actions. If there is a conspiracy, its to simply mask their activities or not confirm their existence, which is not any different from what the Fed or government does every day in a thousand different ways. As such, what is questionable yet unanswerable at this point is whether the PPP actually do anything, such as buy equity futures in thin markets to encourage a rally. While we can question the effectiveness of their actions, again if they actually take action, we can imagine for a moment that if they did take action periodically in times of market stress that those actions over time would systematically mute implied volatility (volatility expectations). That is because the downside is never as bad as it otherwise would be. As is the case with aggressive mortgage purchases by the Fed, this action sends out signals to buyers that its okay to take the risk of buying a stock because stocks do not look that risky. Again, this lends technical support to the equity market and not one based on fundamentals. In both cases, (Fed purchases of MBS and PPP purchases in equity futures), the important question is how sustainable these practices are given the limits on the resources required to engage in these activities. In the case of mortgages it is the continued ability of the Fed to continue their counterfeiting program. In the case of the PPP, its a matter of technicals dominating the near term direction of prices. When the Federal Reserve allowed investment banks like Goldman Sachs to become commercial banks, these institutions gained instant access to the Feds printing press. That they have three years to bring down the leverage ratios from over 30 to 1 to 10 to 1 meant that they now had even more incentive to use other peoples money to take risk while gaining the ability to be bailed out if theyre wrong. Through risk free borrowing and lending, prop desk trading and lending to hedge funds, they vaulted their earnings while funneling their new found money into thinly traded markets. Indeed, if you possess a stupendous amount of capital in the form of risk free money in a thin market, you can make the markets do what you want for quite a while. Finally, with other factors, some well publicized, others only a theory, driving down implied volatility, the incentives to take those risks only grew.


In my view, technical rather than fundamental factors provide the context for the rally we have witnessed; technical factors that are a consequence of the distorting hand of policymakers. The question going forward is whether fundamentals will improve enough to support current valuations or drive earnings growth rates higher. Given the lack of savings, inability to borrow and declining income, I do not believe that consumers have the capacity to increase consumption and support corporate earnings. Consumers attempts to increase savings coupled with the likelihood that massive increases in government debt will come with higher taxes and higher inflation will only pressure disposable income and the purchasing power thereof for years to come. I do not trust that this rally is sustainable and I believe the counterfeiting activity and confidence game is increasingly transparent to more and more people. The puppet masters are pushing on a string and I am positioning portfolios accordingly.

[1] Hat tip to Zero Hedge for this revelation


Entropy, The Long-Term Cadence

March 1, 2010
As a preface to our soon to be released Global Context Monitor, Ill state clearly what I believe to be the drumbeat setting the tempo for markets over the long term. That drumbeat is marked by two natural tendencies. On the one hand we have entropy, of which deleveraging is symptomatic. On the other hand, we have the consequential struggle by the status-quo to counter entropy with centralization. This centralization will be enabled by deficit spending, currency debasement and force. This drumbeat will dominate for years to come, though growing louder with an increasing tempo over time. Let me first explain what I mean by entropy. While this is a term usually reserved for thermodynamics discussions, I use it here to describe human interactions as well (and markets are a result of human interactions). For this discussion, think of entropy as a natural tendency towards disorder and heterogeneity. Though disorder invokes a negative connotation, in this sense I use it to refer to a migration towards more localized decisions and authority. Heterogeneity refers to the varying and competing principles, morality or priorities that people hold, (see There is No King and Make Allowance for Their Doubting for related discussions). Heterogeneity spurs decentralization which motivates entropy. In short, while we gather together and form societies, most people do not give themselves over entirely to those societies and would prefer to retain their cultural or individual identities. There is a balance between centralization and individuality, but the scales have been tipped (and continue to tip further), towards centralization. For decades, the trend in government around the globe has been towards more centralization and control. While we engage in a liberal[1] versus conservative policy dialectic, the results, regardless of which side prevails, have all tended towards more power residing in the hands of the government. With more centralized government, we necessarily have homogeneous principles, morality or priorities imposed upon us. Along this path of centralization, free market principles such as individual rights, property rights and objective law (all of which set the conditions of prosperity), have all been sacrificed. However, the pent up forces of entropy are building, with pressures on the European Union, greater geopolitical assertiveness from Russia and China, and growing issues such as States Rights and Nullification in the United States serving as anecdotal evidence of this trend. In a sense, deleveraging can be viewed as symptomatic of entropy as well. The less leveraged the economy, the less interconnected and exposed all economic actors are to the systemic risks that arise from leverage. To counter the natural process of entropy, proponents of centralization are using all available tools. Case in point, deficit spending has been taken to surreal levels to maintain existing promises, make new promises and ensure the road to utopia has few bumps. Increasingly, currency debasement through the direct monetization of treasury debt is the only way maintain the requisite amounts of deficit spending to fund the expansion of the state. While it seems bad now, I doubt they have even really gotten started. To what extent force comes into play domestically we will simply have to wait and see, but history suggests that those benefiting from centralization will resort to increasingly aggressive means to maintain the status quo. While this context, if correct, does not portend financial stability and even a return to the path of prosperity, even in the intermediate term, there will be plenty of opportunities to profit during what I expect to be very turbulent times. In order to do so, being nimble while interpreting market signals and geopolitical events in the context of these countervailing pressures will help us position for changes in the balance between centralization and entropy.

[1] Here I use the word liberal in the altered sense of the word as opposed to the classical and original definition, which simply referred to proponents of free markets and competition.


Grains - An Independent Drumbeat

March 10, 2010

The Beat of Its Own Drum

One thing I am constantly on the look-out for are asymmetrical risk profiles. In my view, long exposure to grains offers precisely that by providing much more upside than downside. At its core, the case for grains is as fundamental as supply and demand. The historical demand picture for grains consists of food for people and livestock. Inputs into this process are land, water and fertilizer. As has been the case for several years, the new found prosperity in emerging markets has lead to increasing demand for grains to feed their livestock as protein becomes a larger component of their diets. This trend I expect to continue, or at least not reverse itself. However, there is now a entirely new source of demand on grains from alternative fuels, which is exacerbated by massive government incentives and subsidies. This not only constrains the amount of grain that can be used for food and feed, but also creates a competing demand for the main input in the grain supply process water. With subsidies discouraging economical rationing of water and encouraging the further diversion of such a scarce resource into the energy supply chain, the potential for even minor dislocations in the supply and demand balance to have massive implications is severe. If there were ways to invest in water rights, I would. But since private water rights effectively do not exist (or are not tradeable and therefore not priced by market forces), long exposure to grains provides the next best alternative. On these merits alone, one can make the case for gaining long exposure to the price of grains. But to this, we can add knock-on effects from the deleveraging process. In Show Me the Money, I wrote: Today, much of the capacity to bring those essentials to market is being destroyed as a result of tighter credit . Todays capacity destruction is indiscriminate, which means supply constraints can pop up almost anywhere. Moreover, the credit destruction is far from finished. I feel highly confident that we will see prices rising significantly for the above referenced essentials over the next several quarters. The indiscriminate capacity destruction that is resulting from declining availability of credit is hitting farmers as well. There is much anecdotal evidence that farmers are finding it hard to gain access to credit to maintain their operations and, for example, must cut back on the use of fertilizer. Perversely, subsidies in India are encouraging the overuse of urea as a fertilizer, which is reducing yields and contributing to food shortages in that country (hat tip to Market Skeptics for that anecdote). Ultimately, not only are farmers having a hard time maintaining production at previous levels, many are facing the hard choice staying in business at all. Water waste and the deleveraging cycle will constrain the ability of the market to meet increases in demand that arise from both natural forces and unnatural government policy. Add to this mix something as unreliable as the weather, and we truly have an explosive situation. While it is not the case that the prices of grains cannot go down from here, it is that the potential for a massive spike in prices far outweighs the downside risk.


Global Context Monitor: 1Q 2010

March 11, 2010

Entropy, The Long-Term Cadence

In Entropy, The Long-Term Cadence I discuss what I believe to be the dominant theme for years to come. To summarize, its a struggle between the natural tendency towards more localized decision making and control and the desire of government to counter this tendency by maintaining the trend to more centralized planning and authority. The trend towards centralization can only be maintained for as long as deficit spending, currency debasement and increasing force are tolerated.

Sequence, Not Timing

With this stated context, I will now provide my view on how the above dynamic may unfold. While I frame the following outlook in terms of time horizon, I am more certain of the sequence, not the timing. For example, while I may expect a particular outcome over the next several months, the longer term picture is dependent entirely on how markets and policymakers might react to such an event. Also, though I think policymakers contingent reaction is set in stone, I do not necessarily believe the markets reaction is. The near term investment environment is dominated by what is effectively a chicken or egg scenario motivated by a positive feed-back loop. The intermediate term is fully dependent on policy responses that will likely prove to be counter cyclical in nature; mainly ever increasing government intervention and more quantitative easing, which will of course crowd out private capital and incentive. Another factor that may come in to play at any time is what I would refer to as a different kind of liquidity trap. Finally, there is a trend that, while in part related to the long-term cadence, is mostly marching to the beat of its own drum. Ultimately, there are consequences to these policies that cannot be avoided. I view these consequences not as some type of endgame but rather as a new set of opportunities that will need to be framed differently. Making it through the consequences is the tricky part, which challenges the vast majority of conventional and marginally unconventional thinking. But before we look forward, lets put the rally in risk markets over the last few months in context. Effectively, the remarkable performance of equities and other risk assets over the last several months is a result of massive distortions created by policy makers. For a more detailed discussion of this topic, please see our latest post A Context of Counterfeit, Consequence, Conspiracy and Confidence, but to summarize: 1. The rally was driven by bank proprietary trading enabled by free money, moral hazard and thin markets 2. Low implied volatility, a result of the mortgage purchasing component of the Federal Reserves quantitative easing program, has provided false signals of market confidence 3. The possibility that the Presidential Working Group has been supporting equities through the futures market would also have dampened implied volatility and provided similar false signals of confidence

Near Term
With the backdrop of an artificially contrived equity rally, lets first take a look at the near term. The chicken and egg scenario of what comes first lies between a sell-off in risk assets and a whiplash inducing rally in the US Dollar. Will a sell-off in risk assets (e.g., equities, real estate, oil, industrial metals, precious metals, etc.,), spark a rally in the US Dollar or will a rally in the US Dollar spark a sell-off in risk assets. An academic question perhaps, but the practical aspect is to understand the positive feed-back loop (or pro-cyclical) relationship between the near-term strength of the US Dollar and weakness of risk assets. Regardless of which comes first, the reasons to expect a near term rally in the US Dollar are as follows: 1. 2. 3. Euro is under pressure as countries like Greece, Spain and Portugal will either be bailed out or threaten to exit the monetary union Global carry trade funded in USD that has supported risk assets will unwind, fueling further sell-off in risk assets Potential for dollar funding crisis among foreign banks is as severe, if not more so, than in early 2009



Any tightening, explicitly or by stealth, by the Federal Reserve will be USD favorable as it gives the Fed a slight veneer of credibility with respect to defending the dollar

The rally was not supported by volume or broad participation and fueled by unsustainable distortions. If fundamentals do not materialize to support current valuations, or implied volatility spikes as a result of the end of mortgage purchases by the fed, a significant sell-off in risk assets will ensue. Other catalysts that loom on the horizon for risk assets are: 1. 2. The potential for massive downgrades in the municipal markets as individual states drown in their bloated budgets and unemployment benefits spin out of control An acceleration in bank failures, particularly regional and community banks, as the practice of extending and pretending finally proves unsustainable and banks are forced to begin foreclosing on commercial real estate loans

The dollar carry trade and rally in risk markets are linked and any rally in the USD will lead to a sell-off in risk markets, which will pro-cyclically encourage a further rally in the dollar which will lead to moreyou get the picture. Current Positioning: 1. 2. 3. 4. Short Equities Short Oil Short Copper Long USD vs Euro

Intermediate Term Reaction Function

If we see such a self-feeding risk market sell-off/ US Dollar rally dynamic take hold, I fully expect the Federal Reserve to announce more quantitative easing via purchasing treasuries. With the backdrop of a stronger US Dollar, the Fed will believe it has the leeway to print more money. I believe they are desperately looking for an excuse to do so for the following reasons: 1. 2. 3. 4. The Fed will need to help the Treasury roll-over the massive amounts of short-term treasury issuance to fund their near term deficit spending This will prevent a sell-off in treasuries that will belie the actual inflationary pressures building as a result of quantitative easing and, to their minds, help prevent an erosion of their credibility They need to continue to prevent a contraction in M2 as credit money is destroyed (a consequence of deleveraging) by plugging the gap with increasing amounts of base money Just as the Fed replaced the temporary liquidity programs on the asset side of their balance sheet with outright mortgage and treasury purchases, the Fed will replace the decline in their mortgage holdings that result from pay-downs with the purchase of more treasuries The most politically acceptable way to pay our massive obligations is to inflate them away (Sovereignage is an oldie but a goodie. Mel Brooks was right when he said "It's good to be the king".)


This additional quantitative easing may provide an ephemeral boost to the treasury market much like it has over the last several months and provide a false signal of muted inflation expectations. Current Positioning: 1. Cash and Cash Equivalents (to take advantage of opportunities)

From a tactical perspective, depending on how the near term unfolds, we expect to reverse our long positions on the dollar, unwind short positions on equities and take more permanent positions in long exposure to industrial metals and commodity companies. Also, we will look to add to precious metals exposure throughout. Finally, there may be opportunities to take long positions on treasuries as well (for the then to be near term).

Another Form of Liquidity Trap

Not quite a rose by any other name, but there appears to be an unholy mosaic of policies surrounding cash and cash equivalents that, to a skeptic, looks like a trap set among liquid products. This mosaic is comprised of the following developments:


1. 2. 3. 4.

Redemptions from money market funds can now be frozen Withdrawals from demand deposits can be delayed (keep an eye out for more developments in this arena) the Treasury faces massive roll risk from the incredible amount of short-term funding they are undertaking which, as mentioned above, the Fed will be forced to monetize the Fed now is looking to sell their bond holdings directly to money market funds, as well as letting them participate in reverse repos, which will allow them to roll their near term treasury purchases right back onto money market funds

With the Fed able to funnel their purchases of treasury bills through money market funds, they can focus their balance sheet expansion on the purchase of intermediate and longer term treasuries, which is where inflation expectations can be more directly muted. Also, given 1) and 2) above, investors in money market funds and holders of demand deposits will be locked in the trade if a dollar funding liquidity crisis takes hold or if policymakers finally declare a bank holiday and officially devalue the dollar. Current Positioning: 1. 2. Long Precious Metals Long TIPS

The Beat of Its Own Drum

In Grains An Independent Drumbeat, I discussed our view on grain prices over the long term. As I concluded in that article: Water waste and the deleveraging cycle will constrain the ability of the market to meet increases in demand that arise from both natural forces and unnatural government policy. Add to this mix something as unreliable as the weather, and we truly have an explosive situation. While it is not the case that the prices of grains cannot go down from here, it is that the potential for a massive spike in prices far outweighs the downside risk. Current Positioning: 1. Long Grains

Ultimate Consequence
As Ive written time and again, policymakers are reading from the same old play book of fiscal and monetary stimulus. They will continue to rely on that playbook until they simply are not allowed to continue. Massive treasury issuance to fund the expansion of the state enabled by outright treasury purchases by the Fed is merely a stall. As deleveraging destroys credit money, we will find ourselves awash in Federal Reserve notes. Whether through hyper-inflation or official devaluation, the dollar will come under serious pressure. On the bright side, for some, our debts, both private and public, will be easier to service. Also, while opportunities abound with these types of conditions, conventional ones do not.