Cash is Trash
The Daily Reckoning PRESENTS: Your wealth is being stolen due to inflation. Whether you like it or not, central banks continue to churn out a ridiculous amount of paper currencies, thereby robbing you of your savings. Puru Saxena feels that this is a crucial issue that you must understand if you want to survive and prosper over the coming years…
CASH IS TRASH
With the United States heavily in debt and facing record-high deficits, the global economy has severe imbalances. The total debt in the United States has now grown to $46 trillion. The trade deficit now exceeds $800 billion, and the American consumer is swimming in debt. Similar imbalances can be seen throughout the “developed” economies of the West. Therefore, bankers and governments who want to stay in power at all costs have decided to resort to accelerating the rate of monetary inflation. “But why would they do that?” you may wonder. The answer can be summed up in the following words: Inflation makes debt less formidable and easier to handle.
Allow me to explain. I want you to imagine that your grandmother took out a loan of $50,000 in 1950. Back then, this was a lot of money, and your grandmother would have found it quite hard to service and repay this debt. However, due to inflation over the past 56 years, and its consequence (decline in the value of money), your grandmother’s debt is now much easier to repay – $50,000 isn’t worth that much today. So, you can see that with time and inflation, debt becomes more manageable.
Our world has faced inflation, and nothing but inflation. Since the Great Depression of 1929, the money supply has increased constantly. However, what concerns me is the fact that the rate of inflation (money supply growth) is likely to skyrocket over the coming years. Below, I present the money-supply growth rates from around the world:
Euro area+ 8%
Looking at the above figures, you can see that over the past year, a significant amount of money has been introduced into the system. The thesis is that the surging money supply will cause the value of money to drop and make it easier to repay the mountains of debt. “But what about my savings?” you may ask. Frankly, the establishment does not care about your savings. In order to remain popular, the officials almost always cater to the needs of the majority. Today, the majority of the population is heavily in debt. Their backs are against the proverbial wall! Therefore, you can bet your bottom dollar that the rate of inflation will continue to surge and hyperinflation may not be far away.
Some argue that inflation is a good thing, a necessity in the modern economy as it facilitates trade. Personally, I don’t buy into this concept because throughout the 19th century, we witnessed mild deflation, yet our world made huge progress over that period. The next time somebody says that inflation is OK, ask that person if they would like to own shares in a company, if this organization issued and gave away new shares every year? Would they be interested in owning stock in this great company if roughly 10% new shares were being added to its share capital every year? The truth is that nobody in his or her right mind would invest in such a scam! Yet, people find it absolutely normal when the same thing happens to their money stock, otherwise known as savings!
Money is supposed to be a store of value that acts as a medium of exchange. Well, the paper in circulation today does act as a medium of exchange because you can go to Starbucks and buy a cup of fancy coffee, but it surely isn’t a store of value! How can it be a store of value when it buys less and less with every passing year? In fact, the U.S. dollar has proven to be such a great store of value that it has lost 92% of its purchasing power since the Federal Reserve was established in 1913!
Unfortunately, this trend is going to worsen in the future, thanks largely to the loose monetary policy of the central banks. So, you can rest assured that parking your wealth in the “safe haven” of cash is the quickest route to the poorhouse! It is sad but true – cash is trash! If you want to protect your family’s wealth, you have to use the system to your advantage. Put simply, you must get rid of your cash and invest in appropriate assets.
Now that we’ve established that cash is probably the worst asset to own, we need to figure out which assets are undervalued and worth owning. During highly inflationary times, cash declines in value against everything and this is what we are witnessing today. Real estate is soaring, commodities are rising, and the global stock markets are also enjoying the liquidity-induced party. Now, I am sure that in a few years from now, all these asset-classes (with the exception of bonds) will be higher than where they are today, at least when measured in dollars or euros. In other words, I expect paper currencies to continue losing their purchasing power. Furthermore, if my assessment is correct, commodities and equities of emerging markets will outperform property as well as bonds over the coming decade. The advance will be punctuated by severe corrections, but the primary trend is now up.
Furthermore, it may well be that due to hyperinflation the Dow Jones Industrial Average goes to 20,000 within the next 10 years (too much cash chasing too few stocks). However, I can promise you that if that happens, gold will be at $2,000 per ounce and crude oil will reach $200 per barrel or more. The point I am making is that on a relative basis, I expect tangible assets to outperform stocks and bonds by a long way.
Several analysts are now calling the end of the primary bull market in commodities. Below, I present a list of some bull markets we’ve seen over the past 35 years:
1970’s: sugar went up 45 times
1970’s: oil went up 30 times
1970’s: gold went up 24 times
1970’s: silver went up 24 times
1980’s: NIKKEI went up eight times
1980’s – 1990’s: NASDAQ went up 50 times
1980’s – 1990’s: Dow went up 14 times
As you can see from the above, in the past, these previous bull markets took the various items to unprecedented highs as prices surged several-fold. Coming back to the present situation, in the current ongoing bull market in commodities, gold and silver have doubled in value, oil has increased six times, sugar has risen three-fold and stuff like corn, wheat, and cotton haven’t even moved.
Moreover, the public remains oblivious and hasn’t even started investing in this area. These factors combined with the industrialization of China leave very little doubt in my mind that the current boom in commodities is still in its infancy. How high will she go? All I can safely say is that when the public gets worried about its savings and turns to tangibles, the ’70’s bull market in commodities will look like a blip on the radar screen.
for The Daily Reckoning
April 26, 2006
Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication available at www.purusaxena.com
An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.
The above is an excerpt from Money Matters, a monthly economic publication, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly reports, subscribers also benefit from timely and concise “e-mail updates,” which are sent out when an important development in the capital markets warrants immediate attention. Subscribe Today!
Eric Fry, reporting from Manhattan:
“The crude oil market is throwing off more mixed messages than a budding romance. Crude’s alluring price profile seems to be saying, ‘Come and get it.’ But at the same time whispering in our ears, ‘I think it’s time for you to go.'”
For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.
Look at these headlines, from the fall of 1990, taken from Peter Lynch’s book, Beating the Street:
“How Safe is Your Job?”
“The Consumer Has Seen the Future, and Gotten Depressed”
“How The Real Estate Crash Threatens Financial Institutions”
“Uncertainty Rains for the U.S. Consumer”
Doesn’t it seem that those headlines would fit better with today’s economy? In Lynch’s book, he talks about the Barron’s Roundtable he took part in two months after 1987’s “Great Correction”:
“Mr. Zulauf set the tone in 1988 with his opening statement that ‘the honeymoon, from 1982 to 1987, is over’…In between worrying about the killer bear market and the worldwide depression, we worried about the trade deficit, unemployment and the budget deficit…
“When we convened in 1990, the oft-predicted Depression was nowhere in evidence and the Dow had climbed back to 2500 points. Still, we found new reasons to stay out of stocks. There was the collapse in real estate, another calamity to add to the list. We were unsettled by the fact that after seven straight years of up markets (1987 ended with a slight gain over 1986, in spite of the Great Correction), a down market was inevitable. Here was a worry that things had been going too well!”
What? Worrying that things are going too well? That is all but unheard of in today’s economy. After all, look at these headlines, collected over the last few months:
“New Home Sales Soar”
“Consumer Confidence at 4-Year High”
“Low Inflation Fosters Jobs”
“Economic Growth Heats Up”
What do you see today? Interest rates on the rise, a higher unemployment number than the government would like to admit to, skyrocketing oil prices, and, don’t forget – debt, debt everywhere. And yet, consumers continue to buy gee-gaws and gadgets at Everyday Low Prices, their credit card strip becoming worn out as the days go by.
“The first half of 1982 was terrible for the stock market,” continues Lynch.
“The prime rate had hit the double digits, as had inflation and unemployment. People who lived in the suburbs were buying gold and shotguns and stocking up on canned soups. Businessmen, who hadn’t gone fishing in 20 years, were oiling their reels and restocking their tackle boxes, preparing for the shutdown of grocery stores.”
What happened to the air of caution that prevailed in the previous decade?
You know what the old-timers say: Bull markets climb the wall of worry. And as you can see, there’s no worry in the markets today.
Now, for a look at what’s going on in today’s currency markets…
Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis:
“The slow, steady drip that I’m talking about is the euro’s rise versus the dollar, so far, in 2006. It’s been so slow that before you know it, the euro has gained almost 5% versus the dollar.”
For the rest of this story, and for more insights into today’s currency markets, see The Daily Pfennig
Short Fuse, back in Baltimore, with more views…
*** A note from our esteemed junior DR editor, Craig Collins-Young:
“‘The government is taking nearly a thousand dollars of my money each paycheck!’ a friend of mine recently purported while I was visiting her in New York City. ‘Being a public school teacher, we get very little in way of emoluments. With the costs of this city, each dollar is precious. So, can I have some of your dollars? Think of the children, Craig.’
“‘Well, uh, you see…’ I stammered.
“‘What about a revolution or some sort of revolt? I know taxes are important,’ she continued, ‘But from what I understand, the government is fairly profligate with regard to spending our hard-earned dollars. I think I could really use the money in a more efficient manner.’
“‘Ah, you mean imbibing two bottles of Shiraz at the pub on the corner?’ I replied.
“‘Har. Har. What do you know?’
“Well, I don’t claim to know much, but I could offer some information on the opposite side of the issue – that being the Fair Tax. Just the night before our conversation, while enjoying a relaxing train ride from Baltimore, I was reading a book by Neal Boortz and Congressman John Linder dubbed The Fair Tax Book. In it, the writers expound their platform for a revocation of the income tax, the Medicare tax, the Social Security tax, the capital-gains tax…and even the death tax.”
*** Markets make opinions…and rising gas and oil prices are certainly bringing the freaks armed with their asinine ideas out of the woodwork. We’re sure some of you have seen this e-mail, or ones similar:
“By now you’re probably thinking gasoline priced at about $1.50 is super cheap. Me too! It is currently $2.79 for regular unleaded in my town.
“Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50 – $1.75, we need to take aggressive action to teach them that BUYERS control the marketplace…not sellers. With the price of gasoline going up more each day, we consumers need to take action. The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas! And, we can do that WITHOUT hurting ourselves.
“Since we all rely on our cars, we can’t just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.
“Here’s the idea: For the rest of this year, DON’T purchase ANYgasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.
“But to have an impact, we need to reach literally millions of Exxon and Mobil gas buyers. It’s really simple to do!”
“I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP THEM DOWN. THIS CAN REALLY WORK.”
Looks like there are a lot of people who don’t understand the dynamics of supply and demand. Prices go down when people buy less of a good, prices go up when people buy more of a good, and prices go way up when demand surpasses available supply.
Economics Prof. Pat Welch of St. Louis University says any boycott of “bad guy” gasoline in favor of “good guy” brands would have some unintended (and unhappy) results.
“To meet the sudden demand,” he says, “the good guys would have to buy gasoline wholesale from the bad guys, who are suddenly stuck with unwanted gasoline.”
And not to be overlooked is the fact that oil companies do buy and sell from one another. Mike Right of AAA Missouri says, “If a company has a station that can be served more economically by a competitor’s refinery, they’ll do it.”
Right adds, “In some cases, gasoline retailers have no refinery at all. Some convenience-store chains sell a lot of gasoline – and buy it all from somebody else’s refinery.”