Archive for October, 2009

Currency crisis ahead? Part 2: Credit limit reached

Thursday, October 29th, 2009

Since we wrote the last article, the first symptoms of a US dollar short squeeze are appearing- rising USD and falling stock prices. From Market Club’s trend analysis of the US Dollar Index, you can see that it has moved from a strong down-trend to a weak down-trend. Should the USD appreciate further, it is a good opportunity to sell it in this temporary surge of strength because it is a structurally weak currency in the long run.

However, what can upset this temporary strength in the USD is a currency crisis (or semi-crisis). As we sniff around for information and insights, we can’t help but smell some whiffs of a brewing USD currency crises in this coming November. But this is a tough call for us because it is based on a very strong gut feel that there’s something fishy going on that only select few insider knows. Not only that, such a crisis will be at odds with a short squeeze of the USD. Thus, it is possible that we may witness a big move in the global financial markets in November (i.e. a surge in volatility).

So, what may trigger a possible currency crisis next month?

For this, take a read at this recent news report:

Roughly $211 billion separates what the country [United States] owes and its self-imposed credit limit.

And by Friday, after another week of massive debt sales by the Treasury Department, that gap will likely have narrowed considerably.

It is now expected that the $12.104 trillion debt ceiling could be breached by the end of November.

You see, the US government has its own credit limit (albeit self-imposed)just in the same way you have a limit on your credit card. If a person relies on his credit card debt for his daily spending and hits the credit limit, he will in default unless that limit is increased.

Therefore, lawmakers will have to vote to increase Uncle Sam’s credit limit, as they had always done more than 90 times since 1940. If not, the US government will have to shut down (the last shut-down was in 1995). But a shut-down is hardly a show-stopper. What will stop the show is that this will imply a default in the US government debt, which means the value of US Treasury bonds will be marked down. That will crash the value of foreign nations’ dollar reserves (watch out, China), which will have major international repercussions. Not only that- since many banks’ toxic assets are replaced with ‘safe’ Treasury bonds, this will result in their assets turning toxic again.

It is assumed that Uncle Sam’s credit limit will be increased, since the alternative will be unthinkable and that there’s not one instance in history where it did not happen.

But there are a few hitches. Firstly, lawmakers usually vote on an increase before the credit limit is breached. Right now, they are busy with health reform and intend to talk about the credit limit after the former is wrapped up. But since the health reform is a highly divisive issue, it may take longer than expected. Furthermore, some law-makers may even threaten to veto any increase in credit limit as a bargaining chip in the health reform debate. Also, given the out of control debt position, some law-makers may demand more fiscal responsibility from the government.

So, it is very likely that the vote may come after the credit limit is breached. That means that the Treasury will be hard pressed to use every trick (including the dodgy ones) to get things going. Since the financial system is still under the Treasury’s life support, what will happen when credit is cut off while lawmakers wrangle against each other?

Currency crisis ahead? Part 1- Potential short squeeze on the US dollar

Tuesday, October 27th, 2009

Jimmy Rogers had been saying that he expects a currency crisis soon, maybe this year or next year. While we agree with Jimmy Rogers, that in itself is not particularly insightful. The difficulty is in predicting the timing of the currency crisis.

As we explained the dilemma of the world’s major creditor nations in What if the US fall into hyperinflation?, it is clear that the current status quo is an accident waiting to happen. The question is, in what form this accident will look like. Already, the rise of the Australian dollar and Brazilian real is described as “bubbles” by some pundits.

Unlike short selling of stocks, there is an unlimited supply of US dollars (which is the world’s reserve currency) that can be borrowed at effectively zero interest rates to be ‘shorted.’ Since the exchange rate of currencies are relative, shorting the US dollar is the same as going long on other currencies. As we said before in Return (and potential crash) of the great Aussie carry trade, this state of affairs is indeed a paradise for speculators.

Indeed, shorting the US dollar is so popular that central bankers of the creditor nations must be getting nervous. What if, the selling momentum gathers steam and snowball into a US dollar crash? There will be hell to pay should that happen. Possible outcomes of such a scenario include more bank collapses, trade war, hyperinflation and so on (see What Happens If the Dollar Crashes). Therefore, we expect coordinated central bank intervention in the currency markets soon to thwart such an eventuality. The longer they wait, the closer the point of no return will arrive. If coordinated actions are not forthcoming, individual unilateral actions will be taken (e.g. Brazil recently announced a tax on speculative capital), which is less desirable because the outcome tend to be more messy, unpredictable and contradictory to the objectives of other nations.

What will happen to the financial markets when central bankers really do that?

For speculators who are taking advantage of the higher and higher interest rates in Australia (i.e. borrow are zero in the US, buy AUD and then collect the higher interest yield), a rising US dollar will result in an instantaneous loss. Rising interest yields in Australia will not cover that loss since it has to be parked for an extended period of time to bear the returns. Therefore, speculators will pull their cash out of Australia immediately to buy USD. That in itself will result in the USD appreciating further, resulting in further losses for the existing speculators who have yet to pull their cash out, prompting them to panic and rush for the exit. For the speculators who are punting on the stock market, they will liquidate their stocks and rush for the exit too. The same can be said for the commodity markets, including gold and silver. This is a classic short squeeze, which will occur when the momentum and sentiments are at the extreme.

But this is just a better outcome. In the next article, we will talk about a possible Black Swan in November that may trigger a real currency crisis. down, but is UP!

Monday, October 26th, 2009

If you have been trying to go to to order our book and found that the web site is down (it is still down at time of writing), please accept our apologies. We have shifted the entire site to instead. The links have been updated.

Release of new book: “How to buy and invest in physical gold and silver bullion”

Sunday, October 25th, 2009

Finally, our book, “How to buy and invest in physical gold and silver bullion,” is ready!

We know many of you want to invest in physical gold and silver bullion but do not know how to get started. So, this book is written to help you get started. It is written for the complete beginner in mind. There are two parts to the book:

  1. Background information on the history of money, inflation, deflation and a correct understanding of gold. Although most of the materials in this part of the book are available on this site (it frequently quotes this site), they are scattered throughout in bits and pieces. Therefore, this book will present them in a consolidated and organised manner, which is most useful for the beginner. However, there are also some new material not found on this site as well as ‘enhancements’ to what is already freely available here.
  2. The second part of the book gets you started in learning how to buy physical gold and silver bullion. It has information on storage, forms of bullion, how to avoid the fakes, bullion coin specifications, a section on silver and tax tricks used by the rich.

In total, this compact book has a total of 81 pages. Our feeling is that some (or many?) people will find that this book is written quite concisely (with a few examples for the more difficult concepts), which means that every word counts.

In addition, this web site complements the book. From time to time, as additional supplementary materials are available, we will post an update on that web site. Also, our list of recommended bullion dealers will also be updated from time to time. So, you can subscribe to the emailing list (at the right side of the web site) to be notified of updates.

Best of all, if you help us sell our book, we will share 50% of the profit! Click here for more details. So, if you have a blog, web site, Facebook group page and so on, you can join our affiliate program to earn extra cash.

Finally, if you encounter any problems buying that book (both the e-book and physical edition), please let us know. We don’t expect any problems, but in a world of Black Swans, who knows? Also, please give us any feedback, especially the physical edition of the book- this is the first time we’ve outsourced to to print, deliver and process the sales of the physical book and we need your feedback.

Remember, at a time when gold prices are trending up, if you are investing in physical gold and silver bullion, you are a still contrarian (see Is long gold mainstream?) because the crowd are investing in ‘gold.’ So, why wait? Buy the book now! 🙂

Forum discussion: Immigration policy, fake GDP & suspiciously low unemployment rate

Saturday, October 24th, 2009

One of our readers had this to say at the forum,

The policy change of the new federal government to high immigration (the immigration revolution) for Australia is causing high demand for services and resources and is bidding up the price for real estate.

It is doing no favours for the current population.It is making life harder and planning for the future more difficult. Haven’t we been told that water resources are running low and farm land is becoming less productive, etc. Also its politically incorrect to challenge since the media/Labor equates criticism to immigration as racism well I think that it is just plain suppressive.

About that recession that we never had I think we should look at the stats again the measure of GDP is skewed. I am not a nation but if I was my income would have gone up a fraction according to the current measurement of GDP for that quarter however if I was to measure me as an individual ( which I am ) then my income went down. How can this happen? The government used a quirk in the figures to fool us. This is the core of it “The number of immigrants rose at a higher percentage rate than the growth in the economy” so it was a recession they just didn’t tell us. The high immigration policy has been going on since then so our growth is still being padded out by this quirk no wonder we do not feel the recovery as much as we think we should.

Also another quirk is that our unemployment rate is suspiciously low some of this this seems due to the education revolution reclassifying some youth from unemployed to students with no real change in status and the compression of wages by cutting hours worked we should measure something like FTE (full time equivalents) to get a real picture but this isnt being done. The number of hours worked in the whole economy has been dropping for month’s now and only in the last month did it rise and one month is not a trend.The whole unemployment measure needs an overhaul and perhaps the ABS needs financial independence like the reserve bank.

What are your views? Click here to discuss at the forum.

What’s the biggest threat to Google?

Thursday, October 22nd, 2009

Following from our previous article (see Google vs Rupert Murdoch- who will win?), we will look at what is the biggest threat to Google. For those who are interested in investing in the technology sector, this is one of the things to watch out for in your business analysis because it will have major flow-on implications on other technology and media businesses in the long run. For those who are thinking of starting an Internet/technology business, it will determine which sides of the dividing line (information as commodity vs free and expansive information) that you will be supporting (or switch sides to).

For starters, Microsoft’s new search engine, Bing, is not the biggest threat. Bing and Yahoo! are there to keep Google competitive, but they don’t pose a long term strategic threat to Google. So, assuming that information will remain free and abundant for the foreseeable future, what can deal a long term mortal blow to Google?

Remember, in our previous article, we wrote that

… information (collectively) is free and abundant, but consumers’ attention (for each individual information provider) is scarce.

And here is the beauty of Google’s business model- it sells access to consumers’ attention.

For a rival to erode the long term competitive advantage of Google, it must be able to:

    1. Steadily gain more and more attention of consumers over the years
    2. Shut out Google from what gained the attention of consumers

    Any rival that can fulfil these two conditions will undermine and erode Google’s capability to sell access to consumers’ scarce attention. Microsoft’s Bing may be able fulfil the first criteria, but it cannot fulfil the second one. After all, the search engine robots of both Google and Bing trawl in the same playground of freely available information.

    But there’s a potential rival in the horizon that fulfils both conditions: Facebook.

    At first glance, Facebook and Google seem to compete in two different market space. Some may argue that they complement each other. But there’s one problem for Google- its search engines cannot penetrate through the wall of Facebook and index the consumer-generated content. With each of the 300 million Facebook users who can potentially interact with each of the other 300 million users (via status updatess, posting and commenting of pictures, engage in forum discussions, play games and so on), plenty of content are generated everyday that is outside the view of Google.

    Then there’s a disturbing trend that may perhaps be happening right now- as people spend more and more time in Facebook, more and more ‘Internet’ activities are migrating towards it, which in theory can make it an ‘Internet’ within the Internet (we will call the former “Facebook world” and the latter “public Internet” from now on). For example, as Facebook contains more and more interactions between people, more people are using Facebook messages in favour traditional emails to communicate with each other. We can imagine a possible future where Facebook messages supplants traditional emails. Also, it is already possible to host forum discussions at Facebook groups within Facebook world, which in theory, can replace public Internet forums. Software developers can also develop Facebook applications, which in theory, can function as services (in Facebook world) normally found in the public Internet (which is the domain of Google). For example, what is stopping Facebook to host blogs, polls, newspapers, forums and other content inside Facebook world?

    Facebook is also intruding into the public Internet. Through its Facebook Connect feature, people can bring their Facebook identity into the public Internet to take part in discussions, which can then be tracked by Facebook. This feature serves to draw people from the public Internet into Facebook world.

    Obviously, Google has already seen this threat as you can see from this article. We believe that it is no coincidence that Google’s next big idea product, Google Wave, is a competitive threat to Facebook’s social media function.


    Meanwhile, for those interested in trading the technology stocks, our friends in Market Club has this to say about Nasdaq- Is the NASDAQ Now in Thin Air?.

    Google vs Rupert Murdoch- who will win?

    Tuesday, October 20th, 2009

    We all know that News Corp’s Rupert Murdoch hates Google. Six months ago, he launched an attack on Google,

    Rupert Murdoch threw down the gauntlet to Google Thursday, accusing the search giant of poaching content it doesn’t own and urging media outlets to fight back. “Should we be allowing Google to steal all our copyrights?” asked the News Corp. chief at a cable industry confab in Washington, D.C., Thursday. The answer, said Murdoch, should be, ” ‘Thanks, but no thanks.’ “

    Google, with its huge armies of software robots and off-line human agents (e.g. the book scanning project, Street View), is like a huge vacuum cleaner that tries to suck in the entire world’s freely available information in order to index, analyse and categorise them.

    The end product of their effort is a wealth of meta-information (information about information) and information in which they grant access to the masses through their famous search engine (and other lesser known information services). In this information saturated world, the divide between the haves and have-nots lies in the line between those who are information-rich and those who are information-poor. Google, with their wealth of meta-information, is the gate-keeper for those who wants to cross from being information-poor to information-rich.

    Paradoxically (counter-intuitive, we would say), unlike conventional businesses, Google does not charge for access to their meta-information (who pays when doing a Google search?). For example, a large percentage of you reading this blog are brought here free-of-charge by Google’s search engine. Interestingly, you may notice that Google provides all kinds of free services (e.g. Gmail, Google Maps, Google Doc, Picassa, Google Reader, Blogger, YouTube, etc). So, how on earth does Google makes its money if it is giving things aways for free?

    To understand this paradox, we have to appreciate the entrenched position taken by two diametrically opposed camps in the digital world. We will requote Graeme Philipson from an article we wrote three years ago (see Analysing Web 2.0 businesses: Shoutwire vs Digg case study),

    We are not even a decade into the digital millennium and already the battle lines have been drawn. Two camps have emerged, each with widely divergent views on the nature of information, who owns it and how it should be distributed.

    The forces are at this stage evenly matched, and it is not apparent from the day-to-day squabbling which side will emerge victorious. But one side must, because their views are diametrically opposed and can?t coexist in the long term.

    On one side are those who believe information is a commodity that can be owned, bought and sold, and its distribution controlled. This naturally leads to a restrictive view of information. This group comprises most of the music, publishing and film industries, and most hardware and software companies.

    On the other side are those who believe that information by its nature should be free, and that its distribution should be uncontrolled. This viewpoint naturally leads to an expansive view of information. This group comprises the open software movement, a few far-sighted computer companies (Google is the best example, but also includes heavyweights such as IBM and Sun), and most consumers.

    Naturally, businesses that deal with digital information (e.g. data, music, software, movies, etc) will take the view that information is a commodity. Famous companies in this camps include Microsoft, Apple and as expected, Rupert Murdoch’s News Corp.

    On the other side, most who belong there (i.e. those who believe in free information) are not profit maximising businesses- they consist mainly of consumers (of course, who do not like free information, music, movies and software?) and non-profit open-source movement. Very few profit maximising businesses belong to this camp- the big names include IBM, Sun and the 600-pound gorilla, Google.

    So, at the very heart of Google‘s business model is the idea that information is free and abundant. Think about it: if information becomes a scarce commodity, Google’s business model will collapse- its ubiquitous search engine will die a natural death as it will not be able to index restricted information. Without its search engine, Google’s monopoly will cease and its revenue will dry up. That’s why Rupert Murdoch’s attack on Google is akin to trying to drive a stake at its heart.

    Now, let’s take a look at current reality. It’s true that most information is free (at least for the non-specialised ones that the masses are after). This blog that you are reading now is an example of free information. It is also true that there are too much information available than you can consume. For example, there are millions (okay we made that number up, but you get the drift) of investment blogs that can supply everyone with ideas, news and regurgitation of facts and figures and are vying for everyone’s attention.

    So, here comes the crucial point to understand: information (collectively) is free and abundant, but consumers’ attention (for each individual information provider) is scarce. Actually, each feed of one another in a positive feedback loop- to attract the attention of consumers, businesses are forced to give more and more information away, which in turn causes information to be more abundant (collectively), which in turn makes consumers’ attention even more scarce (for each individual businesses), which forces businesses to give yet even more information away.

    And here is the beauty of Google‘s business model- it sells access to consumers’ attention. For example, at any Google search results, you will find paid advertisements on the top and at the side. By using Google’s search engine, your attention is captured by Google. Then as you click one of the search results, you may stumble into say, this blog site. Here, we have captured your attention that we sell to advertisers, either directly or through Google. So, why is Google giving away so many free services (many of which are integrated with each other), so much so that you can even organise your life around it? The short answer is that it is trying to monopolise more and more of your attention within its domain.

    Now, let’s look back at Rupert Murdoch’s plan of bringing paid content into his agenda. Will his plan work? By introducing paid content, News Corp will lose the attention of millions of consumers who are not willing to pay. Not only that, the Google search engine will no longer be able to index and analyse News Corp’s information. That means it will lose even more consumers’ attention through the loss of search engine traffic.

    In a world where information is free and abundant and attention is scarce, that attention vacuum vacated by News Corp will be filled quickly by other information providers. In fact, this will be windfall for them and a mortal blow for News Corp. If News Corp attempts to make up its loss of attention by improving the quality of its information tremendously, no one will know about it because Google will likely to retaliate by imposing an information blackout on News Corp.

    Putting the politicians on notice

    Sunday, October 18th, 2009

    Over the weekend, the Reserve Bank of Australia (RBA) governor, Glenn Stevens, surprised the financial markets with his unusually hawkish stand on interest rates. In response, as this news article reported,

    Financial markets responded by pricing in the most rapid series of interest rate rises Australia has seen for 15 years. Markets now predict that the Reserve board will raise rates at seven consecutive meetings, lifting its cash rate from 3 per cent 10 days ago to 4.75 per cent by May and 5 per cent by July.

    As we wrote back in July (see How are central bankers going to deal with asset bubbles?), under the influence of William White of the Bank for International Settlements (which is dubbed as the central bankers’ central bank), there’s a sea-change in central bankers’ thinking. Glenn Steven’s aggressiveness is the result of such a sea-change. Our long-time readers should not be caught by surprise at this, unlike the financial markets.

    Economists like Professor Steve Keen reckons that if the RBA really carry through its threat that way, it will be a big mistake. The problem with monetary policy is that it is an extremely blunt instrument. Though rising interest rates can put a brake onto the growth of dangerous debt-fuelled asset bubbles, it will also constrict other sectors of the productive economy as well. The risk is that the productive sectors of the economy may be crippled, bringing down the rest of the economy along with it, and as a result, burst the existing asset bubbles in a spectacular way.

    Therefore, what is needed is a very precise tool that can target asset bubbles specifically while leaving the rest of the economy alone. Unfortunately, the RBA do not have the power to to enact such a precise policy tool- they can only change the interest rates lever. On the other hand, the arm of the government that are controlled by politicians has the power to formulate such a tool. Very unfortunately, we have politicians who are unwilling to attack asset price bubbles (and worse still, inflate the bubble even more), due in part to control of vested interests and fear of losing elections.

    The outcome is that we will have politicians (both at the State and Federal level) and the central bank engaging in policies that are uncoordinated and mutually incompatible. Unless that change, there’s a significant risk of loss of control of the economy by the government. Should this happen, the most convenient scapegoat will be Glenn Stevens as he will be accused as the man who bust up the Australian economy. But for us, we will point the finger at the Rudd government because they understood what the root cause of the GFC (see the essay written by Kevin Rudd here) but instead, not only did nothing to deal with Australia’s towering debt levels, but also introduced policies that increase the risk of a home-grown credit crisis in Australia (the most notorious is the FHOG). The State governments are not any better either.

    The politicians must be put on notice.

    Unemployment in Weimar Germany

    Thursday, October 15th, 2009

    Since the powerfully rally several months ago, there are many economic indicators that seems to point to an economic recovery (there are also indicators that point to worsening economic conditions). In Australia, we have the ‘honour’ of being the first Western developed country to be on the road to recovery, with unemployment rate actually falling. The Reserve Bank of Australia (RBA), in the belief that emergency threat of deflation is over, decided to raise interest rates (and indicated that more rate rise will follow).

    For the bears (particularly for those who are in the deflation camp), this is a very trying time. Some of them even seem to be throwing in the towel (e.g. Gerald Minack).

    But is it really blue skies ahead?

    Our view is that, when governments print copious amount of money, mirage of prosperity can appear. In fact, money printing, in addition to doing wonders for stock prices (see Should you be bullish on stocks?), can also do wonders for the unemployment rate. Let’s take a look at this book, The Economics Of Inflation- A Study Of Currency Depreciation In Post War Germany, written by Costantino Bresciani ? Turroni, an economist who lived through the German Hyperinflation of the 1920s,

    In the summer of 1922 unemployment practically disappeared. It appears that?in spite of the gaps caused by the war in the ranks of the working population?the total number of individuals occupied in industry, agriculture, commerce, public services, etc., was greater in 1922 than before the war.

    Next, we will show you the graph of the unemployment rate:

    German unemployment rate 1913-1922

    German unemployment rate 1913-1922

    As we can see, in the midst of hyperinflation in Weimar Germany, as the standards of living of workers collapsed (as the German mark depreciate against the US dollar), the German economy had made great ‘strides’ in the area of unemployment!

    So, don’t be surprised if the US economy’s unemployment numbers actually improved in the months to come. This need not necessarily be a sign of prosperity. Instead, it can be a sign of inflation.

    What can spark a USD rebound in the short term?

    Tuesday, October 13th, 2009

    Back in April last year, we wrote in What if the US fall into hyperinflation?, countries like China, Middle East and Russia will be taking two-pronged action:

    1. Slowly and quietly diversify away their US dollar reserves. Obviously, none of these countries will be doing so while talking about it with their megaphones- the US dollar will crash straight away if they act so foolishly.

    2. Since there is so much to lose from a collapsing US dollar, we can be sure that central bankers around the world are collaborating together to avert a sudden loss of confidence in the US dollar. If possible, they may even want to engineer a rise.

    The first point is old news. Blogs and the mainstream media have reported on that extensively (e.g. US dollar rout gains momentum). Everyone knows that. The strong down-trend in the US dollar is testament to the fact that the majority are shorting the US dollar. The carry trade that we wrote in Return (and potential crash) of the great Aussie carry trade is an example of such.

    The problem with the first point is that given the strong down-trend of the US dollar, foreign central bankers must be getting worried that selling of the US dollar can eventually become a ‘bubble,’ which implies a crash in the US dollar. Therefore, we can expect that something will be done sooner or later in the name of ‘preserving’ their export trade. It is time to be on alert for a short-term US dollar rebound, which is likely to be coupled with falling stock prices (see Indicator turned bearish despite high in index) and falling gold prices. Indeed, this little news article has been reported in the Financial Times:

    Asian central banks intervened heavily in the currency markets on Thursday to stem the appreciation of their currencies against the US dollar amid fears that their exports could be losing ground against China.

    The mainly south-east Asian countries have been spurred to defend the competitiveness of their currencies by China?s decision to in effect re-peg the renminbi to the dollar since July last year.

    The question is whether these currency interventions will be coordinated or haphazard among the central bankers. But we can be sure that interventions will increase as the rout of the US dollar continues.

    But make no mistake about this: in the long run, the US dollar will weaken.