THE BOTTOM LINE:

Something is wrong. On Friday the pundits were bellowing that the unemployment rate had fallen to a mere 7.0%, the IPR had risen and, of course, the equity markets cheered. The Grande Dame Dow roared ahead 198 points. Gold and silver sank further as they have been for 6 weeks. 

It is now becoming common thinking that the Fed must “taper” Quantitative Easing. Common thinking is very dangerous, indeed. It causes volatility as markets are whipsawed, with futures wagging the Dog’s tail. 

Of course, eventually it must be tapered but that will not necessarily revive the country’s economic problem. In fact take a quick look at the ten year Treasury last week. Interest rate vigilantes are just waiting with baited breath to revert that market – and it will not be gradual – it will be knee jerk. 

“So what”, you ask? 

Well, higher interest rates will be very nice for insurance companies (now reeling under impending Obama Care) and seniors (reeling under financial repression, an insidious tax on savers) but as interest rates rise housing, capital investments and the debt-burdened American consumer will have to pay up. Savers will benefit. Increased saving is not what our legislators in Washington want to see at this time. 

Ever wonder why Bitcoin has increasing appeal? Think about that. Take a look at Treasury rates between January 1 and December 6, 2013. As you can see the Ten Treasury year bond has fallen as yields have risen 102 basis points. Be careful what you ask for, Dr. Yellen, the Bond Vigilantes may still control this picture. 

In other words, is the US economy really ready for higher interest rates?

While the economy may be looking slightly less torpid, the banking system is still very much on the wane. The money multiplier continues its descent to lowest level in the history of the time series, resting now at $.71 but clearly on the downtrend. The Fed’s economists ignore the artifact even though Milton Friedman scolded the Fed for not increasing the money supply during the Great Depression in the face of the multiplier’s shrinkage. Several years ago Fed Chairman Bernanke responded to him that the Fed would not make the same mistake this time. Unfortunately the Fed has acted implementing several QE programs. The results are clear and definitively negative. We are in a pernicious deflationary environment. Gold and silver are shouting this fact. The graph below, from the St Louis Federal Reserve Bank, conjures the vision of a rocky, mountainous banking bottom descending yet to its deepest depths. 

Hence the title of this paper, “Challenger Deep.”

Evidently, creating asset “bubbles” as economic policy is not the way to sustain a vibrant economy. The money gods have spoken. That is their message. 

Now we have a third bubble (non-hard asset resource equities) inflating in the open. It is strictly a monetary phenomenon. 

Reporters are cheering. They should be warning. You know the saying. I think my friend Dennis Gartman may have developed this and it is so true to life. 

“When you are yelling, you should be selling and when you are crying you should be buying.” It is just a matter of determining how long this situation will exist. 

Perhaps I can add another question, “When the MSNBC pundits are cheering, should you be fearing?” 

Printing trillions of fiat dollars has not restored a sustainable US economy. Unemployment and underemployment are far too high after 60 months, labor force participation is at historic lows, real wages are stagnant, college costs exorbitant, medical care is likely to be more, not less, expensive, a new higher debt ceiling almost a certainty on February 7th 2014, unemployment benefits are to be lengthened once again, and consumers are teetering. 

We have an epiphany to encounter before the turn comes. When it does, of course, hard assets will be seen in hindsight as a negative bubble. Unless there is a miraculous Deus Ex Machina we have 1 to 5 years of economic headwinds ahead. Challenger Deep indeed!

I might add any of the St Louis Fed’s money multiplier time series. They are all signing the same song. QE programs have enlivened the equity markets. But they will kill the bond market in due course. Gold and silver are just the beginning of the story. Equities, excepting equities on hard assets, are approaching “Bubble Territory” (no one can call top of a bubble). Housing must follow suit as interest rates rise. Consumers must resort to saving to attempt to restore retirement wealth for future family generations. Most are just beginning to be aware of the dilemma facing their legacy in future generations. 

A Succession of Asset Bubbles 

When will this all end? I don’t know. We will have an idea when the multiplier makes a final bottom and turns up and the velocity of money accelerates. 

Most observers and TV personalities do not focus on the history of the past two gigantic asset bubbles. From 1995 through 2000 the Dot Com bubble reared its head. Then Washington inflated the housing bubble in response to the bursting of the Dot Com stocks. A close examination of the velocity of money during these two periods shows how damaging these two bubbles have been. 

During the Dot Com bubble velocity soared only to decline thereafter. Then the massive housing bubble ballooned and velocity recovered though less than previous highs. In 2007 the housing bubble began to deflate and velocity tanked to the lowest level ever. In 2010 velocity recovered a small amount as you can see below. We only have data through mid-year 2013 but clearly the ability of velocity to accelerate is declining in the face of successive and very destructive asset bubbles.

Evidently, creating asset “bubbles” as economic policy is not the way to sustain a vibrant economy. The money gods have spoken. That is their message. 

Now we have a third bubble (non-hard asset resource equities) inflating in the open. It is strictly a monetary phenomenon. 

Reporters are cheering. They should be warning. You know the saying. I think my friend Dennis Gartman may have developed this and it is so true to life. 

“When you are yelling, you should be selling and when you are crying you should be buying.” It is just a matter of determining how long this situation will exist. 

Perhaps I can add another question, “When the MSNBC pundits are cheering, should you be fearing?” 

Printing trillions of fiat dollars has not restored a sustainable US economy. Unemployment and underemployment are far too high after 60 months, labor force participation is at historic lows, real wages are stagnant, college costs exorbitant, medical care is likely to be more, not less, expensive, a new higher debt ceiling almost a certainty on February 7th 2014, unemployment benefits are to be lengthened once again, and consumers are teetering. 

We have an epiphany to encounter before the turn comes. When it does, of course, hard assets will be seen in hindsight as a negative bubble. Unless there is a miraculous Deus Ex Machina we have 1 to 5 years of economic headwinds ahead. Challenger Deep indeed!

What to do? 

1. Budget for lean days. 

2. Buy gold and silver as hard asset backstops, if possible. Barter may someday be necessary. They are cheap and will likely become cheaper. 

3. Look for sustainable opportunities in the Discovery space – particularly precious and industrial metals (such as silver and copper – Nu Legacy, Pershing Gold, Terraco Gold come to mind), Fertilizers (particularly phosphates – Arianne Resoruces), potable water technology and water assets (nuclear desalination companies – Babcock & Wilcox comes to mind), arable land opportunities, cost effective medical technologies with breakthrough potential (Senesco Technologies and Neuralstem come to mind). Buy any real Quality of Life investment opportunities. 

We will, of course survive, this dark period of economics if we act now. On the bright side there will be investment opportunities that abound. They are beginning to appear already. Try hard to be there when the bottom is in. Wait for the turn. Make sure your investment can sustain itself. The great wealth opportunities will be for the taking.

The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin. We own shares in Senesco and Neuralstem and Advise Arianne Resources.