Wednesday, April 29, 2009

An Open Letter

I wrote a letter - or should I say the modern quasi-equivalent of it - to Jon Nadler of Kitco Silver in response to This Article:

Here's the letter.

I enjoy your writing very much and read your Kitco posts almost daily.

I live in London, Ontario. I am 24 years old and have invested since I was 13 (co-signed RSPs by my parents, and my first brokerage account when I turned 18).

I am a precious metals investor - actually I call myself a SAVER, but more on that in a sec. I favor silver more than gold, as there is currently less than 1/6 of an ounce of silver available on the investor market for every human being on earth, whereas there is over 3/4 of an ounce of gold. Also historically if gold becomes referred to monetarily by the general public (usually through mass panic), it exponentially grows in value through good old fashioned demand. Once its price becomes too high in currency terms for the average investor, a large chunk of demand inevitably turns to silver which is obviously cheaper.

But enough on metals. I could talk about them for hours. There are a few points I would like to make about the Bloomberg article you cited.

First of all, the article treats the "Deflation" of the private sector balance sheet as if it is the defining point of some new long-term trend. It is not long term by any means. Take a monthly chart of the CPI (even with its ridiculous government "economist" manipulation). CPI, rising prices - the symptom of base money supply increase - has gone up ever since the 1950s. Inflation is a guaranteed thing. The saying should be "THREE things are guaranteed in life".

The US and Canada both currently have a government whose financial activity equals over 50% of GDP (Federal, State/Province, municipal taxes combined). It is a proven fact that governments do anything and everything far less productively than the private sector. Governments are not concerned with profits as they do not operate under the entrepreneurial umbrella. They don't have to pine and advertise for your dollars. They just pass laws that says you get to spend time in jail if you don't pay. To top it off, being completely unconcerned, ignorant, and oblivious to the concept of profitable venture, all of their financial decisions are made for political reasons. Hence the massive losses (see US Postal Service or CN Rail before it was bought out private).

Government employees are roughly 40% less productive than private sector employees. The only place hiring right now is the government. Millions of jobs being stolen from the private sector. Millions of people that are now detracting from our GDP versus adding to it in the form of true production (not the hedonics garbage the government numbers throw at you either).

So when our economy finally does turn around what will happen? Automatic inflation. Bond yields will spike, the Fed will actually have to raise rates in a few years in order to stem the dollar destruction.

Short term deflation follow by long term intense inflation or even some hyperinflation.

And here's an even scarier thought. Who stands to benefit from such things?

Consider the government. Now taking ownership of a huge chunk of the financial institutions. Hence, taking ownership of billions upon untold billions in loans. Loans against property, against cars, against businesses, buildings, etc. It is no new story that the governments of Western civilization are expanding in an exponential manner. Creating artificial demand when the market is trying to curb it because it never should have existed.

First you have trillions in loans issued to a massive population. The largest spending binge by far in the history of mankind by any nation. The banks hold the actual assets against the loans as collateral (not to mention that they use fractional reserve banking so the assets they hold have technically costed them 1/9th of the intrinsic value).

The loans go bad because of a decade of government intervention and guarantees creating deteriorated standards and ridiculous requirements for massive amounts of credit. And because a good 50-60% of this demand is fake (again with the government thing).

The banks become insolvent overnight as they have hardly thought to keep up reserve levels with even the most dire analysis of their loan portfolios. Millions of loans go bad. Billions of dollars of actual wealth is repossessed by the banks and in turn by the government who have stepped in to "help".

Next comes a short-term period of deflation as the private money supply contracts rapidly in the landslide of panic. The deflation makes the debt-load of citizens even more unbearable under crushing unemployment and still-way-too-high prices for the barest essentials. The banks repossess more along with the government.

In the meantime the government has been desperately spending like crazy to offset the natural market reaction of less spending, creating artificial demand. Here's the fun part. They may have even perfectly balanced the deflation of private money supply with the inflation of government money supply. But it is not the money supply alone that gives the death blow to every day families. It is the velocity of that money supply that truly causes prices to hit astronomical levels. Once the government spends those new dollars into the rest of the economy (already factoring in that you are getting 40% less for your money anyway, giving you an intrinsic 40% increase in base productivity prices).... that's when your crushing inflation hits.

But all the good that the inflation would do the overburdened consumer base is too late coming. Too many of them have foreclosures come and gone. Too many of them have their excess one (or two or three) new financed cars towed away by the repo man. Now that hyperinflation comes, it is the government and major banks who hold all the assets.

Not only do they get the wondrous benefit of having their massive debts shrink to miniscule levels, that now hold the real assets that will go UP exponentially in the wake of such a beautiful thing. Thus you have the largest transfer of real wealth of this (and probably the last few) centuries. I have learned in my own study of economics (I am almost completely self studied and fiercely believe in Libertarianism and the Austrian School) and of history that 99 times out of 100, the big players win.

Goodness this is long winded. I should have posted it as "An article of my own". And here I thought it would be only a few paragraphs! Guess I'm not going to be elabourating on my precious metals "SAVER" analogy. I'll just say I only have a small savings account in currency, and the majority of my savings in silver and some gold. My INVESTMENT pay yields (income). My SAVINGS don't lose value every day.

Anyway I hope you actually end up reading some or even hopefully all of this. I know you are probably busier than hell right now but if you do manage to read it please send me some kind of a response. It would make my week!


Derek Blain.
Avid Kitco Silver Fan

An Update on some new positions:

July Puts on the following companies:

TCO @ 10.00

MFC @ 12.50

July Calls on:

SKF @ 100.00 and 80.00 strike prices

Increased my position in PST October calls @ $60.00 due to high selling volume. Picked up more contracts at $1.20.

Sold ZNN Motor company on speculative jump at $5.26/share

Still holding SST.V shares, waiting for the conversion to Silver Wheaton shares :) 400% gain.

Still holding CDE shares. They have recently spike up over $1.30/share

Still holding Baffinland Iron Mines shares bought at $.175/share (Currently $.395/share)

Happy trading all. One area I will also be looking for a few excellent opportunities in Asian water treatment companies. Also agriculture companies are going to be excellent purchases for the next decade or two. Much less fertilizer being purchased this year due to far less credit availability. This will lead to highly reduced yields on crops and therefore less supply. In population dense countries this will cause very high price spikes in food commodities. Sugar is also an excellent buy at current price levels (the actual commodity).

Again if anyone has any questions please feel free to email me or if there is anything you think is an interesting play I'm always looking for new ideas to look in to.