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Deflation, Greece, Spain, Bear Market…main topics at Money Show!

May 17, 2012

The Las Vegas Money Show attracted some 2000 traders and investors, May 14-17, 2012!

I just finished with 4 days at the Las Vegas Money Show, some 300 workshops, and some great presentations. Steve Forbes, Steve Hochberg, Andrew Busch, Brien Lundin, Peter Schiff, Mark Skousen,  and Jim Jubak were some of the speakers at this conference. The main messages at this conference were the problems in Europe and the likelihood of this situation creating a serious banking and deflationary crisis in the coming months and years. Why are the inflationary pundits likely wrong…about the coming deflationary environment that is emerging?

First of all, our money system today is a digital system with high-speed computers as the means for distributing money units. Today, some 96% of all money transactions are done via electronic transmissions and exchanges. This is unique to 2012 and much different from the markets in Zimbabwe (2009-10) and Germany (1923-24). Both of these hyper-inflations were caused with a PAPER monetary system. Barrels of paper were the means for increasing the money supply in the markets and then increasing prices of goods and services. Today, we have only about 4% of all money transactions done with PAPER. Does this image create a mindset of hyper-inflation (picture taken from Germany in 1924)?

Where are all the ‘paper’ notes today? Only some $900 billion in dollar notes are in circulation today. Yet we have $trillions of digital units circulating between all the TBTF banks and other non-bank financial institutions. These digital units are not getting to real consumers to use for spending, however. Let’s remember that some 70% of spending is done by consumers. Consumers, today, are short of money units to spend and this limits the possibility of hyper-inflation (for most goods and services). So where are all the digital units going today? Let’s get this image in our MINDS when we think about today’s money system:

Most of our money units today are stored in cyberspace as digital numbers. Central banks create new units (out of nothing) and ‘type’ into their accounts whatever number they desire (we call this QE). These units then can be used to increase the accounts of other dealer banks or the financial accounts of governments. These units are not getting to real consumers for immediate spending…as in prior periods of history. What is happening is that these units are creating massive ‘excess reserves’ in some commercial banks and then being used to purchase government debt securities. This process creates new money units (for the big commercial banks) but not necessarily any hyper-inflation within the greater markets.
The best presentation at the Money Show was that of Steven Hochberg, an Elliott Wave Analyst. His presentation clearly demonstrated that what is now happening in the greater global markets is a ‘roll over’ of many stock markets and a trend towards value destruction and deflation. This trend actually started back in the early 2000 period and is now reaching a new and more serious phase. Debt has reached levels which can no longer be sustained and this is causing all the problems in Greece, Spain, Italy, and soon the USA. Actually, all the global markets (including China) will enter this deflationary environment in the near future. Think with this image going forward:
The bottom in VALUES has not been reached yet! We have many more years of deleveraging, foreclosures, and deflation ahead of us. This environment of DEFLATION will eventually affect all asset sectors and all markets. This situation should be evident to everyone by mid-2013. Many of us, however, now recognize the symptoms of deflation and many of us ‘see’ this trend emerging with a vengeance. Digital money is only one cause of this trend. The main cause is psychological. History demonstrates that market sentiment changes markets in predictable cycles. We are now entering the ‘winter’ phase of a long wave depressionary cycle (a 70-80 year psychological cycle). Some call this cycle the Kondratieff Wave Cycle:
Let’s conclude with this message:  History is the direct result of the human nature. Unfortunately, it is not reasonable to accept that knowing history can change human nature. Therefore, history will repeat itself because human nature does not and likely cannot change despite education. Of course, better education could reduce or minimize some mistakes, but people in general are stupid. People are stupid enough to repeat their own mistakes, as well as the mistakes of others throughout history. Therefore, history repeats despite education, because human nature does not change (a paraphrase of many philosophers of history).
Investment suggestion:  For those who now hold gold and silver and/or mining stocks in their portfolio, the coming deflationary environment may temporarily cause some downward pressure on precious metals. This situation, however, is unlikely to last long. As investors and traders become aware of the ‘bubble’ in government securities of all forms, they are likely to seek a physical unit (gold and silver) as their ‘store of value’. This will create a ‘rocket’ explosion in the price of gold and silver. The next couple on months may be difficult for these metals as deflation initially creates a demand for CASH. Stay patient and prices will change with sentiment. Enjoy!
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