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Commodities / Money Supply Apr 04, 2007 - 10:28 PM GMT

By: Richard_J_Greene

Commodities

There is no shortage of commentary in financial newspapers, hemming and hawing over such matters as GDP growth, or the CPI data, or even the same store sales of major retailers. The fact of the matter is that all such releases are virtually worthless since their unit of measure being reported is in a fluctuating measure that is constantly changing – the US dollar; (or any other paper currency for that matter).

It is akin to weighing yourself on a bathroom scale but allowing the amount of ounces in a pound to constantly fluctuate. What good would that kind of data be to anyone? Yet this is precisely what analysts and commentators debate with constantly in the financial press and on stock market shows such as CNBC.


The same can be said of technical analysis of stock trends or anything else. Technicians swear by their charts and the various support and resistance levels as if they are Bible, meanwhile their measuring unit – the dollar is constantly changing. This makes the prognosis suggested by the charts meaningless. As an example, look at some of the major stock averages such as the Dow or the S&P.

While the Dow has made new highs and the S&P has come within shouting distance of its 2000 highs, the story looks completely different if we look at those averages in terms of a measuring stick that holds its value such as gold. If we were to use gold as the measuring unit rather than the depreciating dollar, we would see that the Dow and the S&P are off by over 50%, a bear market event that has not ended by a long shot.

John Maynard Keynes certainly had it right when he quoted Lenin saying, “There is no subtler, no surer means of overturning the existing base of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.” Worldwide money growth is growing now in excess of 14%. If we consider the economy is growing 6% in real terms which is probably generous then inflation is in excess of 8%. This can probably be considered the minimum inflation rate we have been experiencing recently in the United States as well.

For those that wish to review economic statistics that have not been tortured into admitting whatever the Government wishes, we recommend: www.shadowstats.com which is compiled by John Williams. On this site he shows what the numbers would reveal before all of the adjustments, substitutions, and manipulations. After reviewing the data it becomes quite apparent that we have been in a recession for over a year. The reason so few have any idea that we are in recession is because 99% + of those looking are relying on inflation estimates that are vastly understated. As an example, any retailer that has less than 8-10% same store sales is actually experiencing negative real sales growth unless they can depend on continually expanding their store base which should be a difficult task in what is in actuality a recessionary environment.

Getting back to Keynes' above quote, he may well have the ratio correct in that very few see “the hidden forces of economic law on the side of destruction” which is causing ongoing misallocations of capital. The retailer that continues to expand its store base while not recognizing the tide has turned in the economy due to the whitewashed Government statistics is committing just such a misallocation. Another great example is the recent homebuilding boom that was stimulated by unhealthy doses of inflation, particularly easy money to highly credit unworthy speculators.

Under normal credit conditions and realistic measures of the economy the boom would never have reached the excesses it has which are so vast that it will likely take many, many years to work off the supply. Under the circumstances of our present day monetary system it can still not be stated conclusively that there will be huge declines in home prices in dollar terms, however, it is a pretty sure bet that home prices will continue down in real terms for many years and will not keep pace with inflation. Do you think home prices declined in Weimar Germany where inflation rates reached annual rates of millions of percent?

The high rates of money growth worldwide are making it more and more difficult to hide the real situation with bogus measures and manipulation. More and more people are beginning to get the sense that something is just not right. There are strong signs over long periods of time that this process has been going on for a very long time. Fifty years ago a man could support his family with his single salary but over time it became necessary for the wife to get a job as well. Then many people found it necessary to get a second job or do something on the side to make ends meet. Folks, this is a declining standard of living and it is far from ending.

We notice issues being brought up in the financial news today for the first time, that we have seen for years; so we know that realization is spreading and it will only be a matter of time before the smarter people discover how to protect themselves. For those that have tried to remain safe by staying in cash, currently they can only keep from losing more than 5% of their purchasing power per year by keeping their money in the bank. This is because if you can get around 4% in the bank while inflation is really closer to 9%, you are losing purchasing power of 5% a year.

This is a difficult concept for the average person to come to terms with since as Keynes alludes, very few understand the confiscatory nature of inflation. Bonds and inflation-adjusted securities are similarly a poor choice largely due to being short-changed by the severely underestimated measures of inflation. Once this is understood it will dawn on a person that he will have to find returns of 8-10% right now just to keep pace with inflation and the depreciating value of his money. Similarly, a retailer will have to maintain 8-10% sales growth just to stay even. When you look at all of the alternatives along with the very high debt levels that have been run up to overcome these hurdles there are very few investments that have performed recently to that extent with the hope of maintaining a similar pace in the future.

We clearly have negative real interest rates today. With such inflation in the system we need to avoid paper investments which are created at will in favor of real things which at least can not be created out of thin air. Bringing it down to the very basics gold and silver have always functioned as money and will be turned to in mass as more and more understand what is happening to our money system.

Buy Gold and Buy Silver if you want any hope of preserving and creating wealth in the years ahead.

By Richard J. Greene
http://www.thundercapital.com/

© 2007 Richard J. Greene
Richard is Managing Partner, Portfolio Manager of Thunder Capital Management. Richard graduated from St. Leo College, received his MBA in Finance, Management and International Business from the University of South Florida and is a Chartered Financial Analyst (CFA).

Thunder Capital Management LLC was founded in July of 1999 with the mission of creating wealth while preserving capital. Founder and Portfolio Manager Richard Greene, who utilizes his unique combination of expertise and experience in a wide range of markets, industries and investment vehicles, oversees all investment activities of the firm.

This article is made available for informational purposes only and is not intended to be an offer to sell or the solicitation of an offer to buy interests in any fund. Such an offer will only be made upon the delivery of a confidential offering memorandum which are available to pre-qualified persons on request.


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