by Ned W. Schmidt, CFA, CEBS
Schmidt Management Company
March 23, 2010
A time existed when accepted thinking was that the Earth was flat. As it was not, that thinking made for some difficulties. One matter made difficult by this wrong headed belief was navigation. How does one get a ship from one location to another with the “wrong” map? Well, it was accomplished by a set of rules twisted to enable successful navigation despite the wrong theory or framework.
A similar problem exists today, except that navigation is not successful. Our world continues to operate with misguided belief that Keynesianism is a properly constructed economic framework for policy making. Nations continue to attempt to navigate the economic waters, only to be dashed on rocks due to a faulty map. Keynesianism is the “flat earth” theory of today.
Have the Greeks learned an important lesson? Such as: Beware of Keynesians bearing ideas. No one else seems to have learned, but maybe the Greeks will show the way. Actually, we have little hope for the rest of the world. The Keynesians continue to mislead the masses. For example, if the U.S. would just borrow more than the $1.605 trillion dollars that it did this past year, prosperity would be assumed. We all of know such thinking is nonsense. However, that is the wisdom of the Keynesian henchmen serving in the Obama Regime.
Part of the failure of modern Keynesianism is that collectively it does not understand money. It fails to recognize the importance of money, how money is created, and the implications of money. Under the Keynesian led Federal Reserve, the financial system has been ravaged. It may indeed be now largely dysfunctional. One of the ramifications of that situation is the faltering money supply growth portrayed in the above chart.
U.S. money supply growing at only about a 2% rate has some serious ramification. It means, first, that if one strips out the debt financed spending of government, the U.S. economy is not growing. Lack of money supply growth stems from a lack of bank lending. Without bank lending any economy, including the U.S., will have great difficulty expanding.
Lack of money supply growth has implications for the pricing environment. U.S. money supply growth is non inflationary at the present time. Price pressures that might exist, such as in oil, stem not from the withering U.S. economy, but from economic growth in China. China is not apparently impeded by Keynesian economic thinking as of yet. China’s other advantage is that the government seems to favor creating wealth rather than destroying wealth as is the case with the Obama Regime. As apparent in the table below from the elves at the Federal Reserve Bank of Cleveland, the U.S. pricing environment does not exhibit any meaningful inflation at present time.
Source: Federal Reserve Bank of Cleveland
With anemic money supply growth and a non inflationary environment domestically, little reason exists for the U.S. dollar to depreciate. Rather, the U.S. dollar is becoming rarer on a relative basis. That set of conditions actually suggests that the U.S. dollar should appreciate, as it has been doing. This set of circumstances may change in the future, but that is the situation at the present. Expectations of the U.S. dollar depreciating in the immediate future, ceteris paribus, are not supported by the data.
In reflecting on all this, remember the incredible record of the Federal Reserve. Hamstrung by Keynesian dogma, it has never got it right. When a batter strikes out every time, one must assume that the batter will continue to do so. NOTE, we are going to assume that the massive negative implications of the nationalization of the U.S. health care system by the Obama Regime will take some time to unfold. The additional debt to be created by this action will increase the need for and size of future debt monetization. Therefore, this event removes any doubt of the need for U.S. investors to own Gold in the long-term.
Flip side of U.S. dollar appreciating is a lethargic price for $Gold, in the short-term. Little reason exists for $Gold to move materially higher immediately. As a Major Wave II is likely dominating, an important bottom should occur by end of summer. Risk is still to U.S. $970. Note that assuming $Gold is currently in a Major Wave II is consistent with the monetary picture painted above. U.S. dollar-based investors should be adding to their Gold holdings as prices move lower. Major Wave III does lie ahead.
Investors not living in U.S. dollars may have a different view, given whatever their currency has been doing. Currency values for years have not reflected the fundamentals, but rather the herd thinking of the investment funds. At the present time, the highest risk situation is the Canadian dollar. Canadian investors should be using over valued Loonie to aggressively buy Gold. Indian investors should likewise be aggressively adding to Gold holdings. Rupee is overvalued relative to Gold. EU investors should be adding to Gold if the Euro price of Gold weakens. The latter two groups should also be buying Geiger counters given their proximity to the soon to exist Iranian nuclear arsenal, another gift from the Obama Regime.
© 2010 Ned W. Schmidt
GOLD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. For a subscription, click here.
Disclaimer: Please remember that no method is perfect nor is the one running the model. All estimated returns are for the model portfolio and do not reflect those earned on actual portfolios.