Hi Max, I think this is your kind of effort. namely, Lots of meat.... <g>
Today's WrapUp Jim Puplava 05.21.2003
[The Paper Chase
In the crime business, detectives know that money plays a very important role. ‘Follow the money’ is an old cliché. The same is true in the financial business. If you want to know which area is going to go up next, follow the money. In the larger context of the financial markets, this means follow credit and money flows. Central banks around the globe are creating oceans of money or credit that is finding its way into every nook and crevice of the economy and the financial system. Excess money creation during the 1990’s created a credit boom leading to financial bubbles in the U.S. stock market and malinvestments in the economy. Those malinvestments in the economy now represent excess capacity as cheap money and credit created an extraordinary investment bubble in not only the financial markets, but also excess capacity in almost everything but energy. There is now excess capacity in just about everything you want, and scarcity in everything you need such as energy.
Since the stock market bubble burst money and credit continues to flow freely in the U.S. and elsewhere. In the U.S money aggregates are all up year over year and are still growing faster than the economy.
As long as the Fed has the ability to create money and credit, that money is going to find a place to land or invest. Think of that money as a giant hive of honeybees. Wherever the hive lands, it has the ability to create honey for investors. Right now the hive has been chasing one paper asset after another. In the 90’s it was emerging markets and the U.S. equity markets. After the stock market bubble burst it began to chase yields, first in Treasuries, then mortgages, then emerging market sovereign debt, and now the Euro. This hive of money is so huge it dwarfs most markets and asset classes. The general destination of this money has been the bond markets because it is the only market large enough to accommodate it. This money hive is the $1-2 trillion that trades in the currency markets on a daily basis looking for high returns on paper. Most of it has been going into the U.S. Treasury market because it is one of the few large markets capable of absorbing this huge influx of money.
Because of America’s huge trade surpluses, money is going into foreign hands since we pay for those goods in U.S. dollars. That money is either invested in the exporter’s country inflating that country’s money supply stock or the central bankers of those countries intervene in the foreign exchange market acquiring dollars that their domestic exporters wish to sell in order to prevent their currency from rising against the dollar. In order to buy those dollars they print their own money, which expands their money supply. With these newly acquired dollars, central bankers in turn wish to earn a rate of return on that money so they invest those dollars in paper assets. Over the last two decades, the final destination of those dollars has been U.S. financial assets, stocks, bonds, and money market instruments. They not only earned a great rate of return on those assets during the 80s and 90s, but they also saw those assets appreciate in dollars against their own domestic currencies. They made money from asset returns and then made additional returns from seeing the dollar appreciate against their own domestic currency.
For balance of essay complete w/lots of cool charts, graphs tables go to:
For some reason, this excerpted portion gets me all aflutter!!! <gg>
You can see this paper trail in the graphs below of the U.S stock market in the 90’s, the Treasury market over the last three years, and the Euro over the last year. However, all of that money will eventually have one final destination which is real money, and by that I mean gold and silver.
The final destination will be gold and silver with silver representing the greatest opportunity. Now the smart money has been going into the euro and gold. Smarter money is going into silver. If the Fed embarks on a policy of hyper-inflating the currency in order to avoid a depression at a rate more aggressive and uncoordinated with other central banks, you may see an all out flight out of the dollar. This is part of the equation that sets up my Perfect Storm scenario. It hasn’t happened yet. There is a gradual exodus out of the dollar but it hasn’t turned into a stampede. Foreign central banks have invested close to $150 billion in Treasuries over the last year so money is still coming into dollar assets. This is done because that money has very few places to go. Therefore, it simply chases one paper asset after another. Eventually it will all be going into hard assets in one form or another as central banks depreciate their currencies against each other in order to keep their economies and exports competitive. At some point in the not too distant future, we should see another full-fledged financial crisis erupt. There is simply too much money sloshing around the globe, and too much credit and leverage in the financial system. As I said earlier, it is not a question of “if” but merely a question of “when.” The ultimate destination will be a flight to hard assets, especially silver and gold.
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