Expect Massive Inflation & Pain For Ordinary Citizens

Today one of the top economists in the world sent King World News an exclusive piece cautioning about the massive inflation present in the financial system and how destructive this is for citizens. Michael Pento, founder of Pento Portfolio Strategies, also warned the worst is yet to come as standards of living continue to be destroyed.

Pento: “Wall St. Pundits have summarily declared Ben Bernanke free from any wrongdoing regarding the negative effects derived from artificial interest rates and massive increase in the Fed’s balance sheet. Specifically, most market commentators now claim with certainty that the central bank’s unprecedented manipulation of markets has been done without creating any inflation.

This assertion is untrue in every aspect. Most importantly, the Fed’s quest to boost asset prices has been accomplished by creating credit by decree. In other words, Mr. Bernanke has purchased more than $2.5 trillion worth of MBS and Treasuries with newly manufactured money within the last five years alone….

“Therefore, there has already been $2.5 trillion worth of inflation that has been directly injected into mortgage and Treasury securities; and this number is still growing at a rate of $85 billion each month. This means the Fed is causing a tremendous amount of inflation to occur in bond prices. Banks have taken the Fed’s new money and purchased assets including equities, MBS and Treasuries, which in turn has helped push interest rates down to record lows.

Bernanke’s debt monetization has sent stock prices up 140% from their lows and also sent home prices rising 10.2% YOY on a national basis, according to the S&P/Case-Shiller Index. Inflation is very evident in stock values and has now even caused real estate prices to jump. This process of balance sheet expansion has caused the broad money supply M2 to rise 7% YOY. With real GDP growing at just 1.5-2% annual rate, the excess money growth is causing asset prices to rise.

Source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/6/9_Pento_-_Expect_Massive_Inflation_%26_Pain_For_Ordinary_Citizens.html

Sprott: Why SocGen Is Wrong About Gold’s Imminent ‘Demise’

A Retort to SocGen’s Latest Gold Report

Société Générale (“SocGen”) recently published a special report entitled “The end of the gold era” that garnered far more attention than we think it deserved.  The majority of the report focused on SocGen’s “crash scenario” for gold wherein they suggest that gold could fall well below their 2013 target of US$1,375/oz. It also included a classic criticism that we’ve heard so many times before: that the gold price is in “bubble territory”. We have problems with both suggestions.

To begin, the report’s authors appear to view gold as a commodity, rather than as a currency. This is a common misconception that continues to plague most gold market analysis. Gold doesn’t really work as a commodity because it doesn’t get consumed like one. The vast majority of gold mined throughout history remains in existence today, and the total global gold stockpile grows in small increments every year through additional mine supply. This is also precisely why gold works so well as a currency. Total gold supply can only grow marginally, while fiat money supply can grow exponentially through printing programs. This is why gold’s monetary value is so important – it’s the only “currency” in play that is immune to government devaluation.

Chart A illustrates the relationship between the growth of central bank balance sheets in the US, EU, UK and Japan and the price of gold. This relationship has an extremely high correlation with an R2 of about 95%. As central banks increase the size of their balance sheets through ‘open market operations’ to buy bonds, mortgage-backed securities (“MBS”) and the like, they inject more fiat dollars into their respective banking systems. As gold has a relatively stable supply, if there are more dollars available, the price of gold should rise in dollar terms. It’s really a very simple and intuitive relationship – as it should be.

Global -Central -Bank -Assets -vs -Gold

Source: Bloomberg and Sprott Asset Management LP

This relationship between central bank printing and gold has existed since the beginning of the gold bull market in 2000. In fact, this relationship shows that for every US$1 trillion increase in the collective central banks’ balance sheets, the price of gold has generally appreciated by an average of US$210/oz.

Somewhat surprisingly, it turns out that the collective central bank balance sheets have actually shrunk over the past three months – by approximately US$415 billion. The biggest drop was seen in the ECB’s balance sheet, which shrunk by the equivalent of US$370 billion, while other central banks also experienced small declines. Based on our simple model above, a decrease of US$415 billion should produce a gold price decline of roughly US$87/oz. And as it turns out, gold fell by US$76/oz over the first quarter of 2013. Does this sound like a bubble to you? It certainly doesn’t appear to be. Gold is performing almost exactly as it should – by acting as a currency barometer for the amount of money being injected into or withdrawn from the economy… which leads us to Japan.

Japan’s recent QE announcement is a thing of wonder. It represents an absolutely massive injection of yen relative to the size of the Japanese economy. The Bank of Japan’s US$75 billion equivalent per month of yen printing, coupled with the US Federal Reserve’s $85 billion per month (through its current QE program) will addUS$1.97 trillionto the collective central bank balance sheets over the next 12 months. Given Japan’s considerable contribution, we seriously question how SocGen believes gold can drop to US$1,375/oz by the end of the year. For that to happen, we would need to see a collective balance sheet decline of roughly 15%. Does SocGen seriously believe the US Fed (or any other central bank for that matter) is going to reverse its QE accumulation and then start aggressively selling balance sheet assets over the next year?

The only gold ‘crash scenario’ that makes sense to us at Sprott is if governments begin to balance their budgets and return to sound money practices. There is no question that gold could lose its utility if western governments made a concerted effort to fix their fiscal imbalances, but who honestly believes that’s going to happen any time soon? We certainly don’t – especially in the US. While US deficit spending may diminish in scale, it will remain well above $1 trillion per year after factoring in unfunded obligations. We don’t know of any creditable forecaster who believes otherwise.

We also don’t see a chance of the US Federal Reserve ending its QE programs, despite the continual jaw-boning by various Fed officials of a planned QE exit strategy. There is simply too much risk to the US bond market for the Fed to cut the US$85 billion in monthly Treasury and MBS purchases that the current program employs. After all – remember that those purchases are what keep interest rates close to zero today. If the Fed were to remove that flow of capital, the free market would once again dictate US bond yields and stock prices. There’s not a chance the Fed will take the risk of finding out what US bonds or stocks are worth to the market without a perpetual government-induced backstop. Why take the risk?  Especially since the cumulative QE programs to date have not caused a drastic increase in inflation expectations.

While we expect the Fed to continue to threaten to lower its monthly QE purchases, we believe the chances of even a mild decrease to its current US$85 billion per month rate are negligible. Four years into it this grand QE experiment, money printing has become the backbone of the US bond market, and the unsung driver of the US equity market. In our view, gold cannot become irrelevant for the precise reason that QE is here to stay… and the collective central bank balance sheets will continue to increase over time. We would question any pundit who believes otherwise – unless they can clearly articulate how the Fed can exit QE without causing irreparable harm to the very financial markets the QE programs were designed to assuage.

We believe gold is nowhere close to ‘bubble territory’ today. It is acting exactly as a currency should. Under its current stewardship, we expect the Federal Reserve’s balance sheet to continue to expand along with Japan’s. SocGen’s “crash” scenario would require a complete reversal of this trend, which we do not believe is even remotely possible at this point.

Gold is the base currency with which to compare the value of all government-sponsored money. Investors can incorporate it into their portfolios as ‘central bank insurance’, or ignore it entirely. Either way, we believe gold will continue to track the total aggregate of the central bank balance sheets of the US, UK, Eurozone and Japan. If SocGen believes the aggregate central bank balance sheet will continue to shrink as it did in Q1, then gold should continue its decline. We strongly suspect that shrinkage is over, however. Given Japan’s recent QE decision, we would expect the aggregate to grow a lot bigger, and fast. If there was ever a time for gold to be a relevant currency alternative – it’s now.

Article Source: Zerohedge

Profit From Power Elite’s Key Sector Price Inflation With Gold

“The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold.

Zero-bound interest rates, QE maneuvering, and ‘essentially costless’ check writing destroy business models and stunt investment decisions which offer increasingly lower ROIs and ROEs.”

Bill Gross, Founder & Co-CIO, PIMCO, 1/3/2013

For several years, Notable Independent Commentators, including Deepcaster, have warned that the Elite Central Banks’ Orgy of Fiat Currency Printing, a la QE etc, would result in Price Inflation.

So it is no surprise to us that The Bond King, Bill Gross of PIMCO, with about $2 Trillion under Management, would finally warn, in his January, 2013 letter to Investors, of Impending Price Inflation in Key Commodities.

Of course, General Price Inflation is already here, if one looks at the Real Numbers (e.g., U.S. CPI at 9.8% per shadowstats.com) as opposed to the Bogus Official Ones.

Going forward, this Mega Bank-generated Price Inflation provides considerable Profit Opportunities, but only in certain kinds of Commodities, and especially in one Sector Bill Gross does not specifically mention. (See Notes 1, 2, 3 and 4)

In sum, Policies actually being Implemented by the Power-Banker Elite virtually ensure a continuation of Fiat-Currency Depreciating Policies, and thus Price Inflation in Certain Commodities Sectors, as well as Increasing Risk of Systemic Destabilizing à la 2008-2009.

Yet consider also that the “Regulators” continue to accede to the Mega Banks wishes.

Basel Committee’s revised LCR prompts relief and concerns

The Basel Committee on Banking Supervision’s decision to give global banks an additional four years to meet liquidity requirements was aimed at ensuring that the change wouldn’t discourage lending to the real economy. Some banks have already benefited from the revised liquidity coverage ratio, with their share prices increasing. GFMA welcomed the Basel panel’s decision to allow mortgage-backed securities and equities to be included in banks’ liquidity buffers.

Basel panel’s allowance of MBS in buffers faces scrutiny

The Basel Committee on Banking Supervision’s decision to let banks include equities and residential mortgage-backed securities in Basel III liquidity buffers is gaining plaudits and criticism. Bankers welcome the revision, but experts say it is unlikely to significantly lift a slack securitization market. The change also presents challenges for regulators

Significantly, Many Mortgage Backed Securities are still Toxic if Mark-to-Market Standards are applied, which they are no longer required to be.

So, de facto, the Banks may “count” Toxic Securities as part of their Liquidating Buffer.

Worse yet, the Regulators have, once again, administered a mere slap on the wrist to Major Banks which engaged in unacceptable practices. For example

Banks settle mortgage-related legal disputes

Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and other major banks agreed to pay a total of $20 billion to settle two legal disputes related to the mortgage crisis. BofA agreed to pay Fannie Mae $11.6 billion. In a separate dispute, 10 lenders agreed to pay more than $8.5 billion over foreclosure practices.”

sifma SmartBrief, 1/8/2013

Hardly a deterrent going forward.

In effect, this policy allows Risk to continue to Threaten Systemic Stability and its wealth of Individual Investors.

Making matters worse for Systemic Stability and Investors alike, is the Mega-Bankers’ Cartel (see Note 5) ongoing Manipulation, not just of Precious Metals but of a Wide Variety of Markets.

While Deepcaster, GATA and others have been complaining about such Manipulation for years, the Situation has become so threatening to Systemic Stability that even the Most Reputable and successful Investment Managers such as PIMCO’s CEO, Mohammed El-Erian, are complaining about the Risks inherent in such intervention as well.

“The investment recommendations made by many financial commentators are now dominated by cross-asset class relative valuation rather than the fundamentals of the investment itself….

“This is an understandable approach as unusual central bank activism has artificially elevated certain asset prices. Yet the dominance of this increasingly popular advice comes with potential risks that need to be well understood and well managed.

Several asset classes now have highly manipulated prices due to experimental central bank activities, both actual and signalled. The more this happens, the more investors come under pressure to migrate to higher risk investments in search of returns….

“Just a few weeks ago the Federal Reserve announced it is targeting a further $1 trillion in asset purchases in 2013, representing a third of its existing balance sheet. Other central banks — particularly the Bank of England, the Bank of Japan, and the European Central Bank — are also expected to expand their balance sheets again in the months ahead….

“There is a limit to how far central banks can divorce prices from fundamentals….at some point, and it is hard to tell when exactly, the private sector will increasingly refuse to engage in situations deemed excessively artificial and overly rigged….

“Have no doubt: Central banks are both referees and players in today’s markets. With 2013 starting with so many liquidity-induced deviations, investors would be well advised to take greater care when pursuing opportunities that rely mainly on the ‘central bank put.’” (emphasis added)

“Beware the ‘Central Bank Put’”, Mohamed El-Erian, ft.com, 01/07/13

Chief Executive and co-Chief Investment Officer of PIMCO

El-Erian is Spot-On correct about the Risks Associated with Investment in “Highly Manipulated Asset Classes, which is why Deepcaster’s portfolio Recommendations aim both to Minimize Risk from and to Profit from, these and others.

But it also makes certain Real Assets even more attractive going forward.

Thus the Big Smart Money is responding accordingly, moving Money into Gold and certain other commodities (See Notes 1, 2, 3 and 4).

For example, notwithstanding ongoing Cartel (Note 5) Precious Metals Price Suppression and in response to Japanese Prime Minister Abe’s pledge to spur Inflation, Japanese Pension Funds ($3.36 Trillion in Assets!) plan to double their Gold Holdings in the next two years according to Bloomberg Business Week.

A word to the wise: Go for the Gold.

Best regards,

www.deepcaster.com
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