Counterfeiters and Thieves?

Nice piece from Dan Denning:

What’s the difference between a thief and a counterfeiter? A thief takes what is not his without another’s consent. A counterfeiter passes off as genuine that which he knows to be a fraud. Or, in simpler terms, one is a politician and the other is a central banker.

We’ll get back to that in a moment. But judging by the complete and utter lack of interest in our comments earlier this week on the Queensland Rail float (other than a reminder that in Australia they’re called ‘railways’ and not ‘railroads’) now must be a very good time to buy things that nobody else wants. The prospectus isn’t out yet, but we’ll have a look when it is and let you know what we think.

Maybe your best short-term strategy at the moment is to ride the counterfeiter’s put. If the Federal Reserve, the Bank of Japan, The European Central Bank, and the Bank of England are all going to create money to buy assets and “reflate” the economies they are in charge of respectively, that new money is going to leak somewhere. It could be stocks.

Mind you, this makes stocks a total speculator’s play at this point. Excess credit distorts values by elevating prices (price and value, of course, are not the same thing). There is no hope for a diligent investor in this environment. His best bet is to stay on the sidelines and wait for the liquidity to slosh its way around. Maybe this is why Greg Canavan at Sound Money. Sound Investments took the week off. He’s a value pilgrim in an unholy land.

Alan Kohler over at Business Spectator contributed an extremely useful insight to the ‘currency war’ metaphor that is now all the rage. Earlier this week he pointed out that low interest rates, easy monetary policy and fiscal stimulus are all ways for a government to steal demand from the future to make present growth look better. A whole lot of global theft took place since late 2008.

But with household deleveraging taking grip somewhere in the part of the Western brain that produces a profound, emotional sense of fear, it’s been hard for governments to encourage their peoples to spend monies they don’t have and don’t want to borrow. We have reached the next stage of the strategy.

If the first stage was “beggar the future” with borrowing and spending, the next stage is “beggar thy neighbour” by stealing his demand. Kohler points out that when you can’t steal any more future demand from your economy; you have to steal future demand from someone else’s economy. The most direct route to that kind of theft is to manipulate the hell out of your currency so your exports are always cheaper to your neighbour and he keeps buying what you’re selling.

The long-term consequences of this policy are mixed. On the one hand, the export driven model that relies on competitive currency devaluation has left the world awash in surplus productive capacity and cheap goods (with a hat tip to slave wages in some parts of the emerging markets). More stuff. Cheaper stuff. Good, no?

It is, if you like stuff. It is not, if you like work. Now a lot of people don’t like work. But other than inheriting money from your rich father, it remains the best way to pay the bills ever invented. It also, if you want to be philosophical, is one of the activities that gives our lives meaning, purpose, a sense of fulfilment, and tangible accomplishment. Work is how we make the world better, richer, or at least busier.

Competitive currency devaluations steal work from one country and give it to another. That makes them unpopular in the countries where jobs begin disappearing. This is why currency wars quickly become political hot potatoes. Out of work citizens are angry voters. And angry voters want somebody to do something about the problems.

That is where we are now. And that is why gold – which is nature’s currency and can’t be printed by anyone and is relatively scarce in the earth’s crust – is going up against all that paper money serving a devious master. But as the Aussie dollar reaches parity, something must give.

That is, if now resembles the past few years, this latest move down by the dollar and up by the commodities would be reversed. Gold, copper, silver, tin, oil and the rest would fall as the dollar corrects. Corrects to what, though? Can you think of a good reason why the U.S. dollar should get stronger from here?

We can’t either – unless it’s just the simple observation that everyone is agin’ it and no one is for it. If everyone is a dollar bear, is it a good trade to be a dollar bull? Or is this the long-awaited moment where the dollar begins to circle the hyper-inflationary drain?

It’s a moment we’ve been talking about for years. Does the simultaneous rise of all asset classes against the greenback indicate that the moment is finally here? And if it is….what should you be doing, or have already done?

This is one of the subjects we’ll be taking up next month in Sydney at the Australian Gold Symposium. You should have received a note about it yesterday afternoon. Daily Reckoning readers get a special discount to the show. But as always, space at these things is limited. And gold is pretty hot now. Have a look at the program and if it suits your tastes, lock in your discount while you still can.

By the way, a hat tip to our small cap sleuth and cheeseburger connoisseur Kris Sayce. It’s not a well kept secret anymore that one of his top rare-earth stock is going through the roof. It’s up 202% from his May buy-price. It’s up so much, in fact, that it’s listed as a hold in his newsletter. The buying frenzy has well and truly taken hold.

As we said, it’s not a mystery to figure out what the share is. It’s been all over the headlines lately with the rare earths story becoming main stream. But it was most definitely not in the headlines with Kris tipped it. And that is really the whole point of what he’s trying to do: get in early on big ideas.

Of course with small caps, the earlier you are the riskier it is. Most small businesses fail or blow up. The up-side is that it doesn’t cost you much to have a small portfolio of business experiments. And when one or two gets it right and the project or business is “de-risked”, you can do quite well. But they key is being willing to take a punt and buy something when there’s no confirmation from anyone else that you’re on to something good.

This is counterintuitive and contrarian instinct. It’s also why we prefer deserted, slightly derelict pubs to fashionable ones (plus the beer is cheaper). For investors right now, it’s a horrible market. There’s only one pub. It’s crowded. And everyone is drunk.

For speculators like Kris, it’s great. They were already in the pub and had a position in select shares when the party started. True, in a world with so much liquidity it’s getting harder to find stuff that hasn’t gone up or could be mis-priced or undervalued. The party wont’ last forever, either. That’s when you’ll want to head for the door before everyone starts vomiting and the fists start flying.

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