Run from your Money

Cash is trash, they say. You have to be fully invested, they say. Oil is going to $85, they say. The Dow Jones is going to 10,000, 12,000, 16,000 or more, they say. Buy copper, they say. Fill the warehouses with commodities or float fully loaded oil tankers but whatever you do you must run from your money. Interesting, why?

Because the central banks of the world has slipped the leach on the printing presses and the global economy is drowning in liquidity. The new game in town is to get hold of printing press money, preferably first and to convert it into a “store of value”. Flipping cash for stores of value is the way to go. Cash burning a hole in your pocket has a whole new meaning.

Funny thing about stores of value is the market chemical reaction to cash-is-trash liquidity flows. It changes colour like a magical chemical experiment and previous stores of value turn into red hot speculative assets, the next big thing. No longer is there any store of value intentions. All that remains is speculation on the next price increase. Flipping to the next big fool with a wad of cash to get rid of.

China said we will rid ourselves of the dollars and buy commodities. The Chinese population gets access to easy debt and floods the Hang Seng and Shanghai Composite with buy orders. “Investors” and Investment Banks draw down the cash and buy oil and the Dow. Get away from the sidelines and commit your cash is the refrain. The dollar is going to crash get out. Who knows what the miners do when they end up with all the cash?

Bubble, bubble, toil and trouble goes the nursery rhyme. Inflation is alive and well and living with the previously known as “stores of value”. Incredibly, gold is the Cinderella of the stores of value. Perhaps gold’s money prince will meet her at midnight when all other so called stores of value will be exposed as the ugly sisters.

Keynes’ saying “the market can be irrational longer than you can stay solvent” is another misguided observation of an interventionist. Are all these people really stupid? Were they stupid when they flipped houses? No, they were and are riding the wave of massive debt formation (then) and liquidity formation (now). The behaviour to get rid of the cash is fully consistent with the very logical and rational conclusion that the printing press money is actually worthless. Get it, get rid of it and let some other idiot hold the worthless trash.

Sharing the same thought is a recipe for group hysteria and bubble formation. Those who bought as a store of value are mightily pleased that their store of value has appreciated by 20%, 50%, 100% or more. Soon all thought of “store of value” is gone and rabid speculation takes its place. Value is counted daily with soaring stock exchanges and multiplication in commodity prices. Look at that, I was trying to preserve value and boy, did I preserve value…

It becomes the bluff and the double bluff, the triple agent on the inside. The stores of value can only be stores of value when they are firmly entrenched in the real economic environment. The flow of liquidity detaches these stores of value form reality and the noisy crowds form. Reasons to anticipate a reconnect to reality at some future date are legion. Shares in bubble, no way – the economy is in recovery and the stock exchange is anticipating that recovery by at least 6 months (property never goes down in price, you know). I suppose that the “stock exchange” was anticipating a boom until it crashed. Oil is running out and there is an economic recovery underway (I have seen a green shoot with my own eyes). Soon the lack of demand will catch up with the heady price, which in fact is still far too low for the serious shortages which may occur then.

Economics is about “cause and effect”. The reality disconnect is “effect and cause”. Companies post excellent results (not better than expected low ball estimates but the real thing) and the effect is that the share price rise. Cause = profitability and increased income stream. Effect = rising share price.

The liquidity disconnect turns it on its head. Effect = rising share price. Cause = profitability will improve at some stage in the future. The real cause is printing press money. Hoping for something is not the same as identifying a real cause. I can start a rabbit farm anticipating a massive demand for cheap red meat but I suspect I will end up with lots of rabbits to feed and no money. Well, at least I would have rid myself of all that trashy printing press money.

The world is running out of oil but the effects may only be felt in 20 or 30 years provided nothing happens to change that outcome. The dramatic demand adjustment to an oil supply squeeze in the 1970's proved the case for economic rebalancing to oil shocks. It is not wise to invest in or trade oil as if the “peak oil” day is today when the rest of the economy is not adjusted for that event. Ask the question, is it demand or printing press money in the driving seat? High and rising oil prices are a disconnect with the economic reality of demand today. Price distortion caused by printing press money will cause economic rebalancing. Incessant meddling with price formation and discounting future income to today (cause) will perpetuate and accelerate violent economic adjustments (effect) in proportion to the distortions caused. What an excellent example the cash for clunkers programme is of meddling with price formation and discounting future income to today. The giant of all gigantic meddlings with price formation and discounting future income to today is the policies of zero interest rates which abolish interest on savings (just add the banking margin to zero for the lending rate) and Quantitative Easing allowing Central Government to excessively discount its future income (taxes!) to today. Christians will know that even Jesus demanded the usury that the saver is owed (Mat 25:26-27 “His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I reap where I sowed not, and gather where I have not strawed: Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”).

Understanding the inflations of the printing press requires an understanding that inflation will express where the printing press money ends up. Meat and potatoes prices will inflate if the money ends up in meat and potatoes. House prices will inflate if the money flows via debt formation into houses. Zero interest rates, Quantitative Easing and unlimited liquidity drive investors out of money and into stores of value. The inflation goes with the flow. Follow the flow to identify the inflation. Asset inflations always end up deflating when the flow slows. There is no need to remove the flow. The cycle of exponential growth only needs to be broken and the money flow asset inflation will deflate.

Run from your money and rush into inflated assets. Run from the US$ and into some inflated 3rd world currency (emerging markets are the next big thing, you know; they say emerging markets will save the global economy). Emerging economies with a dictatorial political or utterly corrupt political system where politicians are not inflating their money supply (or are they printing at 25%pa or even 50%pa and have been engaging in unofficial Quantitative Easing for ages). How promiscuous savings can be, whoring in dark corners with the printing press crowd.

Make sure your savings avoid the STD’s of printing press money when you pick your stores of value. Buying into asset inflations sets you up for the next bubble collapse from which only the nimble or the lucky escapes.


Sarel Oberholster
BCom (Cum Laude), CAIB (SA)
23 August 2009


© Sarel Oberholster

Ps This is a rambling satire on the insanity of building economic foundations on printing press money and the self congratulations that goes with it. I logically and a bit more boringly explain the process of a flight to stores of value in “War on Savings” which is available as a PDF download on my blog.


Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .