What To Do; What To Do?

 

I have been expecting the value of money to change substantially in the medium term, and my expectation has been for price inflation. A lot of it. Anyone trying to construct a building has seen it happen. But we see it in food too, and fuel. It isn’t just a matter of there being so much more available spending money, but supply chains have been disrupted as was easily predictable. When blue collar people are staying home from work, of course production of goods will suffer. In Canada, we are reporting an inflation rate of 3.4%, but if you are shopping for pretty much anything, you probably don’t believe it. It’s hard to see how price inflation can do anything but get worse. Not only is the government running huge deficits, but people have very high savings from which to fund their spending.

We have an M2 in Canada of about 2.2 trillion dollars. When the government infuses several hundred billion new dollars into the works, the action greatly raises people’s ability to bid up the prices of goods and services. So, we expect prices to continue rising. But read on.

Prices are a function of what people are willing to pay. Their willingness to pay depends on how rich they feel. Cash is only part of the feeling. What they perceive as the value of their other assets has a lot to do with the spend-versus-save decision. Other assets include stocks, bonds, real estate, and derivatives, among other assets. The real estate market is twice the M2 money supply --- in excess of 4 trillion dollars. The stock market value is over 3 trillion. It’s hard finding data to establish the size of the Canadian bond market, but my guess is 25 trillion. My estimate on the derivatives market in this country is about 100 trillion. Further, many Canadians are exposed to the markets of other countries. My point is that even though the expanding money supply combined with shortages of goods makes a good argument for aggressive price inflation, even a small contraction in other markets could make people suddenly feel quite poor. And such contractions have a way of snowballing, especially in an economy that contains so many investment bubbles. Deflation is a very real risk. Cash may be trash now, but we may see cash becoming king again, so it is important to hold cash and assets that are liquid --- easily convertible into cash. It’s a difficult road to navigate. Cash is losing value at the rate of at least 5% per year (I think it is probably more like 15%), and it doesn’t take long for half the value to be gone, and yet cash may be what is needed at some soon time of trouble.

My advice: take charge of your investing. Study. Read widely. If you are a believer, pray for wisdom. Be nimble and ready to turn on a dime, but don’t be fickle.

 

The Fading of Canada

 

I haven’t posted anything here for a long time. Life gets busy, and there seems to be many other ways to make a positive difference in people’s lives…..and that is what I really like to do.

I am concerned about a trend I see in Canada. Maybe it is elsewhere, but I have not been traveling during the Plague, so I cannot offer firsthand testimony. What I see here is the widening difference between being Have-Nots and what that very astute MP Pierre Poilievre refers to as Have-Yachts. 25 years ago it seemed to me that there was a veritable slave class developing, and that maybe the best way out of it for most people was education. I have long encouraged people, both young and old, to get more education. Aside from the process being good for maintenance and development of mental faculties, knowledge is power.

I see Canada’s GDP per person rapidly declining. We are now #18 according to a list I recently saw (https://statisticstimes.com/economy/countries-by-projected-gdp-capita.php). $42k GDP per person. And when you consider that GDP is about production, and not usability of the production, that makes matters worse. For example, if production is wasted or destroyed, it is still part of GDP. GDP can be very high in a war economy even though huge amounts of resources are being blown up and do not increase wealth at all.

Our per capita income is reported as higher than the 42k. No wonder, with all the cash being freely given to people, ostensibly as “stimulus.” It’s sad that our financial policy makers are so economically illiterate that they think cash injected into an economy whose debt is several multiples of GDP will actually stimulate the production of goods and services. So far as I know, there is no empirical evidence to support such nonsense. Instead, what we have is an increasing amount of cash chasing a decreasing amount of goods and services. The economy is choking, and our governments are stuffing more cash down its throat.

I am not against distributing cash, but it must be accompanied by measures to increase the production of goods and services if our standard of living is to be maintained.  We do not eat cash, cover ourselves with it, nor drive it. If 100 people show up at an auction with $10,000 each, prices to which the items are bid will be a lot lower than if someone suddenly gives each attendee another $5,000. Our economy is like the auction. We are driving prices up at quite the rate. Far beyond the annual 2% rate that the Bank of Canada claims as a target. We left 2% over the rear horizon quite a while back. Yet the Bank of Canada keeps on with the story that sounds like it was written by a Liberal speech writer.  It looks to me like we have entered into an inflationary depression. Admittedly, there are deflationary pressures such as low consumer demand and the possibility of a credit collapse, but I think the Bank of Canada, with its fake excuses, will keep pumping cash into the federal buckets.

In the short-term, the deficit between growth of money and decline of production has been closed by imports, but that is not a sustainable solution. The value of our money is only what our creditors assign to it, and the more Canadian money there is versus our own production, the lower the value of the money because essentially a nation’s money is a claim on its production. Ultimately, the lower our production, the lower our standard of living.

Come to think of it, in some ways the standard of living has been dropping since I was a boy. We used to have physicians making house calls and milk delivered to the door (from a horse drawn wagon even!). We used to sit in the car while the gas was pumped for us and the windshield washed and the oil checked. We used to be able to phone businesses and not reach a computer giving us a string of layered messages, adverts and monotonous music. We used to be able to drop in at a CRA (at various times CCRA and Revenue Canada) office and talk to a real person face to face. We had wood furniture. We had stay at home moms because families could live on one income. We didn’t have our public parks (such as Beacon Hill here in Victoria) turned into squatter camps. We had grade schools with classes of under 20 students.

No, this country is in a slide, mostly under the stupefied watch of its “natural ruling party” --- the Liberal Party, which long ago divorced itself from liberal values so far as I can tell.

The Reddit Crowd versus the Silver Shorts

I have been noting lately some of the discussion around the short squeezes related to GameStop and certain other stocks. Basically, GameStop short positions exceed the total float of GameStop shares, and a crowd on Reddit decided to bid the share price up so that the shorts would suffer a huge losses. And they succeeded. So then they got the idea to ply their tactics on stocks of other companies such as Bed Bath & Beyond and AMC, with some success with those stocks also.

Flush with the exuberance of inexperienced success, they seem to have lately decided to squeeze the silver shorts. In doing so, they have shown they do not understand the market. It’s one thing to take on the GameStop shorts. Quite another to go up against the silver shorts. Now they are trying to enter the big league. I have very little doubt that the silver price will be energetically headed north, but that process needs no help from the Reddit crowd. Silver tends to be produced largely from mines that are primarily base metal mines, driven by industrial demand. Yes, there are mines that primarily function on account of the silver in them, but a large part of supply is a by-product of mining other minerals. The economic slowdown has reduced such mining activity. In some cases, mines have closed directly as a result of covid. There is a shortage of silver production, just like there is of uranium. Further, the demand for silver as a critical component in several key industrial processes, besides jewellery and investment, is likely to outstrip supply for some years to come so far as I can tell. So yeah, silver doesn’t need Reddit.

The Reddit warriors can’t squeeze the silver shorts anyway. GameStop has a float of less than 50 million shares. If you are short and the price starts getting away, you have to buy stock. You could buy call options to accomplish the same thing, but the short positions were cumulatively so big that buying calls would have driven the options to unreasonable prices. Silver is different. If you are short silver, you can buy futures, options on futures, silver ETFs, and shares in silver mining companies to hedge against losses. You won’t have to get squeezed. Further, I think the main silver shorts have the ability to affect trading rules. These people are powerful. The Hunt brothers, multi-billionaires when a billion was something, found out 40 years ago just how powerful the silver short interests are. If the Hunts could be squished, so can the Reddit mass.

Nothing succeeds like success, but nothing goes to the head like success either.