Global Stagflation Forces Big Alliances To Adapt
History is written by the victors, the losers are no longer around all that much after all to write anything. So history almost always tells us that what came out of the conflict was good and right. Until someone else wins - then history gets re-written. Well I think history is being rewritten right now and I'll explain why.
It’s sort of like official employment statistics, or GDP figures. They change later when your attention has moved elsewhere and you’re no longer looking at them.
We seem to therefore have a need to revisit past events (and stats) at a later more informed stage, and if necessary revise the official account and maybe our possibly erroneous recollection of what took place. You see propagandistic “spin” is of the moment. Like a marketing campaign which has a certain running cost, the dissemination of lies to mask and confuse the release of factual information has a time limit and then it switches off. That leaves the written history of an event remaining for posterity. Who wrote it? What were their motivations? Does the written history need to be revised or not? These are questions that market participants must bear in mind. They could be learning the right or wrong lessons from events depending on veracity and completeness of the incoming information.
Let’s look at an example or two.
Capitalism, it is said, provides an environment whereby the survival of the fittest takes place within the sphere of business. Well, that’s what they say. (who says?). But wait a minute: how about if a health insurance company has a competitively priced and good value insurance policy, which is good for it’s customers, but somebody elsewhere brings out an industry wide law that makes this health company and it’s product go away. Was that survival of the fittest or something different? Power counts as well as fitness I think.
Ok that’s a selective case. Maybe I should leave the body politic out of it and try again! Did you hear the story about the guy who struck gold and built a gold mine? He had a hole in the ground and money came out of it. What could go wrong? Well there was this other guy with a printing press who could also print money. Now that should not be a problem in theory, because the more money the printing press prints, the higher the value of gold should be. One cancels the other, right? Ah but what if the guy with the printing press uses his freshly printed money to buy bonds and push up the price (pushing down interest rates)? Gold is “safe money” and bonds are supposed to be “safe money” too. So if somebody pushes up the bond price, that competes with, and pushes down the gold price at the same time, doesn’t it? Scissors cuts paper, rock breaks scissors, and printing press breaks gold mine. Tough luck Mr Gold Mine Guy! You must have been an “inefficient business” since you "failed to thrive" under capitalism!
I think by now I have made my point. History is written by the victors. It will always neglect the finer details of the losers' stories. They’re extinct species, they failed! We are the Champions my friend! Move on, there’s nothing to see here! Therefore the study of market history may not help one to get an accurate interpretation of current events, because the history may focus on “didn't matter” key points, and the “pivotal things that really matter” can slip away with little comment made for future reference.
In this context I would mention the example of the Hunt Brothers corner of the silver market and the top of interest rates while Paul Volcker was working at the Fed.
Here is a very good question about that time: was gold tracking silver downwards after the Hunt were “broken” by the Comex liquidation only rule, or was the it more significant that the Fed was guarding ability to borrow by selling T-Bond paper debt, and for that reason there was a requirement to prevent gold assuming even greater status as a safe asset to hold?
Here are the prices of gold and the T-Bond at that time for the six years from 1979 to 1985 (gold is represented by the darker line):
Note the anti-correlation during end of 1979, and the change after that date a major feature of the time. The breaking of the Hunt’s corner and the silver (and also gold) highs were at Dec 79 - Jan 1980. The correlation between both metals and the T-Bond which is much less commented upon in financial history is also clearly visible. So the Federal Reserve had a serious interest in this as their borrowing costs were rising fast. I think it was all about competing fixed interest assets (gold vs. bonds), interest rates and a plunging bond market. But the history books say it was all about the Hunts and silver and stability.
In the circumstances it becomes interesting to see what is going on now in the competition between bonds and gold for their asset allocation prioritization by buyers of either.
Here is the same chart for the last six years from 2008 to 2013 (gold is represented by the darker line):
Once again the correlation is clear, but it appears to be a medium term generalized correlation rather than a short term or precise correlation.
There are not all that much information available about the relationship between the price changes in gold, and bond prices. The key technical indicator or study for this is of course the Gold:T-Bond ratio, which keeps a low profile in technical analysis.
A closer look at the Gold:T-Bond ratio seems appropriate at this stage. The ratio between the two markets, gold and the T-Bond is shown below:
That is a lovely descending trading range above isn’t it?
I propose that not only is the USD playing "pass the printer" in a relay race to the bottom with other dollar index currencies, but gold is for the moment included within this arrangement - for the necessary purposes of non-transparency of the pact between Central Banks. Bond support - gold suppression.
The problem with this arrangement is that (in my opinion) all resources were also included in this scheme (was the Comex founded expressly for that purpose?) of price suppression for cheap purchase by the west. The power of the west was recognized and respected by the unfortunate resource producers, who could not do much about that situation. Rather like gold bugs nowadays complain about price suppression activities in the precious metal markets, not much happens to stop it and that reveals the identities of the owner(s) of the fist(s) inside the glove as it were.
Only at high inflation times did the producers of energy fight against this, and attempt to raise the price of their exports when priced in rapidly diminishing value western currency. Hence during the 1970s we see that OPEC pushed up the price of oil; by reducing production. Well the new producers of oil, and natgas, and the buyers of those products in the far east are not so easy to intimidate. There is a certain change in the middle east as Israel must now be included as a natgas producing nation and must move towards new affiliations with other energy producing nations. These changes are already evolving into some sort of real form and the Saudis negotiating with China and Russia is a part of the same process. Cyprus has/had a lot of natgas I assume but the old tried and tested US-UK-IMF-World Bank-ECB indebtedness exploit package will soak much of that up in repayments. The ways of financial confiscation are never going away it seems. However, on the other hand, Russia and Gazprom today are not 1970s OPEC.
Things are not quite clear cut, as both Russia and China, in addition to producing energy and wanting fairer prices for those, are at the same time importers of agricultural softs and their interests in those would be aligned with the interests of the west. So for example: China wants low cost gold to acquire, low cost grains, and so on, and this causes a certain wishlist of pricing circumstances which is not all that different from eg the USA and UK. They are colleagues, not friends or enemies, because they are allied on some issues, and competing on others. You could say whole countries have become a little like political parties as they jockey for position but all depend on each other not messing it all up to some degree.
Any way I have rambled on long enough now. There is no clear conclusion about these matters, only a recognition and bringing of certain changes to readers attention for discussion and further research. The strategies to safeguard resource pricing under inflation during the stagflation of the 1930s-40s evolved into new alliances during the 1960s - early 80s. And I do not spend all my time in geopolitical research, but this article is instead a stream of thought about a global matter that has become visible while located near the edge of my main research focus as it were. I'm open to criticism on it as well as the contribution of additional information to the thesis.
As I see it, this boom-bust-stagflation cycle turned and here we are in the stagflation phase again with heavily indebted governments each wishing to trash their currency thoroughly. They at the same time wish to apply the cost of that inflation upon (a) their subjects and (b) the countries selling them commodities. Difficult problem that, because the opposition want to do the same. Modern financial markets are intercorrelated, and some of the producing countries are now consumer countries and vice versa. So old alliances alter to take account of this and new alliances are forming. The commodity-resource acquisition game is evolving into something new.