The Great Debase Race

"Although there are countless maladies that are forever causing the decline of kingdoms, princedoms, and republics, the following four (in my judgment) are the most serious: civil discord, a high death rate, sterility of the soil, and the debasement of coinage. The first three are so obvious that everybody recognizes the damage they cause; but the fourth one, which has to do with money, is noticed by only a few very thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments, and in a hidden, insidious way." - Nicolas Copernicus

Yesterday Mario Draghi the president of the European Central Bank announced that starting in March the ECB would buy EU 60 billion a month of corporate and government bonds.  He added that this would continue through September 2016 and could continue longer should there be no proper recovery in the works by that time.  This "stimulus" package amounts to a minimum of EU 1.1 trillion or $1.3 trillion. The immediate impact of the announcement was for stock markets in Europe and the United States to rally and for the Euro to lose 2% against the dollar falling to its lowest level in 11 years.  Margin requirements in the future currency exchange jumped to 100% a sign of impending volatility and risk.

With Europe now firmly in the money printing camp along with Japan and China and with the United States presently sitting on the sideline, the beneficiary is the United States Dollar (USD) which continues its march higher.  While the stock markets of the world rally I continue to hark back to the words of the quote above as this mass global stimulus is going to have a huge impact on generations to come.  As I wrote last week this massive overhead of debt is getting to a level that is unsupportable but that has not deterred the central bankers of the world to print more.  So where can we hide?

The first benefactor is the stock market.  The problem here is that at some point there will be a tipping point where stock valuations become so high that they collapse on themselves.  Whether we are there now or whether they can continue on their surge higher is anyone's guess but as this market is clearly manipulated by the central bankers I choose not to play this game.  Anything that is manipulated will have a poor outcome just ask the Patriots!  The short term benefits (a win) are undermined by a lasting legacy of questions and doubt and in some cases the winner is stripped of their crown like Lance Armstrong.

The debasement of currency leads to a loss of faith in the debased currency so people turn to things that benefit from this loss of faith and the benefactor of this has and always will be gold.  Already gold has risen from just over $1,160 an ounce to $1,300 an ounce in January alone and with the continued debasement of these currencies it should be a huge benefactor in 2015 and beyond.

The bond market should also continue higher as interest rates will continue to remain low but like the stock market this will only last until there is a complete lose of faith in the ability to repay the enormous debt burden at which stage everything falls to pieces (once again another scenario that would be excellent for gold investors).  Can you imagine the 10-year Note yielding 1.00% or lower, as if not you might want to start as in the near term I expect yields to head lower from their already low levels.

So from an investment standpoint you could toy with the stock market but to me the safer bet currently is gold and bonds.  Gold in particular looks interesting as it has been in an all out bear market for the past four years.  Gold mining stocks have been particularly hard hit some losing more than 70% of their value so to me this is the place to be as it just might be that its time has come around again.