Those who fail to learn history are doomed to repeat it. I do not think there is a more appropriate saying for the times we are experiencing right now.

Anyone who is paying attention to the bond “markets” will notice a substantial rise in particularly the long end of our bond “market.” I cannot imagine why anyone would want to buy a promise to repay 10-30 years from now when the numbers say IF you get paid back, it will be FAR less VALUE than you are expecting.

Many will argue that getting paid back is not an issue. It may or may not be, but the numbers do not lie- only those reporting them. Any country drowning in debt, “printing money” to even service existing debt while adding even more trillions to the debt pile are more than likely, according to historical evidence, to keep “printing” until the currency reaches its intrinsic VALUE of near NOTHING. Keep in mind that our dollar is not an asset, but a unit of debt and its only VALUE is the perceived VALUE of what you can buy with it.

As the “printing” continues, prices start to rise slowly at first and then pick up steam. In Europe, they are already talking about “price caps.” This is an edict that the government puts out so that businesses cannot charge any more than a certain amount for their goods.

This has happened in Venezuela, Germany, Argentina, and other countries – including HERE in the 1970s. In each case it leads to NO SUPPLY. The simple reason is that if a business cannot raise prices but the cost to produce or sell goods go up- they STOP PRODUCTION.

I have written in the past about my own experience in the 1970s when I was just a kid and learned LONG before I had a clue about economics just how damaging this path could be.

I went to Denler’s Grocery store (local grocer- not a mega corporation like we have today) and my mom wanted American cheese. The owner of the store was stocking shelves. My mom asked Mr. Denler where the American cheese was. He stated “The government says we must sell the cheese for $2.00. The farmer wants $3.00 for the cheese. That is why there is no cheese.”

It could be any product or service, but you get the point. Businesses exist to create profits. No profits cause the business to fail. This impacts not only supply but also JOBS.

This is just another example of how central planning does NOT work. It has a 100% failure rate throughout history. Remember the Soviet Union, Weimar Germany, and countless others who manipulated numbers and assets that led to catastrophic collapses when reality struck. Also keep in mind that, in the beginning it all appears GREAT as the scheme appears to offer “something for nothing” which anyone paying attention should know is an illusion. I believe we are in the beginning of OUR wakeup call right now.

Instead of letting free markets do their job and have a willing buyer and willing seller come to a realistic price, the “markets” that we currently have- along with most of the rest of the developed world have NO PRICE DISCOVERY. All assets are being manipulated starting with sovereign bonds. This impacts all other bonds as well as stock, real estate, and hard assets. Artificially, low rates make people reach further into the risk spectrum to keep up with rising prices and lower purchasing power of their currency. This happens because, as I have said before, the Fed has no magic wand. To keep rates artificially suppressed they need to create cash from nowhere, buy the bonds to create demand where FAR LESS actually exists to reduce the rates. This gives the appearance of strong demand regardless of whether it exists or not.

These actions also lead to what the experts call malinvestment. Decisions are made upon assumptions that can only be profitable at artificially low rates. When rates rise the numbers, in many cases, make no sense anymore and lead to defaults and bankruptcies- as we are seeing RIGHT here and Right NOW in the USA and indeed across the globe.

This manipulation also leads to false prices for hard assets. Generally, it leads to commodities being grossly underpriced and leads to under investment in these areas, which eventually leads to lack of supply and FAR higher prices when manipulation must end so that supply can catch up with demand. In fact, according to Goehring and Rozencwajg, commodities are the CHEAPEST they have ever been in relation to financial assets. (BUY LOW- SELL HIGH).

While the war will be blamed for a lot of our problems going forward, the actual culprit of our current situation is simply conjuring up too much cash and going too deeply into debt so that we could live Far above our means for decades at the expense of future generations. The sad part is that future generations are already feeling the effects and are having one heck of a challenging time getting by RIGHT NOW. This is before any major shock to the system takes place- like a major city or many major companies defaulting.

This is not to say that war is not having some unintended consequences like ridiculous volatility in all asset prices and a lack of supply in some important commodities. All the talk is about oil, which is certainly a concern. What is not being talked about anywhere near enough, are the byproducts that are not being produced right now like helium, bromine, Sulphur, etc.

While we do not necessarily consume these materials like we do oil, these are critical materials that get produced as by-products of oil and gas production. Helium is used to cool MRI magnets. Hydrogen is critical in the production of computer chips. Nitrogen is used to prevent contamination at the atomic scale for semiconductors. Sulfur is critical to produce fertilizer and batteries. Bromide is the flame retardant in every circuit board. Naphtha is the primary ingredient in petrochemical crackers that produce polyethylene, polypropylene, and the plastic that supply chains need to function. All these essential materials are by-products and are not produced independently.

When the lack of supply of critical goods hits, we will all learn that no matter how much cash you conjure up you cannot create the necessities of life with a printing press. It takes hard work, creative planning and functioning REAL MARKETS.

Right now, we appear to be lacking in all areas and could be in for some major changes.

Be Prepared!

Any opinions are those of Mike Savage and not necessarily of those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information in this report does not prove to be a complete description of securities, markets or developments referred to in this material. The information has been obtained from sources deemed to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct.

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