Rafi Farber: Yen Collapse Suggests We are At the Tipping Point of Keynesian Failure
Summary
Transcript
So by the time you see this, it’ll probably all be old news. But nevertheless, it’s still exciting. If there’s one thing that’s the most exciting to me personally, it’s that I’m starting to see that the monetary sphere is turning the corner to realizing that higher rates mean higher inflation, by which I mean the keynesian definition of inflation, which is rising consumer prices. They’re not quite there yet, but they’re about to get there.
And the biggest piece of the puzzle that I see to recognizing that higher rates means higher prices is the japanese yen, because it keeps falling and going and going and going and going faster and faster and faster. I woke up this morning and it’s now at 156. And we’ll see what happens when the bank of Japan makes an emergency rate hike and the end falls even faster. That is going to freak a lot of keynesian monetary theorists out, and everyone in the mainstream financial media, to a man, is a keynesian monetary theorist.
But just like in the late 1970s, when rates went up and up and up along with consumer prices, we’ve already entered this era. All we need now is for the talking heads to realize this and admit it. And then, in my opinion, will be on a beeline to the end game. And as I’ve said before, the logical reason why in this environment, higher rates mean higher prices is that currencies are backed almost entirely by debt.
And hiking rates means the value of debt falls. If the value of debt falls and currencies are backed by mostly, like, mid 90% debt, then cut the value of that debt and you cut the value of the currency. The Keynesians don’t understand this yet, but they’re about to. And when they do, it’s going to be a fun day. So let’s begin with this week’s silver report, brought to you by Fortuna Silver Mines, symbol FSM.
First of all, Fortuna’s first quarter 2024 financial results will be released on May 7. I’m sure Chris will cover them on the channel when they’re out in a live call with Jorgenoza I will go over them, of course, here as well, in two weeks time. And I wanted to show this chart just to show you what Fortuna is doing as we enter an obvious rally point for the gold and silver miners.
This is Fortuna versus GDX. And you can see here it’s been outperforming GDX for the past two years very consistently. And especially here on the rallies. You can see that it’s really taking off now, which is pretty much what I expected from a company like this, up 37. 36% over the last two years, versus GDX, which is still down 5. 34%. And of course, what we went over last week was that Fortuna discovered several rich new veins in its San Jose mine, its main silver mine.
And there are two things about this fortuna. First of all, is not hedged against silver, which on the one hand makes it more volatile, but on the other hand allows it exposure to silver when it does break loose, and it will at the end of this gold and silver rally. And I do believe that we are in late 1978, early 1979, exactly where, I do not know. Personally, I don’t want my miners hedged against silver, at least not with futures hedges.
However, they’re going into gold recently, over the last two years does give them a more natural hedge against silver, because gold, of course, is less volatile than silver prices in dollar terms. It’s like I always say, make new friends, but keep the old. One is silver and the other’s gold. So on the one hand, they’re not hedged against silver, which is what I prefer. On the other hand, there is a natural hedge against volatile silver prices and the fact that they now are producing a lot more gold out of West Africa.
And with that, let’s go to the slides. I wanted to start with the yen, because that’s where the action is. And if you’ve been following the silver report for the last few months, or even the last few years, you know that I look at the yen very carefully because the yen is basically the poster child for keynesian gobbledygook magic, proving, quote unquote, that it works. Except it’s going to collapse spectacularly because it’s such a spectacular Frankenstein keynesian money printing experiment that it is going to crash and burn.
I don’t know for sure if that crash and burn is happening already, but it looks like it might be. So we have here the final support for the yen at 158. 9. I think that is over here. Let’s just say 160 in 1990. This is back when the japanese stock market was at all time highs. Even in gold terms, it was at all time highs. And though nominally the japanese stock market has broken those all time highs, it is nowhere near the all time highs.
And gold prices in terms of gold. So in terms of real money, the japanese stock market is way down, and this is all an inflationary illusion. It doesnt exist. So we have here the two lines from the stock charts chart. Over here we have japanese rates and the yen. And I’ve shown this before, I just want to show you in different time periods here. It’s pretty much been this way since just after abenomics began, when he started expanding the balance sheet in an insane way.
And the crazy keynesian experiment became a super insane, crazy keynesian experiment. And since then, we’ve had higher rates equals lower yen, lower rates equals higher yen. You’ll see on the next slide here that the mainstream unit still doesn’t understand this, even though this correlation has been in place since about 2015. So we go to the next chart here, and this is from trading economics. If you look up the yen, we’re now, this is old already.
It says 154. 75. We’re already past 156 now, so we’re very, very close to that final support of about 158 to 160, and we could be there in the next two or three days, judging by how fast the yen is collapsing right now. So the point is, if you read this paragraph over here, I’m not going to read the whole thing. Just the first sentence is enough to show you what I mean here.
The Japanese yen, it says, weakened to around 156 per dollar, hitting that level for the first time since May 1990, as the bank of Japan held interest rates steady despite pressure from a sharply falling currency, as widely expected, that sentence is implying that had the bank of Japan raised rates, that the yen would be doing better. But we see from the previous chart here that that is not true, and it won’t be true going forward either.
When will they let go of this fantasy that higher rates means a stronger currency? Because in this environment, when currencies are almost entirely backed by debt, that is not true. So I believe that once the bank of Japan panics and raises rates in an effort to save their currency, and the end gets even worse, that is when they’ll start to have to admit that this is not working anymore, and there’s nothing that they can do.
Going back to this chart, I titled it yen carry trade forces yield japanese yen correlation. If you imagine what the yen carry trade is, it takes advantage of the difference in interest rates between the yen debt and dollar debt, meaning yen, japanese government bonds and treasuries. The yield on japanese government bonds is basically zero at three months. And the yield on dollars is like what, close to 5% now? Something like that.
So you sell yen to buy dollars to earn the difference. And the lower the yen goes, you can take those dollars and buy back even more yen. So the more the yen falls, the more that encourages the carry trademark and that piles more people into the carry trade to sell yen to make it even weaker so that they can get even more yen back when they close the trade.
And this creates a snowball effect, which is what is happening. So the weaker the yen goes, the more people are encouraged to participate in the carry trade and make the yen even weaker. And I don’t know if it can stop itself at this point. Now, I wanted to go into copper prices a bit because historically copper leads CPI quite tightly. Gold also leads CPI, but a little bit more loosely.
So if we look at copper here, we see that copper is on its way up again. Copper here is in blue and the CPI is in red. So we see here that copper prices are headed up again and the CPI follows it. A higher copper price predicts a higher CPI. We’re already in a second wave of inflation and copper is just another way to see that. And I just wanted to give a different perspective on cocoa.
We’ve all seen what’s been happening in cocoa, something between 10,000 and $11,000 per ton. And this is so called all time record high. Except it’s not even close to an all time record high. It’s not really even much of a move at all. Most of the problem is in the dollar itself, in which coco is priced. And here is the proof. You see here on the top, the black line is the dollar cocoa price.
And yes, it looks like it’s gone vertical here. This is a classic parabola. Yeah, true. But coco priced in ounces of gold. Where is the all time high? Well that would be here in 1973 at 32oz of gold per ton of cocoa, which equals about $74,560 per ton of cocoa. Now where are we? Where are we now? Oh, we have this tiny little, cute little parabola here going from about 1.
8 maybe ounces to now 4. 96. So let’s say 5oz. So yeah, it’s gone up. There are issues with the cocoa supply, im not denying that. But most of the problem is in the dollar. Its not in the cocoa supply. Because if people stack real money, instead of dollars in their bank accounts, theyd be able to afford coco no problem. The price of coco is lower than it was in the early two thousands.
Its lower than it was around the asian financial crisis in 1998. Its lower than it was in the mid 1980s, and it’s much lower than it was in the late 1970s. And even throughout the entire decade of the 1970s, cocoa was much, much more expensive than it is now. And here’s cocoa versus silver. We see the same little parabola. Yeah, and it’s gotten a little bit more expensive, not denying that.
But it’s nowhere near the record high that it was in silver terms, at about 1030oz of silver per ton of cocoa in 19 7778, it looks like. Now, I wanted to show two more things. This article from ahead of the herd, which usually has pretty good pieces, but this one by Richard Mills is pretty rambling, and I’m not a big fan of it. And I wanted to explain briefly why he says, here is a Volcker like series of rate hikes in the cards by Richard Mills.
And he gave this whole rambling historical lesson about Miller. Is that his name, the Fed chair before Volcker, and versus Volker who hiked rates, and Miller who didn’t. And he goes into the whole thing to show how much he knows about the history of different Fed chairs or Fed chairmen back then, because back then, gender language wasn’t illegal. You’re gonna get your boobs scuffed. But if you got the vulva to stick it out, I’ll be proud to call you ladies policemen.
Sir. Yes, ma’am. Going through this entire article, and I didn’t read the whole thing, because I just. I couldn’t. I just looked at the conclusion, and that is this. And it shows you the same lack of understanding that higher rates are going to lead to higher prices. He says here, our conclusion is that we are in uncharted territory. Everything, including gold, copper, the dollar, interest rates and inflation is going up.
It’s a trend for which there appears to be no historical precedent. Apart from the fact that higher rates, higher interest rates, though painful, eventually lead to the desired result of bringing inflation back into line. That is 100% specifically wrong. There is historical precedent for what is happening now. It is the late 1970s. What this guy does not understand, much like the Keynesians do not understand, which means that the people that are even supposedly on our side in the monetary sphere do not understand this either.
That higher rates means higher inflation. At this point in the monetary cycle, higher interest rates, though painful, will not lead to controlled price inflation, it will lead to exacerbated price inflation. So then what will calm it down? The answer is absolutely nothing. What could theoretically calm it down? A massive increase in productivity that would shower us all with so much goods and services that the supply of goods and services would be so high that prices would have to come down.
But that ain’t happening. The final article I wanted to show you is this one. This is from Bloomberg. And it says here cocoa price swings are the craziest since the 1970s. And this is important because it shows you what could potentially happen and what will probably happen in the gold and silver markets leading up to the crack up boom, which I believe at this point is only a matter of months away.
So it says here in Bloomberg, cocoa resumed gains in New York, with prices the most volatile in almost five decades, amid uncertainty over a historic crunch and his traders pull out of the market. This is the key paragraph that I want people to understand. Futures have soared about 160% already this year as poor west african harvests leave the world desperately short of beans. But the rally has made it more expensive to maintain positions, prompting investors to close out trades, draining liquidity and making the market more vulnerable to large price swings.
So once prices go up and up and up, traders leave the market because they can’t afford the margin requirements. And that hurts liquidity and makes price swings a lot more dramatic, which is what is going to happen in the gold and silver futures markets as well. So you’ll have to be able to hold through that. As it’s happening, liquidity will diminish, open interest will fall, prices will go way up, and then they might go way down, but not as much down as they went up and then way up the next day, and then way down again, et cetera, et cetera, until we finally do reach that 15 to one ratio, gold to silver ratio.
That will signify the end game, the end of the monetary system, the end of the dollar, and the restarting of the economic system of the planet, which will clear out all the insanity. I wish, I hope, happy Passover to those celebrating. And it is the third day of the omer. See you guys next week. And who knows where the end will be at by then. .
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