The information contained in this communication is provided for informational purposes only and has been obtained or derived from sources believed to be reliable. No representation or warranty is being made, express or implied, as to the accuracy or completeness of such information, nor is it recommended that such information serve as the basis of any investment decision. This report contains forward-looking statements that are subject to change. Forward-looking statements involve inherent risks and uncertainties, and the predictions, forecasts, projections and other outcomes described herein may not occur. A number of important factors could cause results to differ materially from the views and opinions expressed herein and there are no guarantees of return. This material is not an offer to sell or a solicitation to purchase securities of any kind. Before making an investment of any kind, readers should carefully consider their financial position and risk tolerance to determine if such investment is appropriate. No information contained herein may be reproduced in any way without the express prior written consent of Michael Krieger. Mr. Krieger may allocate assets to positions described herein and reserves the right to enter, modify or exit any such positions without notice.





Financial Warfare


Unfortunately, I spend a good portion of my day trying to get into the mind of a deranged, academic, conflicted and panicked central planner. In other words, I spend most of my day in the Bernank’s head. August 2011 was an extraordinarily important month in the history of the financial world. It is when I believe the “system” blew up for good. The sovereign rating of the United States was downgraded by Standard & Poors and although treasuries have rallied ever since, it was 100% the equivalent of someone yelling the “emperor has no clothes” and the world indeed noticed. It was also at this time that the European banking system and in reality the entire Euro project started to blow up. Equities plunged and gold soared. It was the worst of all scenarios for the Central Planner in Chief, the Bernank.


As all of you know, I think it is nearly impossible to make money in this market (if you want to call it that) unless you assume all things are gamed and manipulated. I think that if you are under the assumption that there is a free market and that there are rules when it comes to the government, the banks (Central and TBTF) then you can’t succeed because you are operating on an entirely false macro assumption. August absolutely scared the living daylights of the central planners and all of us in the “fight the Fed” camp knew that they would have to pull something together to exact revenge on those that are betting against them. One of the other things that happened in August that scared the living daylights out of the central planners was the massive flow of fiat money into what was perceived to be a “hard” fiat currency – the Swiss Franc. This provided these guys with the perfect opportunity to launch a massive counteroffensive in what has clearly become a gigantic Financial War. In what was an extremely well planned and aggressive move, the cabal of Western Central bankers convinced the Swiss to make the incredible announcement that they would print unlimited Francs to peg the currency at 1.20 to the dying euro.


You have to hand it to these guys. The move was a stroke of central planning genius. Not only did they destroy people with major long Franc positions versus virtually any other currency (the Franc went down 25% versus the dollar in a one month period and 20% versus the euro) which was a way for the central planners to extract a pound of flesh from those betting against them, but it also was just as much if not more so directed at the gold market. Let me explain. Anyone with a large long franc position also likely has a long gold position as they are (rather were) essentially the same macro bet. Such a massive move in a currency such as the franc would have been so unexpected and such an outlier event that it would have wrecked severe havoc on many portfolios. The central planners knew this and they used it to their advantage to stop gold in its tracks as it was headed to $2,000/oz and beyond. This was no coincidence. It was financial warfare. You MUST know your enemy to survive and win the war because the central planners can win battles but not the war.


Total Currency Chaos


What has ensued since the Swiss intervention has been nothing short of total currency chaos throughout the emerging markets world. Here are some numbers to put things in perspective. Since the beginning of August here this is how much various currencies has depreciated versus the U.S. dollar. The Brazilian real – 20%, the Indian rupee -13%, the Korean won -13%, the Mexican Peso -20%! I could go on, but you get the point. Now, I am not going to say that these currency moves were also caused deliberately by the central planners although I wouldn’t put it past them. More likely, they are the symptoms of a massive global economic slowdown and the view that the monetary policy in these countries will have to be loosened materially. However, is this an appropriate conclusion?


While current inflation data may be brushed off as yesterday’s news the figures have continued to come in pretty hot in the emerging markets. Moreover, the massive depreciation in these countries currencies lately has likely only made the inflation situation worse. For example, let’s take a look at the most important commodity to global economic growth, oil, in the currencies of these various markets.


Brent Crude in Mexican Pesos


Brent Crude Mexican Pesos


Brent Crude in Indian Rupee


Brent Crude Indian Rupee


Brent Crude in Brazilian Real


Brent Crude Brazilian Real


Brent Crude in Swiss Francs


Brent Crude vs Swiss Franc


Those Charts are BAAAD


The point of the charts above is to show you that things aren’t as they seem. While crude oil in dollars has indeed come down, what is actually going on is a massive devaluation of emerging market currencies. This is why as you can see, oil is basically at the highs in the peso, rupee and real. While not at highs in francs it did jump a striking 35% in a month after the devaluation was announced. So the KEY point I am trying to make is that this is not 2008. Yes, we are looking at a pretty significant cyclical slowdown globally; what I would call a recession within a depression. However, what is happening is it is simply the emerging market currencies’ turn to devalue in the global fiat currency death spiral game. The fact that oil is at highs for these countries at this point in the cycle is absolutely devastating. Anyone “playing” overseas revenue names better revisit their thesis and fast. Luxury names are supposed to hold up on emerging markets growth? Please. Luxury names are commodities in 1H08. It is the same thing. I called that right and I am saying it here. I hear ALL the same arguments in that sector. It is not immune. It is not decoupling. It will crash.


Gold is Falling? Really??


Ok, so let’s take a step back from propaganda and look at what is really happening. Gold is down a little over $150/oz from the highs in U.S. dollars. That said, let’s look at gold in the currencies above that have recently experience devaluation.


Gold in Mexican Pesos


Gold in Mexican Pesos


Gold in Brazilian Real


Gold in Brazilian Real


Gold in Indian Rupee


Gold in Indian Rupee


Gold in Swiss Franc


Gold in Swiss Franc 


See, once again things aren’t as simple as they may seem. Gold is not falling, emerging market currencies have just been devalued. This is what might be expected within the current macro environment of general fiat currency death as the globe enters a recession within a depression. Things are going to be very, very choppy and I would be extremely cautious in all markets but physical precious metals should absolutely be accumulated on weakness. The system has already blown up and while that makes thing extra volatile and confusing, as JP Morgan said in 1912 “gold is money, everything else is credit.” It shall be seen to be true again.


Peace and wisdom,