Below is Fitzwilson’s exclusive piece for KWN:

Fitzwilson:  “Alan Kay is one of the most brilliant computer scientists of all time.  Very few people have not been impacted by his mind and creativity during the last half century.  Graphical user interfaces and overlapping windows on computers are just a few of his noteworthy contributions.

He is also known for a famous quote.  Reflecting on the future, he said “the best way to predict the future is to invent it”.  He is, of course, referring to the contributions to the future derived from his inventions.  It can equally be used to explain the oddities encountered when pondering economies and financial markets.

Central banks and countries have taken Dr. Kay’s advice to heart and have succeeded in inventing a future that has made both running businesses and the task of investing very difficult.  Instead of billions of invisible hands making decisions through economic interaction, we have an increasingly shrinking minority making the crucial decisions for everyone else....

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To accomplish such a future, markets had to be controlled.  The data about the economies had to be favorable to the narrative of the inventors of these new economic and financial paradigms.  In today’s world, few markets provide true price discovery and few economic indicators are without serious reservations.  Indeed, one European notable suggested that when things get really bad, you have to lie.

Those in control believe that creating and spending money leads to healthy economies, strong markets and real growth.  Real growth will then spur more hiring which will generate more well-being for the citizens.  There are others who believe that healthy, skilled and productive individuals with sufficient opportunity are what really moves an economy forward.  A strong economy will require and result in functioning, healthy markets, providing the essential output of price discovery.  The amount of money will be determined by the needs of the system, not financial “inventors”.

One of the indicators that continues to attract much attention is the velocity of money.  We do not doubt that the Federal Reserve is pulling out all stops to get economic activity to a higher level.  Unfortunately, the first two priorities were saving the global banking system from the consequences of their ill-advised behavior, and then to provide the ability to fund sovereign deficits.  The trouble is that those two tasks required an enormous amount of newly created money to achieve stability for the banking system.  The deficits, both cash and accrued, continue at a horrendous pace.

For all of those focused on velocity, it cannot turn up in our opinion as long as the denominator, M-2, is increasing to such bloated levels.  It is arithmetically impossible.  You can see that in the chart below:

What we get is a Fed desperately trying to increase economic activity, velocity and graduated inflation, but what it ensures is a stagnant economic environment.  Cash piles up on balance sheets which sits idle, to be used for corporate stock buybacks or for speculation on the “prop desks” of the major banks.  Stock markets have responded this year, but the increases ride on instability.

We saw a glimpse of the instability last week as Chairman Bernanke’s comments were mulled.  We also saw it in the Japanese bond and stock markets in recent trading sessions.  The Nikkei has had some severe declines, but we must remember that the declines so far only return the Index to the trend line begun in November.  The most worrisome is their bond market.  It is the second largest in size next to the U.S., and there were several trading halts last week.

There appears to be an eerie calm as markets and central bankers are realizing that the degrees of freedom in solving this predicament are becoming fewer in number.  What it means for investors is to sharpen pencils, stick to value and not chase momentum.  We have no reason to believe that the regulators and politicians are not still in control.  By sticking to deep value, any severe discontinuity in the markets will hopefully be minimized for those investing for the long-term.

In one of his many roles, actor Jude Law stated, ‘Depression is the inability to construct the future.’  For many investors and fund managers around the world, the chaos and uncertainty of global markets has been most difficult to endure.  What KWN readers need to do in this type of environment is to stay focused on value, such as physical gold and silver, as well as the quality mining shares because great value always wins in the long-run.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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