Therefore, those in favor of a commodity currency who store tangible assets are the optimists. Commodity currency advocates are neither ‘doom and gloomers’ nor vampiric fatalistic fiat currency disciples who will be vaporized by a rising golden sun. Those in favor of a commodity currency who store tangible assets realize that the earth rotates, the sun rises and the ages turn. As the night shifts to day life will go on with breakfast being cooked and eaten. The issue is who will do the cooking and who will do the eating.

Strategic Relocation

Shortly before Memorial Day I received an interesting, if not unanswerable, question from a reader: “Would you recommend a place to live in the Montana to Colorado area that will have minimal economical damage?”

The principle of human action holds that every individual derives utility according to their own preferences resulting in a subjective perception for determining value and price. I hate cold weather. Being trained in the law I am often accused of being cold-blooded but the reality is that I am just a desert rat.

While preparation expert Joel Skousen, author of Strategic Relocation, may consider Montana or Nebraska attractive locals I have about the same desire to live in Montana or Nebraska as I have for eating sauteed rats in South Korea. Nevertheless, I know people who love living in Montana and others who find sauteed rat a delicacy. Everyone has their own individual preferences based on their human action.

Preparation

A motto I have tried to implement is: Be prepared. Often the first step is to assess the environment and circumstances. There is an infinity of scenarios that can play out. The key is being able to assess what is possible and its probability of occurring.

Sure, a metorite could come hurling out of left field and destroy your car, or the earth for that matter, but the probability is extremely low. Even if I did purchase meteorite insurance I would still bear the counter-party risk. Therefore, I have chosen to forgo meteorite insurance. Nevertheless, I would not be surprised if a few of my extremely conservative readers did purchase meteorite insurance and maybe even additional reinsurance. Everyone has their subjective preferences.

Mental Calculations of Value

The use of fiat currency has greatly retarded the ability of the general populace to performance mental calculations of value. These fiat currency illusions are like using the term ‘foot’ or ‘feet’ to perform mental calculations of distance when constructing a building but having either no definition of inches or conflicting definitions of inches.

Let us assume plans were drawn up for a building with a 7 foot door within a 10 foot wall. However, the definition of feet when used for the door was 24 inches per foot and when used for the wall it was 6 inches per foot. Can you imagine the resulting chaotic structure?

But that is precisely the problem most individuals and financial professionals have found themselves in. As a result most people can neither accurately appraise the economic environment nor make accurate assessments of the possible events and their probability of occurrence.

Suburban Survivalists

Yahoo Finance! reported that a new trend is coming out of chaotic California: ‘Crisis spurs spike in ‘suburban survivalists’. “Six months ago, Jim Wiseman didn’t even have a spare nutrition bar in his kitchen cabinet. Now, the 54-year-old businessman and father of five has a backup generator, a water filter, a grain mill and a 4-foot-tall pile of emergency food tucked in his home in the expensive San Diego suburb of La Jolla.”

I find Mr. Wiseman’s tale of ‘spending roughly $20,000 since September on survival gear’ rather ironic on multiple levels. First is his name. Second is that he is a ‘fire protection contractor’ so it appears that he is in the risk management business. Third is how he has approached the performance of these mental calculations of value.

Surprisingly Professor Markman does hit on a key issue when he says, “We have no real causal understanding of the way our world works at all”.

Complex Systems

A few years ago I was touring a Wal-Mart store with its general manager. He showed me all around, how the trucks were packed and explained the Just-In-Time computer system that automatically managed the inventory to make sure that just the right amount of goods arrived at the stores at just the right time. After all, this helped reduce inventory which freed up cash and made the company more profitable.

Also a few years ago at a lunch I had a discussion with Kevin Rollins, former President and CEO of Dell Computers, about inventory management. His statement still sticks in my mind about measuring inventory turnover not in days but hours.

Tremendous innovations in supply chain management have taken place over the last decade. Companies and their inventory are leaner than ever which conserves their cash and supposedly increases profitability. But sometimes a black swan flies in, disrupts the system and chaos in sues. Other times it is a gaggle of black swans.

Simple Preparation

If Mr. Wiseman really needs his various preparations then what would the probability be that the area he is in is experiencing massive civil unrest, supply chain disruptions, gang warfare and a host of other undesirable effects?

Often when thinking of disaster preparation people get a little extreme, do not accurately assess the probability of events, focus on fairly immaterial questions like how to buy gold or silver and neglect the more important issues.

When considering physical preparation I think the best insurance is a three month supply of food and a 72 hour kit.

The kit should be extremely portable such as a backpack which may be quickly taken in the automobile should there be a need to evacuate. The food storage is a great hedge against inflation, insurance that you can eat which is not subject to counter-party risk, protection against potential supply chain disruptions such as the recent swine flu advertising campaign, and relatively cheap. Food storage is a form of savings and procuring a three month supply of food may cost only a few hundred FRN$s.

Many of the economic establishment has an insane belief that savings can be too high and often berate China for their high savings rate. The savings rate can never be too high.

For example, an individual can never have too much food.  But many negative effects, such as death, result from having too little food. Therefore I would rather bear the risks from having too much food such as spoilage, etc. than any of the effects from having too little food. After all, the body measures food and water inventory in hours not days. To reduce the cost of having excess food therefore I follow the principle of storing what I eat and eating what I store.

Many, such as billionaires Eric Sprott and Richard Rainwater, find the Peak Oil theory persuasive and foresee a long emergency. Sure, there are additional preparations you can make such as opening a free GoldMoney account where you can begin using gold or silver in ordinary daily transactions, procuring a shotgun or Glock 9mm, storing a year or two of food, spending hundreds of thousands or millions of FRN$s on a ranch in a remote location, etc. For those interested, I address the principles for a comprehensive strategy in chapter 6 of The Great Credit Contraction for dealing with the current environment to protect, preserve and grow one’s wealth.

Conclusion

Using gold to perform mental calculations of value is extremely important in determining how to profitably allocate capital. The current worldwide monetary system is based on a rapidly evaporating illusion. The FRN$ system is facing intense pressure which is resulting in many undesirable consequences. Being able to assess possible events and discern their probability is becoming increasingly important.

Our current society functions because of complex systems and they can easily be disrupted. Preparation to hedge against these uncertainties can cost anywhere from a few hundred FRN$s or become a black hole for capital and time. Having a three month supply of food and a 72 hour kit will provide protection against the vast majority of probable scenarios. The Great Credit Contraction has only begun and the landscape is changing at a rapid pace.

Are you prepared? You may even consider taking a survivalism course. To benefit other readers please leave you questions or suggestions in the comments.

Regards,
Trace Mayer, RunToGold.com
for Whiskey & Gunpowder

March 31, 2010

Survivalism in the Suburbs was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

By the way, last year at the Agora Wealth Symposium in Vancouver, one of our colleagues took the stage to point out that your editor was complete moron. In this particular case, it was for being bullish on gold

He said that gold hadn’t done much adjusted for inflation since 1980. What’s more, he said that it’s worth less—adjusted for inflation—than it was twenty years ago. How, he speculated, could anyone take the advice to buy gold seriously when it had performed so abysmally?

Well here are the facts. The gold price bottomed in October of 2000 at $263.80. At that time, the S&P 500 traded at 1,379. Since then, the S&P 500 has fallen by 31% (closing yesterday at 942.43) while the gold price is up 262% to $956.

We’ve asked Kris Sayce to bring this small fact to the attention of our colleague when he attends this year’s Vancouver show next month. The theme of this year’s show is “Ten Years of Reckoning,” Symposium Promo celebrating the tenth anniversary of the Daily Reckoning. Kris will be spearheading the Australian delegation. More details on that later this month.

In any event, it seems pretty obvious, that for the last ten years anyway, selling stocks and buying gold would have been a good trade/strategy. Stocks ended an 18-year bull market in 2000 and gold ended a 20-year bear market. One asset class was at a cyclical low. The other was at a cyclical high. In fact, you might even say that one was at a generational low and the other was at a generational high.

Gold is no longer as low as it once was. But it’s still not as high as we expect it to go before it starts to look foolish. Meanwhile, today’s government bond market looks an awful lot like the stock market circa 2000. You’re seeing a generational high in bonds. It’s another version of the “high-low” strategy.

This time around, though, we would add energy stocks to the mix, along with gold. Crude oil climbed to an eight-month high over $70 on Tuesday. Bloomberg says the weakness in the U.S. dollar is, “bolstering the appeal of energy as an alternative investment.” Sell bonds, buy energy. Pretty simple.

There is probably some truth to the fact that oil’s latest move is driven by investment demand more than, say, demand growth in the real economy. But investors ARE looking for ways to profit from U.S. dollar weakness. Oil is liquid and popular. In the long-run, it’s the smaller-than-expected oil supply growth that will drive the market.

One thing Kris will probably be making clear to U.S. dollar-based investors is just how relatively attractive Australia’s position is in the developed world. “Even as Australia’s challenges increase, it will still be the envy of the developed world,” writes William Pesek at Bloomberg. “Even in its worst moments… Australia is among the least unsightly economies anywhere,” he adds rather optimistically. We’ll see about that.

Finally, we meant to write a bit about other possibilities in China today. That is, we were going to explore collapse scenarios (financial, political, and societal). But we did not realize it would be ambitious to try that in a few hundred words. So look for something more considered later this week in the essay spot.

Regards,
Dan Denning
Daily Reckoning Australia

June 11, 2009

Last Decade: Buy Gold. This Decade: Buy Energy. was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.