Dan Denning: Turning Debt into Equity & Revaluing Gold

Dan Denning: Turning Debt into Equity & Revaluing Gold

Platypus Rex: End Times Investment Wisdom for the Duck Billed

Dan Denning, 2012 Agora Financial Investment Symposium

Dan Denning, Editor of The Daily Reckoning Australia, believes 2012 is a lot like 2007, but with more denial.

The risk in the system has been transferred from the periphery (bad mortgages) into the core (US Treasuries) – which he anticipates will no longer be risk-free sometime in our lifetimes, and perhaps sooner rather than later.

10-Year US Treasury YieldYields on US Treasuries have pancaked as systemic risk has collapsed to the core. (via StockCharts.com)

The net result is what he refers to as the “Government Debt Depression (GDD)” mess we are in.

Suppression of Price Signals and Corruption of the Free Market

Denning maintains that since 2009 we have already seen the inflation feared with the new monetary creation – pointing to this eye-opening chart that compares the S&P Index with and without the Twenty-four Hour Pre-FOMC Returns:

Markets go CRAZY for FOMC days

Due to this level of corruption in the financial markets, he’s not convinced that an investor can do well by purchasing good companies with good balance sheets and prospects any longer.

The Proxy Down Under, Slowing Down

Having lived in Australia for the past seven years, Denning is familiar with the popular economic proxy for commodities/China/Risk/Growth.  He believes Australia is at the beginning of the value chain – and also the canary in the coalmine – as they supply China with their resources.

Australian dollar price chart

He described the Aussie dollar as “looking toppy” here, and believes a further run up is unlikely from here, as it’d require a reignited global boom.

Turning Debt into Equity and Revaluing Gold

Denning points out that all this debt in the system must be extinguished.  How it does that is a matter of debate, as creditors prefer deflation, but debtors (and voters) prefer inflation.

He thinks this will happen via the introduction of gold as the ultimate Tier-1 capital in the banking system.  Gold, which has been collected by central banks aggressively of late, would be then be revalued as well.

Incidentally Denning’s revaluation theory jives with an interesting article sent along last week by our astute correspondent Dr. Evil (which I have been late in posting):

Earlier this month, U.S. federal bank regulators issued a proposed rule-making note regarding capital risk-weightings for various assets. The Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Reserve asked for comments on a move that would place a “zero-risk-weight” rating on gold bullion held in banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis.

Source and full article at Wall St. Cheat Sheet.

Dan Denning is the author of 2005’s best-selling The Bull Hunter.  He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.

This week Contrary Investing is coming to you LIVE from Vancouver, Canada, with coverage from the 13th annual Agora Financial Investment Symposium!  Stay tuned this week for write ups on the presentations from Niall Ferguson, Rick Rule, Marc Faber, Michael Covel, Doug Casey, Barry Ritholtz, and more.