Category: Finance, Economics and Investing

From May 19th 2012

Sentiment appears to be on the move.

Let’s look at some dates, the first being the 2012 FOMC meeting calendar:

http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

We have meetings scheduled for June 19th and June 20th. The one after that is right at the end of July/beginning of August. In other words it’s just before the the silly season prelude to the November 6th U.S. presidential election:

http://en.wikipedia.org/wiki/United_States_presidential_election,_2012

Meanwhile, over in Europe we have June 17th Greek election, possibly the most watched election of the 21st Century, looming.

Over in the U.S. the economic indicators, while still positive, are showing some signs of weakening. And of course U.S. U3 headline unemployment at 8.1% is masking a U6 of 14.5%, itself flattered by years of calculation changes:

http://portalseven.com/employment/unemployment_rate_u6.jsp

Shadowstats still place real U.S. unemployment on a consistently calculated basis in the low 20%’s.

So we have a convergence of drivers emerging which appear to be focusing on late June:

1) In the U.S. the economic indicators are faltering, unemployment remains at politically unacceptable levels and a U.S. election is rapidly coming down stream. The FED will not want to attract political criticism by announcing measures during an election campaign. The window of opportunity is therefore shrinking fast.

We also have the ongoing trillion USD deficits and the need to fund them, given that China now prefers gold to U.S. treasuries. Around that time Operation Twist also ends, and the market expects something on that basis alone.

2) Meanwhile in Europe the markets shiver with fear at the prospect of the losses the banking sector will face as a Greek exit catalyses another default. The Greeks still look like they are prepared to play the Mexican stand-off game and vote-in anti-austerity political groups. By June 18th the markets could move into complete panic as soon as the uncertainty of the vote outcome is replaced with a conviction that the only outcome will be a new Drachma.

We therefore have that June 18th to June 20th period when the markets are in turmoil, coinciding with an FOMC meeting, and almost certainly with currently unscheduled but inevitable ECB, Eurocrat and Hollande/Merket summits.

The FED will have its drivers and the Euopeans will have theirs. There will be a convergence of interests, and probably ‘solutions’.

A pan-global nuclear level injection of liquidity into the global financial system, associated with global QE at levels we have not see before. All major central banks will participate. No one will want to be the currency that remains too strong in a sea of printing. China especially will not want to compound its already faltering growth with an even stronger exchange rate.

Whether Greece stays in or ultimately leaves, the markets will not wait. The fear factor will have to be addressed with something or Europe will be left with all the market effects of a Greece exit, but without the actual catalyst.

Whatever happens the action will need to be large enough to dissuade the markets from transferring their attention to Spain, Portugal, Ireland, or even Italy.

Doing nothing, either in the U.S. or Europe does not look like a viable option.

And time is rapidly running out.

From May 19th 2012

After yet another week of self-inflicted turmoil the continental europeans continue to choose the option of trying to talk their way through the crisis. The markets are mercilessly punishing any sign of weakness as fear overwhelms rational thinking. And very slowly, ordinary Greeks and Spanish citizens have started to realise that financial Eurogeddon could be just around the corner. The more senior bankers try to calm the markets and their respective populace, the more distrustful the traders and people seem to become. ‘I’ll take my money, thanks very much’ is no longer the cry of the relieved wealthy, who long ago moved their precious Euros into a safer home at the European core, in Switzerland or in U.S. dollars.

So Greece is left with two options:

Stay in the Euro and face a decade or two of ‘austerity’, an almost permanently depressed economy featuring high unemployment and generally falling living standards.

Or an exit from the Euro, the reintroduction of the Drachma and a probable immediate significant decline in wealth. Instant economic pain, but with the possibility of recovery in a few short years.

Either way it will mean pain.

The Eurocrats and politicians think they can frighten Greece into voting-in a ‘pro-bailout’ political group. Meanwhile, the ascending Greek left think they can terrify the European core with the financial implications of a ‘Grexit’.

So what happens next?

It looks like the average Greek thinks that Europe will blink. Those that are already out of work can’t really see how much worse their situation can get. After all, whatever the outcome, you can’t lose a job that you don’t have. So June 17th will probably see an anti-austerity government assume control, with an inevitable battle of wills ensuing shortly afterwords. Mild compromises will be made by the Eurocrats which will not satisy the newly elected local political alliance. We will have a stand-off in the immediate post election period.

The markets know this.

The Greek people probably suspect this.

So the real question is whether Greece will survive within the Euro until June 17th. Will the Greek people continue to withdraw deposits from the already stressed banking system?

Probably.

It’s simply a question of time.

Either way the Eurocrats, European politicians and ECB have some decisions to make. Do they make a move before the election, or wait until afterwards?

If Greece stays within the Euro, the ECB will have to back down and Europe will effectively have to give Greece an unlimited credit line on very easy terms. The German taxpayer will not like this at all. It will effectively mean LTRO/printing and a relaxation of austerity, not just for Greece but for the whole Eurozone. In other words a big reflation, big enough to take the fear from the markets.

If Greece leaves, the markets will ‘frazzle’. Abject panic will be instant as Greece acts as a catalyst, a sovereign Lehman moment. A collective financial nuclear event will be required that dwarfs anything seen previously, something that is so large that it washes through the markets like a nuclear hurricane, in strength and effect. All the world’s central banks will need to act in unison with a massive injection of liquidity, the FED, ECB, BOJ, BOE, BOC and possibly some of the smaller banks.

It would calm the markets but switch attention to the fear of inflation. Gold and other risk assets will react. Equities associated with gold will reverse their seventeen month declines and resume their eleven year bull market trend. We could soon see the old $1900 high taken out as fear of market panic is supplanted by a fear of hyperinflation.

OIl and other commodities will also advance as inflationary fears drive prices into areas that reflect the larger base of global money supply rather than demand.

Consumer prices will eventually increase. Perhaps by then the average U.S., U.K. and European citizen will have started to follow Asians by buying hard currencies as protection against value erosion.

Then in 2013 we have the U.S. ‘fiscal cliff’, the 40% or so increase in U.S. taxes that currently waits in the pipeline.

The U.S. debt mountain will be moving towards $17 trillion.

And the world and the markets will turn their attention to the real story, the elephant in the room that hasn’t been noticed while Europe implodes.

How will the U.S. pay its debt back?

From May 13th 2012

http://video.cnbc.com/gallery/?video=3000088395

I have been one of the thousands of people who have had enormous respect for the investment  achievements of Warren Buffett and Charlie Munger’s Berkshire Hathaway Group. Charlie Munger is now 88 and has earned the right to be listened to, because of both his age and experience, and lifetime of proven success. So it came as a bit of a shock to hear him express the view that “civilised people don’t buy gold”. In pronouncing that blunt view of what may well be the only investment class that survives our current transit from the old world to the new, he has not only categorised most of the developing world as ‘uncivilised’, but has managed to alienate entire groups of Western investors who now think that Charlie is just ‘talking his book’.

Now every investor has a right to promote their interests but opinions need to be qualified and transparent. It is clearly in Berkshire’s interests to encourage equity investing given the sprawling nature of its portfolio, but perhaps the opinion ought to be presented in the context of some evidence. Gold’s performance over the last ten or eleven years has exceeded the returns of Berkshire, as identified by Jim Slater in a recent ‘Investors Chronicle’ article:

http://www.jimslater.org.uk/wp-content/uploads/Gold-vs-Berkshire-Hathaway.pdf

Charlie and Warren missed it, as did Bill Gates and other luminaries of the investing and business world.

But that’s the past, what of the future?

Well here we have the problem of dealing with the question of what will preserve wealth in these uncertain times. One thing is fairly clear is that it probably will not be sovereign bonds. As the retail investor has exited the equity markets since 2008, the sovereign bond market has ballooned into bubble territory. Just as the first signs of exhaustion are appearing in the bond market, after 30 years of growth, the retail investor has switched over a trillion U.S. dollars from equities into U.S. treasuries. Europe, the U.S. and Japan are showing signs of debt stress and the U.S. is almost certain to face some form of deficit driven crisis at least once a year for the foreseeable future. At some point in the fairly soon Western central banks will lose their grip on debt management, and interest rates will start to rise. The personal investment effect on anyone holding bonds in a bubble zone could be catastrophic.

So should you weight your portfolio into equities?

There is always an argument to ‘stock-pick’. The problem of course is which stocks to pick. Which sector should you follow? Which stocks within the sector should to select? Therein lies the rub. Can we rely on continuing Keynesian money printing to kick-start our broken economies? Will the U.S. Europe and U.K. experience something similar to Japan’s 23 year long ‘lost decade’. Answering those questions will provide something of a steer on whether investments in equities are a good idea in principle.

At its most basic level, whatever the economic condition, people have to eat, use transport, and consume utility supplies. There must always be a market for the ‘basics’ and companies providing goods and services in these sectors must be worth considering.

But can you actually make some money out of the financial crisis?

There are no guarantees of a financial return but precious metals must be a contrary bet, as they have been for the last few thousand years. In times of crisis when debt has driven countries and cultures to the brink, ordinary people have resorted to gold. After all as JP Morgan suggests: “gold is money, everything else is credit”. Charlie and Warren may contend that its a dead asset, earning no interest or dividends, but that’s not what it is really about. In times of uncertainty it’s that insurance policy from the ravages of the crony capitalists and insanity of politicians trying to cling on to the vestiges of a system that can be no longer. Gold and silver are hard assets. They don’t ‘do’ anything but then again they can’t be depreciated to zero as is the eternal fate of all fiat currencies. They are a port in a stormy sea of excessive digital paper ‘money’, and for the most part they will still be here long after the mistakes of our current political class have been consigned to entertaining case studies of how not to run a financial system.

Perhaps it is better to be considered ‘uncivilised’ than to continue worshipping at the alter of a failing paper based illusion.