429: Mini-summer crash a precurser to crisis in 2013 - London "safe haven"
Greece and Spain: The Greek Euro issue has now spread again to Spain and the Spanish rates have now risen to 6.7% - close to the 7% that requires Spain to seek a bail-out from the European Central Bank or IMF. The Spanish economy is so big, markets are doubting whether a bail-out is possible. A so called “risk-off” period now seem engrained. There is little chance that things will change any time soon.
Mini-Summer Crash: As we predicted back in March, by May, markets would take a sharp downturn, and we were correct within a week – refer to our chart a few months ago. When the FTSE100 was 6000, we predicted it would crash to 5000 by August – it’s at 5250 now on 2 June. We advised people to bail out of the stock market by end April.
Future Trends: But what has the future install for us now? All the focus is on Europe and it looks like deflation is taking hold again.
· Gold has dropped to $1525/ounce from $1800/ounce. Silver has dropped to $27/ounce from $35/ounce. Many some gold and silver investors have bailed out. You might be wandering whether this gold and silver bull run has run its course.
· Articles have started to appear proclaiming that “Peak Oil is dead” – that the world is all of a sudden swimming with oil. They have dropped 20% already - people are predicting that oil prices will crash.
· Other articles have appeared from Morgan Stanley announcing the end of the “ten year commodities bull run or cycle”.
· People have flocked to the US dollar as the so called “safe haven”.
· Everyone is talking about “risk-off” strategies and – “flight to safe havens”
Views Are Short Term: In our view, many of the headlines and media coverage are laughable. People cannot seem to see further than the next few week. What is happening is a continued nervousness about the huge debt piles and ability of governments to pay off their debts. The austerity measures have spooked many of the conventional market thinkers and they have gone to other places at this time to protect their assets. Some people have been forced to sell their gold and silver to pay for margin calls and the like.
Now lets tell you what will really happen:
· Governments will print more money
· Eurobonds will be issued
· Interest rates will stay low or drop even further
· GDP growth will drop in Europe and unemployment will rise
· Investment in oil, gas, gold and silver will drop as financiers are spooked by the outlook for commodities – further exacerbating the supply shortage
· Yes, oil prices will drop back for a while and inflation will drop for a while
· QE3 will be announced mid 2012 so the effects will be felt prior to the US Election Nov 2012
Commodities: Then oil prices will rise sharply again as developing nations cut further into a tightening supply and silver and gold prices will skyrocket as inflation takes off again. Iran may also create further nervousness driving oil prices higher.
Buy Physical On Dips: What we are saying is, use this mid-summer period as an opportunity to stock up on low priced physical gold bullion, physical silver bullion and oil (equities). Because this commodities super-cycle is far from over in our view. It’s only half way there.
End of Commodities Cycle? JP Morgan Chase and Morgan Stanley are working in concert with the US Fed and Government to keep the Obama Administration in power – these are more or less nationalised banks. JP Morgan’s recent huge trading losses are not a particularly good advert for their market timing and acumen. JP Morgan tries to suppress the price of gold and silver – Morgan Stanley seem to want the price of oil to come down to keep the dollar strong to help foster an illusion that the US economy is doing well. They do not seem to be objective. Their advice is not good. Their analysis is not credible in our view. It’s better at the moment to listen to Goldman Sachs – who appear to have a fairly accurate commodities model they use and seem to be able to call when oil goes up and down and advise people externally about this.
Commodities Super Cycle: We hold a similar view to Goldman Sachs – that we are part way through a commodities super-cycle. Rather than saying we trust any of these banks, what we would say is that Morgan Stanley are likely to be wrong and we question their motives – whilst Goldman Sachs seems consistently right with regard to oil – they appear to be more independent and objective albeit this is just a subjective viewpoint.
London Property: Wander why London property prices keep rising? One of the key reasons is the flood of European rich investors buying prime London property as they escape socialist governments and collapsing governments:
· Greece – likely a socialist government will take control – economic collapse
· Italy – Monti leads a socialist coalition
· France – the socialists have just taken power with Hollande for the first time in 22 years
· Spain – the socialist spend so much money they caused a national financial crisis, the new centre-right government are unable to control the debt levels now
· Egypt – still in turmoil
· Syrian – increasing turmoil
· Yemen – in turmoil
· Iran – sanctions looming and inflationary and currency crisis
· Pakistan – infighting and instable
The super rich of countries have been shifting their assets into London as a safe haven. Although the UK government has high debts, it is trying to do something to rebalance the national economy by reducing the public sector (spenders) and increasing the private sector (value creators). The UK also controls its own tax rates, interest rates and ability to print money or not – and hence can marry these critical tools with employment, inflation and GDP growth. Unlike the Eurozone where Brussels, the European Central Bank and Germany control all the nations economies – force through regulations, new laws etc. Hence the relative UK stability gives confidence for investors in London property.
Prime London Property: The difference between lower end London property and prime London property will increase further as inflation takes hold. One key reason is the poor and middle class will continue to be squeezed and mortgage finance will be difficult to come by because banks struggle - meanwhile cash laden super-rich will be selling equities and foreign business to buy prime London property for cash - not requiring borrowing. This will continue for some time, but watch out you don't get caught in a prime London property bubble - we are not quite there yet, but is might be getting closer.
European History Not Good: Looking back in history for anyone living outside Europe, the UK is about the only country in Europe that has not suffered from either communism or fascism in the last 75 years – it’s never been invaded or occupied by extreme forces. We only need to think back to what happened in the Balkans 12 years ago to know what happens when extremist nationalists get into power. One of the underlying concerns is the mainland European financial and economic crisis spreads creating civil disorder and then forms of extreme politics and/or nationalism of some sort of another. Overall, because the UK is an island, it’s considered by many as a safe haven despite its own debt problems. It has moderate, liberal, respectful and (on the whole) honest government. It has always been rather independent, moderate, fairly hard working and diverse.
The Project: Of course, one of the admirable objectives of the Eurozone single currency "Project" was to break down national boundaries and create a more cohesive tolerant and non nationalist society after World War II. But the threat is this Euro currency breakdown in seized by extremists as a route to power and democracy breaks down (as it did after the Weimar Republic in 1923). History has a habit of repeating itself - we don't expect this and we certain don't want or hope for it, but there are some parallels between this currency extended crisis and the bubble that burst in the 1920s leading to extremism by early 1933.
Floods of Money: The flood of money into the UK has driven down interest rates to record lows, boosted Sterling’s value and this has also further enticed foreign investors into London property as they see this trend continuing.
China Slowing: It’s quite likely China’s economy will start slowing soon. The pace of growth has been dramatic – and in the longer term it’s rather unsustainable. Growth rates of 10% per annum are likely to shift down to the 5-7% range moving forwards, still a fast pace, but this slowing of growth will ease pressures on oil supplies for a while. However, if the Chinese economy slows too much, the government will start printing money just like the US.
US Is The Elephant In The Room: But eventually – the elephant in the room is the US and the gigantic $15.5 Trillion direct debt and $75 Trillion unfunded liabilities plus >$150 Trillion derivatives. The US economy doesn’t look any better than the European economy – in fact their debts are far large and they are running with a 10% budget deficit. But they survive because at this time the US dollar is the global reserve currency and they can print dollars and get away with it. But if the socialists under President Obama get back into power and:
· Increase the government size further
· Increase the money printing
· Reduce efficiencies further
· Reduce the private sector capacity compared to public sector
· Increase regulation and government intervention
Then eventually the whole lot will implode – yes – we are serious – it will happen – it’s just a question of when.
Gold, Silver, Oil To Skyrocket Eventually: When it does happen, gold and silver prices will go ballistic as the US dollar crashes and bond rates sky-rocket. But at this time, all the misery in mainland Europe has deflected the attention away from the US problems for this period and the US dollar has rallied. We expect this to continue for a while until after the US Election - more money printing will happen just before Fall – then in 2013 the whole lot will implode in the US as the US Bond markets take a pounding. This is our central thesis.
Paul Krugman and Keynesians: London had a visit from Paul Krugman, the US Noble Prize winning economist – advising the UK/Euro zone through the media and “BBC Newsnight” that our problem is the lack of Keynesian money stimulus and public sector expansion – quite extra-ordinary considering the mess the UK is in with so much debt. Paul Krugman seems to think printing more money and expanding the government is the way out of this mess – instead, it’s how we got into the mess in the first place. For investors, with US Policy advisers to the Fed like this, we will see continued money printing, expansion of the government, intervention and regulation – in the spirit of “creating jobs” (comment: from thin air, useless jobs that spend young people’s future money today whilst increasing debt, debasing the currency, destroying savers through inflation and destroying more value). Regrettably, we cannot see much of a difference between these US economic policies and those of the ex-Soviet Block – Paul Krugman seems even further left than President Obama and Ben Bernanke. What they do not seem to be able to grasp is that $3 Trillion of printed money has failed to grow the US economy in real terms after real inflation rates are taken into account – and the debt levels have doubled since 2008.
Gold, Silver, Oil: Hence, hang on to your gold, silver and oil. Don’t get shaken out of the market. Also, consider buying gold and silver mining stocks that look very well priced at this time. Use this summer opportunity to stock up on these – not sell. Buy on the dips. Then wait until 2013 and you will be happy you bought the silver, gold and oil when everyone started to doubt it.
US Dollar Crash 2013 Onwards: Even though the US dollar has gone up and US bonds look safe – we say – the US bonds are very dangerous and the dollar will crash. With it, gold and silver will skyrocket in 2013. Of course expect President Obama to get back into power – there are too many public sector workers and unemployed that are relying on his Administration getting back into power. In our view, he’s done enough populist actions to get back into power without much doubt. We cannot see a Republican winning. So the spending spree will continue and the final outcome will be even more severe when the markets finally turn on the dollar and bond market. Hold your course, don’t be shaken out, and wait for the regrettable action in 2013 when governments finally lose the control they have so wanted to seize since the crisis in 2008.