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433: Addicted to US dollars - the 2013 collapse draws closer - property, oil, gold and silver

06-28-2012 team

Tipping Into Recession: Western developed nations are again tipping into recession – this is no surprise. There are a number of reasons for this:

·         It’s been five years since the last major recession. When oil prices remain high – the length of growth and contraction cycles tends to be five years (as in the period 1970 to 1992).

·         Oil prices have been above $100/bbl for well over a year – this is enough on it’s own to cause a recession and should come as no surprise to western developed nations where oil imports account for 2-6% of GDP.

·         It’s impossible to raise taxes as oil prices rise whilst instigating public spending cuts without causing a recession – this pain is still required to rebalance the economy but adding high oil prices often tips oil importing nations into recession

·         Most western developed nations are suffering from severe hangovers from years of racking up private sector and government section debt – the big mistake has been to bail banks out by shifting this bad private sector debt to the public sector – for taxpayers to hold as liabilities

Germany:  Germany has been pressing other European countries to reform and cut government spending like they themselves did in the 1990s, after German reunification. Germany is not keen to take on bad debt from European member states – who can blame them?  After 25 years of Euro harmonization up to 2007 – Germany achieved an overwhelming competitive superiority and advantage in manufacturing and technology compared with all other European nations – using the same valued paper currency. This has meant their exports have increased and their balance of payment surplus has improved as their unemployment has dropped. The European project was always likely to end in tears. Waves of European bureaucrats have wasted vast swathes of money – propping up inefficient countries like Greece. All in the spirit of European unity – an admirable aspiration considering the two World Wars that struck the heart of mainland Europe last century. Historically, mainland Europe has been war struck for many centuries and bringing everyone together was an admirable cause. But economically Germany and Greece are like chalk and cheese. They can never sustainably have the same currency – because Greece will always slip further behind in competitiveness. Cheap Euros, easy lending, a property boom, holiday homes and cheap flights plus poor tax collection all fuelled the Greek "miracle" that has now turned soar. The region Greece-Turkey-Syria-Cyprus is destabilizing as the economy goes down hill and high oil price cause havoc with government deficits. The Syrian regime no longer exports oil after it's fields went into decline in 1995 – they now import oil and cannot afford expensive imports. This means social spending cuts and tensions in the streets. Greece spends 3% of its GDP on oil imports and manufactures very little – any wander the country is in debt with oil prices over $100/bbl. Greece imports all its oil, gas, coal, metals, wood, and much of its food. 3 million Greek people drive cars – burn huge quantities of oil – and many retire at 55 years old on state pensions. It’s totally unsustainable. It will never get back to how it was, because cheap finance and high value Euros will never be available again.     

Worsening Situation: Anyone that thinks the western economy cannot get much worse is very wrong. Okay, oil prices dropping by 25% in three months will start helping in the next few months, but the European debt problems are just not going to go away. They are just too huge. There will either have to be massive austerity measures over many years - 5-10 years, or massive money printing and rampant inflation – or a mix of the two. It will take many years to sort out. But the Greek issue is just a pimple compared to the cancer about to inflict the global economy. You see the big problem is the US debt and bond markets. All the angst over Europe has cause a flight to the so called “safety” of the US dollar as the US economy looks like it's improving. But underneath it all, the US economy is haemorrhaging. It’s like a junky that’s just about to take an overdose. We will explain:

1.  Deficit and Debt Timebomb: Firstly – the country has $15 Trillion of direct government debt, 100% of GDP. On top of this there is Fannie Mae and Freddie Mac liabilities of $4 Trillion. All unfunded pension, Medicaid and military liabilities plus government debt exceed $75 Trillion, about five times GDP. Government tax take is a paltry $1.5 Trillion per annum whilst spending is $2.75 Trillion – hence a $1.25 Trillion deficit per annum or 12% of GDP.  60% of the US debt is bought by the Fed via printed money. They print money to buy their own debt. It’s like a giant Ponzi scheme. There is zero chance – absolutely no way the US will ever be able to pay off this gigantic mushrooming debt. Its absurd people are happy to receive 2% interest rates on newly issued US debt when the risk is so high of default. This default almost happened mid 2011 after the debt ceiling stand-off and debt downgrade. In 2013 we will experience worse problems. 

2.  Printing Has Not Helped: Despite printing Trillions of dollars, the economy is barely growing and the only reason unemployment numbers have dropped is because many people have lost hope of getting a job and have shifted to readily available food stamps instead. US private sector employment is weak and the public sector is still expanding – the government now accounts for close to 50% of GDP and spending. It’s starting to look like a communist block economy if you look at the economic fundamentals. Of course the rich still get richer because they know ways to seize opportunities in this harsh environment - just like in a far left socialist country. Assets are sold to the Chinese at knock-down prices. All the time the dollar is being devalued by the money printing and the relative shrinking economy – full with bloated education sector, nationalised car plants and inefficient central governments. Public sector employees earn 40% more than private sector employees and award themselves handsome pensions meanwhile “spend” taxpayers money inefficiently  – but then complain about private sector bonuses. Meanwhile the private sector taxes rise, employment regulation increases and business confidence drops.  Okay, if we have not got you worried yet, then the next bit should trigger some thinking.

Crash Almost Inevitable: Outlined below are some reasons why we predict a massive US crash in 2013:

·         Obama is re-elected and the Fed keep Ben Bernanke as Chairman “helicopter Ben” an academic who knows nothing other than how to print to prop things up

·         Tax increases and spending cuts amounting to 2.7% of GDP will be enacted January 2013 in legally binding pre-election agreements

·         Government spending in the run up to the Nov 2013 election will end

·         The Iranian nuclear issue will need be tackled - it's almost certainly being put off until after the election – this problem will drive oil prices far higher

·         Europe – and the European currency - will probably start breaking up by then

·         China’s economy will have slowed down – as the European and US economies stumble

No Hope Of Repayment: When the US economy tips steeply into recession by end Q1 2013, the stock market will crash by May 2013 and only one option will be left to try and pump up and prop up the US economy addicted to dollar drugs. A huge injection of killer dollars via the printing press. But this will fail – it will be like trying to blow up a balloon with a rip in it. Or fix an overdosed junkie with the next big shot. When global investing nations start running away from the dollar, and dollar interest rates start to rise well above 2% - towards 6% - the final leg of this catastrophe will start to unfold.

It will be like Greece going pear shaped times twenty.   

At this point, firstly oil, then gold and silver prices will go ballistic – some time in 2013. They will spike to account of all the dollars that are backed by nothing – a fiat currency in its truest sense.

At the moment, the Fed, US government, bankers and vested interests are trying to drive down the oil, gold and silver prices – to kick-start the US ecomomy and prop up the US dollar - to create an illusion of economic growth just before the Nov 2012 election - perfectly timed.  It’s really not going to look this rosy and stable in the US for the next 5-10 years.

Bargain: Just make a note of this for June 28th:

·         Gold prices $1525/ounce

·         Silver prices $26/ounce

·         Oil prices $80/bbl

These are screaming bargain low prices we believe. The dollar has risen 15% in the last 3 months – well done the US Administration - and this has also help suppress the gold price. Even Iran is behaving itself to a certain extend - making some vague promises mid year. Everything is starting to point nicely for an Obama win at the election. The very people driving down these prices are probably buying gold through the back-door because they know after Nov 2012 things will flip the other way. The US dollar as a reserve currency will die as their GDP drops, ability to pay back its debts diminishes further and everyone realises it’s a lost cause.

1 Currency repositioning: So for now, best get your dollars into a safe currency like the Canadian Dollar, Swiss Franc, Norwegian Kroner or Chinese currency.  Even the UK Sterling is probably a better bet. The dollar is a massive bubble about to go pop. Years of markets accepting fiat printing of money and low bond rates is about to come to an end. The dollar is the mother of all bubbles

2 Gold, Silver, Oil: Our guidance is also to take advantage of the low gold, silver and oil prices by buying physical gold, silver and oil company stocks.

3 Property Investment:  Make sure you have property in your portfolio that is an excellent hedge against inflation and cannot be seized by desperate governments. Property in safe havens like London, Oslo, Calgary, Sydney, Singapore and Frankfurt.  For UK property investors, the type of property to purchase is West London and prime London property that attracts cash buyers. Don't be put off by stories of the UK property prices declining. Yes, they are in Hull, Newcastle and Belfast. They are at the low end of the market in all parts of the UK. But in expensive areas and prime areas of London where no mortgages are required by super-rich international investors and families, prices are booming. In Kensington prices have risen 30% in two years. 

Fighting Over Kensington Property: We don't think this will situation change any time soon because as successive countries meltdown and the richest people shift their money out - they will all "end up in London fighting over Kensington property". I true safe haven - multi-cultural liberal environment that welcomes foreign people. Foreigners are treated with respect and appropriate tolerance. The French are leading a charge at the moment, the Spanish started arriving in January and the Greeks turned up last year. Eventually London will see an influx of US citizens and more people from the Middle East. The city will swell with the mega-rich moving to a safe secure tourist destination where serious crime is so low, the police still don't carry guns and its safe to walk around at night. Theatre, museums, culture, restaurants, tube, bus, rail, taxis, attractions, shops, cool climate, music, art, parks, safety. Londoners just don't realise how lucky they are. Every spend a summer in Kuwait City - little wander most of the mega-rich from this region end up in London for the summer. Just a small point is - compare entering England (London) versus USA (Houston) - at passport control, people are treated with respect and it takes ten minutes. Anyone visit the USA will no what we are talking about. This is one reason why the City of London does so well financially.   

Money Goes Around: The overiding thought is that the wealth in merely transfered from one entity to another. If property prices collapse in Cairo, they are likely to rise somewhere else, and for the foreseeable future, that seems to be London.

High Oil Price Impact:  The table below give some idea of what happens when oil prices rise - the green countries become more wealthy and the red countries become less wealthy - a key reason why tightening of oil supplies versus increasing demand has had such devastating consquences for countries where oil imports are up to 8% of GDP at $100/bbl. This tabulation is a compiled modelling of all countries 2011 production and consumption (surplus/deficit) modelled with an average oil price of $100. This tabulation is not available anywhere else - we have this proprietary model to help guide our investments. We use it as a predictive tool as to where the most growth will be with high oil prices. We think its very accurate.

Honesty: The other aspect to consider is how safe, honest and secure is the country you are investing in. Our view is that transparent countries with high governance standards like Norway, Sweden, UK, Canada and Australia are the best places to invest at the moment. The high risk option with rapid growth is Iraq  - almost certainly their wealth will double in five years from current levels. If the security situation continues to stablize, Iraq will be transformed in ten years. any country that spends more than 2% of its GDP on oil imports is at risk - if oil prices rise to $200/bbl - that would be 4% - and that's unsustainable and enough to cause a recession. Norway has the strongest position in combined transparency and oil surplus, plus it's got a small population of only 5 million. Each person earns $25,000 a year in oil wealth! No wander they are the riches country in Europe. No need to join the Euro either - this would only damage their balance sheet!



Oil Surplus Deficit @ $100/bbl as a percentage of GDP

2011 Surplus/ Deficit $bln $100/bbl

2011Surplus/ Deficit bbl/d

2011GDP $bln


Iraq 85.5 2342 150 57.0% Expanding oil production
Saudi Arabia 303.1 8305 578 52.5% Also gas producer
Kuwait 88.6 2427 177 50.1%  
Azerbaijan 31.1 851 70 44.4%  
Nigeria 89.7 2457 239 37.5% Also gas producer
Kazakhstan 59.4 1628 178 33.3% Also gas producer
Qatar 54.2 1485 174 31.2% Also big gas producer
United Arab Em 96.8 2651 360 26.9% Also gas producer
Algeria 50.5 1384 191 26.5% Also big gas producer
Libya 11.2 307 50 22.4% War affected supply
Venezuela 68.9 1888 316 21.8%  
Iran 91.1 2497 482 18.9%  
Brunei 6.1 166 35 17.3% Also big gas producer
Russian Fed 267.2 7319 1850 14.4% Also big gas producer
Norway 65.2 1787 484 13.5% Also big gas producer
Ecuador 10.3 282 120 8.6%  
Turkmenistan 3.9 108 50 7.9% Also big gas producer
Colombia 24.7 677 328 7.5%  
Vietnam 12.0 328 162 7.4%  
Mexico 33.2 911 1155 2.9% Also gas producer
Canada 44.8 1228 1737 2.6% Also big gas producer
Denmark 1.9 51 333 0.6%  
Egypt 0.9 26 236 0.4% Also gas producer
Argentina -0.1 -2 448 0.0% Also gas producer
Malaysia -1.3 -35 279 -0.5% Also big gas producer
United Kingdom -16.1 -442 2418 -0.7% Also gas producer albeit in decline
Brazil -16.8 -460 2493 -0.7% Growing supply and demand
Peru -1.8 -50 230 -0.8%  
Romania -3.6 -99 300 -1.2%  
Australia -18.9 -519 1488 -1.3% Big gas and mining - producer
Indonesia -17.8 -489 846 -2.1%  
France -62.9 -1724 2776 -2.3% Most exposed
Italy -50.2 -1376 2199 -2.3% Most exposed
Germany -86.2 -2362 3577 -2.4% Exposed - strong manufacturing
Ireland -5.2 -142 206 -2.5% Most exposed
USA -401.3 -10994 15094 -2.7% Most exposed
Japan -161.3 -4418 5869 -2.7% Most exposed
China -206.9 -5668 7298 -2.8% Growing demand - boom
Spain -50.8 -1392 1494 -3.4% Most exposed
Greece -12.5 -343 303 -4.1% Basket case - no manufacturing
Netherlands -38.4 -1052 840 -4.6% Big gas producer (and refiner)
India -95.4 -2614 1676 -5.7% Growing demand - boom
Uzbekistan -3.3 -91 50 -6.7% Hugely exposed to Russia
Thailand -26.8 -735 346 -7.8% Hugely exposed 
South Korea -87.5 -2397 1116 -7.8% Exposed - though good manufacturing


Positively exposed to oil relatively stable countries (lower risk)  
Moderately exposed to oil and relatively stable countries (medium risk)
High exposure to oil - big upside (higher risk, less certain environment)
Negatively exposed to high oil price - actly like a tax (high risk)  

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