453: Positioning for a 2013 Recessionary Collapse
Bond Market Bubble: In our view, the biggest bubble in the last 100 years is the US bond market bubble. Record low yields and record high prices have made many Americans wealthy. This bubble is far bigger, far more dangerous and far more severe than the High Tech bubble of 2000 or the real estate bubble of 2007. When it goes pop it will have major ramifications all around the world. Not many people are talking about it, but it’s probably the most obvious bubble of the lot. Let us explain.
· Paying 1.5% on 10-year US debt is just crazy – this implies the debt is low risk, But it far from low risk, in fact it’s very high risk because we cannot see any way the debt will ever be paid back in dollars that have any real value
· The US has direct debts of $16 Trillion, close to 100% of GDP. This is rising by $1.2 Trillion a year. Spending cuts being discussed are just a meagre dent in this gigantic deficit.
· The US can continue to print money and buy its own debt, but only for so long – eventually markets will lose confidence in the dollar, and when the currency starts to crash, bond rates will skyrocket and then a big crisis will start
· Unfunded liabilities – or promises of future expenditure for the current US population totals around $75 Trillion – a colossal amount of money. There is no way this can be afforded or ever paid back by the US government.
Debt Bubble: The debt bubble is now completely out of control. Last year, the US dollar lost its AAA credit rating. Despite this, the Democrats and Republicans are intent on doing further damage by taking things to the wire again, and the final outcome it likely to be deferral of spending cuts and tax increases and more debt loads forming – it’s pretty clear the US dollar will take another downgrade in 2013. All the uncertainly will force the Fed to print even more money to prop the whole lot up. By April 2013, there should be some form of collapse or crash – probably caused by the dollar declining, bond market rates rising and bond prices dropping, as recession starts again. Confidence will be severely hit and a deep recession and higher unemployment will be with the US by end 2013. The bottom line - 2013 looks very bleak – for the USA, also Europe and the UK. It’s been 5 years since the last severe recession, and it’s now time for another one – another big down-leg.
Asset Prices Hit: Every asset class will be hit hard, except gold and silver – people will dash to precious metals as a safe haven against the dollar decline. Gold should rise well over $2000/ounce and silver over $50/ounce in 2013 – with a gigantic upside from there if severe panic starts in financial markets.
Gold Standard - Fiat Currencies: Ever since Nixon bought the dollar off the gold standard in 1971, there has been a gigantic inflating of the dollar debt and bond bubble. The proportion of dollars to gold has got completely out of alignment – apart from a brief period 1979 to 1981 when gold prices skyrocketed to $850/ounce and deflation took place in the dollar. It would have been possible to go back to the gold standard at that time, but the US Fed and politicians never really wanted this, because they like the power and utility of being able to print money and manipulate (or some might say guide) the economy. The Fed supports the elected democratic government by creating bubbles to help the incumbent government get re-elected. The Fed or Central bankers then get to keep their high status jobs and bonuses. When a crisis breaks out, they use all their tools – fiscal, money printing, taxes, interest rates – to either stimulate or slow the economy and in doing so – distort and manipulate the economy – most times leading to inefficiencies such as poor capital and people allocation, expensive and sloppy practices, slower processes with high degrees of regulation and government interference – leading to higher unemployment (or under-employment). In 1910, the US government made up 7% of the US GDP. It now makes up about 50% of US GDP. These people – most of them jobsworths – use the Feds printed money to pay for their inflated salaries. Remember – both in the USA and UK, the average government or public sector wage is higher than the private sector (despite gigantic banker wages and bonuses). The private sector pays taxes to pay for the public sector workers – there is not enough tax revenue to pay for them – so the government prints money to pay for them – and the private sector and savers are further destroyed or drained of real savings, assets and income. The reason is – inflation. Every year, the inflation numbers are distorted downwards – real inflation for the average person is normally about double the RPI or CPI inflation. So people’s real living standards drop, they work harder, two people working to keep up one household going – still going backwards as debt levels increase. This decline in living standards started around 2000 and will continue onwards as the US and UK’s aging population is unable to support the massive government, and the governments continue to money print to dilute everyone’s wealth on an inflation adjusted basis. The only real winners are those with real physical assets, like property, artwork, gold, silver and oil. This is why you have to own these assets – otherwise you will be slowly destroyed by inflation – much of it hidden.
Property Debt: Now people often worry or defend the “poor” people with high debts. Those people that borrowed money to buy assets during the good times. But our view is – these are the people currently getting a very easy ride – because interest rates are so low, especially for property debt (debt backed by real assets), and the central banks will do all they can or will – to prevent deflation. So over time, the asset prices slowly rise, or are at least propped up, and meanwhile the real inflation adjusted value of the debt declines over many years. If the currency crashes, and a hyperinflationary bout kicks in – then debt will be wiped out very quickly and as long as you can keep up interest payments during this time, you will come out of the other side – “out of the tunnel” - with almost no debt and lots of assets – or property – to your name. This is one of the reasons why rich people continue to buy London property for instance. Even if the UK currency collapses, so does the debt value as high inflation takes hold. And governments generally never seize property – they can tax it, bit legally cannot confiscate it.
London Property Investing: For London property investors, you can expect this stagflationary period to continue – but eventually the bond market bubble will pop, then interest rates will rise as the currency declines, inflation will kick-in and there will be a very turbulent time, before it stabilizes again. 2013 will be a very interesting and high risk year indeed. Just as everyone gets used to 0% interest rates and 4% mortgages – it’s quite possible the bond market collapses, interest rates rise to say 8%, mortgages to 11%, gigantic money printing starts to jack everything up and inflation goes through the roof. It’s important not to take on any new debt, but not necessarily pay off old debt. Better to go into a holding pattern, buy as much real physical gold and silver bullion as possible, hold a fair amount of cash for when rates go up – and wait for the crisis to happen. You’ll be hedged against it. If a currency collapse occurs in the Dollar and/or Sterling, gold should skyrocket and this will help pay for higher interest rates for the period of the bond market collapse.
Bond Market Collapse: The most likely time for a bond market collapse – both in the USA and UK – is any time after February 2013 for a period of two years. We are not quite there yet, but it feels very close now. It’s just possible the USA and UK will be able to kick the can further down the road, particularly if oil prices stay below $100/bbl and war with Iran is avoided. But the sheer size of the US debt and our prediction that the USA and UK will sink into recession in 2013 should be enough to destabilize the bond market at its tipping point – leading to financial market panic and bond rates rising rapidly from their lows of 2.3% to maybe 6% in the space of a six month period.
Gold Mania: Back in 1980, all investors were buying gold and silver in a panic when the Iranian Revolution started and an oil crisis hit again, following the high inflationary times of the 1970s. This type of panic gold and silver mania will strike again sometime in the next five years – it has not even begun. We are still in a consolidation phase. The only citizens that are really buying gold heavily are the Chinese – it’s not even on the radar screen in most western nations. People don’t realise that gold is the only real money, and the dollar is only a paper currency – a fiat currency.
Ultra-Rich Smart Investors: You have to try and follow what the ultra-rich investors do – but try and stay ahead of them. That’s difficult of course. But we think the smartest investors and smartest central banks are quietly buying up as much gold and silver bullion as they can at this time- particularly the Chinese. The reason is simple – they see democratic governments massively abusing the financial system by printing huge amounts of money and keeping interest rates so low, no-one wants to save. The misallocation of capital and acceleration of the fiat currency trend means currency collapse and high inflation is almost certain. When markets finally wake up to the fact the USA will never pay its debts – or will only pay them in massively deflated dollars – or with “haircuts” – then there will be a run on the US bond market. This 40-year bond market bubble that started in 1972 will finally pop. Then the currency will collapse in value, import costs will skyrocket, inflation will skyrocket, unemployment will skyrocket, interest rates will skyrocket, gold prices will skyrocket and savers and cash holders will be destroyed. People owning property and physical assets will be the winners. People holding US and UK government debt (bonds, treasuries) will be destroyed – their net worth could drop to 10% of its previous value – or even less. Meanwhile gold owners will see the price of their bullion go up maybe 5-10 fold. There will be a gigantic transfer of wealth from bond/treasury holders to gold/silver owners – then a new global currency will be started. There will have to be some form of re-set.
Staggering Debt: Just to remind you of the numbers once more. The US unfunded liabilities are thought to be $75 Trillion. Its direct debt is $16 Trillion. They are in a gigantic hole – and its only getting worse. This fiscal cliff deal really makes little difference – they will no doubt decide on something to kick the can further down the road. But frankly it’s been 33 years since Volker/Reagan that there was a disciplined Fed and US Government that used interest rates to stimulate capitalism. Now we have a social model – experiment where the Fed props up the government up and vice versa – a very dangerous game – that will certainly end badly in a currency crash and panic.
Money Printing: The new programme of Fed money printing, dubbed as a QE3 expansion, will see a continuation of $40 billion per month in agency Mortgage Backed Securities purchases, as well as $45 billion per month in outright US Treasury bond purchases. Essentially, QE3+ is just a combination of the QE1 extension and QE2, based on the composition of asset buys. This means the Fed is buying bad mortgage debt and buying its own fiat created debt, if you can get your head around that. It’s the main buyer of the debt it issues. Essentially, the Fed is giving gigantic infusions of debt to the banker – this keeps rates at zero for the bankers – then they lend to people like us for 4% (mortgages), 8% (businesses) or 20% (credit cards). No wonder they make such gigantic profits – as long as the whole lot does not go pear-shaped that is. The Fed and Government are trying their hardest to prop up these too big to fail zombie banks. Their friends. In the hope of some form of trickle down to the average person. But don’t wait too long for this trickle down – you won’t see too much of it. If you want to get some of the cheap money or high returns, you need to do one better than the currency bankers and buy gold and silver – you will then be betting against the financial system that surely will collapse in the next few years. Then you will survive. It’s very regrettable – but there aren’t many things out there anymore worth investing in. It’s more about how one can protect oneself from the collapse that will happen soon. Just to put things into perspective, it’s been 5 years since the last real recession and the US has just had an election, so it just isn’t going to get any better than this. It’s going to get a hell of a lot worse unfortunately.
Recession Now Due: It’s now only 2½ weeks until 2013, then we’ll have:
· The “fiscal cliff”
· Iran and/or South China Sea
· Currency and Bond Market Collapse
The Fed has run out of weapons – its only remaining ammunition is more money printing – but this will only lead to further dollar weakness, higher inflation, and eventually the loss of its reserve currency status and the 40 year bond market bubble will pop.