414: Stumbling into a crisis as oil prices rise, printing accelerates and debts rise
The Elite: There is currently a huge push by the global elite to print money, create inflation, give the illusion of GDP growth but meanwhile giving the elite the opportunity to make massive paper profits. Meanwhile these people know that a time will come one day shortly that the financial systems will implode. These elite will head for the hills – likely with hoards of gold and retire with their families in rich bliss. Many of them are intelligent babyboomers that know this phantom bubble of bonds and paper instruments is their last chance to make good before getting out of the game.
Everyone Else Poorer: The unknowledgeable middle class will be destroyed in this process. The working class will remain poor – and get even poorer. The upper 0.5% of rich will get far wealthier. There will be a crash, a severe crash, it’s just a question of timing in our view. You can either sit back and watch this happen, or try and switch to something that will preserve your wealth for yourself as an objective private individual investor – and for the family that relies on “you” to safeguard their financial interests.
Safeguard Your Family’s Interest: This is not about greed. It’s about not getting decimated by corrupt governments and bankers and the people pulling the strings within the closed world of the financial elite. You may have worked hard and honestly for 30 years – do you want all your savings destroyed (or indirectly “stolen” through inflation and bankruptcy)?
Silver: The silver price has been manipulated downwards for decades, as has gold. The reason is simple – the US Fed – a private bank that claims to represent the US government – does not want gold and silver prices to rise because if they rise to sharply and high, then it makes it look like there is a run on the US dollar. Instead, they keep printing money to pay their debt interest payments and try and short the gold and silver markets to keep the dollar's reputation intact and at elevated levels. If gold prices sky-rocket, it implies the dollar is crashing of course. But the Fed and/or their consorts will eventually run out of the ability to short these markets because interest rates will rise as international investors desert the dollar and dollar bond markets. They will eventually lose control. The gigantic short position will eventually have to unwind. When this happens, it will amplify the rise in silver prices. $75 Trillion of dollar derivates and finance will swamp the world markets.
Gigantic Borrowing: Consider this – the US government currently borrows $30 Billion every single day of the year. This is the size of the annual total global silver market - $30 Billion. The US therefore borrows 365 times the size of the global silver market every year. To pay for interest payments, it needs to print money – or add electronic money onto it’s computer screen. Without its ability to create money from thin air, it would be bankrupt – yes, insolvent. The US dollar is still considered the global reserve currency, only because of its historic reputation, historic socio-economic empire and current and past military might. The US dollar took a slap across the face from the rating agencies seven months ago when it’s currency was downgraded from AAA rating. Even after downgrade most intelligent financiers don’t actually believe the US dollar should have such a high rating now – particularly when they look at the $75 Trillion of unfunded liabilities (Medicaid, Medicare, social programmes, military spending). Now “here’s the rub” as they say in the States. Most pension funds, hedge funds and sovereign funds have rules against investing in bonds and funds that are not AAA rated. If the dollar is downgraded any further – which seems very likely in the next 1-2 years - then many of these funds will be forced to sell their bonds and reduce their purchases. This will release a tsunami of dollars onto the market that will drive up inflation. At this point the Fed will be forced to increase interest rates chasing the tail of "out of control" inflation. Defaults in the business and public sectors will occur thence a vicious circle of panic will set in. International and US investors will want to run for the exits – get out of dollar denominated paper currencies and instruments. There will be an almighty shift into gold, silver, oil, commodities and any physical asset - as the dollar devalues and US financial institutions fold. The Fed will be forced to print even more money, leading to even higher inflation and at this stage they will well and truly have lost control. The currency will be almost worthless at this point.
Too Much Debt: You might think this sounds rather extreme, but it is not. It happens to all countries that have 10% or more balance of payments deficits and borrowing that is over 100% of their GDP, with no plan to remediate. The US is particularly susceptible to this scenario because it’s economy is so dominated by consumer spending (borrowed money) and financial services (borrowed money). Manufacturing has been in steady decline for many years. Taxes have increased. The public sector has increased. Regulation has increased. Many smart investors have shifted assets overseas. Oil production is half of what it was in 1970. The population is aging and the US military might is in decline. In summary, we will experience the end of the US global dominance in the next five years. The US took over the mantel from Great Britain around 1930 – when gold was transferred to pay for war costs from Britain to the USA. It lasted 80 years and is coming to an end. The position will switch to China – with the Far East and India in tow. These countries will demand gold, land and assets to pay for debts as the US stumbles into trouble. Why do you think China continues to lend the US money? It’s because it has it’s eye on the US gold, oil/gas and land – in our view.
US Brilliance: There are some shining examples of US brilliance and innovation like Google and Apple – these global companies are likely to prosper for many years to come. But as a proportion of the US economy, they are small – Apple's profits are $10 Billion a year – but the US borrows three times this amount every day – just to survive. The US would need about 1000 Apple’s to pay for the annual debt. The reason why we describe this is not to gloat or cast judgment. We have many US friends, they are hard working, optimistic and have come through many hard times. It’s purely economic commentary as a backdrop to investing – for individual private investors – whether in the USA, UK or anywhere in the world.
Avoid: It’s very important we believe to:
· Avoid western nation’s bonds – particularly those of the USA, UK and Eurozone
· Avoid risky financial instruments that are controlled by banks that might go bankrupt shortly
· Avoid putting too much cash into banks that might fold, and whose government insurance is not worth the paper it’s written on
· Avoid fiat currencies
Invest In: Instead, we believe the best investment strategy is to have your investments almost exclusively in real physical assets – and some in equities related to commodities:
· Gold bullion, silver bullion (not ETFs though)
· Property (residential in large cities with the best employment prospects)
· Oil – stocks in successful oil exploration and production companies
· Land – farmland
· Commodities – metals, food, wood
In general, if you can switch away from risky fiat currencies and into bullion, you will be best protected from the ravages of inflation that is roaring away almost undetected by most people and is likely to continue to accelerate as money printing accelerates.
Currency Declines: In real terms, property in the UK and USA is likely to continue to decline in value in all middling to poor areas, and only rise significantly in the very most select prime areas where the international super rich purchase property (e.g. Chelsea, Kensington in London). But the debt owed on property will deflate quickly away as inflation rages. But be prepared for interest rates to start increasing. As bank interest rates increase, more property owners will struggle – thence central banks are likely to print more money and thence inflation will increase further and the real value of the debt will decline. Remember you only need five years of 10% inflation to see your debt destroyed to 40% of its previous value. So when you come out the other side of this inflation spiral, you will own the physical property – you will have bricks, mortar, rental income and the land it sits on for yourself.
Property Investing: That is why rich people hang onto property – even during bad times. It’s a great inflation hedge. But its very important to be able to ride out the high interest rates when they arrive – as others drop around you. Therefore you definitely need a nice reserve of cash readily available to pay for exorbitant bank interest rates. Yes, for a number of years you will feel like you are being fleeced – as bank rates rise to say 6% over base rates. If base rates rise to 6%, bank rates could be 12% and many private investors will go bankrupt. You need to position for survival and not get left with no cash to pay for monthly interest rates. The bank lending you the money might go bankrupt and be merged with another bank – but you will still owe the mortgage. But inflation will eat the debt away very quickly – then you will own your property almost 100%. Just make sure you have good tenants that pay the rent, and enough money to pay the interest rates. Don’t leave it too fine – otherwise you will worry yourself sick one day when rates skyrocket. You need to be a survivor – not a casualty. We think it will get very ugly as insolvencies and bankruptcies accelerate through 2013 onwards. Don’t let it be you. Position yourself now for a very rough period ahead in the UK and the USA. Bottom line is, both governments have borrowed far too much money and will struggle to pay it back when markets turn against their currencies. The UK could survive because at least it is being seen to do something about the debt situation. The USA is doing nothing at all about it's public sector spending apart from accelerating this spending. The public sector is far too big now, far too costly and all these employees earn money then spend it - they actually earn on average about 40% more the private sector employees. If the public sector shrinks in the USA – growth will also shrivel with it. Its really beyond the point of return. The train has left the station. Most smart investors know this. And its just a question of time before the overall market catches on and there is a run on the dollar. Remember since 1920 when the Fed was created, the US dollar has decline in value by 97%. Meanwhile gold has kept its value. As money printing accelerates, the remaining 3% dollar value will be rapidly destroyed and everything will become far more expensive – higher priced. It’s even possible US real estate prices will rise, but they will likely lag inflation by say 3-5% per annum. Hence if the real inflation rate is 15%, then real estate prices could rise by say 10-12%. This phenomena happened in the 1970s when the US went off the gold standard in 1971 and oil prices sky-rocketted. House prices rose, but not as fast as general inflation.
2012 Interesting Year: 2012 will be an interesting year, because a lot of what we can expect rests on what happens with Iran. This is the crisis on the horizon – it might blow over – but it could get very serious very quickly. You see, if Iran is actually developing some nuclear bombs, it’s hard to see Israel and the USA sitting back and idly watching. Its a huge crisis-accident waiting to happen. Iran on its own has the potential to send gold prices through the roof. The reason is that if war breaks out, oil prices will go ballistic, inflation will skyrocket, the USA will dip sharply into recession then there is likely to be a run on the dollar – after markets see growth cannot pay for interest on the debt, tax receipts drop and oil import bills skyrocket and the US consumer stops spending and using their cars. Just watch the correlation between tensions over Iran and the oil, gold and silver prices. This is nothing new. Back in 1980, at the height of the Iranian Revolution as oil prices skyrocketed, so did gold and silver and inflation took off. It was only a hard nosed and right minded Fed Chairman Volker in concert with Ronald Reagan’s conservative views that put the stop on inflation after 3 years of recession from 1979 to 1982. But this time around, the US debt is just so gigantic they have no way to raise interest rates because it would bankrupt everyone. When the markets finally catch wind of this – and the money printing accelerates further to debased the dollar – gold, silver and oil will go ballistic.
Annual Cycle: We are now in March, approaching Spring. So we will give our annual warning – to reduce positions in the stock market and general financial-paper markets well before May 5th – when the super rich start taking holidays for the summer. Yes, the real movers and shakers of the financial world like to be out of the market by then – so they don’t have to worry about a flash crash. The Northern Hemisphere winter always drives people into cities to work hard during the miserable dark winter periods. They spend more money getting to work, expend more energy and produce more – the GDP between October and end April is always very high. But come May, GDP drops – this then spooks the market and they normally start selling stocks and shares. Its a simple concept no-one ever writes about – but it works very well. Any risky stocks should have gone up from October to end April. If they have not gone up by end April – they will certainly not go up after this time – in our humble view. We tend to build positions from October through to April – then sell down before the summer. It’s best to get out before the super rich do early May.
The Iran Factor: This year will be even more interesting – because Iranian sanctions kick in 1st July. This is a particularly risk period when anything can happen. Hence a shift from stocks/equity into gold and silver around April this year in particular is in our view a prudent one. This will maximise returns. Frankly – we just don’t trust that there will not be another war. The markets thinks there is a 5-20% chance of a war – but our view is regrettably more like 50% sometime in the next 12 months. If you think it through logically – when oil prices rise, economies suffer and politician want to blame someone overseas – it often leads to war. The shenanigans with Iran – all those thousands of centrifuges – it really doesn’t look like a safe situation. Interestingly Iran is now accepting gold in return for oil. Early signs of a shift to the gold standard. They look at their own devaluing currency, the US sanctions on their banks and the US devaluing currency and request payment in gold. They want real sound money.
Oil Prices: If the Iran situation is partly resolved, then it will just delay the US economic collapse a while longer – into 2013. Remember for every $1 the US government spends, it has to borrow 40 cents of it. Their tax receipts only pay for 60% of their expenditures and matters are getting worse over time. Oil prices (Brent) are now over $123/bbl –well into recessionary territory. Logically both the USA and western Europe should be back in recession in six months time after the affects of the higher oil prices feed through.
Strategic Reserves: In the US these high oil prices will get very political just before the election. It’s likely that in the next six months, well before the US election, the US will release more of its strategic oil reserves to bring down the oil price during the US summer driving season. They won’t want people to feel negatively against the Democratic government during the summer period in the lead up to the November elections. This might put a cap on oil price as long as an Iranian crisis does not break out. Of course this is a sort of international market manipulation, but nothing really compared with the OPEC international oil cartel that tries to control oil prices.
Predictive Model: Enclosed below is our latest update of the production - consumption (supply-demand) global picture. This is the summation of all global countries from our highly accurate model. The gap means higher prices. That said, prices would be higher anyway because of the waves of printed money.
Anger Over Oil Prices: Now many people – particularly in the USA – get very angry when oil prices rise. They are not used to paying $50 to fill up their tanks. However, in the UK, France and Holland it cost about $125 to fill up a tank, so they don’t have high gasoline prices compared with most countries. In Europe, the tax rate is about 70% on gasoline instead of 12% in the USA. This means that if oil prices double, the US citizens see a gigantic almost doubling of their fuel bills, but the European might only experience an increase of 35% - admittedly from a higher base. It’s a funny world.
Printed Money = High Oil Prices: Though it’s not very popular to mention it – the real reason we believe that oil prices are ten times higher now compared to 1999 is because there are ten times the amount of dollars that have been created from thin air. The oil price has just kept pace with the declining value of the dollar. In fact, since 1970 – just before the US came off the gold standard, the oil price would barely have moved higher if the dollar had not declined in its purchasing power. So, rather than blaming OPEC, the Middle East, Arabs, declining production, China’s increasing consumption or oil companies, for almost all of the rise in prices, we need look no further than the US Fed for floading the world with fiat currency. We will expand on this theme later this year – with some analysis of numbers. This is why we firmly believe that purchasing (or investing) in gold, silver and oil with your dollars is the way forward – because it will protect you from the rampant inflation as the dollar is further debased. Oil is a real physical asset, something tangible that can be used to create energy, transport and heat. Oil is getting more expensive to extract, but a lot of this is general inflation within the oil business because equipment, services, materials and employees are paid for in US dollars. No wander it cost $60/bbl to extract oil now – compared to $6/bbl in 1999. And oil prices are $100/bbl in the USA compared to $10/bbl in 1999. It’s not because of a speculative bubble or any particular oil shortage as such, it’s just that everything is more expensive because real inflation is getting out of control. The USA reports inflation at 2.5%, but the real inflation is more like 8-10% if you add all the things they take out like energy, housing, taxes and red meat.
That's it for now. We hope these insights have help you frame your investment strategy from 2012 and looking forwards to 2013.