416: Muddling along until US Elections - prepare for the 2013 crash
The New Reality: A big problem is the vast majority of people really don’t realise, understand or want to know the economic reality of these times. The economic fundamentals of the western world have changed beyond recognition now compared to say in the mid 1990s. We’ll try and highlight this with a simple table:
2012 Economics Low oil price - $10/bbl
High oil prices - $110/bbl Low commodities prices
High commodities prices Low inflation
High inflation High growth
Low growth Gold $300/ounce, Silver $7/ounce
Gold $1700/ounce, Silver $33/ounce High savings rates
Low savings rates Moderate interest rates to control growth
Zero interest rates to stimulate-money printing No threat of inflation
Inflation - big threat of very high inflation Robust growing banks
Frail zombie declining banks Chinese-Indian low cost labour
Fast rising Chinese-Indian medium cost labour Rising property prices (above inflation)
Declining property prices (below inflation) Increasing employment
Decreasing employment Lowering youth unemployment
Rising high youth unemployment Increasing public sector jobs
Stagnant or declining public sector jobs Increasing private sector jobs
Stagnant or private sector jobs Low deficits and rising tax receipt
High deficits and lowering tax receipt Tax breaks
Tax increases Technologic revolution - PCs, phones
No technological revolution Stability in the Middle East
Turmoil in the Middle East No printing of money or debasement
Massive printing of money and debasement No riots, social order
More riots, more civil disorder Growing middle classes
Declining middle classes Young population
Aging population Entrepreneural spirit
Distrust of business De-regulation
New regulations, more red tape Easy finance for businesses
Difficult financing for businesses Low cost mortgages (0.75% above base rate)
High cost mortgages (5% above base rate) Stock market bull run (5 years to the end)
Stock market bear market (5 years to the end) Commodities bear market (5 years to the end)
Commodities bull market (5 years to the end) No sign of a crash "goldilocks"
Crashes and bubbles all around China just starting its main growth spurt
Close to end of main Chinese growth spurt Small desert population
Gigantic desert population US military domination - policeman of world
US military decline - disorder/uprisings
Outlook Bleak: The problem is, when we analyze each point in this table, it’s difficult to envisage things actually improving much moving forwards. Over time in the UK and USA, it's highly likely the rich will get richer, the middle class will be wiped out and the poor will get poorer. The middle class and poor will start to merge together financially. There will be some highly educated and computer literate professionals – generally in their mid 30s to 60 years of age, that will still do very well because their expert skills are in high demand. But the middle and lower classes will see higher taxes, inflation and poorer employment prospects giving rise to declining real living standards. We predict over the next 10 years, the average UK citizen will see a decline of around 20% or more. All these people will feel the pinch – really struggle and have to worry about where the money will come from on a weekly basis.
Protect and Grow Your Wealth: The reason for mentioning this – highlighting it – is not to be all doom and gloom – it’s to help convince you that you will need to do something about it, something special, to survive this turmoil coming in the next ten years. You won’t hear any politician tell you about this "new reality" – they like to give good news messages only - the only way they can win your vote. They don’t like to scare people or get emotions up. They want a sort of orderly decline by stealth - a dumbed down society - in a way, you can't blame them for it. They want order and civil obedience. This decline will mainly come in the form of inflation. Yes, taxes will rise as well. But the main method your wealth will be destroyed is through inflation. The official inflation rate way under-states the true inflation rate. The UK government claims 4% inflation, it is almost certainly about double this rate – more like 8%. Now 8% does not sound much. But if your wages rise by 4%, inflation is 8% - that's -4% per annum. Take that over ten years compounded and that’s 50%. Yes, a 50% decline in living standards. Even at half this rate, its 25%. We hope you can see now that 20% could if anything be a conservative estimate. The only way to mitigate against this is to use their cheap money to make high returns - this is what the bankers are doing. But rather than invest in paper - fiat currencies like almost all bankers do, it's best to shift into real money - gold and silver.
Commodities Super-Cycle: It is also very little known even in the business world that we are in a commodities super-cycle – meaning that commodities prices are on an upward rising trend that started around 2000 and is likely to end around 2018. During this period – inflation will rise, GDP growth will slow, commodities shortages will become more severe and all countries that have high commodities import bills compared with their overall GDP will suffer hugely. It is absolutely no coincidence that the PIGS all fit into this bracket, as we have been warning for years. It's roots stem from Peak Oil – the lack of oil production supply compared with demand. We are now on an undulating Peak Oil plateau of western stagnation. The world GDP is controlled to a very large part by oil prices. As oil prices drop, the economy improves. As they rise, the economy suffered. Last month, the Chinese had a deficit- yes – because their oil, gas, coal, metals and food imports bills were so high, they actually made a loss. Now if high oil prices are affecting the Chinese – it’s getting really serious. Let's just list the countries with hardly any indigenous commodities, that need to import almost all their fuel: Italy, Spain, Greece, Portugal, Ireland, Iceland - get the picture? As soon as oil and commodities prices rise, these countries have to go into recession because their import bills rise to over 10% of their GDP (combined coal/gas/oil/electricity/metals). When oil prices were $10/bbl and the EU was subsidizing their construction with endlessly cheap money, they grew strongly. Now the subsidies have dried up, money is hard to come by and oil prices have risen ten fold. No wander they have deficits of 10% of GDP. But at least they are trying to do something about it, unlike the USA - who's deficit is still increasing along with it's debt.
Peak Oil Tipping Point: So often we hear the comment that the western world is less reliant or susceptible to high oil compared with before. But that’s just not true. The western economies are now very weak, with zombie banks and almost bankrupt government, only able to stay afloat through printing of money. The main fuel efficiency savings have been made. This desperate situation was made worse by the Germans passing law to close all their nuclear power plants and the UK not giving any green light to replace old nuclear plants. This indecision will lead to power shortages by the end of this decade. Anyone that things wind energy will save the day don’t understand the basics. When it’s very cold in he winter, there is no wind, and very little sun for solar. So those freezing periods at night will see factories being shut down in a desperate effort to keep the lights from going out.
UK Tax: Another example the UK shooting itself in the foot is the North Sea oil tax hike March 2011. Since then, oil and gas production have crash 20% - yes, instead of the normal 5% decline, despite record oil prices, production has crashed as has the number of rigs and wells drilled. So much for the UK’s energy efficiency and creating jobs – its probably lost $2 billion in investment in a year and 20000 jobs – because the oil companies have moved investment overseas instead. The UK oil tax system is now the most unstable in the world after three tax increased in 12 years - and take a look at the result:
Another 5 Years Left: The current super-cycle is about 2/3rd of the way through now – but the good news for investors is that the last 1/3rd is when the action really starts. These commodities bull runs build up a head of steam, but get knocked back every once in a while. At these points, the naysayers claim its ended and they try and shake these weaker players out of the market. Scare them into selling. But then these buy at low prices and the next run starts. Its nerve racking because one never really knows when the top of the market is. But one thing is for sure, it will always end in a parabolic move higher over a short period of time, particularly for silver, also for gold and to a lesser extent oil. Property is the same, but its more stable and difficult to see the final parabolic move. But essentially, if you look at the current gold price, it’s been steadily rising for many years now, but there has really be no parabolic move higher. Once in a while, its starts to look like one is developing, but it gets knocked back – probably by a lot of influential banks, investors and governments. But essentially, one day, every man and his dog will be trading and wanting to buy gold and silver – and the prices will go ballistic as it catches up with the fiat currencies. The key fundamental point is that it one day has to account of for all the printed money – it catches up and even overtakes discredited currencies. This hasn’t really started yet, certainly not in earnest.
Billionaire Private Investors: We follow the highest net worth individual objective private investors around the world. We learn from their knowledge, honesty and objectivity. They almost all say exactly the same thing. Since they have no particular vested interest. They have switched to gold, silver and oil, commodities investments many years ago and are building positions in these (not reducing) at any good opportunity. They do not invest in government bonds, treasuries or long term currencies. Some invest in the stock market only because it can keep up with inflation and cannot generally be confiscated by governments or nationalised – it a partial hedge against high inflation. But ultimately the winning combination will be gold, silver, oil – with good rental property as debts are destroyed by inflation. We switched to this combination some time ago – starting with property, then oil, then gold and now silver. We are convinced its a winning strategy and sleep easy at night. Its not rocket science.
Wall Street Know-How: Also don't be under any illusion about the Wall Street Investment Bankers - they talk a good talk. But they will not tell you the full story. Many of these bankers must know or realise the end is near now. That a major financial crash is on the horizon. But they see this as may be their last big opportunity to make serious money before heading for the hills. They love quantitative easing because it drives up asset prices - they make some money - then they sell - it drops back again. This range bound volatility is perfect for high returns on high intensity computer driven trading. The more they can pump things up the better, but they have no particular vested interest in seeing it crash. So they talk things up, just like the government. They may be under a false illusion, or just know what will happen in their gut. If you look at the $75 Trillion derivatives market, $75 Trillion unfunded liabilities, $15 Trillion direct debt and $1.7 Trillion annual US tax take, it doesn't take a rocket scientist to realise the whole system is doomed. The money printing will continue until the dollar is destroyed and with it all debts.
QE3 On The Quiet: As we predicted, some six months before the US Election – it looks like QE3 has started or will shortly start. This time its a back-door QE3. This is the reason why stock markets have climbed and oil prices are climbing again. All the money swilling around is boosting asset prices in the run up to the elections. Of course Obama will have to fend off high gas prices over the summer driving season, so then he’ll probably release some more oil from the strategic reserve – to “help hard working families”. It’s all so predictable. It’s a completely manipulated market driven by the Fed in concert with the Government and Investment Banks. It’s all part of the “Big Deal”. Namely, the Fed feathers the nests of the bankers, boosts the economy before the election, in return Obama gets back into power and the Fed guys keep their jobs. Then in 2013 all hell will break looses – but they will have another 4 years to recover. We are due for another recession after the last one in 2007 – yes, its 5 years now. So by end of 2013, China will start slowing down, more money printing will drive inflation higher, food prices will rocket and 2013 will be really bleak. At this point, gold and silver prices should start to take off big time.
Wrong Economic Policy: We have little faith in prudent economic management. What governments should really be doing is increasing interest rates, slashing government spending, reducing private sector taxes and red tape, encouraging innovation, manufacturing and technology, encouraging energy conservation, taxing wasteful airlines and boost private sector investment, and stopping money printing. But they are doing the complete opposite – and this strategy is regrettably doomed to failure eventually. It leads to inefficient, high cost, high inflation, low growth, high unemployment and high deficits with declining currencies and high taxes, regulation and lack of innovation. We really are heading for a big fall in the UK and particularly in the US. There are too many hand-outs, a benefit culture and all manner of subsidization and bail-outs for poor performer. Meanwhile the best performers are taxed to the hilt – and they merely leave the country or invest overseas – keeping their tax burden even lower.
Let's Get Real: We don’t paint a particularly pretty picture, but we think we are being realistic. To be brutally frank, unless you can slip into the upper echelon of the rich, it will get very difficult. To achieve this – to get into the rich bracket of low taxation and huge wealth, you need to understand that governments will continue to print money, debase currencies and unemployment and costs will remain high. The only way to make serious money in the environment we believe is to:
· Invest in the best quality fast growing oil exploration-production companies - stocks
· Invest in the best quality fast growing gold and silver exploration-production mining companies - stocks
· Invest n physics silver and gold bullion
· Hedge against inflation further with high yield rental property with debt that can be eroded over time
Bullion: If you are unsure or not knowledgeable about oil and mining stocks – best steer clear. But buying gold and silver bullion is straight forward and we believe it's a winner. We would not be investing in gold or silver unless we saw prices rise three fold at least – the upside is a ten-fold increase.
Silver Deal Of The Generation: Just to remind you about silver. On the planet, there are 7 billion people. And silver stocks are 0.4 billion ounces. Silver is used for water purification, mobile phones, flat screen TVs, electronics, missiles, medical equipment etc – about 0.5 billion ounces a year. That means each person has 1/14th of an ounce in stock. Each ounce costs $33. That’s $2 worth of silver per person. That’s a ridiculously low price. Can you at least go out and buy your annual silver quota for $2. Your aim should be to acquire as many people’s worth of silver as possible. Enough for a town or city preferably. Silver is running out – seriously – its getting ever harder to find and exploit. Prices will need to sky-rocket to encourage investment. The total annual silver market is $30 Billion – that’s tiny. Warren Buffett could easily buy the whole world’s supply with his cheque book. In 1980, silver prices were $50/ounce. Since then, house prices have gone up 500%, money supply 1000%, but silver prices are down -40%. It’s ridiculously cheap in the extreme.
Screaming Bargain: You just won’t find a better bargain anywhere in the world than silver at this time – it’s the deal of a lifetime in our view. It’s the clearer root we can see to becoming more than multi-millionaires. It's really the only root. As you can understand, we have loaded up as much as possible – and are still looking to buy more whenever possible – excess cash goes into silver at the moment.
Well, we hope this Special Report has help you frame your investment strategy and given some perspective on what is happening in the world. If you have any comments, please contact us on firstname.lastname@example.org