For my first post for 2009 I thought I would quickly touch over some key monetary themes of 2008, then highlight the key risks for the world economy and then the Australian economy in 2009. A lot of the areas covered below will be brief in nature; some follow up posts will try to fill in the details. I will then finish this post with a "Must do" list of action items which you, your family and friends should examine.
2008:
Here is a summary of some of the major developments of 2008. Arguably the world avoided a global systemic collapse of the world's financial industry.
In the United States and elsewhere:
- In the U.S., 34 banks declare bankruptcy and were taken over by FDIC, including IndyMac Bancorp – the largest bankrun in US history.
- However, the Fed and US Govt prevented systemic collapse when Washington Mutual (WaMu) collapsed (with $307 bn in assets, compared to $32bn in IndyMac) by orchestrating JP Morgan to add it to its family. A bank run on WaMu would have easily sparked bank runs across the U.S. and the world instantly placing the world in economic depression.
- Indeed there has been silent bank run in progress across the globe, particularly in the later half of 2008, with investors piling their money into cash and precious metals.
- The Investment Bank model collapses with Bear Stearns folded into JP Morgan, and Lehman Bro. filing bankruptcy.
- Merrill Lynch sold to Bank of America,
- AIG, the world's largest insurance company collapses.
- US Govt announces US$700 bn bank rescue package (TARP)
- Price of oil crashes 78% from its July 2008 peak to go below US$40 a barrel.
- Deflation hits almost all commodities.
- Bernard Madoff was charged with with perpetrating the largest investor fraud ever committed by a single individual in the U.S. with his fund's liabilities of approximately US$50 billion. "A giant ponzi scheme.
In the Australia:
- Australian Govt announces $10.4 billion stimulus package to encourage consumption. The Govt also announces a guarantee on bank deposits.
- ABC learning, Allco Fiance collapse. Babcock and Brown, Centro reprieved from collapse (for now). Many small mining companies go into administration, with the one of largest, OZ Minerals fighting for its survival.
- The RBA custs interest rates to a seven year low of 4.25 percent.
- The ASX announces a complete ban on short-selling.
- The Australian sharemarket looses 41.3 percent for the year
- Australian housing prices start to experience strong quarterly declines towards the end of 2008.
Chart 1: How the major sharemarkets faired in 2008. The All Ords ended up closing down 41.3 percent for the calendar.
Major Risks for 2009:
When I say major risks, I mean systemic collapse of the world financial system. Arguably the process is still in full effect, and there are a number of plausible Lehman Brothers type events which could easily unfold in 2009.
Big 3 US Carmakers continue to live off Govt handouts and/or enter official bankruptcy
The big 3 US carmarkers: General Motors, Ford and Chrysler continue to operate while on deaths door. The only way they will continue to operate is if the US Government continues to through tens of billions at them every month. Declared bankruptcy by one maker will almost certainly cause a complete loss of confidence in the other two. Also be watchful of other non-US carmarkers, whom are in a lot of trouble as well.
The Big 3 US auto companies are a major risk because of their sheer size and outstanding liabilities. Historically, they have greater revenues and employment then many countries. It is reported that about 2.6 million people (direct and indirect jobs) could join the unemployment ques if the Big 3went under.
One aspect of the US car industry which gets small coverage is their pension liabilities. The Big 3 are directly and indirectly responsible for funding the health care of its 2 million plus employees, retirees and dependents of their own companies and their suppliers. The Big 3 are facing the same precarious problem as Governments all around the world which are hoping Superannuation schemes will work out. GM's pension liabilities are by far the worst with pension agreements going all the way back to 1950. Roger Lowenstein of the New York Times stated this in July 2008:
"G.M. acknowledged in its most recent annual report that from 1993 to 2007 it spent $103 billion “to fund legacy pensions and retiree health care — an average of about $7 billion a year — a dramatic competitive and cash-flow disadvantage.” During those 15 years, G.M. paid only $13 billion or so in shareholder dividends. The company has been sending far more money to its retirees than to its owners."
http://www.nytimes.com/2008/07/10/opinion/10lowenstein.html?pagewanted=print
There is speculation the Federal Government will end up taking it over to keep GM afloat for as long as possible.
However the problems will spread much further as William Engdahl stated on 15 December 2008,
"these 3 companies account for a combined 25 percent of all US corporate bonds outstanding which are held by banks, mutual funds, and private pension funds. If the auto parts suppliers of the Big Three are included, an estimated US$1 trillion of corporate bonds are now at risk of chain-reaction default. Such as bankruptcy failure could trigger financial catastrophe which would make what happened since Lehman Bros. appear as a mere hiccup in a hurricane."Watch this space closely…
Derivatives implosion
As discussed previously on the blog, there continues to be the risk of the global derivatives market systematically imploding. With the more-or-less collapse of the debt-driven investment banking model, and the subsequent merger and absorption of many of America's biggest financial entities, the bankers have so far managed to hide many trillions of junk derivatives amongst themselves. Be very werey of JP Morgan, Bank of America, and Citigroup (remember it was in trouble...). There was always going to be huge problems unwinding over US$750 trillion worth of derivative "bets".
Collapse of Pension System
(more to come)
Obama and Bernanke
Without hesitation I am putting incoming President Obama (US Govt) in the "major risks" category for 2009, along with his economic advisors (Paul Volcker) and Ben Bernanke (Federal Reserve).
Obama is set to embrace with open arms the Economics 101 textbook from George W Bush. With talk that Obama is preparing to cut taxes by around half a trillion, whilst also spending another lazy trillion on a 2nd huge stimulus package - all in the first few months of his 1st term, I have little doubt these actions will further contribute and exacerbate the global financial crisis considerably. Obama and "Helicopter" Ben may avoid a systemic collapse in the short term, but the trillions of dollars of bailouts, stimulus packages and massive deficit spending programs will undoubtly push the world towards a Weimer-Germany (or Zimbabwe style) Hyperinflation. Forget deflation (asset deflation needs to happen because of all the debt), hyperinflation is the real cause for concern.
The world is heading towards Hyperinflation
The short term trend is asset-deflation, while basics such as food and rent will continue to increase. However, I have no doubt whatsoever, the long term consequences of the Federal Reserve (and other central bankers) and the US Government (and other Western Governments) "stimulus" packages and pumping liquidity into the financial markets will result in hyperinflation in the United States, and most financial markets (particularly hard and soft commodities). The Flow through effects will spread around the world.
Assets risks and opportunities in 2009 (Australia):
Risks:
Australia has so far witnessed very little of the global financial crisis (except for investors caught in some bad stocks, or parents with children in an ABC Learning centre). However 2009 will be much worse for the Australian economy.
Avoid cash
Cash = debt derived asset
Today's money supply is backed by nothing more then our confidence in Government. So as Governments worldwide expand their money supply to the likes never seen before, all fiat currencies (including the Australian Dollar) will continue to devalue towards its real value – zero (all fiat currencies have collapsed). Your purchasing power will continue to erode. If you put $1 dollar away 100 years ago, it would only have a purchasing power of 3 cents today. This is the power of currency erosion to inflation (expansion of money supply) To date, people have accepted gradual inflation, and don't mind if Coffee rises from $3.50 to $4 per cup, but you only have to look at media reports on "costs of living" such as food, fuel and rent in the last few years, that many people are struggling today.
Governments and central bankers have a blank checkbook and will print trillions worldwide in 2009 to try to make people "feel" prosperous again. A $100 Australian dollar note printed today will be have $99 or $98 purchasing power tomorrow morning. All levels of the governments in Australia will enter fiscal deficits in 2009. The more the federal government tries to "stimulate" the economy or "guarantee" more money, the more worried you should be if you are holding lots of cash. Avoid cash by buying real money, gold and silver, while you still can. The window of opportunity to take a substantial stake in the shadow monetary system is closing rapidly.
Avoid Real Estate
- Stay tuned for post blog coming…
Opportunities:
Sharemarket and Commodities
As always there will be some great opportunities in the sharemarket, but success will depends on your strategy and your discipline. Trade to a plan and keep losses small.
As chart 2 shows below (page 15 of Financial Review 6/1/2009), the US Sharemarket has risen at least 21 percent in the first year after every bear market since 1932, with the average post-bear year bounce of 46 percent. It is quite plausible a large bounce could easily happen with the trillions of liquidity the central bankers are pumping in the financial system. All this money has to find a home, and some of it will trickle into the sharemarket. The other question is whether the current economic circumstances and the risk of further major institution collapse will mean mean the market continues to follow a similar path to the 1929 great-depression bear market (which it is currently doing).
Chart 2: First year recoveries in the S&P 500
On commodities, both hard (metals) and soft (food) commodities could easily rebound strongly over 2009. People will not stop eating and will pay whatever they can do obtain it. Similarly, more and more people will change their context around the world and accumulate gold and silver – the monetary system that will expand ones purchasing power.
So getting exposure to physical gold and silver should remain a long-term priority in the coming years. Once you have exposure to the physical metal, the best leverage will be in unhedged, no debt, gold and silver mining companies (and ASX has a lot of interesting gold and silver stocks worth examining). If you want to venture further, some low debt, high margin soft commodity companies may be worth looking at.
However, no doubt 2008 has taught that investing in gold and silver stocks is very risky when a sharemarket is in free fall. Strengthening fundamentals for gold and silver does not automatically equate to rising stock prices for gold and silver companies. If you invest in any stocks, formulate your exit strategy before you enter. In the current environment watch what the USD is doing, as gold usually acts in an inverse relationship to it. Also be aware of price manipulation which occurs in the gold and silver markets (see GATA and Ted Butler links below).
What you must do early this year:
* You must change your context
This is at the top of the list, because if you still believe many parts of the media and Government that the world (including Australia) will only have a short-sharp recession, then think again. Beware the boiling frog syndrome.
We are currently on a trajectory (world sharemarket terms) which riviales
* You must take action
i) Invest time into basic financial education and have a basic understanding on the consequences of Government/Central Bankers actions on the world and domestic economies. You should spend at a minimum a couple of hours a week studying current events (eg. US carmarkers
ii) Reduce debts and liabilities. All high interest bearing debts should be reduced significantly, not increased. Budget to reduce liabilities such as credit cards, car loans.
iii) Buy gold and silver. People are starting to save once again for a raining day. Be sure that you are saving real money and not paper money - "cash is trash".
* Must watch Library *
Priority #1: Watch the Economic Crash Course @ www.chrismartenson.com
If I had to select 1 item as the be all and end all, take-home message from my blog it is this video by Chris Martenson. He has summarised many of the things I have already discussed on my blog + a lot lot more.
The Economic Crash Course explains in simple terms why the next 20 yrs will be completely different from the last 20 years. He explains while population growth, money supply growth, debt growth, peak oil all mean that our future will be completely different from the past.
You will not sleep well the night after you watch this. Be sure to take 3 hours one lazy Sunday afternoon and watch this with family and friends.
Also see Money as Debt series on Youtube and video listed on www.goldsilver.com
* Must Follow Library *
The following is a list of market commentators worth looking for on Youtube and/or visit their websites regularly.
- Peter Schiff
- Nouriel Roubini
- Marc Faber - www.gloomboomdoom.com
- Michael Maloney - www.goldsilver.com (in particular see video listings page)
- Bill Murphy - www.gata.org (Gold anti-trust Action Committee)
- Ron Paul (only US Presidential candidate focused on changing the monetary system)
- Ted Butler – http://www.investmentrarities.com/tb-archives.html (Newsletter on Silver manipulation and shortage)
- David Morgan - www.silver-investor.com (silver newsletter)
- Alan Kohler - www.businessspectator.com.au
* Must Read Library *
Books:
* The Coming Collapse of the Dollar and How to Profit From It By James Turk & John Rubino
* Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression by Robert R. Prechter
* The Dollar Crisis: Causes, Consequences, Cures by Richard Duncan
* Rich Dad's Prophecy by Robert Kiyosaki
* Rich Dad's Advisors: Guide to Investing In Gold and Silver by Michael Maloney
* Rich Dad, Poor Dad, by Robert KiyosakiArticles:
* Biggest wealth transfer ever: http://goldsilver.com/newsletters/newsID/3592/?ss=43faa8f38f0723bd62a597e86309fdf4"
Must look at these charts - The banks perceive the current crisis to be 100 times larger then the Savings and Loans crisis of the late 1980s.
* Weimar-style Hyperinflation: http://www.engdahl.oilgeopolitics.net/print/FED%20&%20Hyperinflation.htm
* False Deflation: http://www.marketoracle.co.uk/Article8030.html
* Global systemic crisis – New tipping-point in March 2009: 'When the world becomes aware that this crisis is worse than the 1930s crisis'
http://www.leap2020.eu/GEAB-N-30-is-available!-Global-systemic-crisis-New-tipping-point-in-March-2009-When-the-world-becomes-aware-that-this_a2567.html
Closing Comments:
I have posted a great deal of topics, links and commentators worth following above. I know that there it can be information overload at times, particularly when events such as the collapse of Lehmann Brothers unfolds. There is just too much information to digest, so it's important that to set a goal and read a little bit each day, or a couple of hours a week. Get in the routine of understanding some of what is happening, because it will have long term consequences.
No one has a crystal ball and can accurately predict what will happen in 2009 or beyond. However, recent actions by governments and central bankers in 2008 coupled with decades of unaccountable spending, debt, inflation, monetary expansion and market manipulation all point the world economy in one direction. It is simply a timing issue. If you know the direction and the likely consequences, you will know exactly what action you will need to take, today.
I wish everyone a healthy, happy and prosperous 2009.
Best Regards
Scott Reeve
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