World markets are discounting that something big will happen

===================
For my latest musings - please visit www.scottreeve.com
===================


This is my take on the world economy - Preserve your wealth while you still can!

The current talk is that the US and Europe may go back into recession. The reality is that they never left recession that hit in 2008. Bogus diluted statistics, such as inflation, unemployment rates have falsely portrayed the economic reality being felt by individuals in towns and cities around the world. Arguably many cities have been in depression for the last decade (look at Detroit and parts of Europe). The world economy is now on a detox diet and it will take many years, if not decades, to clean it up.

The markets are currently discounting that something very, very big is soon to happen. The markets always do this long before the average man on the street and the media realise it.

It could be a combination of things:
*country default;
* Euro monetary changes (Greece is insolvent, and other countries are close behind);
* central bank quantitative easing (monetising debt);
* major bank failure (particularly in Europe); and
* a significant slowdown in China.

All of these things are very real and we are already seeing the effects of this on world markets.


European contagion

All the major Euro countries are so intertwined lending billions to each other. A contagion will quickly spread when more of the bad debts rise to the surface.

Most of the current Euro-cris discussion is centred around Greece. By many measures its economy looks quite sick. It's sharemarket is now at its lowest level in 18 years (This is debt implosion!).

On other measures it certainly doesn't look as bad as other countries. Greece doesn't have the largest amount of government or private debts in the world, or the highest debt-to-GDP. One big difference is that it owes a much higher per cent of its debt to foreign creditors (foreign banks and countries).

Many argue that its non-sovereign entities which are clamping down on Greece. ie. the Global banking cartel led by the IMF, the World Bank, the Federal Reserve etc working in tune with the credit rating agencies (Moodys, S&P, Fitch). All I ask is what is the interests of the global banking groups? All actions to date show that they put their interests and survival ahead of everyone else. They do not care about the sovereignty of nation states.

So which countries banks' have the most at stake with Greece?

The following interactive chart I put together uses Bank for International Settlements data demonstrating which countries banks are most exposed to sovereign Greek debt as of the first quarter ending March 31 2011.

The most exposured banks are (by country):
French banks US$56.9 bn;
German banks US$23.8 bn;
UK banks US$14.7 bn;

The most exposed individual banks are:
BNP Paribas with US$7.1 bn (France)
Dexia with US$4.8 (Belgium)
Société Généralewith US$3.8 (France)

This is just the banks. When you add Government's holding Greek debt the amount is another US$145 bn.

Chart : There has been a huge widening of bony yield spreads and risk insurance on credit default swaps. Greece has gone parabolic. Portugal and Ireland are where Greece was a year ago.

or as Alan Kohler puts it, when the financial crisis hit last time in 2008, it was about liquidity (banks wouldn't lend to one another). This time around its about insolvency. There is plenty of cash around, but the banks might be broke.

Chart:
source: Alan Kohler, ABC News, Sept 2011

The dominoes are lined up

The next graph shows why the banking system is trying to fix Greece before it sets a precedent. You may have heard that Spain and Italy are "too big to fail, too big to bail". Europe bank exposure to Spain and Italy's are 6 to 7 times worse than Greece.

Chart :

The harsh reality is that no industry should be bailed out, including the banks from country to country. The ongoing debt crisis has come about because banks have lended and taken billion dollar bets to keep this unsound monetary system going (which is based on nothing but paper money generated out of nothing).

Monetary systems do blow up - why is the Euro any different?

One article I came across discuses that country default is more common than we are led to believe. There were a number of large defaults in the 1980s and 1990s in emerging countries across the Americas and eastern Europe. Economist Carmen Reinhart states that the list of deadbeat countries included

"current investor favorites like Brazil, which defaulted in 1983, went through a bout of hyperinflation in 1990 and effectively defaulted again, for the same reason, in 2000"

Reinhart and Professor Rogoff show that, on average, nations add 86% to their debt loads within three years of a credit crisis. At the same time, government revenue falls an average of 2% in the second year after the onset of the troubles. The way things are heading Greece and other Euro countries are heading down this path. Debts need to be rolled over...just like...a few snow flakes can lead to an avalanche.

The Stumble Cycle

Sovereign defaults--when a country stops paying its bills--go in waves, often following global financial crises, wars or the boom-bust cycles of commodities. Some countries, like Spain and Austria, mend their ways; others, like Argentina, are repeat offenders.

Chart :

The combination can be fatal for investors holding bonds issued by financially shaky countries like Argentina or Greece, which sell a lot of their debt outside their own borders (as does the U.S.--45% of all publicly held debt). As a nation's finances deteriorate, foreign investors sell their bonds, putting upward pressure on interest rates. That usually sets off a spiral including a deteriorating currency, which, if the bonds are denominated in foreign currencies, makes it impossible for the country to pay its debt. Greece doesn't have to worry about this last syndrome, because it uses the euro. But that might make things worse since it can't print its way out of its financial difficulties. "It's like entering a prize fight with one hand tied behind your back," Bass says. Argentina takes a different tack. Still struggling in the wake of its 2002 default on foreign-held debt, its president recently tried, and failed, to seize central-bank dollar deposits (and cashier her central banker) in order to repay overseas debt.

France

Following from earlier discussion, the big questions are which of the big European banks will go under first. The largest French banks, Credit Agricole and Societe Generale have billions in exposure to Greece and other Euro countries.

Chart : The share prices of the 3 largest French banks have fallen 73%, 87% and 87% since start the debt crisis started in 2008.



Italy

Until recently UniCredit was the largest bank in Italy by market capitalisation and a major euro-zone bank. It owns other large banks in Germany, Austria, and Poland with around 40 million customers all up. As the following charts shows, the market is dumping the two largest Italian banks. UniCredit is one of the "too big to fail and bail" euro banks and many of its depositors lie outside Italy, making and bail out practically impossible.

An ironic twist to this is that, UniCredit's predecessor was a bank called
Credit-Anstalt. This bank collapsed in 1931 which lead to a contagion which took Europe off the gold standard and pro-longed the Great Depression. Few people remain from the last depression era. Perhaps the money lessons need to be relearn?

Chart :



Australian dollar

The Australian dollar is a proxy for commodity prices and ultimately China. The Australian dollar has recently fallen sharply to 97 cents and has hit a major support level. If this fails there is another major support level at 94 cents.

Chart: The Australian dollar managed to bounce off the firs support level at US$0.97



Commodities

Overall commodity prices are not showing that China is in immediate trouble. Base metals: copper, zinc, nickel, lead etc are not in a major bear market yet. This may mean that the current correction will be short lived. If base metals start free falling and other negative signs come from China (popping of housing bubble?), than the Australian dollar and commodity prices will fall a lot (a huge amount) further.

Gold

Meanwhile, gold and silver have recently experienced a significant correction. Chart wise (USD/gold), gold's correction is not unhealthy. Gold was sitting at 11 year bull-market resistance line and its trending support line is about US$1550.

Chart:


As I posted recently, I believe the gold demand is getting stronger, and will remain strong, despite the recent price volatility. Since that post it has been reported that Mexico, Russia, South Korea and Thailand have all made large purchases in 2011 and globally, central banks are set to buy more gold this year than at any time since the collapse of the Bretton Woods system 40 years ago. The IMF even reported that European Central banks have started accumulating small quantities of gold after selling on average 400 tonnes of gold a year since 1999.

Silver

Silver plummeted last week by 34 per cent within trading days. It went straight through two key support levels and bounced back above them. After hitting a low of US$26.03, silver rebounded 28 per cent in 28 hours.

Chart: Silver fell 34 percent within 4 trading days, then bounced 28 percent within 28 hours


Is this volatility unusual? Silver is a very small market and historically has been prone to major corrections. My research shows that the major corrections in the last few years has lead to an increase in demand for physical silver (from mints and bullion dealers). I believe this will happen again.

Australia

Take away mining and Australia is in recession, and as I stated early, the key to the Australian economy is whether China can keep its economy upright. If it shows signs of weakness, commodity prices will collapse (along with oil, gold and silver) and the Australian Dollar will fall 10 or 20 cents against the USD.

China kept the world economy somewhat afloat during the global financial crisis, and is the sole reason why Australia didn't go and stay into a technical recession. One of the key barometers on the health of China is commodity prices.

Tourism has been in recession for many years now, in part to the high Australian dollar and a tightening of consumer belts.

Manufacturing has largely been in recession for a number of years except for businesses with astute management and niche business models.

Manufacturing insolvencies growing

Despite insolvencies around the world dropping to their lowest levels in nearly four years, Australia is headed in the opposite direction. This year is shaping up to be a record one for business failures on a par with troubled Eurozone countries. The most recent D&B Global Insolvency Index, ranking business failures in more than 30 key economies, found Australia's insolvency rate was on a par with indebted countries such as Italy, Spain and Hungary. Australia recorded a 12.1 per cent increase in business failures in the June quarter compared with falls elsewhere in the world of 5.7 per cent. D&B said its findings tied in with Australian Securities and Investments Commission data which pegged 2011 as a record year for insolvencies.

Business failures in manufacturing have soared 60 per cent in three years. Almost 300 manufacturing firms went broke in the first six months of this year, the business analyst Dun & Bradstreet says, and just 14 new manufacturers started up. By contrast, in 2008, 974 new manufacturers got off the ground, and only 392 folded.

Retail

Retail is finally entering recession. This has long been coming, even though the likes of Westfield (and other groups) have been creating mega-shopping centres around Australia. The whole retail industry relies on ever increasing amounts of debt (more credit cards and increasing consumption). This model is dead, and there is currently too much competition in Australia alone (before you look at internet shopping of overseas products on eBay and the like). Take electronics, there are so many major stores competing on price, and margins are getting thinner. Many of the private equity firms which bought up a lot of the retailers in recent years have failed, as over-inflated sales targets have missed the mark. In the last 12 months several major groups have entered administration: REDGroup (Borders/Angus and Robertson bookstores); Colorado Group (Jag, and shoe shops), Allied Brands (Baskin Robbins, Cookie Man), Krispy Kreme doughnuts, and Starbucks Australia. Most recently sharper falls in consumer spending has forced Harvey Normany to scrap its Clive Peeters and Rick Hart brands (7 stores to close) and David Jones announcing a 10.3% drop in fourth quarter sales and now expects a small profit for the new financial year.

Sizeable retrenchments are coming.


Housing

Chart:


Lastly, this is a very good presentation by Mike Maloney


Cheers
~ Scott

50 Factors Launching Gold

The following article is written by Jim Willie and published at Goldseek.com (which I came across on goldsilver.com)

It covers many areas I follow on this blog in a quick snap shot. State and local Government debt problems in the US are getting closer on the horizon. Gold and silver continues to advance against ALL government currencies (including in Australia).

Edification is not the word that comes to mind when observing an interview with Larry Fink of Blackstone this morning on network financial news. It was inspirational if not humorous, and somewhat pathetic. Of course the interviewer treated him like royalty, when just a syndicate captain, a Made Man. As a cog within the US financial hierarchy, he was asked why Gold is approaching record price levels near $1500 per ounce. He gave his best 10-second answer, showing no depth of comprehension but an excellent grip of propaganda laced with simplistic distortion. He said, "GOLD IS RISING FROM ALL THE GLOBAL INSTABILITY, AND NOT FROM INFLATION AT ALL." Sounds good, but it lacks much reflection of the world of reality burdened by complexity and interconnectivity that the enlightened perceive. At least he did not babble about Gold being in an asset bubble. It cannot, since Gold is money. It is curious that all the analysts, bankers, fund managers, corporate chieftains who did not advise on Gold investment over the last ten years are precisely whom the financial network news appeals to for guidance in the current monster Gold bull run. They knew nothing before, and they know nothing now. The major US news networks carry the Obama water while the USCongressional members carry the USBanker robes and show respect with genuflection before the priests. But guys like Fink are their harlot squires. Poor Ben Bernanke, despite his high priest position, does not gather a fraction of respect that Alan Greenspan did even though Alan presided over the collapse. The wild card possibly later this year or 2012 will be a national movement to force mandatory wage gains, and thus avert a national economic collapse. The squeeze is on in a powerful manner to both businesses and households.


ANOTHER STRONG GOLD BREAKOUT

As long as Quantitative Easing programs are in place and actively pursued, Gold & Silver prices will soar. The programs are urged by exploding budget deficits and absent USTBond demand. That translates to a ruined USDollar currency. Gold & Silver respond to the debasement and ruin. Efforts will become ridiculously stretched to save the USDollar, but will fail. QE will go global and secretive, assuring tremendous additional gains in the Gold & Silver price. No effort to liquidate the big USbanks will occur, thus assuring the process will continue until systemic breakdown then failure. The more extraordinary the measures to save the embattled insolvent fraudulent USDollar, the more the Gold & Silver price will soar. It is that simple. Gold & Silver will soar as long as central banks continue to put monetary inflation machinery to work. They are attempting to provide artificial but coordinated USTreasury Bond demand. In the process their efforts will continue to push the cost structure up further. In my view, since the Japan natural disaster hit with financial fallout, the Global QE is very much in effect, but not recognized as a global phenomenon. It pushes up Gold in uniform fashion worldwide.


50 FACTORS POWERING THE GOLD BULL

1) USFed is stuck at 0% for over two years and printing $1.7 trillion in Quantitative Easing, otherwise called monetary hyper inflation. They are not finished destroying both money and capital.

2) USFed tripled its balance sheet, with over half of it bonds of exaggerated value, while it gobbled up toxic mortgage bonds as buyer of last resort. The mortgage bonds have turned worthless. The USFed waits for a housing revival to bail itself out, but it will not arrive.

3) Debt monetization has gone haywire, as over 70% of USTBond sales from the USFed printing press. The QE was urgently needed, since legitimate buyers vanished. Even the primary dealers have been reimbursed in open market operations within a few weeks.

4) PIMCO has shed its entire USTreasury Bond holdings, seeing no value. They joined many foreign creditors in an unannounced buyer boycott in disgusted reaction to QE which is essentially a compulsory unilateral debt writedown.

5) Growing USGovt deficits have run over $1.5 trillion annually, with absent cuts, obscene entitlements, endless war. The prevailing short-term 0% interest rates are out of synch with exploding debt supply and rising price inflation.

6) Unfunded USGovt liabilities total nearly $100 trillion for medicare, social security, pensions, and more. The obligations are never included in the official debt. It represents insult to injury within insolvency.

7) Standard & Poors warned that USGovt could lose AAA rating in lousy credit outlook, one chance in three within the next two years. Ironically, the announcement came on the day when the USGovt exceeded its debt limit. The network news missed it.

8) State & Municipal debt have collapsed, as 41 states have huge shortfalls, and four large states are broken. They might receive a federal bailout. It could be called QE3, maybe QE4.

9) Coordinated USTBond purchases from Japanese sales have relieved the USFed, as other major central banks act as global monetarist agents. The sales by Japan are vast and growing. Witness the last phase in unwind of Yen Carry Trade, where 0% borrowed Japanese money funded the USTreasury Bonds and US Stocks.

10) Quantitative Easing, a catch word for extreme monetary inflation and debt monetization, has become engrained into global central bank policy, soon hidden. It is so controversial and deadly to the global financial structures that it will go hidden, and attempt to avoid the furious anger in feedback by global leaders. This is the most important and powerful of all 50 factors in my view.

11) The FedFunds Rate is stuck near 0%, yet the actual CPI is near 10%, for a real rate of interest of minus 9%. Historically a negative real rate of interest has been the primary fuel for a Gold bull. This time the fuel has been applied for a longer period of time, and a bigger negative real rate than ever.

12) The USGovt claims to have 8000 tons of Gold in reserve, but it is all in Deep Storage, as in unmined ore bodies. The collateral for the USDollar and USTreasury debt is vacant. It is in raw form like in the Rocky Mountain range or Sierra Nevada range.

13) Fast rising food prices, fast rising gasoline prices, and fast rising metals, coffee, sugar, and cotton serve as testament to broad price inflation. So far it has shown up on the cost structure. Either the business sector will vanish from a cost squeeze or pass on higher costs as end product and service price increases.

14) The entire world seeks to protect wealth from the ravages of inflation & the American sponsored QE by buying Gold & Silver. The rest of the world can spot price inflation more effectively than the US population. The United States is subjected to the world's broadest and most pervasive propaganda in the industrialized world.

15) The European sovereign debt breakdown with high bond yields in PIIGS nations points out the broken debt foundation to the monetary system. The solutions like with Greece in May 2010 were a sham, nothing but a bandaid and cup of elixir. Spain is next to experience major shocks that destabilize all of Europe again, this time much bigger than Greece. The Portuguese Govt debt rises toward 10% on the 10-year yield, while the Greek Govt debt has risen to reach 20% on the 2-year yield.

16) Germany is pushing for Southern Europe bank climax in their Euro Central Bank rate hike. Europe will be pushed to crisis this year, orchestrated by the impatient and angry Germans. They have no more appetitive for $300 to $400 billion in annual welfare to the broken nations in Southern Europe.

17) Isolation of the USFed and Bank of England and Bank of Japan has come. The small rate hike by the European Central Bank separated them finally. The Anglos with their Japanese lackeys are the only central banks not raising rates. With isolation comes all the earmarks on the path to the Third World.

18) The shortage of gold is acute, as 51 million gold bars have been sold forward versus the 11 million held by the COMEX in inventory. Be sure that hundreds of millions of nonexistent fractionalized gold ounces are polluting the system. Word is getting out that the COMEX is empty of precious metals.

19) Such extreme Silver shortage has befallen the COMEX that the corrupted metals exchange routinely offers cash settlement in silver with a 25% bonus if a non-disclosure agreement is signed. The practice cannot be kept under wraps, as some hedge funds push for fat returns in under two months holding positions with delivery demanded.

20) China has begun grand initiatives to replace its precious metal stockpiles. They are pursuing the Yuan currency to become a global reserve currency. As they build collateral for the Yuan, they are also elevating Silver as reserves asset.

21) A global shortage of Gold & Silver has been realized in national mint production. From the United States to Canada to Australia to Germany, shortages exist. Many interruptions will continue amidst the shortages, which feed the publicity.

22) The Teddy Roosevelt stockpile of 6 million Silver ounces was depleted in 2003. He saw the strategic importance of Silver for industrial and military applications. The USEconomy and USMilitary will turn into importers on the global market.

23) The betrayal of China by USGovt in Gold & Silver leases is a story coming out slowly. The deal was cut in 1999, associated with Most Favored Nation granted to China. But the Wall Street firms broke the deal, betrayed the Chinese, and angered them into highly motivated action. No longer are the Chinese big steady USTBond buyers, part of the deal also.

24) Every single US financial market has been undermined and corrupted from grotesque intervention, constant props, and fraudulent activity. The degradation has occurred under the watchful eyes of compromised regulators. Fraud like the Flash Crash and NYSE front running by Goldman Sachs is protected by the FBI henchmen.

25) The USEconomy operates on a global credit card, enabling it to live beyond its means. The USGovt exploits the compulsory foreign extension of credit in USTBonds, by virtue of the USDollar acting as global reserve currency. Foreign nations are compelled to participate but that is changing.

26) The USMilitary conducts endless war adventures for syndicate profits. They use the USTreasury Bond as a credit card. The wars cost of $1 billion per day is considered so sacred, that it is off the table in USGovt budget call negotiations, debates, and agreements.

27) Narcotics funds have proliferated under the USMilitary aegis. The vertically integrated narcotics industry is the primary plank of nation building in Afghanistan. The funds keep the big US banks alive from vast money laundering.

28) No big US bank liquidations have occurred, despite their deep insolvency. Any restructure toward recovery would have the liquidations are the first step. The USEconomy is stuck in a deteriorating swamp since the Too Big To Fail mantra prevents the urgent but missing step.

29) The unprosecuted multi-$trillion bond fraud over the last decade has harmed the US image, prestige, and leadership. The main perpetrators are the Wall Street bankers and their lieutenants appointed at Fannie Mae and elsewhere. They bankers most culpable remain in charge at the USDept Treasury and other key supporting posts like the FDIC, SEC, and CFTC.

30) The ugly daughters Fannie Mae and AIG are forever entombed in the USGovt. They operate as black hole expenses whose fraud must be contained. The costs involved are in the $trillions, all hidden from view like the fraud. Fannie Mae remains the main clearinghouse for several $trillion fraud programs still in operation.

31) The US banking system cannot serve as an effective credit engine dispenser, an important function within any modern economy. It is deeply insolvent, and growing more insolvent as the property market sinks lower in valuation. The banks lack reserves, and hide their condition by means of the FASB permission to use fraudulent accounting.

32) The big US banks are beneficiary of continuous secret slush fund support from the USGovt and USFed. Their sources and replenishments have been gradually revealed. The TARP Fund event will go down in modern history as the greatest theft the world has ever seen, easily eclipsing the biggest mortgage bond fraud in history.

33) The insolvent big US banks continue to sit at the USGovt teat. The vast umbilical cord of banker welfare has not gone away. Goldman Sachs still is in control of the funding machinery.

34) The shadow banking system based upon credit derivatives keeps interest rates near 0%. The usury cost of money is artificially low near nothing. As money costs nothing, capital is actively and rapidly destroyed.

35) A vast crime syndicate has taken control of the USGovt. A vast crime syndicate has taken control of the USMilitary. A vast crime syndicate has taken control of the USCongress. A vast crime syndicate has taken control of the US press networks.

36) A chronic decline of the US housing sector keeps the USEconomy in a grand decline with constant deterioration. With one million bank owned homes in inventory, a huge unsold overhang of supply prevents any recovery of housing prices. Home equity continues to drain, and bank balance sheets continue to erode.

37) Over 11 million US homes stand in negative equity. The sum equals to 23.1% of households. They will not participate much in the USEconomy, except when given handouts. They have become downtrodden.

38) The USEconomy will not benefit from a export surge. The US industrial base has no critical mass after 30 years of dispatch to the Pacific Rim & China. The industry must contend with rising costs in offset to the falling USDollar, which is cited as providing the mythical benefit. Then can export in droves if they do so at a loss.

39) A global revolt against the USDollar is in its third years. The global players work to avoid the US$ usage in trade settlement. Several bilateral swap facilities flourish, mostly with China. If China supplies products, then the Yuan currency will be elevated to global reserve currency.

40) Global anger and resentment over three decades has spilled over. The World Bank and IMF have been routinely used by the US bankers to safeguard the USDollar and Anglo banker hegemony. Neither financial agency commands the respect of yesteryear.

41) A middle phase has begun in a powerful Global Paradigm Shift. The transfer moves power East where the wealth engines of industry lie, far from the fraudulent banking centers. The next decade will feature the Chinese as bankers, since their war chest contains over $3 trillion.

42) The crumbling global monetary system was built on toxic sovereign debt. Legal tender has been nothing more than denominated debt posing as legitimate by legal decree. That is what word FIAT means. The system is gradually breaking in an irreversible manner.

43) The global central bank franchise system has been discredited. It is a failure, which is not recognized by the bank leaders still in charge. The stepwise process of ruin continues with a new sector falling every few months. Next might be municipal bonds.

44) Witness the final phase of a systemic cycle, as the monetary system has run its course. It is saturated with debt from faulty design. The deception cited in the mainstream media focuses upon the credit cycle which will renew. It will not. It will break of its own weight and lost confidence.

45) The recognition has grown substantially that suppression of the Gold price has been the anchor holding fiat system together. The Chinese realize that Gold, when removed, leads to the collapse of the US financial system. They realize it more than the US public. But the syndicate in control of the USGovt understands the concept very well, as they designed the system.

46) The institution of a high level global barter system might soon take root. Gold will sit at its central core, providing stability. No deadbeat nations will participate. That includes the United States and several European nations. The barter system will be as effective as elegant.

47) The movements spread like wildfire in several US states to reinstitute gold as money. In a few states, led by Utah and Virginia, progress has been made for Gold to satisfy debts, public & private. Consider the movement to be in parallel to the Tenth Amendment movements.

48) Anglo bankers have lost control in global banking politics. The phased out G-7 Meeting is evidence. China has wrested control of G-20 Meeting, and has dictated much of its agenda in the last few meetings. The US has been reduced to a diminutive Bernanke and Geithner being ignored in the corner.

49) New loud stirrings by Saudi Arabia seek a new security protector. If security is no longer provided by the USMilitary, then the entire defacto Petro-Dollar standard is put at risk. Remove the crude oil sales in USDollars exclusively, and the US sinks into the Third World with a USDollar currency that cannot stand on its own wretched wrecked fundamentals.

50) The IMF solution to use SDR basket as global reserve is a final desperate ploy. By fashioning a basket of major currencies in a basket, they attempt to enforce a price fixing regime. It is a hidden FOREX currency exchange rate price fixing gambit that will invite a Gold price advance in uniform manner across the currencies bound together. This ploy is being planned in order to prevent the USDollar from dying a horrible death at the expense of the other major currencies. By that is meant at the expense of the other major economies which would otherwise have to operate at very high exchange rates.


THE BIGGEST UPCOMING NEW FACTORS

Introduction of a New Nordic Euro currency is near its introduction. The implementation with a Gold component will send Southern European banks into the abyss, marred by default. The new currency has the support from Russia and China, even the Persian Gulf. In my view, it is a USDollar killer. The first nations to institute a new monetary system for banks and commerce will be the survivors. The rest will slide into the darkness of the Third World.

Gold & Silver seem to be the only assets rising in price, an extension of a terrific 2010 decade. The exceptions are farmland and the US Stock market. However, stock valuations are propped by constant and admitted USGovt support. Their efforts are mere attempts to keep pace with the USDollar decline, as stocks merely maintain a constant purchase power.

A hidden overarching hand seeks the global Gold Standard as the bonafide solution. Darwin is at work, but Adam Smith turns a new chapter. The crumbling monetary solution demands a solution. Further investment in the current system assures a devastating decline into the abyss of insolvency and ruin.

The Houdini Economy

I believe there are many, many parallels in the world economy today, to that of previous economic depressions. We need only to look at past history. However, historian's all have different accounts and points of view. Is historical information based on objective analysis, primary evidence or a biased second hand account?

Is the economic events of today so different to that of the past? We are constantly told we are living through the worst economic downturn since the Great Depression; then we are told Australia has a resilient economy and that we are weathering the storm. Surely it can't happen to us?

"But we live in a modern, innovative, high-tech society today!"

In the 1920s America - the "Roaring Twenties", the sharemarket was booming, the humble car was built for the masses (T-Model Fords), and the population was extremely opportunistic. The population had never felt so wealthy, the horse and buggy were essentially gone from urban areas and the economy had never been more innovative. It seemed the good times would always last.

And today? We live in the so-called "new economy". A modern, innovative, high tech economy. We have never felt wealthier. We expect the good times to always get better. The next 20 years will be better then the last 20 years.

These are two different points in history - but the same human traits of economic complacency are well and truly alive today. There is usually a large economic depression every 75 years - the average life span of a human. Is it a coincidence economic lessons repeat? Is it a coincidence that each generation since the 'silent' generation (of the 1920s and 30s) has progressively had worse money habits than their parents generation? Everything used to be bought within our means, today its on credit, and we have little incentive to save for a raining day.

Houdini economy

** The big difference between 1929 and today, I believe, is the acceptance of mis-information by the general public and an acceptance to think the monetary system will always work. We live in the so called "Information Age", yet our diluted statistics mean we live in a Houdini economy. It's all smoke and mirrors. Government's have an interest to keeping the public unaware about what is really happening in the economy - to maintain political and social stability (in the short run).

However, comparing today to the past has become distorted because economists, Governments, and the media think they are comparing apples to apples. Today, statistics are treated as gospel. We believe that the stats on the nightly news are accurate, objective and unbiased. Why are we not learning from recent events? Many of the economists and bankers who got it wrong, are still in positions of power and influence. Central banks are being given expanded powers (particularly the Fed Reserve), rather than face increased accountability.

More often than not, an economic number today will be grossly diluted to that of 75 years ago. For example, the unemployment rate, or level of inflation are grossly misunderstated today.

For instance why is unemployment so low at the moment? In the 1930s it got to 32 per cent in Australia! Yet it is still around 5 per cent today, despite a recession and economic turmoil worldwide.

Answer: The ABS counts people as been employed if they are working just 1 hour per week.

But as the following chart shows, the number of hours worked has been falling gradually in the last 15 years. For starters there are a lot more part time jobs. It's good for people who want to work less, but its bad for recording what the real unemployment rate should be.

Chart 1:
Source: Kohler, ABC News

Getting back on topic - lets compare further to the last Great Depression:

1929 to 1932- the greatest sharemarket crash in history put the world into a Great Depression. In 3 years the market fell 89 per cent.

Current sharemarket crash? Depends on your measuring stick, namely, the monetary system has changed. 1929 money was backed by gold. Today it is backed by an exponential curve of debt.

If we use the Dow/Gold Ratio (which is what the 1929 sharemarket crash was recorded against), then the current bear market we have today really started in 1999 (not 2007). So far from top to bottom of the bear market the Dow Jones has fallen 84 percent measured against gold (the old monetary unit).

Perhaps we are already in economic depression but we just aren't awake to it?

As the following chart shows, the inflated US Dollars of today have diluted the impact of what is really happening. From 1999 to 2007 the Dow Jones rose in nominal terms, while the old monetary system was showing the economy was sick (and crashing), now both these measuring sticks are showing the US and world economy is continuing to tank.

Chart 2: Dow Jones over last 100 years
Wow - look at the 1929 crash! It's huge. What this chart fails to show is that important change of the monetary rule book in 1971 (when the gold link was removed).

The following chart puts the 1929 crash, and today's sharemarket crash into a better perspective (apples vs apples).

Chart 3: 100 yeas Dow/Gold Ratio.
Source: Steve Hickel, gold-eagle.com

The last dip in Dow/Gold Ratio:

Notice has taken at least 32 years to reach a new peak in the Dow/Gold Ratio in the last two downturns. In the last downturn there was stagflation in the 1970s, a change of the monetary rulebook in 1971, a commodity price peak in 1982, and an increase in social security outlays of Governments among other things. There was no great depression, but inflation was accepted and new bubbles came along to occupy everyone's money. The key last time is that there remained confidence in the new fiat monetary system. I believe this time round will be different.

Clearly there is a huge difference between Chart 2 and Chart 3. Chart 2 is an inflation drive chart. Chart 2 characters a true free market which goes from undervalued to overvalued and back over time. (Change the monetary system (methodology), and you will change the shapes of the charts!)

Steel industry today vs 1920s

Lets compare 1920s and today even further...

In the 1920s, there was a huge boom in the United States steel industry. 15 per cent of steel was used in automotive manufacturing. By 1928 there was over 21 million cars, enough for 1 in every 6 Americans. When the Great Depression hit however, by the mid 1930s over 50 per cent of the United States steel capacity stood idle.

Today there is vast amounts of steel capacity standing idle also. Lets compare.

Kingdom of Rust

According to latest research from Macquarie Bank, there is some 362 million tonnes per annum of unutilised steel capacity in the world.

Chart 3: Today, around 25 per cent of the world's steel capacity is sitting idle.
Source: Macarthur Coal Presentation - 17 June 2009

To put this into perspective, this is equivalent to:
- every single steel mill in Europe, Japan and Korea shutting down OR/
- ¾ of China’s steel production closing down.

With all this recent iron ore hype in the Australian sharemarket (in the last couple of months), just stop for one moment and envisage 3 out of every 4 steel mills in China closing down. Only the lowest cost (lowest debt) iron ore, coking coal, steel producers could survive a sustained turn down. Clearly there is too much capacity worldwide. This is not unique to just the steel/iron ore industries. The capacity for most goods today is built on the premise that the current monetary system will continue to work, that the world economy will continue to expand at a rapid rate, and that our tolerance of debt will continue to expand.

All this extra capacity will have to be removed from the system. Many companies will continue to go under. This is only natural. In the boom times too much competition led to cheaper cars and airfares, and even steel was pre-fabricated in China and exported back to Australia! There needs to be a giant shake-out across industry worldwide. Give it a few years..

Baltic Dry Index

Much of the gains on the Australian Securities Exchange (ASX) in recent months have been on the back of a bounce in commodity prices (ie. A fall in the US Dollar), and increased shipping movements out of China for Australian iron ore and coal. This has also lifted the Baltic Dry Index (BDI), which had a major crash in 2008. The BDI is a daily number published by the Baltic Exchange – it tracks world wide international shipping prices for dry bulk cargoes such as iron ore. It shot up in the boom years, and crashed big time last year as the following chart demonstrates.

Chart 4: Baltic Dry Index crashed 94 percent when the resources boom bust, its now rebounded on growing Chinese iron stockpiles.
Source: Bloomberg

The following chart from Alan Kohler pictures an interesting relationship between the BDI and movements in the Australian and US Dollar. Positive movements in commodity prices (particular in US terms) and the BDI - is a positive force for the Australian sharemarket.

Chart 5: Baltic vs AUD
Source: Kohler, ABC News

I believe its now time for the BDI to fall sharply once again. The third quarter of the calendar year is traditionally the worse for commodity prices (from my experience, particularly in base metals). Apparently about 10 per cent of the world Capesize ships (the largest) are sitting of Chinese ports, unable to unload their iron ore. The two largest iron ore terminals in China are said to be close to full capacity. Now that the 2009/10 iron ore benchmark prices have been finalised (with Japan and Korea), my bet is the Chinese have done most of their shopping for this year, and will try to manipulate the market in the short-run to really hammer down prices come next year.

World Trade

Ok, so i've talked about the BDI - what about world trade as a whole?

The following chart from Alan Kohler paints a bleak picture for world trade. It uses a base of 100 for the peak in world trade (some 12 months ago). Already we have gone from a massive boom, and the big bust continues at a greater magnitude than the 1929 trade bust. Just like the 1920s America – there is significant overcapacity in the world. Trade flows are stalling.

Chart 6: World trade has fallen off a cliff much higher then the Great Depression slump.Source: Kohler, ABC News

Covering up debt - back to the suitcase method

We all know what hiding bad debts can do... Subprime mortgage-backed securities, bundled together, given a AAA rating and sold overseas to unknowing investors worldwide. This grand scheme worked for a while... now it appears the humble suitcase is back in vogue to move Government debt around.

Here is a rather amusing article. If this were true... the US/Japanese Governments are running out of places to hide their debt!!

Suitcase With $134 Billion Puts Dollar on Edge

Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. ..

The trillions of dollars of debt the U.S. will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones aren’t losing faith in the U.S.’s ability to control the dollar. ..

Think about it: These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. ..

Let’s assume for a moment that these U.S. bonds are real. That would make a mockery of Japanese Finance Minister Kaoru Yosano’s “absolutely unshakable” confidence in the credibility of the U.S. dollar. ..

Bad news can only be covered up for so long. Question everything!

Scott