Saturday, August 29, 2009

A Shocking Fall 2009 Economic and Monetary Collapse?

A Shocking Fall 2009 Economic and Monetary Collapse?

Government expenditure is surging and revenue collapsing. This is a recipe for bankruptcy!

Government expenditure is surging and revenue collapsing. This is a recipe for bankruptcy!

* Although, it is hard to assess the exact time the next collapse will come, I don’t think it will be like 2-3 years into the future. Crystal ball reading is always difficult. But the fundamental economic reasons behind an economic collapse is seldom in doubt. In this most excellent article by Egon von Greyerz of Matterhorn Asset Management, he does a lucid job in explaining what I see also. We are in agreement over global monetary collapse driven by the USD collapse, economic collapse and the price of gold will rocket!

The autumn of 2009 will be full of shocking surprises in the banking sector, in financial markets and in the world economy. The events that we outlined in our previous newsletter, “The Dark Years Are Here” are going to start unfolding. There will also be shocking falls in stockmarkets, in the dollar and in bond markets. But these falls will create major opportunities for investors which we will also discuss.

The syndrome of hope and false expectations
Some readers might feel that we are prophets of doom and that there is only gloomy news coming out of Matterhorn Asset Management. For people who want only good news we suggest that you listen to politicians or read the newspapers or your average stockbroker’s forecast. This is where you find the good news. But if you do listen to these people, remember that virtually nobody warned you about the events in the last couple of years, and that today most of these people are saying that the worst is over. And this is also what stockmarkets are telling us, isn’t it? These “optimists” whether they are politicians, bankers or from the media all make their living based on good news and this is why they will continually tell you lies and never warn you about the risks.

Investments are all about managing risk and our responsibility is to understand risk and warn investors when risk is unacceptably high. We have done this for many years and we will continue to do it. Sadly most investors base their investment decisions on hope. When government, private and corporate debt explodes the risk to the economy becomes very high. And when bank credit is growing exponentially and bank leverage is 50 times or more, this is very high risk. When derivatives reach $ 1 quadrillion with virtually no reserves against this astronomical exposure then investors should run for cover.

… In the next few years the leverage will hit back with a vengeance and the deleveraging of asset bubbles and credit bubbles will have a devastating effect on the world economy. This is will lead to a massive deflation of assets and credit. Governments will continue to print money at an accelerating rate. Eventually the money printing will lead to a collapsing currency creating hyperinflation in many countries and especially the US and the UK. But even with hyperinflation many assets such as real estate and stocks will decline in real terms.

Governments living in cloud cuckoo land
Never before have governments in the world expanded deficits and credit to the extent that we are seeing now. In 2009-10 government budget deficits will be at least $5.5 trillion. This amount needs to be raised by all the countries running deficits. The US, of course, has the biggest black hole and will need at least $3 trillion during this period. But these sums, which are unlikely to be sufficient, are just budget deficits and do not take into account the likely rescues of banks, other financial institutions, corporate failures, pension funds, insurance companies, cities, states, local government etc.

The US has lent or committed $13 trillion to prop up its collapsing financial system and economy. Virtually none of these funds have been written off yet and there will be a lot more to come in the next couple of years. It is still our view that the total cost to the US alone of the current crisis will be at least $25-30 trillion.

And where is the money coming from? …. Governments believe that they have found an unlimited source to prosperity. … Especially the US and UK governments, being the biggest culprits, believe that they can manufacture endless amounts of money and that this will create eternal wealth for their economies.

How do they do it? Governments use fancy terms like Quantitative Easing in order to confuse the people. In simple terms it means borrowing money that doesn’t exist or just printing money. To borrow money that doesn’t exist must be fraudulent and both against the law and the constitution. Yes of course the government is breaking the law and the constitution. But not only that , they are actually stealing money from the people, money that the people doesn’t have, but that they will have to work for generations to pay off.

But governments are not just creating money out of thin air. They are also looking after their affairs better than any other group in the economy. The only net increase in jobs in the last few years has been in the government sector, both in the US and the UK. Whilst the rest of the economy is suffering and cutting down, government is adding hundreds of thousands of jobs. Also pay and pensions in government jobs are superior to the private sector. So the main growth sector in the economy in the last few years has been the government sector that produces nothing but consumes 50% of GDP. No wonder we are all in trouble.

Government spending has gone from 10% of GDP in 1932 to almost 50% in 2008
Even more intriguing is of course that the financial institutions that caused the crisis, mainly through greed, are the ones that benefited from the bubbles they helped to create. They are also the beneficiaries of the trillions of dollars that governments have printed to rescue the system. This is like giving somebody who has robbed a bank the reward money.

This is Robin Hood in reverse, with governments robbing from the poor in order to reward the rich for their misdeeds. The poor, who are likely to get much poorer in the next few years, are unlikely to accept their fate without a fight. With the next stage in the downturn, due to start in the autumn, social unrest will grow and it could easily get out of hand in the next 2-3 years.

US Dollar UK Pound (and many other currencies) will have major falls
Both the US and UK governments have for years printed their currencies. From 2007 when the current crisis started the printing of dollars and pounds have accelerated. In the case of the US dollar we are looking at trillions of new dollars. So when money is created which has only air behind it and no assets or substance, is this money not worthless? Yes of course it is but because governments and financial institutions worldwide have benefited from a strongish dollar, no one has said that the emperor is naked although everyone know he is.

Supporting the dollar has also benefited the Chinese who have built up their own industrial base by financing the US deficits and excesses. But the Chinese with over $ 2 trillion in reserves of which as much as 2/3 could be in US dollars have now said in their veiled but very clear language: “The Emperor has no clothes”. The Chinese have now told the US to clean up their act but the Chinese know and the Americans know that their is no chance whatsoever that the US can reduce their deficits and dollar printing.

Therefore the dollar is living on borrowed time and as we outlined in last month’s newsletter “The Dark Years Are Here”, the autumn of 2009 will see a precipitous fall of the dollar. It will be relentless and greater than anyone can imagine. There is always a day of reckoning when the law of supply and demand is out of kilter and that day is now here. The move will be unexpected by many and this will mean that everyone will run for the exit and dump their dollars thus exacerbating the fall.

The situation for the pound is not much better due to the dire straits of the UK economy. The pound may not fall as much as the dollar and probably not at exactly the same time. Normally a currency is attacked one at a time so we might first see the dollar moving and then the pound. But the pound has started to move down against the Euro and Swiss Francs in August and it is also possible that it will fall with the dollar against other currencies.

Gold (and silver) – a spectacular rise
Investors who understand markets, know that if something has a major fall, something else will have a major rise. All you need to do is to turn the chart upside down. The major beneficiary of the dollar fall will be gold (and silver). Gold has all the advantages that the dollar has not:

- Gold can’t be printed
- Gold has no debt attached to it
- Gold has represented real money for 5,000 years whilst no paper currency has ever survived in tact throughout history

- Gold has limited supply – Gold production is declining and demand increasing
- Total annual mine production of gold is only $75 billion per annum which is 0.05% of world financial assets
- Total increase in debt in 2009 in the US alone will probably be in excess of $5 trillion against an increase in gold of $75 billion – a 66 to 1 ratio

- Central banks which have been net sellers are becoming net buyers of gold
- China and Russia are major buyers of gold and only declare increases in holdings with long delays
- Retail demand of gold in China and India is very high – These are nations who understand the virtue of gold as savings

With world debt probably increasing by as much as $7.5 trillion in 2009, there will be at least 100 times more paper money created than new gold produced. It can’t be difficult to forecast which money is likely to appreciate the most in the next few years – paper money with an unlimited supply or real money, GOLD, with very limited supply.

Short term gold is being suppressed by governments with the help of their bullion bank friends. Also, we would not be surprised if central bank gold has been lent to the market via the bullion banks. There has been no independent full audit of the gold in Fort Knox for decades. But we are convinced that gold cannot be held down for much longer. In the next few weeks gold will pass the $1,000 mark. Once firmly above $1,000 gold will move swiftly to probably $1,400-$1,600 in 2009. Even without the effects of hyperinflation gold will go up several times from current levels in the next couple of years….. to continue reading click here!

The fall of the dollar and the pound and the fall in US and UK government bonds (creating higher interest rates) will happen this autumn and will be much more dramatic than most people can imagine.

The fall of the dollar and the pound and the fall in US and UK government bonds (creating higher interest rates) will happen this autumn and will be much more dramatic than most people can imagine.




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