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MCD BLOG – latest at top – Blog started 31st July 2008

This is Mike Downey’s personal blog - primarily devoted to his views and forecasts on economic and world events.  The views expressed are intended to act as a record of this tumultuous period and of predictions made and to assess accuracy over a long period.  It is written with a UK perspective for interest only - not to be used for investment decisions or any other purposes! 

Tuesday, 17th October 2017

Watching Theresa May trying to deal with the EU over Brexit is one of the most awful, excruciating experiences ever - she is a rank amateur in a pack of hyenas.  She has no idea how to 'negotiate' with the enemy - because that is what they are.  One respected guru (Martin Armstrong) suggested she go on a crash course of poker instruction in Las Vegas - because that is exactly the game being played in the Brexit 'negotiations - and she has no idea how the game should be handled.  She and many of her ministers are making terrible mistakes in how they are progressing Brexit - the end result if it continues like this, is that the UK will suffer greatly.  The stupidly-handled loss of the Government's majority makes a forthcoming disaster almost certain.

The UK sadly has a sub-standard Prime Minister who has already made enough mistakes to fill a large bucket.  Added to the statements by opposition politicians and remainers designed to derail Brexit, the EU bureaucrats and politicians must have great confidence that the UK will never get its act together.  Unless some fundamental political changes are made in the UK, we are doomed to get a very poor deal with the EU, or no deal at all.  So sad.

Friday, 31st March 2017

The delivery of the UK's Clause 50 termination letter happened this week - equivalent to lighting the blue touch-paper on a firework.  From early reactions by the EU it is crystal clear that they intend being as difficult and obstructive as they can possibly be - including an early statement that they want the UK's agreement to cough-up an approx £50Bn exit fee plus an undertaking that would block the UK's future ability to make it a corporate tax haven - Singapore-like - all before they will entertain any free trade discussions. Also giving Spain a veto over Gibraltar - definite no-no red flag for the British - it can only have been inserted by the EU to make sure that 'negotiations' are crippled from the start.  Any pretence that the EU do not want to punish the UK has been blown-away.  The UK government has responded in 'hopeful' terms - but I fear that they might actually and naively believe there is a chance that EU politicians and bureaucrats will be kind to the UK.  THEY WILL NOT - they clearly want to persist in the narrative that the EU are in-charge and the UK is a mere supplicant that needs to be punished.  The only chance of that changing will be if/when European industrialists get involved to stop their exports into the UK being penalised.  But even then, the political/economic importance of the EU/Euro to Germany who derive massive advantages from the arrangement, will override any German industrialist's interests.  Merkel will not be influenced - the solidity of the EU is the only thing that matters. The French of course, just want to screw the UK, whatever.

The EU will go out of their way to hinder any progress on the issues important to the UK, so that the timescale becomes bogged-down, with the UK having to continue full payments to the EU and be cow tailing to the EU on all issues - for a very long time to come.  This will happen if the UK government makes any attempt to 'negotiate' the key issues - as currently seems to be Mrs May's intention.

The only UK policy that would make sense in these circumstances - is as outlined in my last blog - I repeat:

There's a lot of nonsense in parliament and the media about the UK's Brexit negotiating stance.  I cannot understand why nobody in power has the commonsense to make a very simple but clear policy statement, which is; 'The UK policy is that we will provide free trade (i.e. no tariffs or artificial barriers) to all EU countries wishing to export to the UK.  But if any tariffs or impediments are imposed by the EU, that the UK will exactly reciprocate.  On this basis there is no need to 'negotiate' at all - it will be up to the other 27 countries to decide if they wish to impose tariffs on their own industries - that is if all 27 can agree amongst themselves.  The time saved in not having to negotiate detailed EU trade terms can be spent in dealing with all the non-trade issues within the EU and arranging all the non-EU trade deals with the rest of the world, to start ASAP (As Soon As Parting).

One interesting observation heard recently from EU officials was that the UK's Clause 50 letter was not legally terminal and could be subsequently withdrawn unilaterally by the UK at anytime before it actually left - meaning that the UK would then remain fully in the EU.  If that legal opinion is correct, it is quite possible that the EU's policy is to make the UK's exit terms so terrible, that there will be another UK referendum to rescind the Clause 50 letter - as Blair is now pushing for.  Just a thought ...............

Friday, 18th November 2016

It's still too early to see how the UK's Brexit negotiations will turn-out, but the portents are not good if you listen to the EU bureaucrats in Brussels and various political heads in some of the countries - many are definitely looking to punish the UK.  What does look a lot brighter and perhaps more certain - is that the EU itself could fall apart long before any Brexit negotiations are completed.  The Liberal Elites, who are the main backbone of the EU, are in retreat just about everywhere - Trump's victory was the latest example of this.  With elections and referendums coming-up over the next twelve months in many important EU countries, there is a good chance that there will be nothing left to Brexit from!

There's a lot of nonsense in parliament and the media about the UK's Brexit negotiating stance.  I cannot understand why nobody in power has the commonsense to make a very simple but clear policy statement, which is; 'The UK policy is that we will provide free trade (i.e. no tariffs or artificial barriers) to all EU countries wishing to export to the UK.  But if any tariffs or impediments are imposed by the EU, that the UK will exactly reciprocate.  On this basis there is no need to 'negotiate' at all - it will be up to the other 27 countries to decide if they wish to impose tariffs on their own industries - that is if all 27 can agree amongst themselves. 

There is a really big opportunity coming for the UK amongst all this political turmoil - that is to form a new British-inspired European Trading Bloc providing free trade, but without the political interference that EU membership implies.  There will be many European countries that will find this an attractive alternative, once the dead wood of Hollande, Merkel, Renzi, etc., have been swept away, Trump-style!

Wednesday, 29th June 2016

The blue touch-paper was well and truly lit in last Thursday’s referendum on Britain's exit from the EU, with many of the 'scaremongering' prophesies made then now becoming reality.  The reaction of the EU politicians/ bureaucrats in Brussels has been predictable and fairly unpleasant, even in the 'diplomatic' language used.  It is pretty certain that many will go out of their way to punish Britain for its temerity in leaving.  This is partly as revenge against the likes of Farage who has been a thorn in their side for years, but also to demonstrate to any other countries that any thoughts of also leaving will be extremely unpleasant and painful. 

The 'hopes' that the Brexit Leave campaigners had for an easy exit, with continuing full access to the single market - now look forlorn.  Perhaps when the industrialists in Germany and elsewhere get involved there may be some amelioration of these attitudes - but the EU bureaucrats and politicians have no doubts on how to teach their underlings (the UK) a real lesson.  It is clear that Britain will be given a real pasting at considerable cost to all in the UK.  Coupled with threats from Scotland to leave the UK, the future currently looks bleak.  Quite a few (about 4 million) have so far signed a petition for the UK referendum to be re-run, with the almost certainty that next time more people would vote 'remain', after they have now looked over the precipice and seen the dangers/ consequences there are.

Brexit has fired a shot across the bows of the EU and has acted as a beacon to others in the EU who are dissatisfied.  However, because the EU will go out of its way to punitively punish the UK, the short-term damage caused to the UK could be considerable and possibly long-lasting.  The UK has to be more circuitous/ sophisticated in how it handles this – just simply leaving and hoping good deals can be done, is myopic and dangerous in the extreme.  Notice of leaving under Article 50 must not be given – the UK would be a cooked goose – which is of course, why the EU is pushing.

In the absence of a second referendum, which would almost be an act of complete capitulation to the EU machine, there may be a much better way forward which could eventually produce the results the Leavers wanted, without the pain of a Brexit.  This is what should happen:

1)     Announce that due to the aggressive reactions received from the EU, and the obvious conclusion that they will purposely make things difficult for the UK - that we (the UK) have decided not to pursue Brexit yet and will not be formally notifying our departure under Article 50.  As the sole prerogative rests with the UK, there is nothing the EU can do about this.

2)      However, to reinforce the UK’s great unhappiness with the various aspects of the EU already exposed in the Brexit referendum, namely; immigration, interference with sovereign rights, etc., etc., we state that the UK will be become proactive within the EU to push for the fundamental changes needed.  This posture would follow the wishes expressed by the British electorate but in a more subtle way and would satisfy most referendum Remainers and Leavers.  It requires no approval from the EU.

3)      As part of this, the UK will commence unofficial ad hoc discussions with other parties in the main EU countries who are already gaining public support with their own electorates, and who could become greatly influential in changing the political dimensions within the EU itself, to make it far less federally-minded.  This will tend to undermine the support base for the federalists – the Junckers, etc.  The UK should also stop ‘gold-plating’ EU directives as the British tend to do, and start ‘using’ the EU for the UK’s benefit – much like the French, Italians and others.

4)      When there is enough support within the EU member countries for such a change to the EU constitution, the UK in concert with the other allied countries, will push for these fundamental changes in the EU.  If successful, then the objectives of Brexit will have been achieved without a 'war' and the collateral damage that would involve.  If not successful, then a number of countries together could break-away into a new European Free Trade Group – it would then not just be the UK by itself - we could even offer associate membership to whatever remains of the old EU!.

An alternative route forward if the EU decides to play tough with Brexit, is just to withdraw from negotiations and pass British laws to say all trading arrangements with the EU remain as they are (i.e. free trade) but that if the EU (all 27 other countries together) want to impose tariffs or other trade impediments on the UK, that the UK will reciprocate fully.  The chances of all 27 countries agreeing amongst themselves is near zero, especially as the UK imports more from the EU than vice-versa.

Finally, it is worth noting that this Brexit-induced situation comes on top of the already dire global economic state already commented upon previously in this blog.  There is a real possibility that Brexit could be the Black Swan event that tips the whole global economy over the cliff.  Certainly the EU has very many problems, in addition to the Merkel-induced disaster of mass immigration.

Sunday, 20th December 2015

As predicted, virtually all major countries, including UK, USA, EU, have passed 'bail-in' laws that mean ordinary bank depositors will be fully in-line to pay for the losses the banks incur next time from their casino gambling activities - which have continued unabated since 2008 and before.

All major market fundamentals look in bad shape, but stock market valuations continue to be propped-up by the easy money policies of QE and ZIRP.  Many commodities have already crashed, and bonds look set to follow shortly, with other asset classes of stocks and property not too far behind.

We now live in a completely centrally 'managed' global economy, which is largely divorced from what is actually happening.  Japan is probably the most 'advanced' country down this slippery slope, with debt levels that are absurdly astronomic - and completely unsustainable if/when the central banks run out of ammunition (hint; that's very soon now). 

2016 will be an interesting year!

Saturday, 18th April 2015

An interesting and potentially important thing happened last week - the Austrian government abandoned the guarantee previously given to depositors at Austrian banks.  This follows an earlier resolution by the EU that in future EU banks will be bailed-in by depositors rather than bailed-out by taxpayers as was the previous policy.

It doesn't take too much intelligence to figure-out why the Austrians made that change in policy - they clearly fear that their banks will become insolvent sometime in the future and the government does not want to be on the hook for any compensation.  I expect other countries to follow suit before too long.

Several years ago in this blog I expounded the dangers of the hypothecation of assets by banks globally.  Hypothecation is the use of the same asset many times over to 'support' the loans and derivatives the banks have made to boost their reported profits and bonuses.  At the moment the banks are on averaged leveraged 1:26 as a result.  That means that if the total value of the 'collateral' held by an 'average' bank falls by more than 4% - that bank is insolvent.  Of course, the reality is that the banks have actually been grossly insolvent for years - but that fact has been covered-over by the massive QE money-printing by central banks over the last seven years.

The ability of central banks to continue QE at the scale needed, together with the allied policy of having zero interest rates - is clearly coming to an end.  When it does, the outcome is certain - the asset class valuations that have been artificially boosted by QE - shares, property, oil and commodities, etc., etc.,  - will crash.  It's as sure as gravity!  When that happens, many global banks will go bust and depositors will have their funds seized (well actually converted into worthless bank shares).  We have been warned - and there will be few places to hide from the coming holocaust.

Saturday, 17th January 2015

It's beginning to look ugly - commodities and oil prices are crashing - leaving many financial 'institutions' and banks with heavy losses.  The sudden decision this week by the Swiss National Bank to decouple from the Euro (there had been a peg at CHF1.20 = €1; at time of writing it's CHF1 = €1) has caused mayhem and again heavy losses to the financial sector and will cripple many people in Eastern Europe particularly who have CHF denominated mortgages.  Already some FX traders have gone bust. It will not take too many 'counter-party' risks and bankruptcies like this and oil, to destabilise the whole shooting match.  The spectacle of banks failing because their asset bases are no longer at the high values of before (all artificially bubbled by QE and ZIRP [zero interest]) will be something we shall get used to - before the whole lot collapses.

The ability for central banks to cover this downward plunge is much diminished - interest rates are already near to or even below zero, and QE is becoming a widely discredited policy that probably cannot be used for too much longer.  However, having said that; QE is the only tool now available to central bankers - so they may try to use it again in desperation.

I do not think there is any doubt now that we are entering a deflationary spiral, which may not be too bad a thing for the general populace initially - but would cause the grossly debt-laden banking & sovereign sectors an enormous amount of grief.  Getting inflation going was the only hope that bankers had for reducing the debt mountain they've built.

My current forecast is for an initially sharp deflationary period, with a general collapse in those asset prices that are currently bubbled (stocks, commodities, property).  The consequences of this will be terrible for the financial sector, and so I predict that more aggressive QE will be launched - but this will only provide some short-term and only partial relief before the deflation flips over into hyperinflation as the QE money hits the streets - next time I think QE will be used to directly stimulate consumer spending, rather than just asset prices that were targeted by previous QE exercises.  Zimbabwe here we come!

What this will do to social cohesion is problematic, to say the least.  The facts of life are that the world's population can only 'just' be supported if everything runs perfectly.  If/when that perfection breaks down - it will be a FACT that the world's population cannot be supported.  Sadly, war is the only natural solution to that problem - and with Ukraine and ISIS we are already on the way ...

 Monday, 21st May 2014

Things are still looking rosy - stock markets peaking, unemployment coming down, at least in some countries according to governmental statistics.  Overall debt base reaching new record highs, although the pace of debt growth has slowed slightly.  What is there to worry about?

For as long as nil-cost money can be 'printed' or otherwise created, then the day of reckoning can be deferred - it keeps banks solvent, asset values soaring and generally keeps the party going.  If/when that stops, the consequences will be dire for many people.

In the meantime - have another drink ...............

Monday, 3rd February 2013

Rather than wait for too long - I thought I should say a quick hello to any readers I (still) have out there - although I have nothing particularly new to say.  The process that started before has really got going, with stock markets surging (until very recently), house prices booming and unemployment apparently collapsing - everything in sight has been moving in the right direction and there are many people (perhaps even the majority) who feel we are over the worst and that sunny uplands beckon for the future.

I am reminded (although not that old) of the roaring twenties, where the optimism and general partying carried-on right up to the cliff - with virtually everybody completely oblivious of the dire situation into which the world was about to plunge.  The same thing happened before both World Wars.

The reality is that the foundations upon which our economies are built are now in an even worse state than in 2008, when complete and utter collapse was only avoided by the wholesale conversion of private (banking) losses into public liabilities, and the massive printing of money, which continues to this day.  No lessons have been learned and the bankster partying continues unabated.

Pigeons will come home to roost before long.  Enjoy whatever time is left ............

Tuesday, 23rd July 2013

It is now July 2013.  I have picked up my last blog written in Dec 2011 several times over the period, but have not found anything of note to add that had not been said before.

The only main thing that has happened in the intervening period is that governments on a global basis have thrown so much additional debt and liquidity at the problem to try maintaining the status quo, that many people have been led to believe that the problem has gone away – and that the good times will shortly return.

Sadly, nothing could be further from the truth.  The intervening years with virtually every last resource being thrown into the hole, which is getting deeper by the month - has put us all in a far more parlous state than we started from.  The dire predictions made before in my blog stand.

As I write this - the national newspapers have many articles about how confidence levels in the general populace are at all time highs, stock markets high, house prices rising.  With most people feeling that the worst is over – what can go wrong?  To cap it, the UK government has just announced a new taxpayer-funded sub-prime mortgage scheme to boost house buying by those who would ‘struggle’ to obtain normal, commercial loans.  Now, where did we hear of that before?  I guess they hope this will prop-up their popularity leading-up to elections in 2015, before negative equity and repossessions start again.

As most of governmental ammunition has now been expended in fighting/hiding the problem, the prediction is that at sometime in the next two years, probably less, the cracks in our global society will have grown ever wider and will be incapable of being papered over.  It is from that point that the pack of cards will start to collapse – and it will then be too late to try escaping the consequences.

The big unknown in all this is - will there be a black swan event (or rather when will there be one – they always turn-up sooner or later) - something that is of such a size and unexpectedness that it completely destabilises the current economic and political scene.  The global economy is now so fragile that any such event would have the effect of precipitating a major depression, or worse.

For decades we have been living a life style that is significantly in excess of our production levels.  We have covered the gap by borrowing – which is the same as stealing from future generations.  No amount of economic clever talk, quantitative easing, and excessive taxation can wipe out the sins of the past, given the scale they have reached.  We are bust.

Ultimately, the only way out and forward will be for countries to declare bankruptcy and dump creditors – but this will of course have a terrible knock-on domino effect on a global scale, with whole currencies being ‘rebooted’ and starting again from scratch. That sadly, is my prediction.  I am just thankful that I am at the end stage of life – it is our children who will suffer the most.  That is our legacy to them.

Saturday, 17th December 2011

All eyes have been on the Eurozone, which if it wasn't so serious and important would be an amusing spectacle watching politicians trying to preserve their ridiculously impossible pet project.  They wriggle and worm their way around, using all the smoke and mirrors they can lay their hands on, to try hiding the reality that such an economic abomination as the Euro can never work - and that in trying, they risk destroying the very democracy that originally gave them power.

I sometimes think that the real definition of intelligence is the ability to work through and predict the consequences of actions you take - several steps ahead.  A bit like playing chess.  On that basis, the European politicians and economists trying to stir this brew together must be especially dim-witted.  The Euro as currently structured with such a wide diversity of country components and without political or central bank authority is completely unworkable and completely undemocratic.  The UK was right to remove itself although there must be a danger that some in the EU, and particularly the French, will try to punish the UK in its isolation.

However this spat over the Euro zone is just a minor side-show compared to the catastrophe about to engulf the whole globe.  As knowledge of this very real threat slowly seeps into the general population’s awareness, a new word will be learned and on the tip of everyone's tongue.  The word is hypothecation - as in asset hypothecation.  This is the process that banks have used to over-leverage collateral many times over for their personal profit.  To briefly explain what has happened, imagine a situation where a bank lends you 200K (doesn't matter what the currency is) to say buy a house.  The bank now has an asset sitting on its balance sheet (your obligation to repay the loan secured on your house).  The bank then thinks - well we've got that asset, so might as well use it to borrow money ourselves and we can lend that out too and get interest paid on that money (good for profit & bonuses).  The bank that lends them that money then itself has a new asset (the promise from the borrowing bank to repay the loan).  That bank now uses that asset to borrow money, and so on, and on and on ………….

In the USA there are laws to prevent this happening by more than 148% over the original asset value.  But in London, UK the banks were entirely unregulated and without there being any limit to number of times a bank could hypothecate an asset, unlike the USA's 148%.  That is why virtually every major bank has offices in the City of London - to enable unlimited hypothecation to happen, quite legally and unregulated.  The IMF reckons that the average degree of hypothecation is x4 - but that could easily be a great understatement, because nobody actually knows what the figure is - they only know the practice was widespread and rampant.

What this means is that much of the asset base the banks claim to have are based on hypothetical assets (i.e. assets that don't actually exist).  It has of course boosted reported bank profits and therefore bonuses - but the whole thing is a complete sham, literally a house of cards just waiting to topple.  The only reason the banks have not collapsed just yet, is because of the efforts of governments and central bankers to prop-up the banking and economic system so that the effects of the banking debacle remains hidden from view.  The only possible way out of this hypothecation nightmare is for the central banks/governments to do four things simultaneously:

1)     Not require banks to acknowledge they are in fact completely insolvent – this is achieved by allowing them to hold ‘assets’ at their hypothecated values rather than the truthful near zero value.

2)     Re capitalise the banks by allowing them to make enormous profits, partly by benefiting from near zero interest rates and also by feeding quantitive easing money through the banks.  Sadly the banks want to pay themselves enormous bonuses from the resulting ‘windfall’ – and especially in the US where banks have not been nationalised at all, this bonanza accrues to shareholders (Wall St., etc.) who should in truth have lost their investment.

3)     By encouraging inflation through QE to increase/hype-up asset values (shares, commodities, properties, etc.) and to reduce the real cost of debt.

4)     By not allowing any banking component to fail – they must always be bailed-out.  Allowing Lehman’s bankruptcy was a mistake in this context – probably caused by Paulson’s (ex Goldman Sachs) personal vendetta.

The above process has been exactly what some central bankers have done (The US Fed, BoE, etc.) - and it can work and eventually restore the banking system, except for one very important risk: - it requires the central banks to print money at whatever level is required.  If that falters, either because a major central bank (like the ECB) does not want to play that game, or if a major country (like Germany) will not countenance money printing – then the whole game is up. 

That is why the USA and others are so concerned about the European situation.  There is now a very serious possibility, even probability that the end game is fast approaching when those bank losses can no longer be covered/hidden.  Once banks are allowed to fail (and they can only be ‘saved’ by money printing) then the domino process will start – and become unstoppable.

All the forces of economic ‘nature’ are pointing in a deflationary direction – people are cutting-back, governments are too.  It is becoming clear that all the artificial measures taken to try stimulating growth and inflation are not going to be successful.  A deflationary path will destroy the current economic system, but eventually will herald a new future based on true values rather than the phoney, zombified existence we now have.  However, the transition will be very long and very painful for all.  There is still a chance that the inflationary route will prevail if the banking system is 'protected' by outright money printing - and it may come to pass that the ECB actually starts massive money printing once they peer over the precipice as they are now starting to do.

The rest of this article is based on the deflationary route happening - a different tale of woe and predictions will follow if inflationary path is the one followed - neither are pleasant outcomes!

When people start to realise the full enormity of the catastrophe waiting for them, the rush for the doors will be overwhelming and we will have the mother of all depressions, from which recovery will be impossible for a very, very long time.

If there is no major money-printing, then in the short term we can predict a major reduction in asset prices - these have been enormously pumped-up by all the funny money generated by the hypothecation process and subsequent QE.  So the prediction is that all assets (shares, commodities, property, valuables and gold) will crash in value – probably more than 50%.

We can also predict massive social unrest as unemployment soars, with a crime wave like nothing seen before.  Capital controls to prevent money flight are assured, and quite possibly the creation of police states to try controlling the rampant and violent lawlessness that will be commonplace.

Banks will undoubtedly crash causing a domino effect all around.  I believe the only solution will be to have central banks taking-over retail banking operations, letting all the insolvent banks (that's pretty much all the major banks) go bust, taking depositors money down with them, subject only to the governments’ guaranteed amount, which I believe will be made a personal amount rather than the amount per individual bank accounts that a person has, as at present.  Gold and other valuables will of course be sequestered.

These effects will be seen in countries around the globe.  The world is a complex place with many intertwining links that enable our sophisticated society to function efficiently.  That includes the production and distribution of food - in fact it is only because of those efficient intertwining systems and the use of previously abundant energy sources that the world's population can be (almost) fed.  Interrupt those systems, as will happen, and an awful lot of people are going to starve, even in previously 'advanced' countries.  Once that happens, then all bets are off - violence and wars can be expected.

I do not believe there will be too many hiding places from the above process.  I think that so many people will be suffering very badly that a combination of communist-style restrictions on anyone with wealth, plus of course the effects of rampant lawlessness, will make life hard and unpleasant for virtually all.

That will be our legacy from the greed of banks, the corruption and incompetence of governments, plus our own past delight in living high on the hog whilst we could.

Happy Christmas!

 

Tuesday 30th August 2011

It is now over ten months since last writing in this blog.  Not much has happened that was not predicted, except that much more money and debt than expected has been thrown at the problem, with the ultimate result that the crash will be longer coming and far more serious and more destructive.  Although I realise that the doom-laden views expressed here are not shared by many ‘experts’ in the City, it looks as those stages are now about to start happening – the original prediction made re markets collapsing was before the news that quantitive easing was going to be channelled into the banks specifically to allow them to profitably speculate on stocks and commodities, pushing stockmarket prices, etc., upwards.  If Bernanke and UK’s Mervyn King and perhaps also the EU, do go ahead with another major bout of money-printing, as I think they will (not many options to preserve the status quo are now left), then the show will stagger-on for a few more months before finally and disastrously collapsing.

To bring this to a simplistic level, cutting through all the mumbo jumbo of finance, the only sustainable standard of living long term is based on what one produces (GDP) – any consumption above that is achieved by taking money from other people – you can do that for a while (as we have done), but eventually you hit the buffers (as we have) and the standard of living then collapses not just to the production level but further down as all those debts have to be repaid or defaulted upon.  That’s the simple truth folks!  The wealth we think we have is illusory and the process of regaining stability involves the diminuation of that illusory wealth back to its real level or below – either by collapsing asset values and earnings or by currency debasement.

It doesn't seem to matter how many times in the past Keynesian stimulus has been tried and failed, politicians will try once more.  It’s the easy option because it puts off the evil day when real corrective action has to be taken.  However, this time there are two big differences. 

Firstly, governments have used-up all the ammunition available to ‘fight’ recession – the cupboard is now bare, except for further Weimar-type currency printing – and we all know where that leads.

Secondly; a sector of people have used their position and influence to gain advantage over the rest of the population.  Outright greed has pervaded all aspects of this crisis.  That coupled with the naivety, incompetence and corruption of politicians and the political system based on bribes, lobbying and political donations - will produce an explosive backlash by those disadvantaged - i.e. the rest of the population when they finally realise what the financial elite have done to them.  At the moment they haven't got a clue.  Apart from a few who have lost their jobs, most people have been largely unaffected.  In fact some, especially those with big mortgages have done quite nicely because of the exceptionally low interest rates that have crucified those with savings.  The abnormally low interest rates have also allowed the financial elite to make further massive gains at the expense of everyone else.  It is no surprise to hear that the very rich have become substantially richer whilst the poor have become much poorer. 

The greed that originally started the whole crisis has been allowed to grow into the supposed cure, with the result that rich bankers and other financial manipulators have actually increased the amounts they take from everyone else.  This will rebound on them, as it has in every previous crisis that eventually destroyed the empire of the day.  The lessons of the French revolution should not be overlooked by the banker class - it could be them rather than the aristocrats next time.  Once the general population has started to seriously suffer, as they will shortly, and they realise what mugs the financial elite have made of them, then retribution will be firmly on the agenda.  The abuses of the financial system by the financial elite, and the incompetence of the political regulators is nothing short of breathtaking – and continuing – still no real efforts have been made to outlaw the many abuses there still are.

The recent riots in the UK have shown the extent of the underclass that's been created by the appalling education standards and moral decline occasioned by the decades of leftist liberal thinking and soft social security policies that have predominated.  Whilst a lot of just outright criminality was involved in those riots, there is no doubt that when real hardship starts to be felt, then social and political influences will come into play giving rioters some feeling of righteous legitimacy as Robin Hood characters acting against the wealthy and those who have precipitated and benefited from the economic chaos.  It’s at this point, now not too far away, that those with some wealth will need to worry greatly.  The economic and social situation is now so bad that simply tightening up policing tactics will not be sufficient.  Also, there are now so many in the UK reliant on either government jobs or handouts, that the election of a government who will adequately deal and correct those problems is far from certain.  In other cultures this situation is often resolved by a dictator appearing, but in a highly democratised country this may not happen and continued descent to the depths may be the outcome.

So what particular predictions am I making now?

1) Firstly that politicians will defer taking any real action until the markets make them.  That in itself will make the situation even more dire, but also will eventually make the tough decisions needed politically that much easier because even the dimmest will see there is no alternative.  Every politician, especially EU, USA and UK ones will try clinging to the status quo for as long as possible.

2) The USA is already so far down the hole and still digging hard, that my previous prediction of a complete USA monetary collapse is now certain to happen; the only question is how long before the inevitable happens.  Anyone who knows the American psyche will confirm that given the alternatives of either living in poverty and servitude for decades whilst creditors (like the Chinese whose ill-gotten gains largely came from suppressing their currency) are paid-off in full, OR defaulting and waving goodbye to the creditors and getting on with life – the latter will be the choice taken.

Once it does there will be many other dominos that will fall too.  Whilst that will be a terrible and traumatic time, the basis for a long term and sustainable recovery could then be in place, always assuming of course that war does not breakout.  However, I suspect that full recovery even after defaulting will take more than a decade – and that’s only back to a non-leveraged standard of living, not to the excessive debt-fuelled levels of the past.

Current levels of debt for many countries are at an unsustainable level and are the result of living beyond ones means for several decades.  The process for the USA and other indebted countries will be akin to a corporate bankruptcy where the creditors take large bad debt losses, which in turn then precipitates further bankruptcies in others.  In some heavily indebted countries probably the only way forward will be a complete default and a new currency - that gives a new start in much the same way as a newly 'phoenixed' company has – having neither debts nor liabilities, just a fresh start.  That does not mean however that the economy will revert to where it was before the troubles started.  The pace of growth will be much reduced and standard of living will be more determined by how much one produces rather than how much you can borrow as in the old days.  That is the legacy left for future generations by the profligacy of us baby boomers.

3)  Because of the slower rate of growth, it is highly probable that unemployment will be very high and the standard of living very low.  Deflation is more likely to occur, which will have a major effect on asset prices downwards and on commodities, gold and precious metals, etc.  The use of these as a way to preserve wealth is not going to be a successful strategy, despite the claims currently made by gold bullion dealers and others.  A major concern for gold buyers (and completely disregarded by those pushing gold) is that governments can and do, sequester gold and other ‘precious’ assets in times of crisis.  It is very easy for them to lawfully insist that all gold, etc., is sold to the respective government at a mandated (low) price.  The existing anti-money-laundering controls would ensure that no open market exists for gold, etc., and the price will collapse to the mandated level.  That is why I consider it best to keep out of the gold bubble that’s still being spuriously inflated right now.

Currencies however are a zero sum game.  What goes down is countered by some other currency going up!  I believe that remaining liquid but in a stable currency (i.e. one that is likely to survive the economic bloodbath and relatively increase in value) is probably going to be the only strategy that stands a chance of preserving wealth.  In the present circumstances trying to make money by speculating on assets, shares, commodities, precious metals, antiques, paintings, wines, gold, etc. is in my opinion a mugs game - it may show gains short term but long term major losses are certain.

4) In the UK and other western countries that have major deficits, there will be a serious erosion of living standards with many forced to live at or below poverty level.  The UK will not be able to afford its current stupidly luxurious social security system.  So real poverty will be suffered by many, with a consequent effect on social cohesion, crime and general well-being.  Life for many will not be pleasant, and for those with some wealth - very worrying as they try to protect themselves and their property/assets.  Many will consider migrating elsewhere, but I fear that by then capital controls will be widespread. 

As previously reported in this blog, the USA already has exchange controls in place preventing USA citizens from exporting more than US$ 50K without approval.  So any plans to jump ship need to be made now before things deteriorate too far.

How to protect yourself?

The future is undoubtedly downwards – probably steeply, but at this stage it is too early to know if the pathway is through hyperinflation because of quantitive easing (money printing), or through deflation.

The one thing that is certain is that the amount of ‘real’ money in circulation is on a steeply downward path.  This means that corporate profits and share prices will fall substantially – I would forecast at least a 50% drop.  Unemployment will zoom upwards causing poverty and also poverty-induced crime.  Commodities will drop substantially in price as demand and speculation (a significant effect of financial elite exploitation) declines.

Gold and other precious metals, etc., will rise short-term as people try to find something that they hope will keep value.  If hyperinflation is the route forward, gold prices, etc. will increase further until the sequestration point, at which time they lose their inflated value.  If it’s the deflation route, then gold, etc., will simply decline greatly in price.

In my opinion, the only way to stand a chance of preserving wealth is to keep as much wealth as possible liquid - in cash, and to make sure that cash is in a strong currency and preferably outside of the country of residence, where it could be accessed/sequestered by some government edict.  Ultimately the only threat to a currency is if inflation is high and reduces its buying power – so only stable, low-inflation currencies without high indebtedness are suitable.

What currencies are suitable?   The answer is going to change as situations change.  So for example, the Swiss Franc was the currency equivalent of gold, but because so many speculators have panicked into it in recent weeks, it has become overvalued and at the time of writing is no longer a suitable haven.  That will change, but situations need to be kept under constant review.

The general policy should be to use the currencies of stable economies as the cornerstone - that means countries that do not have large deficits and debt.  That rules out currencies such as US$, UK pound. Euro.  It will be necessary to use those weaker currencies from time to time in order to exploit the variability that exists when investors feel optimistic or pessimistic.  But the main home for currency should be with the stronger economies.  A big upside for currency transfers is that all gains are free of UK tax, if the currency is for your own/family expenditure overseas.  Some may think the US$ and Yen are stable currencies – but both have serious and major problems, as yet unrecognised by most.  Current personal favourites are Swiss Francs (still), Norwegian Krone, and New Zealand Dollars – the latter because of its predominantly food production basis and bankers who have not let rip.

Finally, for any readers who think the above is just scare-mongering, I would strongly recommend that they read the very recent article ‘There may be NO way out for Britain’ – it’s a long and detailed essay, and essential reading for every British person – and for citizens of other over-indebted countries like the US for whom the analysis is also probably pertinent.  It is from a highly-respected financial organisation and gives a very logical/rational view on the true state of the British economy.  It also shows the awfulness of The Blair/ Brown government – they should be strung-up for what they did to Britain –  www.tullettprebon.com/Documents/strategyinsights/Tim_Morgan_Report_007.pdf

Friday, 1st October 2010

The original purpose of starting this blog was to record events and make predictions of future happenings for subsequent assessment of accuracy.  So far things have worked-out more or less as predicted.  There are so many commentators on the dire consequences of current economic events that any short-term comment by me is now superfluous - but the time to make a major prediction has arrived!

It has now become clear to many that the long-term economic effects of what has so far happened are disastrous - although there are still many people happily plodding along in the belief/hope that all will be fixed and we can all go back to more or less where we were before this all started.

There is every reason to believe that we are witnessing at first hand the destruction of our current economic system.  The various Keynesian stimuli and quantitative easings have achieved nothing apart from delaying the inevitable - and loading the next generation with an unsustainable level of debt.

There is an unwillingness by politicians and the general populace to recognise that things are really bad, and that eventually everyone is going to have to suffer the consequences as the excesses of past profligacy over several decades, are reversed - as will most certainly happen. Attempts to mount a 'King Canute' defence against this will fail.

The crunch point is rapidly approaching where the USA, and probably other grossly indebted nations including the UK, will launch into another bout of massive quantitative easing - designed primarily to devalue the respective currencies and to try taking an export-lead advantage over non-QE countries.  This is unlikely to achieve any better results than the last bout of QE - only to increase debt levels even further.  However, I do believe that some senior politicians and economists now recognise the dangers involved.  I think this will be seen by them as a shit-or-bust exercise, in the hope that a big enough stimulus will finally succeed in breaking us back into the sunny uplands.  This is hopeful/delusional thinking - but it will be tried.

When it fails again, we will all be in a very serious mess, with no chance at all of escaping the death spiral without pulling the emergency parachute handle.  The only solution, and the one I now predict will happen - is a complete default by the USA on the US dollar and US debt.  Sometime in the next two years, the USA will announce that the US dollar is being withdrawn and replaced by a new currency - perhaps called a Federal Dollar, or an Eagle or similar.  Holders of the old dollars will see their holdings made worthless overnight - there will probably be no convertibility from old to new - it will be a clean-sheet start.  The USA will say sorry, but that will be that.  The new currency will be controlled and stable and not subject to the banking and over-leveraging abuses of the old currency - it will pay interest and will be wanted by the international community even though they have just been shafted and lost their shirts on the old dollar.  At a stroke, the excesses of the past will have been expunged and the country's debt written-off, but there will be serious consequences for many other countries.  I would expect to see other indebted countries (including the UK) adopting similar 'bankruptcy' processes as a result of the strain.

Many governments, especially those like China who are owed large sums of money by the US, must already be aware of the risks of this happening.  This is probably a main motivator for the Chinese to convert as many of their current dollars into assets and commodities whilst people continue to accept the currency.  Once they don't, the game is up, and the old dollar becomes worthless and unwanted very quickly.  I believe the economic effect in the medium/interim term will be for asset, share and commodity prices to rise strongly - not because there is any upturn or other economic reason, but just because people will want to convert their dollars into something tangible before they become worthless.  This stage will not last long and the pass-the-parcel (of dodgy dollars) game will come to an end once there is a more general realisation of what's happening.  At that point the value of assets and commodities will reduce sharply back to their true economic level in depressionary times - i.e. substantially below the prices paid before.  The same will happen to gold prices - once there is a stable new currency (new dollars) that people trust, then the value of gold will plummet down to its intrinsic value as merely a component of jewellery.  Gold bugs beware!

This will be a most traumatic time - it is effectively an economic world war, which will have serious repercussions for everyone.  We must hope it does not provoke physical war - but that sadly cannot be ruled-out.  Prior to this end-game starting, there will be serious economic controls on citizens with capital and foreign currency restrictions, including a sequestration of gold and other precious metal holdings - for how it's done see http://en.wikipedia.org/wiki/Executive_Order_6102.  The USA has already brought-in capital controls (remittances out of the USA above $50,000 are now illegal without official authorisation).  The UK will probably adopt similar measures soon - perhaps even on the 20th October as part of the austerity package being unveiled?  Be warned!

Wednesday, 4th August 2010

A lot has happened in the last five months, since I last put pen to paper metaphorically. The prediction on the general election result was slightly out - although I noted that Cameron was apparently taken by surprise in 'winning' it.  The coalition Government seem to have started well and are making the right noises and actions in trying to recover from Blair and Brown's disastrous governance.  I have some hope for the future, although I believe the depth of the economic problem represents such a severe risk for the UK and elsewhere that recovery will not be obtained for many years and with considerable pain.  We must hope it doesn't finish in a similar way to the 1930's depression.

On a broad scale, I think it is becoming clear that the world's economies are being manipulated massively by many governments.  They recognise that the greatest threat to the world economy is a mass-realisation by the public at large that things are really bad - leading to mass panic and literally a collapse of the whole system.  It is all very, very fragile and if sentiment turned sharply negative the downturn could become uncontrollable.

Virtually every significant part of the economy is being either actually manipulated or media-manipulated.  This applies to the stockmarket where prices are being 'supported' with quite low volumes, and of course the liquidity stimulus (QE) of the last year or so.  Gold appears to be a massive Ponzi scheme with annual sales of gold to punters greatly exceeding actual physical gold inventories - it is rumoured that paper gold bullion is only backed by about 2½% of physical gold.  Investors should be very wary about where they put their money.

As opposed to the time this blog started, there are now many good economic commentary websites, which do give a realistic view of what is happening.  The two I would recommend for those wanting to keep abreast of things are: www.zerohedge.com/ and http://dailyreckoning.com/ 

The over-riding view is that the world economy has been completely debauched by politicians and bankers, with the ready acceptance by the general populace who were enjoying the boom.  Hoping that this can be 'fixed' and everyone can go back to a roaring standard of living - as many do hope - is stupidly ridiculous.  We will have to suffer for past excesses - there is no realistic hope for anything else.  The artificial stimuli applied by governments at enormous cost has only delayed the onset of the real problems and will probably make eventual escape that much more difficult and protracted.  The jury is still out on the question of whether the dramatic reduction in living standards is going to be achieved by deflation or inflation.  There is no doubt that the core problem is major deflation, and without artificial stimulus being applied, deflation is certain.  However, it is possible that Bernanke and others will 'print' so much money that hyperinflation will result - I think it virtually impossible for a balance to be achieved.

Predictions?  I think that many governments, although 'firmly' setting-out on an austerity route will find the social pressures such that they will restart QE money-printing to at least temporarily ease those pressures.  This will of course do nothing to help the country's long-term prosperity and could lead to a hyper-inflationary outcome.

A fascinating theory came to me recently - that of using QE not for internal stimulation, but for currency manipulation.  As forecast a long time ago in this blog, the secret to economic recovery will be to arrange for the country's currency to greatly devalue - thus making exports very competitive, choking-off imports and stimulating the real economy of making things and selling to foreigners.  The way this would work is for governments to secretly 'create' more money, and to then use that created money to buy foreign currencies.  Done on a big enough scale, this would result in a depreciating currency for 'us' and an appreciating currency for 'them' - nicely shifting the problem onto their shoulders - perfect!  Apart from being 'rumbled' by foreign governments, I can't at this moment see any reasons why this ruse would not work - and it could be reversed at any time by simply selling the foreign currency, quite probably at a nice profit!  I think I will recommend this strategy to Cameron & Osborne.

Tuesday 2nd March 2010

I have been most surprised not to read any comment in newspapers, or anywhere else, on the subject that is most likely to bring UK plc down.  The media concentrates on the public deficit, but nobody mentions the real killer waiting to pounce - the UK's dreadful balance of payments situation. 

The facts: at the end of 2008 the UK's net reserves (gold and foreign currencies) stood at $60Bn.  At the end of 2009 it was down to $32Bn - a loss in the year of $28Bn.  We therefore have probably less than 12 months before we totally run out of reserves!

Public sector deficits can be covered by printing money (QE) - but foreign currency & gold cannot be artificially created.  They have to be earned or borrowed.  Despite the 25% sterling devaluation that has already happened, the UK's exports are not increasing, mainly because our trading partner countries are also struggling, and the demand is simply not there.  Imports still come in, UK oil production is dropping - so there is unlikely to be a natural rebalancing.  Overseas investors are unlikely to want to lend in sterling which is almost certain to devalue further - which would of course make borrowing in foreign currencies especially expensive for the UK Treasury.

This is all terrible news - those in the UK who are old enough will remember the balance of payments crises that continued for decades after WWII and seriously damaged the UK economy.  It is coming back, but probably in a more ferocious form than before.  Not only will the economy be blighted, but there will almost certainly be exchange restriction (remember when you could only take £50 out of the country?) with enforced repatriation and conversion into sterling of privately owned gold and foreign currencies.

The other prediction I would like to record here, concerns the UK political scene.  I have become convinced that the Tory party grandees (not including Cameron & Osborne) have decided they want to lose the next election.  This would force Brown to address the problems he has created - the depths of the austerity needed (whatever party is in power) will make Brown the most unpopular PM in history.  After a respectable period when all the really nasty moves have been taken - say after about two years - you then force a vote of no confidence and another general election.  Having already dumped the useless Cameron/Osborne, another Tory leader is anointed (possibly William Hague), producing a landslide election result.  Hey presto – a Conservative government for the next upteen decades again!  A master stroke! 

I am so certain of this scenario, I'm off to the bookies to place a few bets ...........!

Tuesday 19th January 2010

As part of the reason for writing this blog is to record my personal thoughts as we go through these tumultuous economic times, I simply have to comment about one of the headlines in today's UK Times - Goldman’s oracle says buy lots of equities - it concerns a statement by Peter Oppenheimer, Chief European Strategist, that the bull market has miles to run yet, we're only at the beginning, and everyone should buy as much equity as they can.

I remember very clearly the Chief Economist at Goldmans saying several weeks before the market collapsed a couple of years ago that "categorically there will be no recession".  As a result the market responded upwards for a while, whilst Goldmans off-loaded much of the stock they held - the market then collapsed.  Goldmans recently admitted that at the very same time they were advising clients to buy certain stock, they were actually betting against the same stock.  Unscrupulous or what?  They claimed they had a right to offset risk.

I take today's encouragement to load-up with stocks as a clear sign of an impending collapse in the market - perhaps even the predicted (by me at least) second downward leg of the W.  Time will tell - but I for one am keeping my hands in my pockets on this!

Thursday 31st December 2009

The Financial Times on Monday this week had the headline 'Corporate optimism at highest in 6 years’, sub-headings: ‘Bosses see turning point for economy’, Number of Boxing Day shoppers up by 18.6%’.

That certainly puts me in a real minority - but time will tell if I am right or not - but I am sticking to my views; we (the UK) are in a very bad way and are more likely to descend into depression than we are to get of this mess quickly.

My End-of-year Review: it's still a lonely place being a pessimist, the FTSE closes the year on a near-record and everyone thinks the recession is over, although the UK unlike other countries has not yet emerged.  There appears to be a general optimism that things will get better - certainly the shops have been full and the pre-VAT rise sales have been going well.  Gordon Brown of course hopes that feel-good factor will continue into the next general election, which must be held by May latest.  However, why anyone would want to be PM with this almighty mess to deal with, defeats me!

Personally, I have an enormous feeling of impending doom about to break upon us.  Brown has allowed the country to run-up a staggering level of debt, to fund a highly irresponsible level of public expenditure.  In my humble opinion the aftermath of this will crucify the hopes of the British people for many years ahead.

I am reluctant to say that Brown is operating a scorched earth policy of destroying the economy to leave the Tories with a major problem, but it is difficult for me to see what other motivation he has.  When we learn that Brown deliberately let immigrants flood into Britain to rub the Tories nose in it, and to increase Labour's voting population, anything from this awful government is possible.

So, my specific predictions are:

1) There more likelihood of a March election, before the current euphoria evaporates completely.

2) There will probably be a hung parliament, which with Cameron/ Osborne's inherent weaknesses is about the worst combination given the depths of problem the country faces. 

3) As a result, external parties will be the biggest influencers on what happens to our economy in the future.

4) Those external influences will be:

a) A reduction in the UK's credit rating because of our out-of-control debt and public deficit situation, which nobody has the guts to address.

b) A consequent increase in interest rates to try encouraging overseas lenders to continue lending. 

c) However, this will only happen after a further significant devaluation of the pound has occurred.   There may also be exchange controls introduced.

d) The rise in interest rates will of course increase the adverse effects of the massive debt level now built - putting more pressure on tax increases and public expenditure reductions.  Not helpful in getting an economy going again.

e) Unemployment will zoom, and there will be many public sector strikes and great social unrest.

f) A eventual visitation from our friends at the IMF and the administration of their medicine.  Perhaps also sterling joining the Euro, if it hasn’t already collapsed!

Not a happy prediction, but one I sadly think will be proven correct.

Happy New Year - I doubt it!

 

Friday 13th November 2009 (appropriately!)

As predicted in MCD Blog the Quantitative Easing level has risen enormously from the original £50Bn to now £200Bn with probably another 25 or so to come - and all in such a short time.  Virtually the whole lot has gone on government spending with the private sector being starved of funding.  Only public servants and bankers are doing nicely thank you. 

A couple of weeks or so ago Gordon Brown said something I agreed with - he said that if we don't carry on spending and stimulating the economy, then things will get very bad indeed.  The only problem is that his ability to carry-on borrowing and counterfeiting our currency will reach the buffers before too long.  After that things will get very bad indeed.  Servicing the massive debt burden being run-up by Brown will be bad enough if interest rates were to stay low, but with the almost certain reduction in the UK's sovereign credit rating sometime soon, the consequent increase in interest payments the Government will be forced into, the future will be grim indeed.

It is a King Canute exercise - QE is only a viable proposition if it is used to bridge a known gap.  If it is used to defer something horrible in the vain hope that better circumstances will somehow happen - then it is just a very expensive way of mortgaging the future for a short-term and temporary respite. Our children will not thank us for doing this.

There seems to be a belief by many people including those in the City, that we will shortly be able to get back to where we were – high stockmarket prices, high property values, high standard of living, etc., as if nothing had really happened.  There is a collective failure to realise that where we were was the result of completely unsustainable liquidity levels and gross fiscal and financial mismanagement.  There is absolutely no way we will be able to get back there for many years, if ever.

This mass delusion will carry a high cost for those being sucked in.  The greed of not wanting to miss-out on a major bull run predicted by 'experts' will cause significant losses for those that succumb to the temptation.  Such booms are called a suckers rally for good reason.

The apparent wealth we all thought we had in the past was a mirage based on the fiscal imprudence of our leaders and bankers, and ourselves.  Our apparent wealth will have to be reduced down to its real level, either by major reductions of asset prices and pay, or by major inflation, or a combination of both.  Maintaining the status quo in real terms is not an option - sadly.

I am sticking by all the previous predictions made.  I believe we will be in serious trouble once the artificial stimuli cease.  By that time our resources and reserves in the UK will be exhausted in vainly trying to put off the evil day when real action has to be taken.  The risks of social break-down are very real.  Many people are going to see their lives seriously affected with not much to hope for in the future.  They will not be happy!  

As this is being written the stories that the world (apart from the UK and a few minor countries) are now emerging from the recession and will be growing strongly - are everywhere.  These reports are coming from respected organisations - OECD, IMF, etc.  I believe this is an over-rosy view that will be reversed as stimulus effects die, and debt costs mount.  But some countries - particularly the UK and USA will suffer more than most - they were the ones to let things rip (see MCD Blog Dec’08).

The other great debacle concerns the handling of bail-out money and QE which has allowed bankers such as Goldman Sachs to make obscene profits and bonus payments.  It shows the stupidity and incompetence of governmental leaders, who even have to appoint the very same bankers to key positions because they themselves have no idea how the system works or how to repair it.  I suppose it would be too much to expect the bankers not to take personal advantage of the opportunity given them.

There is a view afoot that because the bankers have not admitted to all the losses that are actually in the system; they have effectively been over-reporting their profit.  They should have been making massive loss provisions, but they have not, and have instead awarded themselves enormous bonuses based on profits that are not actually there.  If that scenario is correct, the bankers will be coming back for yet another bail-out by taxpayers.

It is difficult to write a blog that repeats itself, but the views expressed before do not, in my opinion, need changing.  The principle of going with the flow and taking advantage of current stockmarket 'strength' seems the best approach as long as it is recognised that this is an artificial situation that will reverse at some stage in the not-too-distant future, and to get out quickly at the first signs of trouble.  Personally I believe the current stockmarket surge has gone as far as it will (the Dow closed at 10,270 today), so now would probably be a good time to take profits.

The danger of a collapse in Sterling is still there, probably more so especially when the awfulness of the UK's situation is more widely realised.  It is a hopeless case, with such an over-large, overpaid, over-pensioned, unproductive public sector.  An enfeebled manufacturing base following transference to China, etc.  A large benefit-dependent population fuelled by Labour's grossly irresponsible immigration policies, which we now know from leaked documents were inspired by a desire to rub the Right-wing’s nose in multiculturalism.  Add-in the collapse/ expiration of North Sea oil production (which saved us last time), and you have an unholy mix of incompetence and circumstances.  The UK's people will be paying for Blair/Brown's imprudence for a very, very long time.

Personally, I find it difficult to see any sector of UK activity that is likely to 'pull' us around.  Certainly the financial services 'industry' that were supposed to have been our major strength, have been exposed as a bunch of unprincipled 'gangsters' happy to pillaged our futures for their own greed, aided and abetted by a government besotted by spin and riddled by an incompetence that defies belief as the facts become known.

It is such a desolate scene that will only be relieved by a return to true values and the rebuilding of our core strengths and a desire to achieve real success, rather than the vacuous aspirations of our politicians.  So far, no politician has yet emerged with the personal strengths (like Thatcher) to carry this through.

I fear a level of austerity that will test the fabric of our society, which I believe is now not capable of adjusting to the new reality - we have become too used to the soft life and our poor standards of education and backbone are just not up to the job.

To take a phrase from 'Dad's Army' - we are doooomed!

 

Thursday 25th June 2009

The last few months have been difficult for pessimists.  The markets have surged, the pound sterling has zoomed upwards, and announcements of the recession being shortly over have been coming thick and fast from many different and respected pundits including even the Bank of England - although in the last few days they have been back-tracking.  It has indeed been a very lonely place not joining in with the 'party is resuming' brigade.

Can we have been so wrong?  Are the excesses of the past going to be eradicated by the strong V shaped recovery the B of E now predicts? 

When in doubt the best route forward is to revert to commonsense and ask the question; does it make sense?  Partly in answer I give the link to a recent article written by Toby Birch - the author of 'The Final Crash' which accurately predicted over two years ago all that has happened.  He makes the valid point that we should not expect things to resume back to where they were before the crash.

This makes sense to me, given that the whole global liquidity scene was so artificially inflated by the out-of-control banking and derivatives sector.  For us to go back to those asset prices and boom conditions would take a similarly irresponsible stimulus to be applied to the economy.  Surely no government is going to sanction that?

But maybe they will!  I do believe there is a real danger that Anglo-Saxon politicians (especially USA & UK) may find the prospect of 'quantitative easing' just too irresistible'.  What a super deal it is, especially for a relatively short term politician - you print your own money (just like counterfeiting), can pay your entire public sector with it, it doesn't feature on any public borrowing statistics, you don't have to pay interest on it, and beauty of beauties, the downside effect doesn't kick-in for quite a time.  Perfect! 

So, I think the green shoots being seen are a combination of the end of destocking which gives the perception of an upward bounce, plus the opening effects of printing money going into the economy.  This is all very well if everyone is happy to play the game, but there are already the signs that our external creditors (Chinese, etc.) are not going to play ball. 

So, I think we are seeing the rush of those people who failed totally to see the crash coming, who now don't want to miss-out on the bull market that everyone knows has its biggest lurch upwards in the first few weeks.  Greed has overtaken fear at least temporarily.

It has been a little like having a very boozy party funded by money out of thin air (the banking fiasco of derivatives) which shuddered to a halt in August 2007.  The boozy party has now recommenced with more money out of thin air - this time from printing money and taking-on unaffordable government debt.  And some see this as green shoots of recovery appearing!

It is time for me to go on the record and stick my head above the parapet and say this is complete tosh.  I predict we will suffer for a very long time - it is far more likely to be an 'L' non-recovery rather than a 'W' recovery.  The idea of a 'V' recovery as predicted by the BoE is absurd.

Of course it is in the interests of the City and the government to talk recovery up especially as sentiment is often the most important factor in influencing markets.  But the latest news that UK government borrowing is at a staggering £30Bn per month must mean the buffers are going to be hit fairly soon and hard.  And yet the FTSE is still buoyant!  Daft!

So, the bottom-line from me is that the predictions made earlier in this blog are still on track to happen.  Once UK public sector redundancies get going together with pay and pensions restrictions, and union action - we will see a truly torrid time for all in the UK.  At the time of writing all of these effects are hidden from view - in fact there are many households where disposable income has actually shot-up as mortgage interest has dropped and few have yet been made redundant. This is indeed the phoney period before the onslaught to come.

I think the most likely scenario is a growing resistance of overseas creditors to fund the UK government's bond issues - probably following a down-grading of the UK's credit rating. Once the slide gets going, sentiment will start collapsing and the rest of the scenario will happen.  A sterling crisis and perhaps even exchange controls are on the cards.

Because sentiment has the biggest effect on short-term trends, and has been the predominant factor over the last three months, my personal investment strategy is to go with sentiment, but at the first sign of trouble to immediately default to the doomsday action of hunkering-down.

Wednesday 25th March 2009

Quantitative Easing has now started in the USA, UK and Switzerland, and perhaps other countries too.  This is the start of the great experiment in economic management/ mismanagement!   We are about to enter uncharted waters where nobody really has a clue what will happen.  However, I will give my opinion on what will happen although I do hope I am wrong - but haven't been so far!

I believe there will be four primary stages to this economic depression:

Stage 1 - this has largely already happened - securing the banking system by throwing previously unimagined amounts of money at the problem.  This has been successful, although at what ultimate cost is impossible to say - but it will be enormous.

Stage 2 - Attempts to stimulate growth by reducing interest costs and by 'quantitative easing' - this is the stage we are now entering.  These will largely fail for two main reasons; a) People will want to pay down debt and reduce spending just as the Japanese did - they will certainly not want to continue borrowing and accumulate more debt.  b) the pace of industrial collapse is increasing to a point where continued financing of the losses being incurred in the private sector is no longer possible - leading to much higher levels of unemployment and corporate insolvency - which in turn increases the downward spiral.  Consider the plight of the car industry - but only as an example of similar situations in many other industries; no company can survive a 50% reduction in sales which lasts for more than a few weeks - the inherent fixed costs of continued operation become simply unfundable.  Pouring public money into such situations only defers the evil day but at tremendous cost.  If people don't want/ can't afford new cars even with government grants, there is no point in trying to keep the factories going.  In my opinion the only sensible thing to do is to mothball the assets until demand makes the operation viable again.  The speed of collapse now happening makes immediate recovery very unlikely.  We will instead see a form of severe stagflation or possibly deflation - depending on whether the stimuli produce any worthwhile increase in demand.

Stage 3 - With the failure of governmental stimuli there will be a growing awareness that the excessive effects of the global boom have to be reversed before any real recovery can commence - there is no easy or painless way to undo the damage caused by the unrestrained excesses of the past.  There will eventually be a realisation that standards of living will reduce until the point at which equilibrium is restored - i.e. that people live within the bounds of what they produce - not what they borrow.  With the alarming collapse in production that means a very significant drop in wealth and income.  In my opinion the reduction in both, in real terms is going to be at least 50% and probably much more.  These reduced levels of wealth from stockmarket valuations and sterling devaluation have already happened with some more to come.  Property values will follow soon - just as they did in Japan, as will income levels - salaries and wages as workers scramble for the few jobs going.

This is a nightmare scenario because it would mean that many families will see their wealth and income reduce back to the postwar period, especially when the effects of debt repayments are taken into account.  Poverty will become widespread in developed countries and starvation in the third world. 

Stage 4 - Only when bottom is reached will a genuine recovery commence – as always there will be several false dawns.  As said before in this blog, the components needed for success are still there in the form of labour, innovation and capital, although the latter will be a scarce resource in the early stages.  The pendulum effect will apply - meaning that things will over-correct and for a time will become worse than they should.  This is the time for wise people to invest.

Timing on all this will probably be faster than most expect as the snowball gathers pace.  The UK government can be expected to try deferring the worst effects until after the next election, but they will start coming under great pressure as the problems of trying to borrow more money become apparent, and they are forced to drastically cut back on public sector spending.  That is when the fireworks start in earnest and civil unrest becomes a further restricting factor on governmental options.  The warning given today by Mervyn King, Governor of the Bank of England that the UK has reached the limits of its ability to stimulate the economy, reinforces that view.

 

Thursday 5th March 2009

I have just reviewed the earlier parts of this blog to see if any changes of thought are required – I don’t think so!  The situation currently looks as dreadful as predicted!  We are continuing to tumble down the spiral to who knows where.  There is good reason to believe we are witnessing a major rebalancing of our whole economic system.  Of course, that may not be an overly gloomy view because eventually the actual components of wealth will re-assert themselves - labour, innovation and capital - but we will have to reach bottom before that happens.  We have had an enormous boom (despite Gordon Brown’s claim) and in my opinion there is no alternative but we have to have a subsequent enormous bust – and almost certainly the quicker the better. 

The experience of Japan has some guidelines for us in how this depression will pan out.  The Japanese were historically a frugal people, just as the British were - when the Jap boom collapsed in 1990 amid ridiculous asset price inflation - property and stockmarket, the population went back to the happy frugal life they had before.  They rejected rampant consumerism and realised they didn’t need the new car each year, new clothes, and to spend, spend all the time.  As a result their government's attempts to re-stimulate the economy failed spectacularly.  The Japs had received such a shock that they preferred to rebuild savings rather than resume spending.

I believe we will see the same mindset in the western world, which will have dire consequences for our level of production and apparent material wealth generation.  I deliberately used the term material wealth; because I believe we will see a retrenchment back to the old values of pre-consumerism days.  This will be forced upon many people by their circumstances, but probably also becoming the fashion for others.  We may even return to a happier way of life.  For these reasons I believe the current governmental efforts to stimulate the economy will fail, leaving an even more massive debt mountain overhang for our children to pick-up.  I watched Gordon Brown’s address to the US Congress today – he got many standing ovations for giving a seriously upbeat speech – I suppose he has to, but I think in reality his delusion continues!  The following day the Dow crashed, which was a more appropriate reaction.

In my opinion, the destruction of apparent wealth will continue for some time yet - many who previously regarded themselves as wealthy will no longer be so.  Many of course will actually be destroyed by the effects of negative equity, investment losses and unemployment.  Only those who divested themselves of shares and property before the crash and have no reliance on pension investments will be spared - but even they must be wary - the hyper-inflation to be unleashed by current governmental action, quantitive easing and more, will also soon destroy those who currently feel comfortable – unless they take action.  The 'international' losses to UK based investors has already been considerable - an average 40% drop in the FTSE combined with a 30% devaluation in sterling represents a massive destruction of wealth.

I hope by writing this blog to better identify the time to switch from liquid assets into those investments that are likely to protect against the awful effects of hyper-inflation.  The time is not yet in my opinion - the world still needs to adjust to the new reality.  I believe in the comment made nearer the start of this blog that those countries that have let things rip, will be the ones to suffer most.  That means the USA, UK and many others - the device that will effect the wealth destruction will be devaluation and inflation.  Only when that rebalancing has happened will those countries and the rest of the world be able to stabilise and recommence growth.  It will not happen for a considerable time yet.

To try putting a date when bottom may be reached, it would be worthwhile looking at what is likely to happen before the bottom is glimpsed.  Certainly unemployment must reach levels not even envisaged in the past, and there will have to be acceptance that real wages have to drop considerably - the UK's minimum national wage will have to be abolished or drop considerably in real terms.  The forthcoming hyper-inflation will provide the mechanism for effecting the changes needed.  A bigger barrier to cross will be dismantling the grossly excessive public sector infrastructure we can no longer afford (if we ever could!).  Given the resistance of the vested interests involved (public sector unions, left wing politicians, etc.) and the 'fact' that no effective action will be taken before Gordon Brown is ousted in 2010, I personally do not see much progress until 2012 at the earliest – for the really pessimistic this is the year some believe the world will end! (check it out on google).  The scale of the problems faced by virtually all major countries I think means that timescale will apply to most - and frankly it could be a lot longer.

Going back to a previous blog theme, the name of the game at this stage of the depression is the preservation of wealth rather than trying to make money - at the moment that would be pure gambling.  Cash is still king, but where to keep it is the question.  We are about to enter a period of competitive devaluations and probably protectionism, as countries try to get the most of whatever declining trade there is to be had.  It is important to look for those countries/currencies that are likely to do better.  We are looking for places that have not let rip, and are not so vulnerable to the massive readjustments now underway.  My personal favourites are Switzerland and Norway, although the former is affected by its runaway bankers, and the latter is sensitive to any further fall in oil prices.  Gold might be a refuge but I am always worried when I see so many people rushing in - is another bubble being built?

For many people there will be no escape.  They are trapped in their country, their property, their investments, their pensions.  The changes underway will wreak havoc with many people's lives, and will probably induce a complete readjustment to the way they live and their thought processes.  Back to basics may be the key phrase, and quite likely a rejection by younger people of their parent's values, or lack of them.  There has to be a good chance of inter-generational conflict, especially as many expect the next generation to pay the cost of the now excessive pension benefits of the baby boomers, who might also be blamed for causing the problems in the first place.  This is a nettle the UK government has not even started to address - in fact they have consistently run away from it, as evidenced by the refusal to do anything about the massive/grotesque and completely unfunded public sector pension liability.  There is of course good reason for that - the government knows for sure that any attempt to rein back will provoke unprecedented union action in the form of highly damaging strikes and disruption.  They don't have the balls or the desire to address the issue - but this depression will force their hand – the government will simply not have the funds to continue as they are.  I fear that Britain will not be a particularly pleasant place to live in the future once these problems start.

For entrepreneurial types the changes now being wrought will create new opportunities, as they always do, and eventually there will be a recovery – always assuming of course that war does not break-out – a distinct possibility for the future.  Massive unemployment has always been a spur to entrepreneurial recovery and this is one hope for the future.  In some ways, the quicker we get to bottom however bad that is, the better – we can then all get moving again.  The stimuli being applied by governments will probably only succeed in dragging out the timescales involved and probably making the eventual bottom further down.

 

Wednesday 4th February 2009

This piece is on the subject of commonsense, and its potential use in determining how the future will shape-up.  Probably like most other people, I find the current economic situation quite bewildering – all these billions, even trillions being thrown around with gay abandon – I don’t really know what the end result of all this will be, and worryingly, I suspect our political masters don’t have a clue either.  I think that probably it’s being done to try solving today’s problems, with a lot of crossed fingers behind backs that it is not going to have some nasty after-effects later.

I have been alarmed for a long time to see in the UK a quite gross lack of commonsense in the way the government acts, and the horrendous growth of the public sector – unbelievable amounts being spent on bureaucracy, silly useless PC job titles, massive salaries and of course gold-plated inflation-proofed pensions that ordinary taxpayers could only dream of.  And it’s still increasing – a look at the job adverts in the Sunday Times last week reveals that over 80% are for public-sector – i.e. non-productive jobs – the private sector is on its knees, but the public sector is still roaring away.  Gordon Brown seems to have latched-on the Keynesian ‘lets borrow and spend our way out of this’ idea, and he thinks that continuing this particular form of profligacy is a good idea – putting more money into employing largely unemployable time wasters.  I’m very unimpressed with most of the public sector employees I have ever met – I certainly wouldn’t give them a job.

Commonsense says this can’t be right, and I think it is that thought we need to hold onto in trying to peer into the future.

In reading the obituary last week of Sir Alan Walters – Thatcher’s economic guru, I came across this paragraph in The Economist:  At the time of their meeting, in 1974, he was beginning a total re-evaluation of economic policy provoked by Edward Heath’s disastrous government, in which he had served. That had ended with a Keynesian public-spending binge, the orthodoxy of the day, to stimulate the economy. But instead of helping, it had caused runaway inflation and a rash of strikes. Surely there was another way?

I suspect we are in for a serious bout of déjà vu, which will only end when we hit the IMF brick wall or similar obstruction, or if we finally get a politician with both brains and guts – there are none currently on the horizon in my opinion, and that includes the spineless smoothy Cameron or his useless side-kick Osborne.

I have been reading a number of optimistic economic opinions recently that forecast a fairly short recession before we return perhaps next year to the sunny uplands.  Several have forecast a recovery of sterling, and indeed as I write the pound has been heading upwards – today at $1.45/ €1.12/ CHF1.68.

Does it make sense?  Not to me it doesn’t – until we get back to doing sensible things that contribute to the wealth of the country and its people, and leave behind the political spin and prolific waste of resources, this country will continue to descend back into being the basket case it used to be in pre-Thatcher days.  We are doomed until then!

Conclusion:  We are by no means out of the wood, and things will get much worse before getting better.  Eventually sterling will be worth holding again – when it reaches bottom - but it still not there yet even after the fairly significant devaluation already suffered.  The only redeeming factor for sterling is that many other currencies are not in good shape either.

 

Saturday 24th January 2009

Every so often a piece of news comes into one’s knowledge base that fundamentally changes one’s views.  That happened this last week – I read the article by Ambrose Evans-Pritchard in the Daily Telegraph which introduced an element of the UK’s bank bailout that I had not considered before – I had naively assumed that bailing-out banks was just a matter of printing pound notes, which of course is in the remit of the government to do, even though it could have nasty after-effects later.  Ambrose (and I would strongly recommend him as probably the best economic commentator – see http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/ ) wrote that the effective take-over and ‘guarantee’ of the UK’s banks involves taking onto the UK’s balance sheet the foreign debts and foreign assets of those banks – these amount to over £4.4 trillion, compared with UK’s foreign currency reserves of only £60Bn.  The problem is the same as an accountant gets when looking at a struggling company’s balance sheet – the liabilities/ creditors are always 100% good, but the assets and debtors are never all good!  In this case, given the intellectual diarrhoea and lack of caution exhibited by our banks, there is every chance that a fair proportion of those assets are bad, if not very bad!  Set against the miserably tiny reserves the UK has, the foreign currency obligations will swamp the UK government's ability to meet the guarantees they have been issuing - it is clear that the government simply cannot print pound notes to sweep away this problem.  

If these figures are correct (I have checked the £60Bn), then it will be a foregone conclusion that the only options open are to call in the IMF, or to dishonour ‘guarantees’ as Iceland recently did.  The consequences of a sovereign default by the UK would be so dire for the global economy that the only real option is to go to the IMF.  This would probably result in the most draconian cut-back on government spending and borrowing, guaranteeing the deepest of depressions.  Scary indeed!  Writing as I am four days after the Ambrose article was published – the Daily Telegraph article has disappeared from its website – it is such strong stuff I wonder if political pressure has been applied, as it could lead to a serious run on the pound and the UK in general.  I kept the link – so the article can be read at http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2009/01/20/seriously_alarmed

If the above is true, the political fallout of IMF control would be immense as it would be clear that the whole Gordon Brown stack of cards has collapsed with disastrous effects for many people.  The spectre of exchange controls, compulsory repatriation of funds and 'war loan' stock - making those with more than x wealth lend it to the government on a non or very long repayable basis.  This is not a prediction and I hope it is far too extreme to become true - but just in case we need to keep an eye open and move quickly if it starts looking likely .................... 

What should the UK citizen do about this?  Sterling is almost certain to weaken further, although its drop in value so far already exceeds the 1930 and ex-EMU depreciations.  The advice given several months ago to get out of sterling was good, and those who took it are now showing a substantial ‘profit’ at least in terms of pounds.  For those still in sterling, I believe the best advice is to move into commodities – particularly those that have suffered a major price drop – oil of course springs to mind, but there are probably others like food.  The timing is somewhat critical as some of those commodities have further to drop as the global recession gathers pace, so now may not be the optimum time, but it probably will be shortly!

 

Monday 19th January 2009

Announced today that there will be a further massive bailout of UK banks – the first has not achieved the desired effect, mainly because of the enormity of the (undisclosed) losses on bad investments and loans made by the banks.  In reality, probably nobody knows the extent of losses already in the system, but it is recognised that every downward notch in the general/real economy means that whatever those losses were, they will be even bigger.  This gives the impression of a bottomless pit into which unimaginable amounts of cash are being poured, without any real knowledge of either what is being achieved, nor what the ultimate cost will be - or what the long-term economic and social consequences will be.  However, the government has no alternative to these panic measures as a collapse of the banking system would be unimaginably dire.

Much emphasis is being placed on getting banks to lend again, but I am not at all certain this is the key problem it’s being made out to be.  Certainly there are good companies that need bank finance, but there must be very many businesses that are now on the road to insolvency because of greatly declining sales demand – bank lending in these circumstances is not the answer – any loans here will only stave-off collapse for a short time but will eventually go bad and have to be written-off.

Similarly, trying to increase lending to consumers so they can carry on consuming is almost certainly not going to work.  Previous, now debt-laden consumers have been given a serious fright/ lesson and are far more likely to want to reduce their debt burden than continue loading-up.  Even if consumers were given money, I suspect that many would elect to pay-off debt or increase savings rather than go out and spend.

Quantitative Easing – a convenient pseudonym for printing money, is the only ultimate ‘nuclear’ option available to governments to artificially increase money supply – but because of the above constraints is probably not going to be an efficient device for increasing demand in the short, or probably not even in the medium-term.  It will however produce a guaranteed period of hyper-inflation in the longer term – which is almost nature’s way of bringing about the drastic reduction in apparent wealth that’s necessary, and the change in attitudes that will eventually lead to a recovery.

The unhappy conclusion is that the effective collapse in economic activity cannot be prevented by the devices and actions currently being implemented.  It might slightly cushion the landing from being catastrophic to being just very hard, but will not prevent very many companies from going bust, or very many people losing their jobs.  There is a point of view that after such extreme excesses over the last decade, there is no real alternative to a fundamental rebalancing of the economy, accompanied by a lot of pain for a lot of people.  It may be that we have to hit absolute bottom before any recovery action will be effective – when people can see that sterling, house prices, the stockmarket, etc. have hit bottom – then the investment and growth path can be resumed again.  Nobody of course rings a bell at the bottom.

We can however be certain that the world’s best economic brains are now on the job, which should be encouraging.  The crisis started because of a virtually complete failure by those at the control levers to even recognise the problem until far too late – now everyone’s eyes are focussed on the issues.  I suspect that nobody knows what the long term effect of the unprecedented measures now being taken and contemplated will be – we are into uncharted waters.  The world financial system has been debased by the past excesses, and is being further debased by the panic measures now being taken.  History books will be written about this time as one of the most momentous periods ever experienced, and perhaps as a case study on how to handle such problems – or not, as the case may be.  ‘May you live in interesting times’ is certainly a most appropriate Chinese curse for where we are today!

 

Tuesday 13th January 2009 (Flying transatlantic)

It's surprising how lucid one feels after a drink at 35,000 ft at 11.00 am!  I have just been reading an article on bank regulation after the credit crunch.  Whilst it is obvious that the government and the 'regulators' have been asleep at the wheel - busy having their forms filled in whilst Rome burnt without even noticing! - the emphasis now seems decidedly in favour of over-regulation.  Having screwed-up one way they seem determined to screw-up in the other direction too! 

The essence of the whole banking problem is that normal retail banks who provided an essential utility service of storing and managing money to individuals and businesses were allowed to also go into the casino business of investment banking - effectively using the implied taxpayer's guarantee of their business to underpin their bets.  The first, utility banking function should be highly regulated - people need to know their deposits are safe.  The investment banking/ hedge fund business should be substantially unregulated apart from preventing fraud and perhaps limiting short selling - it should be clearly labeled as a casino with everyone knowing the risks they take by entering.  The role of regulation should not be to prevent fools from losing their money but to ensure that sensible people can rely on the probity of their utility bank.  So if a financial institution wishes to act as bank with all the regulatory protections and obligations, it should be prevented by law from indulging in casino type activities.  This will of course make banking an incredibly boring business without ridiculous bonuses - just what we want!  At least then the betting failures of the investment banking fraternity will not prejudice the entire world's financial system. 

 

Thursday 26th December 2008

Christmas Day over thank goodness – time to reflect on other issues.  I found the images of crowds pouring through shop doors at the beginning of the sales – more massive than ever of course – a quite depressing sight.  I am sure the era of acute consumerism is coming to an end. 

I feel the dawning of realisation is about descend on large parts of the population who have thought wealth and a good standard of living can be achieved without working for it and without producing anything of real value.  A retrenchment back to basics will follow.

With the distractions of Christmas over we can start to look fully at the awfulness of the economic landscape now opening for all to see.  The plunge in the value of sterling is a reflection of a growing realisation that Britain has very little to offer now that the masters of the universe have crashed – without our financial sector we do not have much left.  A crisis in 2009 will be to do with our balance of payments – it’s been many years since we last heard of that – but it is the subject that will eventually prevent our government from continuing with its current strategy of spending our way out of recession.  Sterling’s devaluation will at least choke-off the flow of foreign baubles that have filled our shopping malls – but the reverse side of devaluation of making exports more attractive will not benefit the UK as much because we now make so little that buyers overseas would want.  Scotch whisky perhaps!

With a grossly negative balance of payments, to fund its strategy the government can only borrow yet more money from abroad – or turn-on the printing-presses.  Who from abroad will really want to lend to a country already in hock, with a currency showing every sign of depreciating much further, and with a near zero interest coupon?  Sterling will have to devalue much further before it becomes attractive to hold again.  So the printing presses it is – unless the decision is taken to enter that other abomination of a currency – the Euro, or bring-in the IMF.  What a choice!  I suspect that the Euro will be adopted as an escape route.

Whatever happens to the fiscal arrangements, the shape of the landscape is now clear – massive reductions in demand and output, businesses going bust all over the place, and a level of unemployment not even dreamt about in the past.  The government’s irresponsible ‘open-doors’ policy on immigration will be seen to be a folly.  The more competent migrants will of course go back home – leaving Britain with those requiring our social-support system.  This together with the level of unemployment will produce major social disruption and discontent – I really don’t see any alternative.  We already have a significant underclass and this is likely to grow exponentially over the next few years.  I seriously fear for the quality of life in Britain.  Discontent and the lack of hope will give many social problems, of which crime and drug abuse will be the most apparent.  Adding to this will be the effect of actions taken by public sector unions – now the only ones with any power - when the government is forced (by the above mentioned financial constraints) to drastically rein back employment, pay levels and of course the pension rights they all have.  Summers and winters of discontent can be assumed.

Do I see any brightness in the near future?  No – except that eventually a realisation will dawn that our old ways have to be abandoned and we have to go back to basics of producing wealth rather than just borrowing it.  There is still a Thatcher legacy of entrepreneurial people in Britain – it is only they who stand a chance of dragging Britain out of the morass.  It is for that reason that America will come out of recession earlier than most despite the awfulness of its situation – they do have that essential resource of success-driven entrepreneurs and a can-do attitude. 

 

Tuesday 16th December 2008 (in USA)

The latest crisis at least in the USA is the auto industry bail-out which is a largely unreformed industry with aggressive trades unions and 'spanish practices' abounding, asking taxpayers to bail-out from an almost certain collapse of the industry.  This is interesting because it will be repeated in many other industries too, and brings back memories of the British car industry and the expensive and ultimately unsuccessful nationalisation into British Leyland in the 1970's.  The reality is that current auto manufacturing capacity vastly exceeds any likely level of demand for several years to come.  Bail-out of the industry will be a disaster, but of course not bailing-out will also be such a shock to the system that it may precipitate the domino collapse of many other industry sectors.  This will be the rock and hard place that will be present for many decisions.

The new reality is that there will simply not be the demand to support the industrial capacity and jobs we currently have, nor will it support the standard of living we currently enjoy.  The world will become poorer; we will all be much worse-off than we imagined possible.

There is a distinct possibility of serious social discontent developing that will not be able to be covered and smoothed over by governmental handouts as in the past.  The reality that there is simply not enough wealth to spread around will eventually dawn on our ruling classes.  The ability to either borrow or to print money will not in practice be available as a way out - as is currently seen by the UK government.

What does all this mean for businesses?

The most important message is not to just hope that things will not be too bad.  Assume they will!  Anticipation and action (now!) will be required to ensure survival.  There is no doubt that very many companies will experience a significant reduction in sales turnover and gross profit generation.  Whilst some of this can be covered by cost & staff reduction eventually (and probably quite quickly) the point is reached where costs have been reduced as much as possible – i.e. that further cuts will damage the company and its chances of surviving.  Further deterioration in trading circumstances will then leave company owners with three stark alternatives:

1)      Put more capital in to cover losses.

2)      Try finding a buyer – but now from a position of weakness

3)      Go bust!

This is the classic scenario for companies in recessionary times, and the result is a large number of companies going out of business, often with serious financial consequences for those involved.

Unless more capital is to be input, or a company sale arranged, the ONLY way out of this predicament for company owners is to arrange a merger of the company with other similar businesses, so that together they achieve a much higher sales and gross profit generation relative to fixed overhead costs.  In that way, they will not only survive but also go on to grow profitably.  Such mergers must be arranged very sensitively to include the interests of all parties – but this can be done.  CMR arranges such mergers - see www.cmrworld.com/CatalystGroup.asp

Cast Iron Prediction:  Very many companies will go bust unless they protect their interests – the merger route is the only way forward for many.

 

Tuesday 2nd December 2008

Many of our problems are caused by bankers – spelt with a ‘w’!  The system that was supposed to be overseen by governments and regulators in fact provided a seemingly one way bet and great encouragement for bankers to take ridiculous risks.  Whilst the regulators were busy having their forms filled in, the much wider and far more important picture was ignored - or more likely not even recognised.

The normal control mechanisms of money supply were overlooked by everyone, with the result that debt was allowed to multiply on other debt, almost ad infinitum.  Milton Friedman will be turning in his grave – for it was he who counselled against the sort of uncontrolled expansion of money supply that Greenspan orchestrated.  At the time of writing (2nd December 2008) the true extent of debt is still unknown but is likely to run into many trillions - possibly at a far higher level than the world's total GDP.  This level of debt could and probably will destabilise the entire planet's financial systems.

In my opinion there are three levels of problems to be encountered:

1) The initial 'trigger' of dealing with sub-prime debt, with the resulting effect on bank liquidity.  That stage has been largely covered by throwing the kitchen sink in the form of unimaginable amounts of money at the problem - without any real knowledge about the economic effects this will produce – it was a panic measure.

2) The next stage of the crisis will be dealing with all the other (non-sub prime) debts and the ensuing consequences.  These fall into three main categories:

a) 'Ordinary' debt but which is now under threat because of the general economic decline - unemployment and corporate debt especially.

b) CDS-covered debt; a clever device invented by banks to enable banks to carry on lending at a ridiculous level without the normal restricting effect on their balance sheets.

c) The devastating effect of all this on the 'real' economy'.  Production levels and employment will slump to levels never before imagined. 

As with all previous economic calamities the only real escape is through the mechanism of currency devaluation.  It is those countries that have let their economies rip – especially through asset/property inflation and excessive borrowing that will be the most affected.  The effect on living standards in those countries will be terrible - back to the economic dark ages well before the last economic 'miracle' happened.  There is really no escape from the excesses of the past, and current attempts by governments to spend their way out of the crisis are doomed to failure and will only exacerbate the situation.  Apparent wealth in those countries most affected will be partially destroyed - future generations will pay the price, and in turn this could lead to inter-generation discontent – will younger tax-payers of the future be willing to continue paying for pensioners and the mistakes of the past?

What can be done?  For those with wealth the name of the game is survival and to prevent wealth destruction - forget trying to make money at the moment unless you are a real gambler.  As the primary consequence will be in the destruction of value in those countries most affected by the mechanism of significant devaluations against more prudent countries - it would seem sensible to dump/get out of the affected currencies (especially sterling).   But where to?

In my opinion there are two types of country:

a) Those that have allowed their bankers to run amok making ridiculously risky loans.

b) Those that have done a. above but have also allowed ridiculous asset inflation and borrowing.

It is difficult to find many countries that have escaped a. above but there are some that have not allowed b. to happen.  For example Switzerland, Germany, and France to a lesser extent.  The latter two are of course Euro zone, tainted by the effects of Spain and Ireland although small.  So on balance the refuge may be Swiss Francs or of course gold.  The current strength of the Yen and US $ will probably not persist – they are largely the effect of unwinding the Yen carry trade and the repatriation of dollars (at greatly reduced values) by US hedge funds. 

For the wider population things are looking desperate.  General living standards will plummet which in turn will create much social unrest.  This is particularly likely in the UK because of the predominance of public sector spending and the almost exclusive strength of public sector unions.  I confidently predict summers and winters of discontent with severe consequences for the country's quality of life. 

The extent of these ‘ordinary’ debts vastly exceeds the sub-prime debt levels which have already stretched the ability of governments to throw money.  Governments simply will not have the ability to throw enough money when the CDS-covered debt regime collapses.  The only way out is to print money to cover these enormous liabilities. 

Many governments will lose the ability to do anything meaningful about the problems.  This may already have happened in the UK - the government have announced support for banks and other institutions measured in hundreds of billions and are now planning for a deficit next year of over £100 bn.  Who is going to fund this especially when they are bringing interest rates down to near zero?  Sterling is now a deeply unattractive currency to hold or invest into.

I see 1970's style balance of payments crises but on a far worse scale.  Britain's export base has been largely destroyed - we are now a nation of (redundant) bankers and public servants.  Our productive base is completely unable to support the living standards we have awarded ourselves by borrowing.  That is the real folly of our past.

Eventually this truism will dawn on the population and at that time the politicians involved will be vilified.  Only when a clear thinking strong leader emerges not tainted by the spin culture that exists in all main parties will the country stand a hope of recovering from this debacle.  No such person has yet emerged!

The answer for many countries will be a form of competitive devaluation - only in this way will a country get an advantage over its neighbours for the decreasing amount of international trade.  There is just a possibility that a coordinated global inflation could solve the problem - inflation is probably the only way to effect the dramatic reduction in assumed wealth that is now required and if it were done in a way that prevented a country from being slaughtered by devaluation (which is a relative term) against other currencies, then there might be some hope.  After all the only components to economic growth are manpower, innovation, energy and raw materials.  We have the first three and with some ingenuity probably have enough raw materials if we avoid bubbles.  The chances of course of getting all major countries to agree are pretty slim, which is why the armageddon scenario is more likely.  Protectionism will probably be the main response of politicians – especially in the USA.

Thursday 31st July 2008

I am starting this blog not knowing where or how to start – there are so many issues to be covered – most with potentially very significant effect on the future.  Initially this blog will probably be quite rambling but I hope that over time a more coherent style will develop.

As a kick-off, I believe the seriousness of the current economic situation has not been fully appreciated, especially by the many optimists there still are.  As a result many of the indices and factors considered by people – like stockmarket prices, etc., are still reflecting an overly rosy picture.  You only know that you’re at the bottom of a recession/ depression when there are no more optimists around – that then is the time to buy!  We are nowhere near that now.

Over a year ago I appreciated reading a book authored by a colleague in Guernsey that forecast a depression far worse than in the 1930’s – at the time (April 2007) his book was derided as being doom-mongering and total unrealistic “it will never happen” they said – see www.finalcrash.com/cmr .  Well, it is happening – all the dire predictions made are now coming true – and we’re only at the beginning. 

I have shared these views for several years, but my pessimism was ahead of its time – I received quite a lot of derision from my investor friends (I used to be Chairman of the Chiltern Investment Group which I founded in 1984) who were universally optimistic that the boom would continue ad infintum.  Sadly for them, my pessimisim was actually understated!

Mike Downey is Managing Director of Cavendish Management Resources.  He is a graduate of Harvard Business School.  So far his reputation for predicting future business and economic circumstances has been good!

©2008-9 

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