So, looks like Ireland is now in a bit of financial trouble. First, we had Greece. Next, we had some trouble in Spain. And now it looks like Ireland might be in for a world of hurt.
If we go back a few years we can also find a few more countries in distress. Argentina had its currency nearly collapse in the early 2000s, and Zimbabwe went through a massive period of hyperinflation this last decade.
Last night, right before bed, it looked like North Korea just launched a small attack on South Korea – so things aren’t looking very good on a global scale.
I haven’t blogged about finances or the markets in quite some time, mainly because nothing really has changed fundamentally until recently. It started not that long ago when Helicopter Ben Bernanke did his second round of Quantitative Easing (aka printing money), which injected another $600 billion dollars worth of liquidity into the system (i.e. he kicked a $600 billion dollar can down the road). If you believe in Keynesian Economics, Santa Claus or the Tooth Fairy, then this injection will create jobs and help stimulate a faltering economy. If you believe in the Austrian school of economic thought, then printing this money is only causing the further devaluation of the US dollar and erosion of purchasing power for most Americans.
I read a book not that long ago called The Second Great Depression. The book was written a few years ago, and proposed six different scenarios that could result in a second, more dramatic great depression if they were to occur. One of the more dramatic triggers for the event involved the collapse of the US Dollar, but the author thought it was one of the most unlikely scenarios. That is, according to the author, unless the price of gold approached $1500 by the end of 2010, which it has unfortunately (for the doomsday scenario) done. That, the author said, would be the canary in the coal mine for the proposed doomsday scenario which ultimately results in the collapse of the US Dollar.
The current price of gold is around $1310/ounce, down from a high of around $1370. I think many people (myself included) are cashing out right now, but that there’s a second wave of growth coming soon. The recent injection by Helicopter Ben will translate into more price inflation about a year from now, and that’s only going to drive more and more investors to the safe haven of gold. So, watch and see if we hit $1,500 in the next few months.
If so, it might be a good time to start stocking up on canned goods and jugs of water.
So far, what I’m seeing is that inflation is creeping up and debts(both consumer and Government) are mounting. Taxes are continuing to go higher, as are bond yields (in anticipation of inflation).
It’s interesting that Bernanke believes that QE2 will actually lower bond yields, keeping fixed mortgage rates lower. It’s already had precisely the opposite effect as the markets know that these actions are inflationary, thus yields went higher to reflect future inflation.
I think gold is going far higher than anyone would have ever believed. It won’t be a rocket ship to the moon, but I think we’ll see days when it will look like one. The markets are uncertain, and the large institutions can have a dramatic effect on the short term price of investments. Longer term(2-5 years out), the direction for commodities and precious metals is only higher though.
Do I think that we’ll be eating canned dog food in the near future? Some people already are, so certainly that will remain true. What I do see happening though, is that eventually the US and then Canada will have to transition from a welfare state mentality to a “You’re on your own. Seek help from friends and family” reality.
If you look at most large companies in North America, they’re sitting on huge mountains of cash. At the moment, it appears that cash is sitting idle. Once inflation numbers can no longer be masked, that cash will evaoporate like water in a hot frying pan.
I think they’ll pare currencies that are losing value (like the US dollar) and sink the money into Gold and other hedges to protect wealth. In the beginning (of the collapse of the dollar), it will present a tremendous opportunity for those who are liquid to purchase distressed US assets at fire sale prices. Mergers, aquisitions and buy outs will happen on a scale never seen before(in the US)
Eventually, prices will catch up to inflation levels and assets prices/company valuations will rise. That’s why I see a window of opportunity for savvy corporations to reap windfall profits if they act swiftly. Stocks will likely soar during this time, only to crash lower once the news becomes common knoledge and the smart money takes profits off of the table (just as Joe Average begins to buy in!)
For most of us, there’s really nothing we can do to change the course of events already unfolding. All we can do is look after ourselves and our loved ones. That means reading the signals and protecting what we have. Cash flow will be king during the hard times.
Any variable rate loans/mortgages should be converted to fixed rates within the next 12 months and ammoratized over the longest possible term. I say this because we’re very likely to see both the prime rate and long term bond yields rise at the same time very soon as central banks realize that inflation is spiking much more quickly than they anticipated.
During inflation, debts become easier to pay down in real terms if you can hedge what wealth or income you have in deflationary assets (like gold or foreign income). That’s why a fixed rate and payment will save your bacon.
I don’t think the world is ending. I do think we’re in for the end of an era. Money will eventually change hands from the incompitent to the compitent as it always has in a free market society. Governments as of late have delayed this inevitable process, but contrary to what they’d have us believe, they’ve certainly not prevented it. They’ve delayed a depression rather than stopped it and history will show just how wrong their actions (and the supporters like Buffett) were.