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Looking for silver bullets…

Discussion in 'The Economy' started by Tropo, 13th Feb, 2009.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    “A bird does not sing because it has an answer.
    It sings because it has a song.”
    Chinese Proverb

    Looking for silver bullets…

    It’s not that we have any interest to defend our newly appointed Treasury Secretary, as it’s too late for that anyway. He was summarily savaged by the financial press after his presentation of a “solution” to the financial crisis. And maybe that was justified given the vagueness of what was delivered after building expectations so high.
    But the driving of the bus back and forth over Mr. Giethner seemed a bit excessive. And I think it goes to the point that many are looking for some “single bullet” or savior to pull everyone out of this mess. There has to be “something we can do” seems the lament.

    Well what if there is nothing we can do, but muddle through at best. We think that will be the case. And we think it will get worse before better.
    But we also think the potential for this mess to get much worse is building if we deny this is a market problem and primarily a market solution is required—excess debt must be cleared, not re-created.
    This is not a call for government to do nothing, we know that will not happen, but for government to do less so overall US debt levels can subside.
    What’s wrong if US savers save again?
    Nothing! In fact it is exactly needed for that repair of $10-12 trillion of wealth destruction from housing and stocks.

    As I talk with various investors, one thing they keep coming back to as evidence the US dollar will be killed is this concern:
    What if China sells off its US Treasury bonds? That is going to crush the dollar.
    We have two points on this:
    1) US Treasuries have been the best single major asset class investment since this crisis began; so it might be a stupid investment decision to sell them, and more importantly,
    2) So what? Let them sell. If US savers increase their savings rates to 10% of GDP, from a low of -2% GDP in this cycle, that pool of money almost entirely displaces any loss associated with China (and most of the rest of Asia) should they decide they need or want to sell US Treasuries and stop buying in the future.
    We realize this process is scary and painful to many.
    But what we think is playing out is the great re-balancing of excess
    consumption (US) in one part of the global economy versus excess production on the other side (China). More balance growth will ultimately be better for all if we reach that stage.
    The symbiotic relationship between the US and China during the past cycle is history!
    Given the huge demand destruction and the ongoing change in the demand patterns as US savers save and rebuild wealth, the exchange of goods from China for dollars from the US, to recycle back into US Treasury paper won’t be happening.
    This means two things: global liquidity based on US financial system recycling of Asian reserve access is dead, and China’s export model is dead in the water.
    The key question:
    Who takes on more pain from this major re-balancing? Our guess is that without a doubt China does. They have no place to run to and no place to hide. They cannot make-up quickly for the complete evaporation of demand for their goods because former massive global demand cannot nearly be absorbed by China’s relatively smaller domestic market.
    China will bear the brunt of this global readjustment in the form of falling production and sharply rising unemployment—this is already very apparent when you look at the numbers.
    Their race is to build domestic demand. But, this race will be effectively neutered if Chinese officials continue to crackdown on the very people they expect to buy the excess production—Chinese citizens.

    Chinese President Hu Jintao is cracking down hard. Many are labeling his latest proposals as the “great leap backwards.” The official urban unemployment is around 5%; unofficially it is pushing 10%.
    Official GDP growth is around 8%; unofficially maybe it’ below 5% and falling fast.
    So, this is why we believe things can get much worse for global markets before they get better and there is no “silver bullet” that will solve the problems of global rebalancing. And logically we shouldn’t want to stop this process because it is the market’s way of cleansing.

    Ludwig von Mises says that capital investment is the driver of real wealth for an economy, not consumption. We agree.
    With US savers on the path to creating a big pool of domestic capital for US industry we can’t see how it can be a bad thing in the end.
    Let’s just hope our “solutions” don’t get in the way.

    Jack Crooks
  2. Chris C

    Chris C Well-Known Member

    2nd Apr, 2008
    Brisbane, QLD
    This trend would appear to be quickly reversing (as it should) as the prospects of the US going forward are just dark as before the treasury rally and the intentions of inflating their way out of this problem seems to be well intact.

    I have been saying this for months now, but gold is looking like the safe haven people are looking to and will probably out perform all the asset classes over the next few years.

    Firstly this is a big IF, made especially difficult when your unemplyment rate looks like getting into the 9 - 10% territory, not to mention it is hard to quickly reverse savings rates from -2% to 10%, not to mention the extreme recessoin this would cause in itself.

    Aside from that, and more importantly, why the hell would you poke a sleeping lion with a stick! US treasuries are going to have a lot of trouble in the short term if China doesn't buy much of the on coming US government debt, let alone if they sell their current reserves.

    Let's be honest, one of the biggest parts of this problem is the free falling US housing prices which the FED is trying to stabalise, so I fail to see the logic of encouraging China to spark what would likely turn into a bond market collapse and further deepen the housing and liquidity crisis. If it was me, I'd be kissing Chinese ass right now.
  3. Mark_B

    Mark_B New Member

    12th Feb, 2009
    Chris, your opinion and, of course, you are entitled to it, but I think describing gold as a safe haven ignores some very disturbing facts about it's volatility.

    What I am about to say is essentially a cut and paste from what I said here.

    Twice in this post I refer to graph's in the above link. Apologies for that. I am still finding my way around this place.

    Ultimately, If people want to invest in gold that is their business and the first thing I say is all power and good luck to them.

    The 2nd and last thing I say is (as with any investment), go into it with your eyes wide open.

    Gold does have it's days, it's months, it's years and even it's decades.

    But it also has it's abysses as well, and they can go on for months, years, decades too.


    What that graph says is:

    There are times when Gold is a spectacular investment, but:
    Gold was a dud investment from 1600 to 1800 inclusive
    Gold was a dud investment from ~1940 to ~1970
    Gold was a dud investment from ~1980 to ~2000

    They're all significant periods of time.

    So if you buy gold remember, it could make your fortune in 5 months, or take you 50 years to break even.


    You can see there that the gold price has risen appreciably in the past few years - great news for anyone who has held it during that time - not so great for those wanting to buy into it at already inflated prices.

    Plus, by buying gold (price expressed in $USD per ounce) effectively you have another layer of risk - currency risk.

    According to the RBA the $AUD is currently at about $USD 0.66 (0.6574). By my calculations using RBA data, since we floated in 1983 the average exchange rate has been 0.722, over the past 1000 days it has been 0.8067, and over the past 2000 trading days it has been 0.7122. As recently as late last year, Westpac was saying their models had a fair value for the $AUD around $USD 80c.

    The Gold price is up.

    The dollar is down.

    Imo, that isn't a great starting point for buying in into any investment, but especially not into one as volatile as gold.
  4. Chris C

    Chris C Well-Known Member

    2nd Apr, 2008
    Brisbane, QLD
    Don't get me wrong, I don't think gold is a good "investment", because in reality it is just a lump of rock (or metal if you want to get technical), though this metal, along with others, has been used relatively successfully as form of currency for millennia, so when the printing presses are going into overdrive all around the world, I'd rather keep my money in something that better preserves wealth and can't be manipulated by the system.

    So my decision to "invest" in gold, and I use the term "invest" lossely, is more a reflection of what I think of everything else and the system, more so than I think gold is a screaming good buy or because it serves some super useful purpose other than looking pretty.

    Gold ultimately is a perceived as insurance against the problems of a fiat, debt based, currency system. At the moment the system is stretched to its limits and there are is a lot of good reasons to question whether the system is even going to survive this crisis. The really unfortunate thing is that there really aren't a lot of alternatives to precious metals at this point given that to my understanding all major currencies in the world aren't back by any commodity, aka they are all fiat currencies just like the USD.
  5. Mark_B

    Mark_B New Member

    12th Feb, 2009
    Stop right there and think about this logically.

    The Australian financial system is arguably the strongest in the world owing to a variety of factors, not least of all our worlds-best-practice approach to regulation.

    It's no accident that of the 13 or so AA rated or better banks in the world (and there are over 5,000 banks) - 4 of them are Australian - CBA, ANZ, WBC, and NAB.

    The Reserve Bank of Australia Act s. 10(B)(3)(b) says:

    (b) the powers of the Bank under the Payment Systems (Regulation) Act 1998 and the Payment Systems and Netting Act 1998 are exercised in a way that, in the Board’s opinion, will best contribute to:
    (i) controlling risk in the financial system; and
    (ii) promoting the efficiency of the payments system; and
    (iii) promoting competition in the market for payment services, consistent with the overall stability of the financial system

    What that says is the RBA stands behind the system, which by default means they stand behind the largest players in the system (failure of a major bank would have too much affect on the system ergo the big banks are too big to be allowed to fail).

    Sitting behind the RBA is the Commonwealth Government.

    And bankrolling the Government is the deepest pocket in Australia - the power to raise taxes (refer to s. 51(ii) of the Constitution).

    Our system will survive - don't worry about that.
  6. Chris C

    Chris C Well-Known Member

    2nd Apr, 2008
    Brisbane, QLD
    I'm not referring specifically to Australian banks when I say "the system", I referring to the fiat currency system, the debt based money system, the USD being the reserve currency of the world system, the welfare state system that governments around the world have adopted, even the dream of health and retirement funding system is deeply flawed.

    Also I'm not referring to Australia specifically, rather all developed nations, as they for the most part are all operating off the same model with the same tragedy of commons with short sighted government built into their democratic systems.

    Obviously the US is the tail wagging the dog at the moment, but it doesn't take a mathematician to work out the numbers don't add up (at least not in most developed countries). Throw in a few major resource shortages, ie oil, food and water, with your aging population obligations and you have a system that has nothing to support itself with, let alone grow. Something has got to give.

    With all that said, I won't be surprised if at the end of all this (two three years away) some, if not all, Australian banks are hurt badly and have been bailed out or nationalised much like the US has been. Like I have mentioned in other threads, Australia has yet to experience its share of the down turn as our recession is lagging the rest of the world, but more importantly our banks, whilst presently owning "reasonably" good balance sheets (though hasn't stopped them from raising lots of equity of late), may find them not so rosy if there are significant declines (15%+) in real estate prices coupled with higher rates of default in both the real estate and corporate sectors due to the severity of recession. When you are operating with less than 5-10% reserves it doesn't take much to push you into insolvency.

    Already Suncorp has been hurt massively by a couple corporate failings and the struggling commercial property market, and we haven't even hit the tough part of our recession yet. It's share price has lost 75% in the last 24 months for a reason, and all the other majors, exception ANZ, are not raising equity because times are good, and their balance sheets are in tip top shape.

    You also need to realise that government and central banks have a vested interest in continuing the charade, or at least focusing on the positives. If the government were to publicly announce that the banks aren't as stable as they once were, then you might cause a run on the banks, and with most major banking institutions holding between 5% and 10% reserves it wouldn't take much to send them insolvent.

    All I'm suggesting is that you don't swallow the government and RBA's propaganda without a second thought.

    I still have lots of cash sitting in Australian bank accounts, and I'm not that worried at this stage, but I'm very wary of how quick things can turn, and if things do start to sour then I will definitely be rethinking the idea of holding money in banks, though once again I think the longer term viability of Australian banks is NOT amongst the bigger issues that I'm worried about when it comes to "the system".