Update on the "Big Picture"
John
Hi again,
I've been trying to find the time to provide an update on "the big picture". By this I mean the longer term view of what I expect to occur at some point between now and about 5 years out.
In order to actually get something out, I've decided to keep this post as short as possible and send it out. Having said that, it's ended out being quite long anyway! Trust me, there's a lot more I'd love to convey if I had more time.
So let's get down to it.
Disclaimer: Remember that I'm not a qualified investment advisor. So the content contained herein should not be considered investment advice. It is a description of my personal research and views on economics and markets in case anyone finds it interesting or helpful. But, as in all things, you must make up your own mind and take responsibility for your own decisions on these matters.
And, for the record, judging by the performance of the overwhelming majority of qualified investment advisors, I'm proud NOT to be one.
All my research indicates quite strongly that major world economies are headed for a major downturn, with the very real potential for it to develop into a massive global financial crisis larger than we experienced back in 2008-2009.
I find basically no major national economies to be even close to fundamentally sound at this juncture.
I expect I'm early making this call, as I was before the financial crisis of 2008-09. But there's no shame in getting out a little early, whereas (particularly in some markets) being even a day late can be catastrophic. A recent case in point is Cypriot businesses, most of which stand to loose almost all but the first Euro $100,000 of deposits they had in Cypriot banks. Do those Cypriot businessmen/women wish they'd gotten out early? Unfortunately, only a very few (the smart ones) did.
I got my superannuation out of the investment markets and allocated into cash a little early in 2007, but my superannuation grew during the financial crisis at over 4% per year while those who left it in, hoping for brighter days lost 20% to more than 50%? How did you fare? Moral of the story: early is much better than late.
I do not know precisely when this next downturn will begin. My best guess is within the next 12 months, but this is not certain. However, to put an outer boundary on it, I would be extremely surprised if it did not begin before the end of 2016.
I am moving to reallocate family savings/wealth so that a very good chunk of it is in physical cash (bank notes) held personally (that is, not in a bank deposit account or bank vault). It is simplest for me to use physical Australian Dollars, but I will be considering holding some US dollars. Other physical currencies I would consider are Singapore Dollars and NZ Dollars.
If I was invested in stocks (and I'm not to any meaningful extent) I would get the heck out. I watch and analyse many world stock markets regularly. One of the most meaningful indicators can be found by measuring the performance of the US stock market. By all the measures that I have found to be useful in determining long term trends, I would estimate that there is a maximum 10% or so upside left in this exhausted beast, but a heck of a lot more downside potential than that. The risk reward is just not there for being invested (on the long side, that is) in stock markets right now. Australian stock markets are at a similar juncture.
I am very comfortable with not receiving bank interest on this cash I will be withdrawing from the bank - I consider it a reasonable price to pay as insurance that my principal savings are protected - that I'm no longer exposed to losing a big chunk of this money if/when bank solvency issues return in the coming downturn.
I maintain my view that Euro currency is to be avoided. The fundamental reason is that the the design of the euro currency system is seriously flawed and, by virtue of this flawed design, will come undone (and is, slowly, doing exactly that). The German influence on monetary policy in Europe has kept the Euro much stronger than it would be otherwise, but eventually "something's gotta give" and it's only a matter of time, in my view. The Euro is simply not worth the risk compared to a bunch of other currencies that are relatively free of such fundamental design flaws.
Without going into too much detail so that I can get this post out, one of the main reasons I am very convinced we are going to experience a major downturn soon is that is it absolutely necessary - it's an unavoidable law of economics... "financial gravity" if you will.... that the mountains of debt choking the world financial system must first be realised (written off), thereby clearing the decks to enable the beginning of the next major generational growth cycle.
Instead of allowing this to happen in 2008-09, central bank money manipulators the world over thought they could bypass the fundamental laws of "financial gravity". In doing so they (as stupid as it sounds) tried to solve a debt problem by creating huge amounts of additional debt and pumping it into the system. That trick works sometimes for much smaller, isolated cases.... but will fail for enormous, global versions like the one we are in now.
This leads me to explain why I'm very concerned that the coming major downturn could develop into a massive global recession/depression worse than we saw in 2008-09. It is because the root cause of the 2008-09 crisis - the massive leverage and mis-allocation of capital in the global banking system - is far GREATER now than it was in 2008 by many important measures.
I've mentioned in years gone by that I hoped that the economies of the world wouldn't be "juiced up" for this long and to these extremes we are now seeing. The reason is because all this juicing increases the chance that the coming downturn will be on the more severe end of the spectrum (and much worse than it would have been had less manipulation and intervention by central planners and politicians been employed).
Modern banks, from the moment they open their doors, are de-facto insolvent. They are basically the only organisation that is permitted to operate this way. They are insolvent because they create money out of thin air. They are permitted to do this because they are allowed to create loans in amounts many times greater than the amount of money that depositors have deposited with them. It is, in a very real sense, a legalised ponzi scheme (or, more precisely, a business that is permitted, almost encouraged, by law to develop into a ponzi scheme). It is also, to any engineer who understands feedback loops, a system that is at high risk of becoming highly unstable. The higher the ratio of assets (loans given out) to liabilities (deposits etc), the more likely to become unstable the system becomes. This ratio is called leverage.
The leverage ratios that many of the worlds largest banks are running at these days is astronomical. It is at levels that simply have no precedent in post-industrialised history. It is truly horrifying to me. If it comes unstuck relatively simultaneously I can scarcely comprehend the scale of the consequences. I pray it does not.
Let's put one of the aspects of this leverage in concrete terms. If every depositor around the world were to go to their bank(s) right now and request to withdraw his/her deposits in full as physical cash, each depositor would be lucky to receive a few cents in every dollar in physical currency.
For your information, based on my research of recent and more ancient history, it is not difficult to discern what the banks have been desperately trying to do for the past 5 years or more, fully aided and abetted by central banks. They are doing what they've always done in crises involving over-leverage of banks - Argentina is a more recent case in point. They are ignoring/whitewashing/lying about the massive losses they need to incur while they, with the cooperation of central banks, gather money into their reserves as quickly as they can in the hope that they can generate enough reserves before they find themselves forced by external circumstances to write-off those losses. The hope is they can generate enough reserves so that they can write them off, at a time of their choosing, when their reserves are large enough to allow them to bear the shock and still keep their doors open. The problem is, I don't see very many banks at all that are going to achieve this in any reasonable timeframe due to the global nature and size of this particular leverage epidemic.
Where do these reserves come from, you may ask? A number of sources, all of which can be neatly summed up as theft. The more palatable description is "wealth transfer". It includes:
Central banks manipulating short-to-medium term interest rates. This means savers (ie depositors) get pitiful interest on their savings. The increased "spread" lands in the banks pockets to help grow their reserves.
Central banks inflating the money supply (as they've done in many countries recently on a scale never before seen, such as in the USA). Much of it has ended up as reserves on bank balance sheets (which is what they want), whilst simultaneously reducing the real purchasing power of savers money.
Via manipulated (down) interest rates, trying to tempt/force speculative activity, thereby elevating stock market (and other investment market) prices which hides the real values of junk assets that the banks have on their books or gives them a great chance of unloading them onto a greater fool (like a superannuation/retirement fund.... which again is ultimately your money at risk).
I will finish up now. I will try to post soon what I think are some of the most interesting and meaningful data points which are part of the basis for the views I have expressed above. Stay tuned.