Ten days into the new year, there has rarely been a time when market commentators have been so thoroughly polarized in terms of the prospect for the immediate future. While the range of optimism to pessimism is exactly as broad as ever, the camps are crowded at either extreme of the scale, with the middle viewpoint, moderate and/or ambiguous, virtually uninhabited.
In the happy smiling optimist's camp, the crisis is over, the stock market is poised for huge gains, the missing recoveries in housing and jobs is right around the corner, the sovereign debt issue is over and the Euro remains intact. Chinese growth continues to support the whole global enterprise and is indestructible.
In the basement regions of gloom and doom, the Euro will go bust as the sovereign debt crises spread and flames rage unchecked through the matchstick superstructure of the flimsy Euro currency zone. Energy prices will soar, crippling economic growth and recovery in G7 - 20 economies, and the American dollar as a viable currency will itself fall apart in a disintegration caused by the sheer excess of its swollen volume. Or it will become the hated only viable choice as every other currency becomes too risky.
Gold is either in a huge bubble on the verge of collapse, as is silver, copper and platinum, or, the monetary metals are in for continued strength and price appreciation as the resumption of widespread economic recession and dollar-driven hyperinflation kneecaps growth prospects and credit markets again freeze. The regulatory reforms that seemed inevitable as 2010 came to a close, like position limits in the commodities futures markets, actually become a loosening of the nearly non-existent regulations in a perverse Orwellian twist of fate. Wall street continues to gush paper profits and ethereal Dow and S&P numbers scale new heights as the fake money begets more fake money through derivatives position cellular expansion.
Does one cash out of the stock market in anticipation of the coming collapse, or load up on commodities, and the companies that explore for and produce them? Or do we abandon commodities for technology and financial stocks that will be the beneficiaries if a real recovery materializes? If we do cash out, which cash should we denominate our hideout in? Dollars, yuan, yen, euros. or gold, silver, platinum and palladium?
Charting a course through this tempestuous investment sea is going to be tough. But, as usual, opportunities will abound for those armed with clear vision and thinking. The risks and threats must be prepared for as if they were inevitable, as the odds are slim that none of them will manifest themselves as major losses for the ill-advised.
Following is our list of top threats, and the best defenses.
Major Threat #1: Sovereign Debt Contagion
Portugal's cost of borrowing soared to new highs last week (+7%), as did the cost of insuring its debt. By some estimates, nearly 80% of the nearly 1 trillion euros in sovereign debt in the Euro zone will require re-structured financing. Greece and Ireland are now paying 80% of their export revenue out as foreign debt. Italy is much closer to collapse than most observers realize, and Spain and Portugal are sure candidates for bailouts.
This means even higher debt costs for these countries, and likely as not, these costs in and of themselves will undermine repayment ability. It all adds up to a deterioration in confidence among investors, which will drive markets lower as investment dries up and money sits on the sidelines in safe haven assets. The question is, what constitutes a safe haven asset now?
It has emerged as a great paradox of the 21st century that the most poorly managed and over-abundant currency has become a safe-haven currency. The U.S. dollar, supported only by the Fed writing cheques to Treasury issuing bonds to the Fed sham, should be the first currency in the coming year up for revaluation. But that's unlikely to happen. As the most ubiquitous unit of foreign reserve holdings, nobody wants to see the dollar devalued. And so everybody keeps supporting the dollar by buying T-bills in a Mexican standoff circle-jerk that will embarrass future historians.
For now, however, the illusion is the truth, and so if things go to hell in a hand basket, the worst currency may become the best safe haven.
Best Defense: Buy Gold and Silver
FORGET the U.S. dollar. It may indeed be safe haven in the short term - at least optically. That's what the U.S. Treasury - United States Federal Reserve - J.P.Morgan/Goldman Sachs, who are collectively the operators of the largest Joint Venture Criminal Enterprise ever to evolve in the history of humanity - want you to believe. You think Madoff was the biggest Ponzi scheme and real estate was the biggest bubble to burst? The U.S. Dollar fraud-in-progress will be both the largest Ponzi scheme in recorded history, the biggest sovereign default in history and the largest bubble ever to burst.
Quantitative Easing, Stimulus, Bailouts and Emergency Lending are all synonyms for the counterfeiting that is the continued epidemic of U.S. Dollar manufacturing. This is the new language of the ubiquitous cartel, who are jointly setting us up for a thorough dousing when the levy breaks.
Gold and silver, as the real monetary reserve currencies of choice, will continue to appreciate in direct proportion to the exponential growth of the ersatz monetary base.
Major Threat #2: Chinese Growth Fades
When the perception of value in a given commodity becomes both hysterically inflated and shared by everyone from fund managers to taxi drivers, it's a sure sign that the commodity in question is on the verge of collapse. No I am not talking about gold.
I'm talking about China. Though China is no more a mere commodity than is gold, it has evolved, since the collapse of the Euro- US economies, to become the salvation, by virtue of its appetite for industrial commodities, as the world's sole economic hero. And heroes are commodities in the metaphysical realm in which exists confidence.
China's growth story is so well known, that even illiterate goat herders in Darfur know that the genocide inflicted upon them is a result of Chinese interest in hydrocarbons under the lands their goats graze upon. The Chinese are proud of the fact that over a million Chinese are at work in the resource and infrastructure industries in Africa. They claim the economic moral high ground and gloss over the theft of natural resource legacy that is actually underway there.
Chinese growth began when the strong-dollar policy of the U.S., combined with higher U.S. wages, instigated large scale export of manufacturing jobs from the U.S. to China. The Chinese' brutal treatment of the vast majority of its citizens ensured that the ultra low wages and subsequent subsistence standard of living that accompanied them could be counted on to remain stable. To this day, affordable housing and food is the greatest issue confronting middle class Chinese.
Despite this, the cost of labour is rising drastically, as is the cost of real estate. Nike and Adidas have moved manufacturing operations to Indonesia, and the diminishing competitiveness of China's labour force that must be the result of a decade of prosperity will continue to chip away at the nation's manufacturing base in 2011. Foxconn, who manufacture the bulk of Apple's gadgets, saw labour costs rise 20% last year.
Analysts like to point out that even if China's growth were to ease, the country's appetite for raw materials will continue to drive many export-based economies, and the likelihood of serious economic contraction therefore remains low.
But that is a dangerous sweeping generalization. The point at which markets turn from growth stories to collapses happens invisibly and in seconds. It is not decided by any one collective institution corporation or government, but when the data that drive the decision making process at these entities indicates its time to stop investing. Increasingly, the transformation from buyers to sellers to dumpers is determined on the algorithmic level.
China's ferocious growth could easily become an unprecedented nuclear meltdown if a few of the corrosive factors present in any supercharged economy were to align coincidentally to trigger negative investment decisions on a large scale. I think that moment is inevitable. I don't know yet if its going to happen in 2011, but if China goes, the rest of the world economy goes with it. The only island of calm will be Latin America, which, though relatively poor compared to the rest of the major economic zones, is a nearly perfect self contained economy.
Best Defense: Buy Gold and Silver
When, not if, China growth reverses, and its massive human juggernaut is forced to turn and start to feed upon itself, the economies of Europe, Asia and North America will be yanked into a collective freefall. Massive Capital Concentrations (multi-billion dollar investment funds, mutual funds, hedge funds, sovereign wealth funds, private wealth trusts etc) will rush into the U.S. Dollar, propping it up at first, but gold and silver will be the ultimate beneficiaries of China's flop. If the U.S. is forced into economic contraction on a grand scale again (depression), we now know the only response the criminals running the U.S. treasury are capable of is more dollar printing. Dilution upon dilution spells appreciation upon appreciation for gold and silver.
Major Threat #3
The Global Recession Becomes the Global Depression
This, many will argue, has already happened. The trillion plus dollars made from a few trees and barrels of ink have created numerical sums that are supposed to represent a recovering global economy. The numbers, however, are misleading. Other astronomical sums that are glossed over, mis-reported, and misinterpreted include the continuing glut of houses, automobiles, buildings, ships and household gadgets.
There are few new jobs being created in the United States or Europe. Official unemployment hovers around 10% while unofficially, and therefore more believably, the figure is closer to 20. People in the United States, Spain, Ireland, the United Kingdom, Iceland, Portugal and now Italyare getting booted out of their homes as banks hustle to evict the residents of their assets before citizen revolt forces legislative protection.
Yet governments and their wet-brained economists continue to coo soothingly into the equally retarded press ears, who dutifully parrot the blatantly fraudulent yet desirable and reassuring facts and figures into an anesthetized public's consciousness.
Best Defense: Buy Gold and Silver and Move to Peru or Canada
It is utterly astounding how real borders have become. Once only representative of lines on a map dividing political territories, countries neighbouring one another have become psychological barriers. The U.S. freaks are nowhere in evidence in Canada, where a mellow and good natured can-do (change the name to Canado?) conservatism enables responsible fiscal management, racial equality, and a robust and balanced economy. If things really go sideways in the U.S., and the violence building and erupting locally spreads, the only salvation for Canada will be that most Americans won't know in which direction it lies. The now farcical physical fence keeping Mexicans out in the south and the electronic fence in the north designed to have the same effect on Canadians, will need to be re-engineered to keep Americans in. It will be a just dessert, in the eyes of the world, for America to become a third world penal colony for the originators of the financial Armageddon presently unfolding.
A nice stash of gold and silver, a stout canon, and a few tasers should be all that a good Canadian or Peruvian or Brazilian or Australian or Kiwi or Swiss or German or any of the other peaceful and responsible countries' citizens need. We'll watch football and drink beer and make a boatload of dough buying junior mining companies while the U.S. and England and China and the Middle East and Africa tear each other to shreds. Then, we'll clean up the mess, rebuild the economy, and launch a new standard of global trade - pegged to gold and silver.
In conclusion, I feel compelled to apologize to the many millions of perfectly reasonable Americans who are my friends, relatives and subscribers, for any offence you may feel. I'm not referring, in the above sense of the word 'American', to you.
MidasLetter is published on the first Sunday of each month and delivers 5 stock selections from the TSX and tSX Venture exchanges in the resource sector, with a focus on precious metals. Subscriptions are $49 per month or $499 per year for a limited time only. Subscribe at www.midasletter.com/subscribe.php