Exceptional uncertainty still rising and certainly bad for financial markets
Posted on 09 October 2011 with 6 comments from readers
What certainties can investors fasten upon at the moment except for the very certainty of uncertainty. The month that lies ahead before the G20 meeting of world leaders is going to be a very long one for financial markets.
There is already a very choppy pattern biased to the downside. Markets are sharply down one week and then recover on a few whispers of optimism from eurozone officials. Then they plummet as it is clear that nothing is very clear or decided or realise that if it was that might not help much either.
Bank recapitalization
Let us deal with the latter. What would it mean if the eurozone could decide to recapitalize its entire banking system, creating so much money that no bank could possibly fail? As we know from past government rescues of failing companies this does tend to only put off the evil day and supports the weak at the expense of the health of those that ought to survive on their own merit.
It is also a highly inflationary option. You cannot get away from the fact that such a massive boost to the monetary base of the eurozone would result in rampant inflation, not necessarily instantly but one, two, three years down the road.
Inflation is bad for economies. It distorts the allocation of capital and slows economic growth. It destroys savings and pensions and income for those living off capital. It encourages speculation and not investment in long-term business. However, this is thought preferable to the alternative of a banking collapse.
What really ought to happen is a controlled liquidation of the bad debts and bad banks, and a consolidation of the sector. This would involve pain for their shareholders and creditors but this is where the risk in bank lending should lie, not with the general public.
At the same time the eurozone crisis is only distracting from very serious debt crises emerging in the US, UK, China and Japan, even Australia has a housing debt bubble. This is truly a world crisis of epic proportions. The eurozone is less highly indebted than most other advanced economies.
The Governor of the Bank of England was not exaggerating last week when he described this as the worst economic environment since the 1930s and possibly ever. What on earth are investors supposed to do?
Staying liquid or more exactly in cash and short-term treasuries is the knee-jerk reaction to such a crisis if you have wealth that can be turned into dollars. Warren Buffett prefers stocks that he can buy at lower prices, although they may still go lower, and Middle Easterners arriving in Dubai prefer property.
Saving the world
There is logic in prefering real assets over money when the global banks are about to be ’saved’ by money printing on a scale never seen before in the modern world. You have to go back to ancient Rome to witness this scale of currency debasement.
Real assets are relatively fixed in supply and so do offer protection against the ravages of inflation. Gold and silver obviously fall into this category and there is a rush to buy these physical metals all over the world, although it is not yet a stampede.
You have to ask yourself who will do best in the medium term? Those buying assets in danger of falling a bit further in a global financial crisis or those staying in cash which is about to be printed to destruction? Those who have seen inflation destroy savings before are buying real assets without too paying too much attention to the immediate price outlook.
Really this is what the global leaders ought to be considering too. Undermining the global monetary system to prop up all of the banks could still ultimately be the wrong way to jump. Without a currency an economy cannot function.
Still in the meantime such exceptional uncertainty will most certainly continue to be bad for financial markets. The ArabianMoney investment newsletter has some good ideas for its subscribers this month on how best to survive and profit in this exceptional period (click here).
6 Comments posted by readers:
good article and an enjoyable read….unfortunately, if this is the abyss, then i feel that no matter what the above article suggests, it is all going to go down the pan…if you do hold cash, then that will be eroded, if you do run to gold then you will need to liquidate in order to survive day to day..(you cant eat it!), you buy stocks for the short tem, then you will need to liquidate to meet increasing margin calls, including on gold given volatility….
can you see the pattern here? my point is that if you do not take a broadsword to the system now and take the pain and change things structurally then, according to capitalist econommcs, you need to cut costs to boost your cash holdings/profit/reserves/savings…and that means more job losses…and an increasing amount of welfare payments and lower tax receipts and demand, and squeeze on margins and increased need of cost cutting and the death spiral begins..until (and thats IF we reach that stage) where people take a massive cut in standard of living (and essentially condemn at least a generation to squalor in the west…in the east this will be 2 generations but they might not know the actual difference given the lower economic base they are starting from) and a handful of semi profitable organisations working nationally to provide the basics while a few global institutions who employ people to make the stuff we ‘need’…!
but imho, i believe wwiii is overdue….unfortunately watch how the west will need such an excuse to recalibrate the new world order…..but this time, we will all lose…..
sorry about the downer but i ain’t getting paid so i may as well tell you the truth!!! ha ha!
I’m glad you quoted the BoE’s governor, Mervyn King, and his comment that this financial crisis may be the worst in the history of the human race (my words).
It seems to me that such a possibility raises the question as to whether the human race can ever recover from this financial chaos, at least recover to its status quo ante or something recognisably like it.
If governments choose banks over taxpayers, bankers over voters, with the consequences of hyperinflation, then I think that democracy has died.
A disregard for the voter in favour of the banking investor is dictatorship and tyranny, and is an outright denial of the fundamental purpose of democracy, which is government for the people, on their behalf, for their benefit.
Hyperinflation is NOT for the benefit of the demos, so that elected leaders will have failed the electorate SO badly that they will have destroyed democracy as a result. Hyperinflation destroys the middle class, who save and whose savings have made capitalism possible.
No middle class, except by previous identity, means no democracy. No wonder that the hyperinflation of the Weimar government led the lost middle class to adore Hitler and to vote for his permanent leadership and the destruction of the vote.
I only hope that a benign tyranny follows the worst financial crisis in the history of mankind, and one which is kind to those who conform to its diktats.
the inevitable slow motion train wreck continues…..slow until we wake up one day and its not slow anymore.
merkel n sarkozy might tap dance one more time at G20, or if they can get the ‘howtizer’ politically loaded, the seeds of inflation are sown to sprout like that rewind cord on the lawn mower you tried to fix as a kid.
it will hit some in the eye……unlike my lucky escape years ago.
I’m hoping that the silver and gold I possess will not only increase greatly in value, but will also purchase currency.
I don’t see that we are at the end of currency per se, but just at the end of the dollar and other existing, debt-based currencies. It seems to me that human beings will always need currency since there is insufficient silver and gold for everyone to use in place of currency.
However, I expect that the new global currency in the new era coming will be gold and silver based, as the dollar was in the 18th century. This currency I expect to be able to buy then in much larger quantities than the majority of people, who currently despise bullion.
It’s far too early to consider war as the outcome. If anything I would expect to see a major demilitarization as the West works to cut expenditure after the Mid-East adventurism and possiby giving way to others that are growing in prowess. I see a period of retreat, consolidation and massive technological change ready for the next move forward to begin later this decade.
The new way forward will be in alternative energy (real alternatives), materials, bio-chem, genetics and environmental engineering.
The next few years will be rough but no time to shrink in fear.
To a degree the UK will suffer badly but is such a small part of the world scene we may benefit much sooner than realised. We can become protectionist simply by following the working practices of the Germans and Japanese by encouraging our enterprises to favour UK SME’s over foreign. We can devalue as needed. We still have a vibrant innovation sector. We can get credit to lower risk SME’s in need and with real chance of paying it back and we can address the tax system to encourage business. We are also in the grip of a baby boom with the likely follow-on boost to growth.
What we don’t need is politial instability.
I wouldn’t say it’s far too soon, let alone too soon, to consider war as an outcome.
Since hyperinflation of the dollar may be about to kick off on the basis that 40% of US expenditure comes from debt leaving the rest to tax, and since hyperinflation is usually associated with war, I would argue that it’s right to consider war along with other alternatives.
The belligerency of Iran and Israel, Turkey and Egypt does make it reasonable to put war, whether regional or wider, into the mix of short to medium term possibilities associated with, probably, the worst financial crisis in the history of mankind.
The occupation of Wall Street and the similar 99% demonstrations being triggered all over the world may lead to rioting and anarchic behaviour in many countries. One way of distracting a rebellious populace at home is to blow the trumpet of war abroad ever more loudly in order to achieve national unity in fractious circumstances.
Ed Note: Yes but only the certifiably insane would mount an attack on overwhelmingly superior forces. We still have a monopolar world.