When I Look at My Screens

8/3/2019 When I Look at My Screens

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Every day when I look at my screens, read briefings, analyses, articles, books, watchbusiness channels, etc. I am acutely aware that I am watching epic events unfoldthat my great grandchildren will be studying in 50 years.

Assuming an ostrich-like pose in response to bad news is not advised. A rational,

calm mind is what is needed. So even though the following is unsettling information,it is useful and I believe important to read and absorb.

We have to adjust our expectations and strive primarily to preserve our capital,not necessarily to grow it.

A time will indeed come to grow it again and I believe there will be some trulyamazing buys to be had.

To add the usual mix outlined below, prices in the much over-valued Chinese realestate market have broken and are coming down hard.

Europe

As I write, Greek Prime Minister Papandreou has resigned about a week afterfiring the heads of his army, navy, air force and armed forces chief of staff andappointing his own favourites. His party is supposed to form a "unity" governmentwith its despised conservative political opposition to implement new, even moreonerous austerity measures.

In Italy, the lecherous Prime Minister Silvio "Bunga Bunga" Berlusconi has saidthat he will resign but not when. The Italian parliament is fractured among manyparties and as usual they range from quasi-fascist to communist. The 10 year Italianbond is now yielding over 7%, a clearly unsustainable level that will lead to a debtdeath spiral if maintained or raised. This yield is substantially higher than that of2008. The size of Italy's government debt is more than that of Spain, Greece,Portugal and Ireland combined and about 70% of it needs to be re-financed by theend of 2012.

There was indeed a huge run on banks underway throughout Europe as I hadthought and the European Central Bank (ECB) had to guarantee liquidity, to allowindividuals and institutions to transfer their holdings in USD to either the ECB itselfor to banks in the US.

On September 12, Mohamed A. El-Erian, head of Pacific Investment ManagementCo. (the world's largest bond fund) said organizations such as the InternationalMonetary Fund need to act with European banks at risk of being engulfed in theregions sovereign-debt crisis. Were getting close to a full-blown banking crisis inEurope said El-Erian. We are in a synchronized global slowdown. Theres verylittle confidence in economic policy making both in Europe and the U.S.


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On October 6, Bank of England Governor Mervyn King, upon announcing a newwave of quantitative easing, frankly stated "This is the most serious financial crisisweve seen, at least since the 1930s, if not ever. Were having to deal with veryunusual circumstances, but to act calmly to this and to do the right thing.

On November 3, the incoming ECB President Mario Draghi said "Owing to theirunfavourable effects on financing conditions and confidence, the ongoing tensions infinancial markets are likely to dampen the pace of economic growth in the euro areain the second half of this year and beyond. The economic outlook continues to besubject to particularly high uncertainty and intensified downside risks. Some of theserisks have been materialising, which makes a significant downward revision toforecasts and projections for average real GDP growth in 2012 very likely."

Translation: Euope is probably already in recession and it will get worse. Becauselarge Euro banks are being required to raise their capital ratios, a lot of them will doso by shrinking their lending thus deepening the recession, which could be quitesevere. Europe as a whole is the single largest export market for both the US andChina.

In the UK there has been another round of quantitative easing and the inflationrate is running at about 6%. The average maturity of the UK government's debt isabout 11 years and it is clear that it is engaged in inflating it away, which is legalizedtheft. Grand theft.

These dislocations are causing volatility which is almost the highest in 100 years.

The U.S.

While the European Community has 27 states and the European Monetary Unionhas 17 states, the US has one national government and one central bank whichmakes it easier to govern - if their is a consensus on the way forward.

Unfortunately, there is not. The "super-committee" which was appointed in thewake of last August's debt financing crisis is deeply divided over spending cuts andtax increases and very likely will not be able to agree on a budget by the November23 deadline, which will result in automatic, crude spending cuts being invoked.President Obama is not helping by his support of raising taxes on the top 1% ofearners (who already pay 38% of all income taxes) and the "Occupy" movementsacross the US, some of which have already become violent.

As well, the US may be on the verge of another crisis precipitated by mortgagebacked securities (MBS) - but this time by prime MBS. House prices continue to falland there may be another 10% to 20% downside, with more mortgages becomingimpaired and more homeowners just walking after their equity goes under water.After a review of more than 1,000 prime residential MBS (RMBS), the credit ratingagency Fitch downgraded 49% of them.


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The market seems to be relieved that US Federal Reserve President Ben Bernankeis publicly musing about another big round of quantitative easing - without thinkingabout the reason why that might be necessary.

Despite all these problems, the U.S. is still the world's lone super-power and in anyglobal financial crisis I believe there will once again be a flight to the U.S. dollar - acortex reaction - as a safe haven.

Middle East/North Africa

Libya has been liberated and Gadaffi has been killed. Life is returning to normaland so is its 1MM barrels per day of light oil production.

Unfortunately, things are deteriorating elsewhere rapidly. There is a newly formedanti-Assad army, numbering up to 10,000 and composed of former Syrian armysoldiers, now massing in Turkey on Syria's border. The endgame is coming thereand it will likely be very bloody and bring Iran and Saudi Arabia into more of aconfrontation.

A U.N. agency has just confirmed that indeed Iran is working on producing anuclear weapon and a plan in the early stages of implementation by Israel to bombIran's nuclear installations was recently leaked. Any Israeli aerial attack wouldprobably overfly Saudi Arabia with its permission. If this occurs, it is quite possiblethat Iran would block the Strait of Hormuz, thus choking off huge volumes of oilexports from the Middle East. At this juncture the world does not need $150 oil.

Gold

As forecast, gold pulled back to $1600 but has since rebounded to about $1800.Macquarie has a $2500 target on bullion for 2012. Don't be surprised by a pullback inthe price of bullion driven by margin calls and the need for liquidity in anygeneralzed sell-off. If it occurs I expect any pullback to be short-lived.

With the amount of currency debasement occurring around the world, I think goldbullion is one of the safest investments around.

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When I Look at My Screens