As we wrap up the year, it is fitting to take stock to see where we've been, where we are and what the future might hold. The financial crisis of 2007-2010 has been averted, at least for the time being. Many banks and major institutions have been stabilized, propped up, bailed out or nationalized. Stock markets have largely clawed back from their sickening descents in 2008-2009. The world's leaders together with their central banks have exuded confidence in their ability to prevent disaster - "We will do what is necessary".
But scratching beneath the surface, worrisome signs continue and some new, very scary ones have appeared. While financial institutions have been stabilized, the credit-worthiness of entire nations has been imperiled in the process. As growing national debt in many nations, especially the U.S., has expanded to fund bailouts, chronic deficits and addictive spending habits, many nations have resorted to massive printing to make ends meet and to fund growing intervention in financial markets. Thus, while stock and bond markets, as mentioned earlier, have recovered, who has been buying? Well, the Federal Reserve, directly and indirectly, has massively entered the bond and stock markets. But take a look at mutual fund flows. Ordinary investors have been fleeing. The bond markets are even worse. The Federal Reserve has bought (with printed dollars) over a $Trillion to prop up bonds and keep interest rates low. They have especially tried to keep mortgage rates artificially low to "save" the housing industry as well. But interest rates have now begun to creep up, as many observers are beginning to see the inflationary pressures resulting from reckless currency expansions by the Federal Reserve, ECB and other central banks. Meanwhile, U.S. housing prices have resumed their downtrend. How long can governments artificially prop up markets and consumer spending without unleashing far greater tragedies like hyperinflation? The commodity markets are sending big flashing warning signals. The chart below provides an idea of what the composite of various commodity prices, be they for hogs, wheat or copper are doing.
Near-bankruptcies of entire nations are now being "averted" such as for Greece, Ireland, Iceland. Spain, Portugal, Belgium and many others are now on the short-term horizon. Meanwhile, virtually every nation's indebtedness is worsening by the day. Many U.S. States are seeking to avert bankruptcy (California, Illinois and many others). The U.S. financial situation continues to deteriorate in almost every respect - see the U.S. National Debt Clock.
So has the crisis been averted or have we simply kicked the can down the road a bit further and turned the can into a big tank? Are we engaging in classic denial typical of a normalcy bias? Or is there real plausible explanation of how we will be able to muddle through, relatively unscathed? Personally, after looking at what appear to be the facts, I don't think we can escape some very serious consequences of the irresponsible overspending, over-consuming and financial manipulation that has been taking place over the years, in spite of the ever more ingenious and ridiculous "initiatives" taken by our leaders and monetary authorities to put off that day of reckoning. At the same time, judging by the conversations I've had with many folks over the last year or so who seem to be either complacent or entirely unaware of anything amiss, I think that the normalcy bias is definitely alive and well. In spite of that, may I wish you all a Happy and Prosperous 2011!
Sunday, December 26, 2010
Monday, December 6, 2010
Recent events in Europe and the U.S. continue to support the thesis that governments simply don't have the stomach to take the actions necessary to bring spending in line with income. Whether it be in good times or bad, "now" never seems to be the "right" time to cut spending, raise taxes and balance the budget. So the can gets kicked down the road again. Mind you, this can is growing bigger by the day. In the meantime, since solely borrowing is no longer an option, governments are resorting to ever increasing levels of QE (Quantitative Easing), or printing to make up the budgetary and bailout-induced shortfalls. The precious metals markets see this and react by moving higher as increasing numbers of citizens become uneasy about the future of their national currencies. This is particularly so in countries such as Germany whose citizens still remind themselves of the carnage wrought by the hyperinflation and total destruction of their precious Marks during the Weimar Republic days. So, Gold and Silver have now moved to new highs against most major currencies. Below is a chart of Gold versus the $US.