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Over the years, I have used gold
market behavior to track economic and political trends. The overall effect
was a good take on gold markets and on currencies, which was the intent from
the beginning.
We have some rather ominous
conclusions about the Summer and Fall of 2008. They are economic as well as
geopolitical. The actual gold focus becomes more of a point of reference, as
it reacts to events that seem to be readying to occur. In addition, we
foresee some rather scary trends for the entire world, going into 09. We are
not going to cover all of this in this article, but to give a basic overview.
First of all, let’s list
some of these dangers and danger periods that we foresee coming.
- The US and Israel are getting ready to do something about the newly militant Iran. The nuclear debate is only
one dimension of that issue. Another is the threat that Iran is becoming too big a bully to the other more moderate Mid East nations, and not just Israel.
- There is a very large
unease again building in the world financial markets. Not only is the
credit crisis not really improving (new estimates out now that financial
institutions are looking at $1.3 trillion of losses) but world financial
markets are actually way down over the last year. Many Asian markets and
also many US stocks are down 30% and more. A building unease is
accumulating that can only lead to another real big world financial sell
off, lasting probably up to a month, before any settling comes in after
a month long bout of central bank firefighting efforts.
- Rising inflation is
unsettling financial markets, as it is unsettling the US and EU central banks. A serious friction has developed that the ECB is not coordinating efforts
with the US Fed, as the ECB fights inflation, and the Fed focuses on
preventing a total world financial meltdown. So far, these efforts are
rather contrary to each other. The dissention is unsettling financial markets.
- Intolerably high energy and
food prices. Disastrous floods in the US Mid West grain belts are going
to lead to a world food crisis in 09. We have only seen hints of this in
08. World inflation will be seriously increased in the entire world as a
result. The
Chinese are particularly vulnerable to this issue.
There are more dimensions to
this but well stop there.
Outcomes
The results of these economic
and political pressures are likely to be:
- A significant risk (well
over 50%, meaning more likely than not) of serious world stock and
financial problems over the Summer. This makes a much higher risk of a
real world financial and stock meltdown exceeding a 20% drop going into
the Fall.
- We have an expectation that
Israel is going to act as soon as this Summer, but by Jan 09 roughly, to
do something significant to stem the Iranian nuclear problem. Israel has repeatedly stated publicly in the past that they will never tolerate a radical
Islamic nation to achieve the nuclear bomb. We believe them.
- Friction between the US Fed
and the ECB over inflation policy destabilizes the markets and make a
real financial panic much more likely. It is not clear the central banks
will be able to pull off another ‘Bear Stearns’ type
emergency bailout fast enough if there is a new huge financial meltdown
emerging. So far, those efforts have succeeded in part, but all
this means is one that more bullet has been dodged. How many times can they do
that?
- A likelihood of political
turmoil in many nations over the food situation. For example, Argentina is in the middle of an incredible battle between farmers and the
government’s policies to tax/tariff agricultural exports. The
months long battle between farmers and truckers who are paralyzing their
economy and a totally unrelenting government may lead to a revolution
there. Other nations such as Egypt, China, and India tried to reduce budget busting food and energy subsidies but had to pull back on subsidy
reductions due to widespread riots.
- China is exhibit
number one in vulnerability to a food and energy shortage. There is one
thing above all that China fears, that is a big viral insurrection
involving the 800 million disenfranchised rural peasants. The rising
food and energy prices worldwide are hammering the world’s
poorest, who already spend over 50% of their $2 a day income on food. The
rising food and energy prices are causing worldwide riots as of now, in
many disparate places, from the richer EU region, to poor Asia, to India, to South America. 09 does not look
good in this respect.
- The prospects of the world
having a record grain harvest in 2008 are rapidly diminishing. Although
it’s stated that China may have record harvests this year, the US, the world’s biggest grain exporter, is seeing widespread damage to its grain
crops. Without the US ability to continue huge grain exports into
09, the world will face new grain export restrictions by many other
grain exporters. This will lead to a real world food crisis into 09. There
is no bigger factor that will lead to world destabilization than food
shortages.
- The commodity markets will
continue to drive prices up, and big investment funds will continue to
pump billions into these markets, making prices shoot higher. There will
be a big controversy over financial gains in energy and food commodities
into 09.
- A new US president will likely be tested by some military related threat. That is a typical cycle, and
it’s coming in 09 as well.
Some serious doubts about the EU
and the Euro
The list of dangers goes on, but
we also see some risk that the Euro will lose credibility if there is
continued strife over EU political organization. In addition, the weaker
South EU nations are in a big controversy with the stronger North (Germany) over the direction of inflation fighting. The weaker EU economies cannot tolerate
a strong Euro, while Germany staunchly resists inflationary policies. We
foresee some kind of break between the two factions going into 09.
A very curious story came out
this week about Germans shunning non German EU Euro notes, trading out the
ones from the weaker southern nation EU mints, based on the two letter mint
codes on the note serial numbers. That can lead to retaliation by the other
country’s people, and is a very viral thing that could spread rapidly
and severely harm the credibility of the Euro.
Crash risk in Summer/Fall 08
Overall, we believe that this
Summer will lead to moderate market turmoil, followed by severe market
turmoil in the Fall and Winter 08 as market sentiments deteriorate. It does
not help that the Royal Bank of Scotland just issued a world market crash
alert this week. Nor does it help that Morgan just put out a report that
there is a big risk of a financial ‘catastrophic event’ due to the
ECB fighting the Fed regarding interest rates and monetary policy…
“We see striking
similarities between the transatlantic tensions that built up in the early
1990s and those that are accumulating again today. The outcome of the 1992
deadlock was a major currency crisis and a recession in Europe," said a
report by Morgan Stanley's European experts…” –Morgan
The PrudentSquirrel Newsletter
is our financial and gold commentary. We have been tracking these issues for
all of 2008 for subscribers. We will continue closely monitoring these issues
this Summer, and rest of the year, in the weekly subscriber newsletter and
with subscriber alerts.
I had one potential subscriber
ask me if the newsletter has much more content than these public articles,
ie, if it was worth subscribing. The answer is that the public articles have
less than 10% of our research and conclusions that subscribers see, not to
mention the subscriber email alerts of important breaking financial news. We
have anticipated many significant market moves in the last year, such as
imminent drops in world stock markets within days of them happening, and big
swings in the gold markets within days of them occurring. We have also made a
number of good calls on big currency swings, such as with the USD, the Euro
and the Yen.
We invite you to stop by our
site and have a look.
Chris
Laird
Prudent
Squirrel
Chris Laird has been an Oracle
systems engineer, database administrator, and math teacher. He has a BS in
mathematics from UCLA and is a certified Oracle database administrator. He
has been an avid follower of financial news since childhood. His father is
Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He
has grown up immersed in financial news. His Grandmother was Alice Widener,
publisher of USA magazine in the 60?s to 80?s, a newsletter that covered many
of the topics you find today at the preeminent gold sites. Chris is the
publisher of the Prudent
Squirrel
newsletter, an economic and
gold commentary.
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