Sunday, September 02, 2007

The outlook from Financial Sense

Some voices and topics from Financial Sense, 25 August:

inflation, deflation, gold, cash...

Jim Puplava: ...I've had Bob Prechter on this program and Bob is a deflationist and Bob believes that we get deflation first and then hyperinflation where I guess my views are we get hyperinflation and then what follows will be deflation. And that's the way it has unfolded with great debtor nations. And I think history will repeat itself here with the US. There is too much debt here and it has to be inflated away...

...I really believe that the full force of these storms aren't going to hit until somewhere between 2009 and 2010 when this really comes home to roost. And all of these debt problems, the problems that we have with energy today, availability, peak oil, the geopolitical problems in the Middle East – I do not expect the next decade to be a pleasant one, John. I wish I could say otherwise because as a father with three children, one to get married shortly and looking forward to grandchildren, you know, this is something that you don't like to think about...

credit bubble, credit crunch, commodities, East delinking from West...

Doug Noland: ...the economy is much more vulnerable than many believe because of the credit that was going to the upper end; and I think the upper end mortgage area is where we had the greatest excesses.

So I think when all is said and done, subprime losses are going to be small compared to the losses we see in jumbo and Alt-A, and especially, unfortunately out in California...

...there’s desperation out there to find buyers for mortgages... Washington generally doesn’t understand the risk of Fannie and Freddie [US government-sponsored entities - "GSEs" - that offer mortgages], so of course they would think it’s their role to step in and provide the liquidity.

But... their total exposure is over 4 trillion dollars now. And this is a huge problem, and I fully expect down the road these institutions to be nationalized. And I think the US taxpayer is going to pay a huge bill for this... To be honest, I don’t mind the GSEs if they want to play a role in affordable housing; if they wanted to try to rectify some of the problems at the lower end because of the lack of the availability of credit in subprime. But to think that the GSEs should start doing jumbo mortgages, to try to be the buyer of last resort for California mortgages, my God, it’s hard to believe that makes sense to anyone because that’s just a potential disaster. It’s also reminiscent of the S&L – the Savings and Loan problem that, you know, was a several billion dollar problem during the 80s that they allowed to grow to several hundred billion by the early 90s. And definitely, the tab of the GSEs is growing rapidly right now...

...even if the central banks add a trillion dollars of liquidity to help out this deleveraging we still have this issue of how are we going to generate the trillions of additional credit going forward to keep incomes levitated, to keep corporation earnings levitated, to keep asset prices levitated, to keep the global economy chugging along...

...The global economy may be something of a different story because we have credit bubbles all over the world. Like the Chinese bubble right now is pretty much oblivious to what’s going on in the US and in Europe. You can see a scenario where, you know, you have serious credit breakdown but let’s say Chinese demand keeps energy and resource prices higher than one would expect. So I’m going to be watching this very carefully because we’re going to see some very unusual dynamics as far as liquidity and inflation effects between different asset classes and different types of price levels throughout the economy.

5 comments:

dearieme said...

In a world of fiat currency Governments will try to renege on their debts by inflation. The first question is whether they'll succeed in running an inflation. The second is that if they do succeed, how dramatic an inflation will it be? Zimbabwe? Weimar? Or just the 70s replayed? The third is, will the inflation, if it happens, be accompanied by an economic boom, or will we get stagflation? I plan to retire so that my pension is in payment before the deluge. Advice welcome, though.

SACKERSON said...

Hi D: as you know, I can't offer personalized advice - and I don't pretend to be confident about the answers anyway.

For those like Marc Faber who think there's bubbles everywhere, but can't tell if we'll see inflation or deflation first, some combo of cash and gold seems appropriate. Unless you trust UK NS&I index-linked savings certificates / US TIPS?

Having said that, Faber has already bought into selected agricultural and commercial property - who know exactly where and at what price? And we're now reading about the East performing differently from the West, and a demand-led secular bull market in commodities of various kinds.

When I get my pension money - not that it's much - I'm half minded to take a calculatedly aggressive/contrarian approach like Faber. Playing safe means letting the system have what it thinks you deserve, which isn't much. What do you intend?

dearieme said...

Sorry - didn't mean to suggest that I was seeking personal Financial Advice. Anyway, my final salary pension scheme - which will pay an index-linked pension, if it survives - is 80% in equities, so my lump sum certainly isn't going into equities. I've got some Index-Linked Certificates and my wife has some Index-Linked Gilts, so I hope to diversify by learning how one invests in Gold or Commodities as a hedge against inflation. I reckon that it's too risky to punt against deflation by buying fixed interest, because if I were wrong and there was then substantial inflation, I'd be wiped out at an age when I'd have little chance of recovering. I can tolerate missing opportunities to make money; my aim is to avoid my widow living in poverty. As for cash, the trouble is that the bastards tax you on all the nominal interest, not just the bit that beats inflation. My answer there is to maximise cash holdings in ISAs.

SACKERSON said...

Hi D: cash is so out of scale with the gold that used to back it, that gold now behaves like other investments. It would seem that gold is not a hedge against inflation, but hyperinflation, when people finally dump the currency altogether. Meanwhile, bullion earns no interest and costs money to store. Peter Schiff (see my review of his book) recommends to his (wealthy, remember) investors to hold 10 - 30% in gold in various ways. I can't make recommendations, as you know.

So long as the cash is earning post-tax/tax-free interest at a rate that matches inflation in the types of things you're likely to buy (what better index is there?), you're OK. After that, you're in real inflation territory and in that case, maybe simply buying canned food, toilet paper, razors etc would make sense!

The rest is for speculators. Marc Faber, for all his careful analysis, is a risk-taker; otherwise, he wouldn't ride a motorbike. His view seems to be that the sun rises in the East and he appears to have bought into agricultural land and commercial property.

We live in interesting times. If you want to secure your wife's living standards, maybe ask your financial adviser about life insurance with a financially very strong company. Life insurance pays what it says on the paper. If you're truly concerned about the fund that will pay your pension, you may wish to ask for expert financial advice on alternatives that give you greater control over your fund, e.g. transfers/drawdown arrangements. Again, please remember I cannot advise, except to sugest that you seek advice.

Best wishes.

dearieme said...

Thanks