Who Can Predict The Coming Events?

October 11, 2008 | By | 4 Replies More

In a world gone mad is there anybody that can confidently predict the coming events that will unfold in the course of the next week, month or year? Indeed who knows, or even has a clue how the markets around the world will behave this coming Monday morning?

A weekend is a long time between closing and opening prices, particularly this weekend. If the gang of seven determine the next moves to shore up markets with the same aptitude and urgency that their individual efforts have so far shown, then it will not be surprising if global markets continue their free fall.

 

 

Given the lack of prompt and enlightened leadership shown by our masters, compounded by margin and debt calls et al, it comes as no surprise that the investment community has become extremely fearful of any exposure to risk over the weekend.

This is why cash has become king, even at the expense of gold. Fear has driven reason from the markets.

Although gold fell back sharply from its high, bear in mind that, in contrast to the Dow’s fall of over 18% since last Friday, gold has risen more than 3% in the same period.

Our political leaders are telling us that inflation is getting under control; we suppose that it is about the only boast that they can come up with given that this crisis is of their own making.

Like just about every utterance made by a politician, it is at best a misrepresentation, at worst a downright lie with no regard for the consequences.

It is impossible to keep boosting the money supply without continuously devaluing the purchasing power of the currency. It is as simple as that!

Within the next few months, even weeks, inflation will take off again. The restrictions on profit margins that have been imposed by the competitive pressures in the retail, construction and other businesses that rely on Joe Public will fade as many go to the wall.

Today in the UK twenty high street retail chains are under threat of closure, many more are likely to follow. When the dust clears and the weak have departed costs and profit margins will rise.

Very soon OPEC and other oil producers will cut production, forcing fuel prices up adding further to inflationary pressures. Nor can we forget that we are well past the peak in oil production.

In the developed countries labor problems are rapidly escalating, particularly in the bloated and insulated public sectors.

Strikes and other disruptions are planned to restore the purchasing power of wages resulting in adding more fuel to the inflationary fires!

On the stock markets, financially sound and well managed companies that are now seriously oversold will begin to pick up value but this will take time. Recognising the bottom and the right time to buy is another question; it will be a case of more luck than judgement.

 

The first step will be to exorcise fear!

 

The comfort of having cash in a safe bank where the interest paid does not begin to keep up with the rate of inflation in the expectation of picking up some bargains on the stock markets may prove a long wait.

The immediate and only viable asset that can retain the value of money remains gold.

With the prospect of another week of market turmoil, more companies going bust, and the possibility of continuing panic if the G7 meeting does not produce realistic and immediate results, we expect gold to regain the high ground above $900 an ounce or, in a worst case scenario, remain around a floor of circa $850 an ounce.

It is a possibility that this coming week could see the expected break out to the thousand dollar level – then watch that heavy yellow metal soar like a bird!

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Category: Review

Comments (4)

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  1. farouk says:

    I do agree that people are becoming mad and acting out of fear. I think the markets will recover as soon as the fear is over

  2. David says:

    John,

    There are a few things you have said about which you
    appear dogmatic.

    For example, the likelihood of inflation increasing in a
    world that is entering a very deep and prolonged recession surprises me.

    The lowering of crude prices results from perception that demand is and will significantly fall.

    Demand for almost everything is tailing off rapidly and that =
    deflation.

    I mentioned before to you that you would find John Mauldin’s free weekly letter of very great value and the inbetween outside the box guests are all well worth a read. I think the stuff would give you a more balanced perspective.

    John carries out serious economic research.

    My two penny worth.

    Regards,
    David.

  3. John Lloyd says:

    Hola David

    Thanks for your comment.

    There are two points that perhaps I should have made clearer.

      The first is that deflation and inflation can go hand in hand, contradictory as it may seem. Witness Japan. Despite the fall in demand and price for commodities, I believe this to be temporary.

      Oil for example is not only a finite commodity but production is under the control of non westerners, many of whom cannot be considered friendly to us. I heard a report on Bloomberg this a.m. that already demands are being made that OPEC should cut back supply in order to sustain a higher price. Russia is making similar noises.

      I am sure that I do not have to explain the result of a high oil price will have, for example, on agricultural commodities and we do all have to eat.

      My take on this eventuality is that the price of essentials will rise sharply at the same time as manufacturing output falls and unemployment rises forcing western governments to print even more money to offset the drop in tax revenues.

      Of course there are numerous other factors to consider but I believe oil to be the key.

      I reason that the populations of the BRIC and oil producing nations will continue to prosper, albeit at a slower rate, and will be taking up an ever larger slice of the resources cake as they aspire to western standards of living.

      It is my opinion that these pressures will result in simultaneous inflation and deflation in the so called developed world, with the possible exception of Canada and Australia.

      Sadly, I anticipate that the UK, becoming bereft of its status and revenue as the worlds’ financial centre and with no other substantial activity left to fill the void and dependent upon imports for food, and other essentials, the nation will be amongst the worst to suffer.

      My second point is that I do not expect this surge in inflation to happen overnight despite today’s UK announcement of a 5% rise year on year.

      Similar figures are expected to be announced from the US. There is a possibility that the rate will drop back, even quite sharply, to around 1% or even zero in the short term. It will take time for the consequences of the billions of new money to take effect.

      It is for this reason that I believe that we may expect the ‘take off’ of inflation to be delayed for up to a year, maybe two, as governments will try to keep a lid on it for as long as possible.

      The time frame will mainly depend on the oil price. Lets face it, we have already suffered a sharp rise in inflation, due mainly to oil at over $100 a barrel that has only been dampened by our somewhat fast entry into recession coinciding with oil dropping.

      In some ways this could be seen as a fascinating horse and cart situation, triggered by the sub prime situation coming home to roost. Perhaps we can save that discussion for another day.

      I have no argument with your observation that I appear dogmatic. My dictionary defines the word as meaning “asserting a settled opinion” or “asserting positively”. In fairness to you the word is also defined as ” overbearing” or “stating ones opinion with arrogance”

      Suffice to say that my views on the global outlook, at this present time, are strongly held. That should not be confused with the notion that I am dogmatic about the virtues of buying gold to preserve wealth.

      On balance I believe that is the only viable option, but as I have so often repeated it is up to the individual to weigh up the pros and cons, do the research, etc., etc., and take neither my word or that of anybody else as gospel.

      There are likely to be very few giving advice that do not have a biased opinion or a vested interest which is why I take my own advice and draw my own conclusions.

      I, for one, am heavily committed to gold and silver ETFs and producers so, without my consciously realising it, my judgement and advice may be prejudiced despite my best efforts to be impartial.

      I am familiar with Mr Maudlin’s news letter on an infrequent basis but I have preferred sources of views that give me a good cross section of opinion from around the world.

  4. David says:

    John,

    Thanks for your response.

    I think we are thinking different time frames. I completely agree that in the longer term oil prices will rise again in line with continued shortages and demands. In the shorter term I see a long and deep global recession which is now only in its infancy and I tend to feel that China and India et al will be hit very hard along with the rest of the world. This would mean that demand for almost everything will fall until we reach a low and recovery commences.

    I also see the scientists producing alternate fuels and power so quite how and when this all pans out I would hate to take a guess at. The scientists work quietly away with the new revolution under way and provide much hope for the future of mankind. The positives receive barely any coverage.

    I also agree with you that “they” will be printing money again like there’s no tomorrow. It will have the effect of devaluing savers savings whilst devaluing the enormous government debt. So whilst cash will be king in the shorter term, “they” will steal our cash by devaluing it and that is where gold comes into its own. This mess will hit everyone one way or another.

    I don’t know of any other commentator who nailed what we are now seeing better than John Mauldin. He was ahead of the curve several years ago. I would rate him second only to Warren Buffett. I know plenty of perma bears and perma bulls but seldom does one read a balanced report based upon solid economic research. John M has provided that with extraordinary accuracy over the years.

    My choice of the word dogmatic was wrong. I just worry about nailing the timings of exactly what happens when. Right now the “mafia” are fighting like hell to try to avoid a total financial meltdown resulting in a depression to pale 1929 events into insignificance. I just hope we get away without that. Beyond that I would hate to make timing forecasts for anything.

    You know I enjoy reading your content and I have no objection to you publishing my random comments. I am a technical trader so I trade the technicals rather than my fundamental opinions or those of anyone else. The direction of gold is still not clear on the charts so as far as I am concerned your readers need to be very clear indeed that buying into gold at this point in time has to be viewed as a long term investment for insurance purposes rather than based upon any justifiable opinion that a low has been confirmed. If it is “insurance” that is required for the longer term, that is rather different to having a need for shorter term returns.

    Kind regards,

    David.

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