Unsuccessful to date in restoring a properly functioning banking system – a pre-requisite of economic activity – governments are making their last throw of the dice. Breathtaking levels of government debt are about to be issued. And a new experiment known as quantitative easing” (or QE) is to be unleashed.
Nobody quite understands how QE works or how it will pan out. But we can ask ourselves one simple question. Is there any possible outcome that could be good for our existing paper currencies? The answer is a resounding “no.” Eventually we’ll hit on something that works to get credit flowing again. If QE doesn’t fix it, we’ll find something else. But there is no outcome that can possibly result in an increase in the value of each unit of currency that is currently in circulation. It is not going to happen.
I’ve seen it all before. Not QE, of course – nobody has seen that, apart from the Japanese version of the early 2000s. But I’ve seen governments issue previously unimaginable levels of debt. I’ve seen how unproven currency experiments – such as the UK’s misadventure with the European Exchange Rate Mechanism in 1992 – pan out. In the 1970s I saw a total loss of confidence in stock markets and the wider financial system. This time round, we’ve seen nothing yet.
We’re back in the 1970s – when gold made gains of 2,300%
You see, in the early 1970s, the US stock market had been driven to new highs by “nifty fifty” darlings such as IBM, Xerox and Polaroid. Five years later, the subsequent oil crisis, rampant inflation and industrial unrest had led to a destruction of share prices on a scale similar to what we have witnessed in the last 18 months. By 1975, investors on both sides of the Atlantic had been overcome by gloom as inflation climbed into double digits. The Dow had gone nowhere for an entire decade when Business Week magazine ran its fabled cover story “The Death of Equities” in 1979. And it was not until 1982 that next bull market finally got underway.If you ask me where we are today, it is back in 1975 – with the first big destruction of wealth behind us, but with the ravages of inflation and drawn-out economic contraction still ahead.
So what investments did well in those darkest hours for equity markets in the 1970s? Inflation made damn sure it wasn’t cash. Indeed “cash is trash” became the investment catch phrase of the day. The disgust with equities was such that the British Rail pension fund did something that had never been done before. It turned its back on the stockmarket and put its pensioners’ money into fine art.
There was also strong demand for other real assets such as property and precious metals – including gold. Indeed while inflation was destroying the purchasing power of paper currencies, gold became highly prized. Its rise from around $35 an ounce in January 1970 to its $850 peak in January 1980 gave investors a 23-fold return on their cash.
Anyone preferring to liken 2009 not to the dismal 1970s, but to the economic depression of the 1930s, could again point to gold’s key role in protecting wealth during the crash. Indeed it was Britain’s exit from the gold standard in 1931 that enabled its government to print money not backed by physical gold. This move let the government repay its crippling burden of debt, but only by devaluing every existing note in circulation.
1931, 1975 and 2009 are bound together by two striking similarities – unbearable levels of public debt, and the role of gold in protecting investors in the subsequent unravelling.
The time to protect yourself is now.
Good investing,
Andrew Vaughan
For The Right Side
Editor’s Note: Andrew Vaughan is Investment Director of The Zurich Club. Last month, members of The Zurich Club received a “Wealth Protection Alert” with specific instructions on how to protect themselves from the events described above. This “Wealth Protection Alert” is a rarely-used mechanism for alerting members to a clear and present danger to their wealth. And it came with easy-to-grasp analysis of the situation and unequivocal advice about what to do: “Buy Gold Now.”
To see how you could profit from The Zurich Club’s strategies for protecting and growing wealth in these difficult times, I urge you to take a no-obligation trial membership. As Andrew says – “We’ve seen this before. And we know what to do.” Click here for details.
Your capital is at risk when you invest in shares - you can lose you some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment.
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This is no ordinary crash… this is a Dubai ‘mirage’ crash
BY FRANK HEMSLEY
If you think the UK and American stock markets have taken a beating, then take a look at the Dubai market.
The chart shows the FTSE in blue, the American S&P 500 in orange and the Dubai Financial Market (DFM) in green.
Western crashes look tame compared to Dubai’s wipe-out
The American and British market falls have been bad enough – a 27% drop for the FTSE and a 37% slump for the S&P. That’s wiped billions off stock market values as investors ran for the exits.
But as the chart shows, these falls pale beside the losses that have been seen in Dubai. Over the last year, the DFM has lost 75% of the value that was pumped up at the height of its bubble market.
As Carl Mortishead writes in The Times, Dubai’s boom was only ever a mirage. Its success was built on oil – even though it has virtually no oil! It cashed in by setting itself up as a “playground” and as a financial centre for its oil-rich neighbours.
The property market was bid up to bubble levels as foreigners rushed in to get a piece of the action. The stock market followed.
But when things started going wrong in global financial markets… when the oil bull market corrected… and stock markets around the world started to crash… the Dubai market crashed further than the rest.
The Daily Reckoning – Depression, not recession
BY BILL BONNER
Today, dear reader, we’re going to let you in on a big secret.
Pssst... we’re in a depression, not a recession.
As we explained yesterday, economists have no sure way of separating the two. But they are profoundly different. In the few words that follow, we’ll explain why... and why this one deserves the “D” and not the “R.”
And since we always look on the bright side, here at the Daily Reckoning, we’ll also explain why this worst of times for most people can be the best of times for you.
But first, we turn to the news. We’ll see what a depression looks like – just from reading the headlines.
The Dow fell 121 points yesterday. That leaves only about 4,000 or 5,000 more to go... before the index reaches its depression bottom between 3,000 and 5,000. That could take a long time... depressions always take time. It might not happen before 2010... or even before 2020.
Oil held steady at $40. Oil seems to be stuck around the $40 level. The dollar/euro exchange rate seems stuck too – in the $1.28-$1.30/euro range. So too with gold – at about $900. Gold gained $9 yesterday... bringing it back over $900.
Credit card delinquencies are at a record high.
The Chinese are now buying more automobiles than Americans.
Disney profits fell 32% in the first quarter (Disney needs to get on board with the Gregorian calendar... why is it reporting 1Q results now?)
Panasonic reported a loss of $4.2 billion; it said it was cutting 15,000 jobs.
In the face of this depressing news, President Obama has said that if Congress doesn’t get off its duff and pass his stimulus plans the consequences could be “catastrophic.”
To read the Daily Reckoning in full, click here.
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