Staring Into the Abyss
05/18/2012 7:45 am EST
It's painful to admit, but the way things are going, there are few places to turn to avoid a major global economic meltdown, observes David Galland of Casey Research.
For pretty much everyone, no matter where they are located in the economic strata, few if any questions are more germane to making plans for the future than whether the US and other major global economies are in recovery.
Getting the answer to that question right is of special importance to investors and businesses. Stating the obvious, if the broader economy really is in recovery, then investors would be well served by investing in the equities of solid companies positioned to take advantage. Similarly, those very same solid companies would be rewarded by increasing their productive capacity through investments in the plants and people necessary to meeting growing demand.
On the same side of the ledger, bond investors would want to begin shorting up their durations or leaving the bubbly bond market altogether, in anticipation that the flood of funds into fixed income would reverse, sending rates higher (and bond prices lower).
Conversely, if the recovery is a head fake, then an entirely different course of action is called for. For instance, one would want to adopt a cautious attitude about common stocks.
And because of the nature of the crisis—crushing levels of sovereign debt—one would want to take advantage of pullbacks in precious metals to buy more, along with other so-called "tangibles." That way they would have some measure of protection against the inflation that fiat-currency powers make all but a certainty.
In addition, reducing personal and business spending in order to conserve rainy-day cash would be advised.
And what about US bonds in the no-recovery scenario? A sound case can be made for including them in a portfolio, as that puts you in lockstep with the government's desperate need to keep interest rates down—or, better yet, have them fall further still. Given the highly politicized nature of our economy, that seems reasonable—and anyone who has been long bonds over the last few years has done very well, indeed.
While you'll have to make your own call on bonds, my own enthusiasm is curbed by looking at the charts of the upward-spiking interest rates on the bonds of Spain, Greece, Italy, and so forth. When the market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, it can express its ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it's going to be a bloodbath.
Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that. For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility.
On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise?
Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.
So, what's it going to be? Recovery...no recovery...or worse, maybe even a crash? We all have a lot riding on getting the answer right.|pagebreak|
The Quest for Confidence
Ultimately, the purpose of searching for the truth about the recovery isn't about either fear or greed. It's about confidence.
If you really knew what's coming, then the right moves to make become obvious. You could then make those moves with the calmness of spirit that comes from certain knowledge and get on with your life. While others struggle or miss an opportunity by betting on the wrong future, you'd have set up your affairs to survive and prosper.
Of course, given that we are talking about a complex system—the economy—total certainty is never completely possible. But for reasons I'll share, the nature of the current crisis paradoxically allows for more certainty than would normally be the case.
And so, I want to share my conclusion about how I believe things will unfold from here, followed with some support for that conclusion.
While, as readers of any duration are well aware, we at Casey Research foresaw the current crisis years in advance, and have remained firm in our conviction that the recovery is a charade.
Based on my own readings, and after spending the last two weeks in the company of a couple dozen very plugged-in economists, top-performing money managers, and top financial analysts, my conclusion is thus: The world's largest economies, including the US, Europe, Japan, and China, are speeding for the equivalent of a brick wall.
In short, I believe that before this crisis is over, we will experience the Greater Depression my dear friend and business partner Doug Casey has long anticipated. In case that conclusion fails to communicate my current view sufficiently clearly, I will condense it as follows: The world's largest economies are screwed.
And I will even set my conclusion to music, in the form of the song "Somebody That I Used to Know"by Gotye, which seems appropriate because the economy that we used to know won't be back again for many years to come.
Trust me, stating an opinion on the direction of the economy in such unequivocal terms troubles me. For starters, I wish my conclusion could be otherwise because no one likes to be a harbinger of doom. Mostly, however, I have long resisted adopting a set-in-cement position on something as wiggly as the future. In my experience, anyone who absolutely, totally buys into a particular future is almost always proven wrong by time.
Yet, as my quest for certainty unfolded, I could come to no other conclusion than that the world as we know it is headed for an economic catastrophe.
As concerning as it is to see how many of the world's largest economies are in trouble, the biggest problem of all is that the central bank reserves of virtually every country in the world are stuffed with US government IOUs masquerading as tangible assets.
So what happens when the world's reserve currency enters collapse and the dollar turns into a hot potato? Don't know, but I'm pretty sure we'll find out in the not-so-distant future.