-- Posted Tuesday, 2 March 2010 | Digg This Article
| | Source: GoldSeek.com
Rick’s Picks
Tuesday, March 2, 2010
“Phenomenally accurate forecasts”
We occasionally feature here the thoughts of Mario Cavolo, a speaker, writer and media personality who has lived in China for more than a decade. Mario is much more bullish on the big picture than we are, doubting as he does that capitalism and the global economy face a catastrophic collapse. Instead, he sees the world muddling through its current crises, but within a long-term upward trajectory that will continue to shape a bullish future. Here’s Mario:
Let's start with a core economic premise and build a scenario of supporting premises as we ponder the new reality of our global economic future without the rhetorical, crash and doomsday scenarios which almost never play out. Here is the premise to explore: Nothing will crash or collapse. Not the Euro, not the USD, not the stock market of this or that country; not anybody’s entire financial system. Assets will swing wildly up and down, systems will change, sometimes dramatically but doomsday collapse is off the table. People who constantly focus on threats of doomsday this and parabolic that are too addicted to the emotional thrills attached to such moves, or trying to sell you something; rather than applying a more genuine and balanced analysis of the global economic stage which is an increasingly complex, fluid, shifting entity.
Now let us build the supporting premises to see why, keeping in mind the intelligence of an elementary school sixth grader, to paint a picture of the new reality in the present and for the next 10 years. The global new reality world is a world with unfathomable trillions of sovereign debt over everyone's heads. It is an ongoing reality, a big part of our new reality. This has been rightfully called a crisis of Biblical proportions. However, based on our premise for this essay, it is not. We just accept it as the new normal reality. We accept it and we adjust to it. Assets will adjust to it. The system will accept it and adjust to it. Individual assets in the system will respond to it by swinging up or down 30% to 50%, creating significant shifts in society and culture. We can't make it go away, any more than we can change the color of the sky or the rising and setting of the sun.
So then, applying a little common sense, how will the assets of the world economic system respond to the fact of massive sovereign debt hanging over everyone's heads in the coming years?
Interest Rates
This is easy. Yields will go up. Higher and higher debt loads scare lenders, and they will therefore demand higher and higher yields in return. Even sixth-graders get it. This phase of the cycle has begun with Australia, India, China and the United States during the month of February 2010.
Interest rates moving up means stock and bond prices moving down. That’s why last month Nassim Taleb, author of Fooled by Randomness and The Black Swan; The Impact of the Highly Improbable, said everyone should short U.S. Treasury bonds. However, this doesn't mean stocks will "collapse." That's mostly rhetorical nonsense. We can state there is a very high probability that stocks do not enjoy bubbles that are possible when interest rates are low because people don't want to leave their money in the bank earning next to nothing. When interest rates are rising, people shift their priorities to avoid risk if possible. Why try to earn 15% with the risk of owning stocks if I can leave my money in the bank at 5% with no risk? Even sixth graders get it.
Future Is Inflationary
Please don’t make the mistake of improperly relating this point to the “failing banks” issue. Yes, we all know there is too much debt and that both sovereign and corporate default on debts is a danger to the financial system. That’s a given over the entire system that must be adjusted to. The stock market will not experience a doomsday "collapse" simply because the future is inflationary per the rising-interest-rate scenario that exists. The cost and price of everything will go up, including the price of equity shares. Most agricultural commodities are going up in price for the simple reason of increased global demand from a growing population. More kid stuff.
Stocks may be worth relatively less when measured against some other asset such as gold or dollars or Euros or coffee. Just look at a long-term chart of the U.S. stock market and you'll understand the point. When the market declines 30% over a much shorter period of time than it required to go up 50%, many investors want to freak out. But in fact, the market will once again adjust, respond and start climbing again. It is important to have a sense of the long term reality of global economics and stock markets. Ignore most of the shorter-term media spin, which has little to do with helping you be wiser and smarter.
Global Currencies
Currencies will continue to devalue. They are in a competitive devaluation game because a lower currency value means cheaper exports to the rest of the world. Right now, the Chinese are in the lead with their refusal to revalue the yuan peg against the dollar. The purchasing power of any currency will continue to decline as it has historically. It is a natural consequence of the global economic order. Sixth graders get it. Due to economic forces on the three major continents, individual currencies will keep dancing up and down 30% against each other. Last year it was US dollar down, Euro up; this year, it’s Euro down, US dollar back up. Anyone can look at a chart and see which way the wind is blowing. The point is that, in the end, the total sum balance of all the currencies added together equals a basket we'll call Basket A, which has the purchasing power to buy a basket of goods and services we'll call Basket B.
Gold
Gold is just another asset to store value which in general keeps going up in value relative to currencies. The part most people miss is the relativity, i.e., recently gold went up against the Euro, right? No! The Euro is going down, so the price of everything, including gold against the Euro, is going up priced in euros. To someone holding euros, the price of gold and the price of a vacation in the U.S. are both going up.
Knowing that interest rates are going up long-term and that currencies are devaluing long-term, we can safely assume that gold will also continue going up long-term. It will also go up as it is regarded as a safe-haven asset against government instability and volatility in the global economic scenario. We can see there's plenty of that going around. Your final clue on the floor of the price of gold is that China and India and George Soros are buying lots of it at around the current $1000-1100 price range.
Oil and Energy
The price of oil is tricky to get a handle on for a number of reasons. First, the price of oil is highly manipulated and controlled by traders and speculators with billions at their disposal in the futures markets. Meanwhile, the oil industry has become more like a mainstream McDonald's or Nike brand. They are now running a massive, orchestrated "the world needs oil" PR campaign while the world is quite intent on going on a low carbon-fuel diet. You do know that big corporations, including thee oil giants, retain PR and marketing firms, right?. That's not just for crisis response on oil spills. Seems weird, doesn't it? I mean, they're just supposed to be providing a commodity, and what the heck are they doing getting involved in PR and branding? Anyway, the second point about oil is that demand is not going to skyrocket. At best it is going to slowly rise. The third point is that oil production levels are dropping, but again this scenario can change significantly.
The fourth point in the oil discussion is the one we sense the oil industry's PR campaign is trying very hard to downplay in order to postpone a decline in oil prices – i.e., that there is now a massive global commitment to alternative energy sources. The buildup in the combination of wind, solar, natural gas and nuclear energy has the potential to put a much more significant dent in the demand for oil than makes the majors happy. Of these, nuclear will be most significant because it is already a well-established industry; moreover, due to advances in technology, nuclear safety today has improved multiple generations beyond what it was in the days of Three Mile Island. Over the next few years, as hundreds of new nuclear power plants come online, most located in America and China, a complementary pro-nuclear PR campaign will insure that images of nuclear disaster will drift out of the collective psyche. (By the way, my family lived near Three Mile Island the week its reactor had a breach. We high-tailed it to Grandma's back in Yonkers for a few weeks!)
Big Oil’s Wish
We can sense that big oil wants oil in the $80-$90 range while in reality, the price of oil belongs in the $55 to $70 range. That would also be much more supportive of the global economy. Finally, the use of alternative energy sources in daily life will cause the routine of our daily lives to change. You will not own a big fat SUV: You will own an electric car, electric bike or even electric golf cart-type vehicle that you use only for local trips at 20 mph. You will not buy gas. You will drive home and plug your electric scooter in the wall every 25 miles. You will in fact enjoy the change and appreciate saving money. Electric bikes and scooters have been mainstream transportation in China for years, along with buses and subways. Why do you think Chinese have so much cash? In America, think Sun City where the residents own golf carts to get around the neighborhood. In the future, that lifestyle won't be restricted to retirees.
It is true we are facing global economic circumstances which can be painted with a doomsday brush. We could also use a Chinese silk brush to paint the picture less harshly. If we take the time to look at the situation with long term eyes and through the eyes of a sixth grader, it enables us to understand that whatever is happening in the world of scary global economics, the parts of the system, the various assets in the global economy, adjust and respond in cycles along the way. We must become smarter so that we too, know how to adjust and respond as effectively as possible, living as we do, here in the new reality.
Bak’s Sand Pile
Giving more weight to the more extreme view, I greatly favor Bak's sand pile model as a way of understanding the state we're in. However, when the sand pile randomly breaks and flows downward, its quantity remains the same and it is still sand, ready to be built up again one grain at a time.
Information in this article comes from sources believed to be reliable. Mario Cavolo is not a registered investment advisor and does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. His research, point of view and opinion are informational and educational only. The author may or may not hold positions in issues referred to in this article. No representations are to be taken as advice or recommendation by the author to buy or sell any asset. Copyright 2010, Mario Cavolo. All Rights Reserved.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2009, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 2 March 2010 | Digg This Article | Source: GoldSeek.com
