Recap on The Great Depression Ahead

[Intrinsic_Value]

basically it reinforced my worry that the markets are in a secular bear mode.
The current upswings in markets could correct downwards again over the next few years. The greater the upswing that is engineered now, the greater will be the subsequent downtrend.

If this situation does occur, then it will be a very dangerous period for buy and hold type investors.

Personally i am keeping my options open by
(a)investing as usual, but only in positions where i am comfortable with the underlying businesses.
(b) using the high AU$ to gain international exposures. If there is termoil, the AU$ will fall, this should help to cusion any overseas exposure (as expressed in AU$)
(c) keeping a tight reign on debt. Property debt is in reduction mode through the controlled selling of property. Share debt is through a margin loan, this is very risky (through asset pricing), but the debt and share position are liquid. Hence i can rapidly change this to suit the circumstances.

I will also reserve the right to head to the exit quickly if i feel a change in underlying circumstances.

The other interesting message from this webcast was the discussion about scarcity of land as a mechanism for a boom (and subsequent bust). This part is very relevant to Australia.

 

[Ausprop]

very interesting and once again we have the challenge of interpreting the results for how they impact us here. if commodities collapse this year we are in for one ugly time. gold at $250...wow that's a call

 

[.toe]

I am starting to feel that Robert Kiyosaki has a better grasp on the economic implications of this demographic phenomenon. He has also been sprouting about baby boomer demographics for a long while though he has a different bent on the economics. There are many places he talks about these, but the best i've read for the economics is the book 'Conspiracy of the Rich'. Here are some aspects of it.

HSDent talks about the similarities between what's happening in the U.S. economy right now and the period before the great depression, which became a long period of deflation. Dent expects the same now, long and drawn out deflation.

But Kiyosaki has further insights which I could only touch on here, and the only way to really do it justice is to read the book. In short though, money is not what it was in the 1920s and 30s. Back then money was a receipt for an amount of gold held by the treasury, which is why in the 30s they could not print money to save the economy, by law. Money itself was deflationary in nature.

But a series of events orchestraed by the 'super rich' (documented in the book 'The Creature From Jekyll Island' which I am now reading), has lead to the current situation where money is now essentially a credit note, or an IOU from the government. So it's legitemacy entirely depends on the good will accredited to the government, or the prospect of future GDP growth. Just like when we borrow from the bank they want to know our earning ability is secure, because they are buy a piece of it.

Kiyosaki's observation has major consequences, it means that while a depression in the 1930s was accompanied by deflation, a depression now would very likely be accompanied by (or caused by) huge inflation, because now we have the ability to 'print' money at will, to to save the situation. The more money in circulation, the less each dollar is worth (hence inflation).

Kiyosaki's advice is to do what the 'super rich' do. They have their banks print money (out of thin air) and loan it to others, who will pay interest on it into the future (against their future earnings). So they are cash flow businesses, they loan cash and receive cashflow. So the strategy of these 'super rich' is to avoid holding cash, but instead to 'sell it short'.

Kiyosaki and others see this as debauching the currency, however he says that those of us who are not in the 'super rich' league have no choice but to try to understand how it works and deal with it. His way of dealing with it is to buy extreme CF+ property via various tactics. He doesn't care if the capital gains are occassionally negative, because the CF++ means he will always be able to hold it and make money, just like the banks do.

I'm a bit concerned writing this though, i see loads of holes in what I'm writing, because really it's just a teaser.

.

 

[Piston Broke]

I am in a science based profession and therefor tend to view the world through such goggles. When criticism is drawn by a person who adjusts his prediction based on updated information doesn't wash with me. Thats what science is. (in relation to graph fitting). Still upto critical evaluation of the individual.

That's why these type of people are generally not very good with economics/money/finance, and tend to write reports and do studies with a pre-determined outcome.
It's curve-fit, biased or rigged. Whichever suits you.
That's why you can't see where the BB money went, and I have a good
idea of where it went.
Harry Dent will have to once again come up with a theory after the event.

@toe
A few years ago I posted about another 70s type decade, I still think that's
happening.
Not sure where that post is, but I knew the BBs would not be the key of the future economy.

26-08-2006, 06:08 PM
There is still too much liquidity imho for a prolonged recession, but that liquidity does'nt seem headed for the RE market, instead I would say it's going to the share market for the next 3-4 years.
If that liquidity ends, we may be in for a stock market crash, followed by a *real* recession for a few more years.
By then interest rates may be 12-13%, metro RE rental yields 9%, inflation 6%, un-employement 9%, petrol $2 ltr, bread & milk $5.
We will reminisce about the "good ol days" when we could borrow @ 6%, houses were affordable, petrol was $1 ltr, and credit was easy.
By that time the baby boomers will mostly be inactive (or in hell for their 60's sexual revolution) the economy will have slowed down, inflation & interest even higher, and 12% seemed a good rate.
Then ...when night seems darkest, morning begins...again.

 

[.toe]

@toe
A few years ago I posted about another 70s type decade, I still think that's
happening.
Not sure where that post is, but I knew the BBs would not be the key of the future economy.

Sure, in '71 Nixon took the U.S. dollar (the worlds currency), off the gold standard all together. Gold was being officially held low 'till then, but afterward it rocketed in price till the value of all gold in the U.S. treasury was worth at least the value of all money in circulation.

Central banks used high interest rates to counter the inflation cause by printing more money which saw gold go sideways then backwards. But lately gold is on the rise again. Is it a show of the markets fear that the U.S. can't avoid over inflating? If Gold was to rise to the point where the value of gold held by the U.S. treasury was to again match the value of U.S. currency in circulation, it would be $15,000 an ounce.

The RBA has sold most of it's gold reserves, believing that as we no longer have a gold standard then gold is no longer of value. The price has more than doubled since then.

 

[Ausprop]

the major point of the webinar tho is that the massive destrution of currency and velocity of currency is what will see the manifestation of deflation, so this thread is heading off on a tangent. yes they can print but not anywhere close to the extent required... and the printing they do is just being channelled into a commodities bubble anyway

 

[Ausprop]

The RBA has sold most of it's gold reserves, believing that as we no longer have a gold standard then gold is no longer of value. The price has more than doubled since then.

if it hits $250/oz they wil be seen as geniuses.

 

[.toe]

Ausprop, Ben Bernanke is not known as Helicopter Ben for nothing, he vowed that if the U.S. economy doesn't catch on he will throw money from helicopters in order to inflate it.

I have read both Harry Dent's Baby Boomer theories and Robert Kiyosaki's, and I think Kiyosaki has good points here. There is a big difference between the U.S. now and the U.S. in the thirties.

In the thirties there was nothing the U.S. could do because printing money was illegal and gold backing was part of their philosophy. Now they can and will keep printing money so long as the USD is the world currency and people are buying it.

The result is the middle class who work for money to pay debt will become enslaved to that debt, as their wages are worthless. This will not be a depression where assets get cheaper, like the great depression, it will be one where money gets cheaper like the German depression. Where the legend goes that a woman took her wheel barrow of money to the store to buy a loaf of bread, while inside the store thieves struck, they stole her wheel barrow but left the cash.

The thing is it's just not true that they can't keep printing money, in one month in 2009 alone they printed as much money as had previously been printed in 200 years. And they're still doing it.

 

[Ausprop]

dent says yes they can print, however, it is nothing compared to the destruction of currency from the credit deflation (see his graphs). and what they do print is not being injected into the economy, the banks are pouring it into commodities which if/when bursts will leave australia as a quivering shell. whilst mainstream belief is that yes this is an inflation problem, his alternatives are certainly worth considering. either way there doesnt sound like a lot of fun for the next 2 years

 

[.toe]

I agree that whatever baby boomers take their money out of, it will deflate, and mostly it will have been leveraged. But they won't be taking their money out of everything.

It's not an uncommon phenomenon that when one investment class is struggling another will boom, that's because the rich have money that needs to be placed somewhere. Where did they get the money from if they all lost it in the recent downturn? The banks, who were bailed out by the government because they are too big to fail. Where did the banks get the money from? It was printed, out of thin air.

Even though we have had the biggest financial catastrophe in history and US property is gone for a long while, baby boomers will still need food and drugs. China and India will still be growing, emerging economies also. There will still be plenty left for the rich to milk via debt and inflation. And again when those classes fail, a few banks will be bailed out and they'll all go on to the next thing.

By the way if you think the RBA will be proven right about gold then the governments of emerging nations in africa, south america and asia will be proven wrong, because they are the ones buying up all the gold right now. Perhaps they plan to reintroduce the gold standard?

 

[Aaron Sice]

It's not an uncommon phenomenon that when one investment class is struggling another will boom, that's because the rich have money that needs to be placed somewhere. Where did they get the money from if they all lost it in the recent downturn?

my raving behind the entire GFC was that there was NOWHERE to put your money without losing it - including cash.

which is why i smelled architecture behind the scenes.

 

[Ausprop]

Where did the banks get the money from? It was printed, out of thin air.

ok well I won't keep banging on about it but just note that if the money isn't being lent the money multiplier takes a huge exponential chunk of cash out of circulation, way way beyond the scope of the impact of printing.

with europe (almost by concensus) ready to collpase this year and the USA arguably on the verge of depression and a commodities bubble primed to pop, it's hard to envisage much of a future for china and india in the short term. they simply don't have enough air under their wings just yet to service themeselves

 

[Ausprop]

my raving behind the entire GFC was that there was NOWHERE to put your money without losing it - including cash.

which is why i smelled architecture behind the scenes.

short dated US bonds according to Dent.

as for the architect, sarkozy was banging on about global currency only a week or two ago

http://www.prlog.org/10141522-singl...-and-planning-for-single-global-currency.html

 

[Intrinsic_Value]

ok well I won't keep banging on about it but just note that if the money isn't being lent the money multiplier takes a huge exponential chunk of cash out of circulation, way way beyond the scope of the impact of printing.

with europe (almost by concensus) ready to collpase this year and the USA arguably on the verge of depression and a commodities bubble primed to pop, it's hard to envisage much of a future for china and india in the short term. they simply don't have enough air under their wings just yet to service themeselves

Yes Ausprop totally agree with you.
The truth is we just dont know how this will play out, there are too many variables involved.

But to just equate increase in money supply to inflation is naive without considering the other factors.

People also forget the speculative element in gold at the moment. With such a long and consistent trend upwards, what part of gold constitutes a 'store of value' and what part constitutues an increased popularity in the asset as a means of speculation?

 

[.toe]

my raving behind the entire GFC was that there was NOWHERE to put your money without losing it - including cash.

which is why i smelled architecture behind the scenes.

Absolutely, I'm a big Matrix fan, and always saw it as a commentary on the financial system. Interesting that the architect always knew how to defeat the people but it was only in the machines best interest once the system became unstable.

If you have not read it already 'The Creature From Jeckyl Island' is a fascinating story about 'architecture'.

 

[Intrinsic_Value]

if it hits $250/oz they wil be seen as geniuses.

Personally i doubt it will hit these levels. A major 'downwards' force was central banks selling their holdings.

To my understanding apart from the US and Switzerland, global central banks have already offloaded a significant portfolio of their gold holdings, so this downards pressure is greatly reduced.

In addition there will be upwards pressure from one of the major global users of gold: the indian population. As their wealth increases, so should their $ value of consumption of gold.

This does not mean that gold will hold at current levels, only that i very much doubt we will see the lows of the last decade.

 

[Intrinsic_Value]

One other point: Harry Dent looks at things from just a US demographic perspective.

I think this is dangerous, because the world is increasing a 'global village'.
Hence exogernous factors outside of the US will play a significant interest on the US economy.

For example Harry Dent's discussion of US inflation tied to US demographics is simplistic in my opinion. One of the main reasons for low US inflation was been the hollowing out of industry to China. This has put downwards pressure on the final price of US consumer goods and hence inflation, nothing to do with US demographics.

 

[.toe]

Also on gold, I think you need to bear in mind that while many governments sold off their gold holdings the U.S. did not. It is still the largest single holder of gold by far in the world.

Why didn't they sell off gold? I'm guessing it might have something to do with the 'conspiracy' that is talked about in 'Conspiracy of the Rich' and 'Creature from Jeckyl Island'. The conspiracy holds that seven of the worlds richest men got together to hatch the most evil plan ever conceived, to dominate world finance. The result was the creation of the U.S. Federal Reserve, in the style of European central banks, but an evil twin.

The Federal Reserve has control of the U.S. treasuries gold supplies. The 7 knew from the start that the system would fail at some stage, it was designed that way. Back in the early 1900s smaller banks were failing left & right. These 7 convinced the government that the largest banks should have the job of protecting the rest, by having sole right to print money, set interest rate policy, and provide an insurance scheme for banks.

They told the government that they would regulate the small banks into survival. Which they did, but they failed to mention that the result would be the less often but far more severe failure of the entire system. The 'insurence' setup would not be enough in this case and the government would have to be called in to protect/bailout the large banks as they are 'to large to fail', a concept that was devised in the early 1900s.

So perhaps there's a reason why the Federal Reserve has not sold off the US gold reserves, because they know that one day gold will be the worlds currency again.

In 'Cospiracy of the Rich' Kiyosaki tells the story of how as a Vietnam pilot he tried to buy goods at a market stall. The woman would not accept local currency, and didn't really want US dolars either. She snuck accross the road, exchanged the US dollars for gold, then gave him his change in local currency. When he asked the local soldiers what it was about they said she thinks the war will be lost soon, and she is preparing to leave the country. The locals saw gold as the 'no fail' currency because their government could not print it into oblivion.

 

[Sunfish]

So perhaps there's a reason why the Federal Reserve has not sold off the US gold reserves, because they know that one day gold will be the worlds currency again.

You may be right. The Bundesbank also has large gold holdings but I suspect that is because they remember their bout with hyper-inflation.

If you take this logic one step further: Is the US hoarding oil in the ground? They may be.

 

[.toe]

If you take this logic one step further: Is the US hoarding oil in the ground? They may be.

I don't know Sunfish, what can you tell me?