Outlook for 2010 - Global "Q.E" to the Rescue...
Originally published January 2nd, 2010.
The year ended with a typical light volume "Santa Claus" rally. Understandably there is considerable trepidation about what the New Year will bring after the prolonged rally from last March and the known fact that would-be sellers have been holding off in recent weeks, waiting for the New Year to sell for tax reasons. It doesn't look good, especially given the rather scary sudden drop in the last hour of trading before the Christmas holiday. However, sentiment is now so bearish, with a widespread expectation for a severe drop in the early part of the year, that the market may confound many by suddenly turning up again, perhaps after an early short, sharp drop. This is made more likely by the fact that although the market appears to have only rallied feebly in December, if we factor into the equation the strong gains in the dollar during December, it has actually made good progress - and more than that appears to have broken out to start another upleg. In fact it looks quite healthy on its Euro and it is worth comparing and contrasting the normal S&P500 index chart and the chart for the same index plotted in euros, both of which are shown below for this purpose.
As many of us know from our private lives, when "money is no object" there is almost no limit to what we can achieve - anything is possible. Thus it would appear that some of us, including the writer, have not had sufficient faith in our illustrious leaders, and their ability to solve all economic problems by the simple expedient of creating money in whatever quantity is required to fix the problem, whatever it is. The erudite term for this money creation is "Quantitative Easing", now increasingly being abbreviated to QE, which sounds like something you might buy at a drugstore for lower bowel problems, but actually means creating money out of nothing, what in common parlance is called "printing money" although these days they do not stoop to the vulgar level of actually creating paper money, but summon it up electronically, as if by magic. Anyway the point is that problems hitherto considered to be formidable such as the toxic waste resulting from the sub-prime mortgage scam, the Commercial property meltdown in the US, the threatened bankruptcy of major corporations and institutions, the careening budget deficits in the US and other countries such as Britain, Greece and Spain, maintaining sufficient demand for US Treasury paper and of course the overriding need to maintain the massive bonuses of senior management of major corporations regardless of performance, can all be solved "at a stroke" by creating money in sufficient quantities to keep everything humming along smoothly. It is true there are some low priority problems like high unemployment, but this actually has real benefits because it disciplines the workforce - the lower classes feel grateful that they have a job at all - any job, and can be made to work harder for the same or less money - "treat 'em mean and keep 'em keen". The trick is not to get them so disgruntled they start to think of revolution. While the generous and universal application of Quantitative Easing can be seen to be alleviating most problems on the planet, there is one almighty problem that even QE is hard put to fix and that is the derivatives mountain. Derivatives have grown exponentially over the years to arrive at the point where all the money in the world cannot honor the liabilities involved, and it is thought that only the benevolent intervention of a federation of planets can rid the Earth of this problem. However, as such intervention looks unlikely in the foreseeable future, the only option open appears to be to let them continue to snowball, and to devalue the liabilities involved by devaluing the currencies in which they are denominated.
There are two primary reasons why Quantitative Easing is expected to transition from being solely a US implemented solution to economic problems to being implemented globally. One is that it is in nobody's interest that the global economy crashes and burns up like the Hindenburg, as depicted on that Led Zeppelin album cover. The elites live lifes of opulence and privelege that are beyond the wildest imagination of the masses, as evidenced by the immense cost and extravagent security operations put in place to protect their esteemed personages when they decide to have one of their global get togethers. Why put all that at risk by allowing economic collapse and disintegration into anarchy and possible revolution when it can be averted or at least postponed by creating the liquidity to enable things to keep limping along? Would you, in their position? - of course not. It is therefore safe to assume that the global elites have got together behind the scenes and organised a joint "global bailout" which must necessitate global QE in those hot spots where remedial measures are most urgently needed. The other primary reason for QE to go global is that other countries are not going to stand for the US escaping from its obligations by watering down its debts by intentionally devaluing its currency the dollar, as it has been doing up to know. "What's sauce for the goose is sauce for the gander" and other countries and especially other power blocks have doubtless figured out that the way to block the US' attempt to wriggle out of its debts and increase its competitiveness by devaluing the dollar on a grand scale is to jump on the QE bandwagon. So the race to the Fiat bottom is on, with most countries hell bent on devaluing their own currencies and ramping their money supply. The realization of this reality, along with self-feeding short covering, is what has fuelled the recent dollar rally.
It doesn't take much effort of the imagination to figure out that with most countries of the world intent on ballooning their money supply with the aim of both solving liquidity problems and devaluing their currencies to make their exports competitive, increasingly large quantities of money are going to be chasing a finite supply of goods, which is and will result in the prices of goods across the board being bid up to higher and higher levels - inflation - and the more the money supply is increased the greater will be the inflation. From all this we can conclude that the interest rate differential between the US and other countries will narrow over time, thus reducing the incentive to play the dollar carry trade, and also that the bullmarket in commodities and collectibles will continue and accelerate. Gold, as the ultimate hard asset and the greatest protection against the ravages of inflation will be the principal beneficiary of money seeking not just to preserve its value, but also to capitalize on what looks set to become the hottest momentum play around. If this Fiat "race to the bottom" becomes an uncoordinated free-for-all, as could happen, then we are looking at increasingly high inflation moving in the direction of hyperinflation. This is looking inevitable as the current policies being implemented by world leaders are clearly not designed to solve the underlying problems of the world economy, which would involve discipline and prudence, and would require unacceptable retrenchment and sacrifice, but instead to buy them more time - to procrastinate so that they can continue to live in the style to which they have become accustomed for as long as possible.
The general conclusions we can make then are as follows - continued ballooning of the money supply in most countries and generous fiscal stimulus. Intervention and support at global hot spots where there is a risk of default, such as some European countries, where the parties or countries involved will be encouraged to ease their problems by means of creating money. Robust inflation moving in the direction of hyperinflation. Continued bullmarkets in most assets with intrinsic value - commodities and collectibles and especially in "concentrated value" assets such as gold and silver, which should be the star performers. Global stockmarkets should continue to rise. Precious Metals stocks are expected to enjoy accelerating bullmarkets, with the still very undervalued junior mining stocks becoming the subject of frenzied speculation similar to the tech stocks in the dot.com boom a decade ago. In the light of these conclusions and keeping this big picture in mind, we should thus not be too concerned by the current corrective action in gold and silver - on the contrary, we should seize upon such corrections as opportunities to build positions in gold and silver and to rebalance portfolios in the direction of the strongest Precious Metals stocks, which is what we have been doing over the past week or so.