The Heavy Weather Report - 2011
This is the fourth in a series of annual newsletters on economic trends and the geopolitical forces that drive them. In 2006 I wrote a newsletter to family and friends called Heavy Weather report – 2006 in which I discussed my analysis of macroeconomic trends, projections for the future (I've called the year-end spot gold price on-the nose three years in a row), and strategies for dealing with what I believed to be an impending crisis. Most of what I said there still applies.
In the next newsletter, Heavy Weather Report – 2007, I further analyzed 2006 in hindsight, offered a primer in economic elements and trends, and refined my projections for 2007 based on those trends. This was all from a perspective inside the US economy looking out, with a particular focus on the behavior of precious metals (a critical issue to anyone preparing for the future).
In the next newsletter, Heavy Weather Report – 2008 , I further analyzed 2007 in hindsight, and outlined my projections for 2008 . In late 2008, there was a near-crisis event followed by massive market interventions, and I declined to make further predictions based on the unpredictable behavior of politicians rather than rational markets.
I started Heavy Weather Report – 2011 in January. Events have moved so fast I've had to start over several times since then. Those of you have followed past year's reports will recall my last estimate for an economic meltdown was for two years in the (then) future, which turned out to be wrong like everything else I expected in 2008.
I am now calling it at 8 months out, towards the end of this year. Not only was there a sea-change 6 months ago, but another, sharper, change in the obvious indicators occurred in February. We are now in serious Black Swan territory. By this I mean that not only are we racing even faster to some sort of inevitable denouement. It is likely to come as a sudden unexpected event, a discontinuity that changes the game in major ways. I will give some examples below, but don't be surprised if I too am surprised.
I Dust Off the Crystal Ball Again
Some Trend Observations
Oil and Israel
The Pan-Arabic Movement
I Dust Off the Crystal Ball Again
In late 2008 I swore off predictions because changes in the underlying machinery had changed the rules in unknown ways. I will now stick my neck out again, because the machinery is behaving in more understandable ways, and the endgame appears much closer.
These predictions are based on 12 months of economic indicators, and on the last 6 months of political and economic trends, inside and outside the US. I take into account economic fundamentals, and the lessons of history when other nations have attempted what is now our current policy. I do NOT attempt to account for any "Black Swan" events, since these things are by definition unpredictable. I will refer to them from here on as "BS" events. Here they are:
I expect Gold to average 1810 in August, and 1930 by year's end. This is, if anything, conservative. It spiked briefly from 1535 to 1570 as I wrote this. BS events could easily push it over 2200 this year. One thing for sure, we've seen the last of 1400, for a long time.
I expect silver to average 65 in August, and 125 by year's end. Yes, I said $125/oz silver.
The US Dollar index, a measure of currency exchange rates, will fall below 70 by August. This is an historic event what will, itself, trigger other consequences. A steep, panic-driven, dive to 30-40 may result.
The Dow index, now on a tear at 12800, will continue, perhaps until August, the penny drops, and investors realize its rise has been due more to dollar inflation than real growth. I expect it to reach into 15000 territory before this happens. Then, I expect a true market crash, back to 6000 or below.
I expect at least $135/bbl oil, and $5/gallon regular gas this summer.
These are some examples of the kind of surprises we *could* be in for over the next 6-12 months:
A panic-driven sell-off of the dollar, and US Gov Debt.
The sudden onset of hyperinflation.
A stock market crash.
An exponential bubble in precious metals.
OPEC begins to sell oil in other currencies.
Bank closures and holidays, stock market suspensions.
Issuance of "New Dollars".
A sudden astronomical "windfall" tax on the sale of PMs.
All or none of the above.
I'm not providing any. Space and time do not allow. Take it or leave it, do your own research. There are others online who make many of the same points with more cogent supporting arguments. Check it out.
Some Trend Observations
Recent Middle East events will account for much of this change:
The end of US control of the region, via the oil/security/dollar complex. End of reliance on the US bodyguard by ME autocrats, shift towards Russia, China in that regard (if they can keep power at all).
Some return of Egyptian leadership in the region, weakening the Saudi position.
End of dollar dominance of oil trading, and of the US WTI index of oil prices.
A sudden 20% drop in the dollar as all this comes to a head toward the end of 2011.
A corresponding jump in PMs. Eg +$300 in gold, and a corresponding $10-20 jump in silver. This is independent of other factors affecting the price.
Continuing and accelerating loss of dollar reserve currency status.
The fall of the petrodollar causes flight from US treasuries requiring massive monetization of debt.
Gov and voters recognize draconian reductions in gov, defense, and entitlements are required to avoid default, but neither is willing. So the printing presses go on.
Growing paralysis of and crisis of faith in US gov.
The currently touted "recovery" will be seen as false.
The housing market will lose another 30% or so.
The Gold/Silver ratio will fall below 20, the DOW/Gold ratio will approach 1 or 2:1 .
Debt monetization combined with oil and other commodity price increases results in a major economic shock to the US.
True inflation reaches double digits and continues to rise.
Depression, yet more unemployment, spread of of civil unrest.
The ME crisis may be the tipping point for the US economy towards a deep, long term financial crisis. Not that it wasn't baked into the cake beforehand. A sufficiently weak economy will trigger the inevitable bursting of the US gov debt bubble (what if they held a treasury auction and nobody came?). Next up: an overnight dollar crash, bank holidays, currency devaluation, and ...
Oil and Israel
Throughout 2011 and 2012 turmoil and change in the ME will accelerate. More govs will fall, balances of power will shift. Oil embargoes of the US are more than possible. Disruptions of the oil supply will rock the planet. After loss of US control in the region, oil and gas will be used to pressure change in Palestinian/Israeli relations. Another war with Israel is possible. The US will no longer be able to prevent one. It will not be in a military or economic position to aid Israel, which up to this point has played US foreign policy like a violin.
The terminally ailing Saudi king Abdullah may not live through the end of 2012. His death will likely mark the end of the monarchy and bring the fundamentalist Wahabbi to power. This will also be the end of the kingdom as a western quasi-ally, and a pillar of stability in the Arab world. Expect $200-300/bbl oil when this happens, a coup-d-gras to the US economy, and others.
The Pan-Arabic Movement
Egypt, Tunisia, Bahrain, Yemen, Libya, Saudi, Syria: all are now in disorder or outright revolt. The decline of US influence, popular revolutions (real or illusory), the fall of secular dictatorships will fuel a renaissance of pan-Arab-ism.
Any real consolidation can only take place in the context of Islam. Nothing else will unite the Arab world, the rural parts of which remain in a 5th century tribal culture. If this occurs, and it seems to me inevitable, the confrontation between Islam and the western world will become acute. Another world war is remotely possible. Severe economic results are a certainty. If Islamic theocracies gain control of the gulf of Hormuz and the Suez Canal, it will be an exacerbating factor.
Pakistan may turn out to be the historical focal point of the early 21rst century, much as Austria defined the 20th. It is balanced on a knife-edge between military and religious control. The eventual fall of its nuclear assets into the hands of Islamic radicals is more than possible. They would be used at the first opportunity. A pre-emptive, nuclear Israeli strike could possibly prevent this, though some devices might survive. A surgical, conventional operation might manage to extract the Pakistani arsenal. But the Israelis may decide to just "nuke the site from orbit, it's the only way to be sure". This would annoy the Muslim world and provoke another, more unified, ME war. The Israelis, with backs against the wall and already having crossed the Rubicon, might well nuke Riyadh, Mecca, Medina, Tehran, etc. The fallout, and the radioactive oil would annoy the rest of us, but hostilities would not likely spread into global thermonuclear war.
I admit this is a worst-case scenario, but parts of it are likely, and the sequence as a whole is plausible.
<The usual caveats apply>
Get and stay out of USD and dollar-denominated assets: cash, CDs, Treasury bonds, state and municipal debt, strictly American companies.
What's that leave? PMs are an obvious bet. Commodities, things we 'll need to live, especially foods and fertilizers, other agribusiness. Energy sources and producers.
I expect an eventual resurgence of nuclear. Uranium has been a good bet and will be again, not so much the old builders and managers of nuke power facilities, unless they learn to standardize like the French. Recent events in Japan are making me reconsider all this.
If you "own" no precious metals, pay down as much debt as possible. You will not be allowed to pay down debt in hyper-inflated dollars, even if you still have a job. Banker-friendly measures will be taken.
If you do (have PMs), consider selling off some at some point in the inevitable bubble to pay off the mortgage cars, and cards. What point would that be?
Assuming there is no outright dollar crash to zero, the PM bubble will top out at 4-8000 (hard to be more specific at this time), then correct back down to maybe 1/3 of the top value. After that is any-body's guess. The top may be over in days, or even hours in this age of electronic trading. In a total collapse of the dollar, the gold price in dollars would just keep going and become meaningless.
All this assumes that there is still an integral US and a functioning economy. A balkanization of the US is a real possibility, but does not yet appear likely. Part of me would like to see this. The pragmatist in me fears the horrific transition implied. I wouldn't expect so peaceful and bloodless a process as broke up the Soviet Union. A radical, and not entirely peaceful revision of politics and economics however, seems inevitable.
If the bubble (parabolic blow-off) in PMs does not occur in 2011 it will certainly take place in 2012. You will know when this has started when the financial news takes it seriously and recommends it, it becomes a topic of conversation at the barber shop and Star-bucks, and your neighbors talk about buying some. Remember that silver will enjoy almost twice the percentage rise compared to gold, as it usually does.
Outright confiscation of private hoards is unlikely. Attempts at heavy regulation and taxation are more probable. There will likely be measures of some kind attempting to prevent those with the the foresight to invest in PMs from profiting thereby. Physical supplies will be unavailable for sale. Capital controls will outlaw transport out of the country. "Safe" deposit boxes will be unsafe. Gold-backed paper in the US will be very unsafe. Even Canadian or Swiss EFTs may capitulate to US demands on American accounts. It wouldn't be the first time. There will be a black market, and a repeat of gold smuggling to Canada, as in the mid 20th.
At some point in the decline, the US gov will be desperate for gold to use in foreign exchange, dollars being in disfavor. There is probably not enough bullion in private hands to make much of a difference. But centralized hoards, like the gold EFTs, and the foreign sovereign bars held in US vaults, are large and slow-moving targets and may be at risk.
Cash: I expect one or more dollar devaluation events, involving the issue of "new dollars" with forced conversion/exchange at a painful ratio. This will not happen until hyperinflation forces it. There may be some kind of dual-currency scheme, with one kind of dollar for sovereign international use, possibly backed by gold, and another more "flexible" currency for internal use by the proletariat.
There will be some kind of cusp towards the end of this year. Stuff you thought can't happen here, will happen here. A financial crisis to dwarf the one in late 2008 is coming in late 2011. Your country and way of life are about to change, and not for the better.
Sorry about the Doom and Gloom, but there is so much denial and disinformation going around now, I feel a little shock is needed. Heavy weather is coming, and I don't mean in a couple of years.
Wavyhill – May 2011