This weeks article, from retirement planner Mike Savage, discusses a “Special Purpose Vehicle” that Europe has announced. What does this mean for the U.S. economy? Read more and contact us today for a consultation.
Weekly Article 09-26-2018
A few weeks ago I wrote about Heiko Maas, Germany’s foreign minister calling for an alternative to the American SWIFT system of global payments. This week, it has been announced that this statement may carry more weight than originally was anticipated.
As reported in Zerohedge on September 26, Europe has, indeed unveiled a “Special Purpose Vehicle” to bypass the SWIFT system and therefore bypass sanctions that are placed upon others- namely Iran currently. This not only weakens the US’s ability to weaponize the dollar but also could lead to far less dollar demand going forward particularly if more sanctions are put on and others don’t see the logic and just continue to trade sans dollar involvement.
So why is this important? Simply because, with the world’s reserve currency we have been able to live above our means for decades and pile up debt that long ago would have been called in by our financiers- similar to what is happening in Argentina, Brazil, Turkey and many other places. The fact that we could “print up money” out of nowhere has led many to believe we could never default because we have a “printing” press- or today a computer screen that can conjur up trillions of dollars with a click of a mouse.
This idea has led to debts being added in unimaginable amounts and with little to no fear of those financing it- namely those trading with us like China, Germany, Japan, etc. Even countries that do little trade with the US have had to hold US dollars to conduct global trade for virtually all natural resources.
This has allowed us to get real goods sent to us for virtually nothing. That sounds great until we look behind the curtain and find out that all of those dollars that we printed up out of nowhere are actually units of debt and we are drowning in it.
Prior to the Europeans joining into the anti-dollar movement there were many other countries that were starting their own anti-dollar trade like China and Russia swapping Russian oil and gas for Chinese Yuan, the Chinese Yuan denominated oil exchange which opened this year and bilateral trade deals amongst many African, Asian and other countries.
While the US dollar remains the dominant world currency it appears that powerful players are looking to change the paradigm of dollar dominance.
This would likely lead to many of those dollars being repatriated, a collapse in the value of the US dollar, and far higher prices- particularly for any imported goods. In my opinion, it would be a boom for American manufacturing as we would likely have to supply our own goods for a while. Short term pain for possibly a long-term gain.
Of course, that weaker dollar would also make our exports look a lot better overseas and could lead to a renaissance of American manufacturing.
In the meantime, we would have to anticipate, in an environment such as this, that the Fed would likely have to raise interest rates substantially to protect the dollar from crashing- similar to what is happening in many emerging market countries right now.
Think of the impact on the bond, stock and real estate markets if interest rate were to rise in a meaningful manner. Also consider what “printing” money in an environment like that might look like. It would just add to the demise of the dollar exponentially.
This is not a pretty picture but it is one we may be faced with at any time.
This is just one more reason we need real assets in our portfolios. Paper assets can, and often do, go to zero. Don’t think so? Ask the many bondholders of Italian banks that went down. Ask the bondholders of Lehman brothers, the stockholders of Enron, Worldcom, Kmart, or any other bankrupt organization out there.
With the credit quality of corporate debt already at all-time lows substantial increases in interest rates could lead to a slew of corporate bankruptcies wiping out stockholders and greatly impairing- if not wiping out of bondholders.
How do you think real estate would perform with interest rates like we had in the 1970s and 1980s when my first mortgage in 1982 was at 16.75%. I also had a car loan at 21%. Asset values would likely have to plummet to be affordable to anyone.
In the meantime, all people have to eat, drink, they need energy to get around and run their homes and they need a means of exchange.
While paper assets can, and do, go to zero hard assets always have a value. Of course, they can spike up if demand is high or fall if demand is low. It is likely a much fairer valuation would be taking place in this situation as the ability to massage prices with money from nowhere would likely disappear and willing buyers and sellers would be setting prices instead- as they should have been all along.
I have written numerous times about the manipulation of prices of all assets for speculators to make a profit. Particularly in the gold and silver markets which I follow most closely. There are many reasons why we may be coming to the end of the line for the paper pushers in this market.
The “smart money” has recently gone long (expecting prices to rise) for the first time in years. The speculators are still historically short and are keeping paper prices low. Recently, the US government had to pause minting silver eagles. (Not enough real silver?)
My son went into a shop where he has been buying gold and silver for years looking for a few ounces of gold and a couple hundred ounces of silver. Upon entering he saw a pallet full of silver eagles and asked if he could buy 200 ounces. The fellow in the shop said that the pallet was sold, and indeed, another full pallet was sold but he could find him 70 ounces of gold with a $3.50 premium on each ounce. So literally, the paper price- which is always quoted- is around $14.00 per ounce. To get the real stuff now you need to pay around $17.50 per coin. I expect that this chasm will widen significantly as the games being played now are forced to end. Don’t get me wrong. This may not be imminent as the characters in this act have proven quite adept at keeping the game going. It will likely end with a thud as someone demands physical delivery of the metal and there is not enough to cover. Many European banks have already paid off supposed holders of gold with cash. Others have refused to deliver their clients gold. (Egon Von Greyerz)
Obviously, many countries are panicking and repatriating their own gold. Banks are loading up on physical metal. Just this week, David Schectman of Miles Franklin reported that JP Morgan has 750 million ounces of silver and 20 million ounces of gold- for themselves! I knew about the 750 million ounces of silver from Ted Butler’s research but was unaware of the 20 million ounces of gold also.
China, Russia and India are purchasing gold like it is going out of style. (Trey Reik-Senior Portfolio Mgr.- Sprott USA). Turkey is also buying all that it can get its hands on. This will likely accelerate the emptying out of Western vaults that has been taking place for years.
If nothing else, using the logic of buying low and selling high would you want to buy assets that are at or near all-time highs like stocks bonds and real estate that I believe are artificially propped up by central banks “printing” and buying of assets and with all of the other pitfalls that may be out there, or assets that are at least at short-term lows like many commodities and particularly gold and silver?
In any case, many people have NO exposure to real assets. In my opinion, this is a mistake particularly at this time.
How does inflation usually happen- when a German in the Weimar Republic was asked he said it happened gradually and then all of a sudden. Personally, I’d rather be years early than a second late.
Look at Venezuela right now!
Mike Savage, ChFC, Financial Advisor
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