I am very worried about the world.
Because I have been studying economics and the financial system since the 2008 crash. And the problems that caused that crash have not been solved and have gotten worse.
None of the bankers and politicians have been thrown in jail. None of them have changed their ways.
And now there are a number problems that the world will have to deal with. Of course I will present you with a solution. Not for the world as a whole. We will have to endure this. But for you as an individual. You can be freed from it all. Oh yes you can…
Problem 1: Stock Market
Stock markets are currently trading around historic highs. This would make sense if the economy would be booming. But it is not.
Key to every investment is the analyses the return on investments. Yet real earnings are not rising in a stalling economy.
So where does all the capital come from that is currently invested in the stock market?
It is the monetary easing. Cheap central bank credit looking for a home. And institutional investors being pulled away from historic safe investments like government bonds (because of the low yields currently on there).
A stock market that is going up for 5 years straight on shaky fundamentals will make a correction.
So we should expect one the coming years.
Problem 2: Bond Market
Now, corrections in the stock markets are nothing new. Surely they will have an impact. But the 800 pound gorilla in the room is the bond market.
Governments everywhere around the world lately have been abusing their traditional role as safe havens by getting into their eyeballs in debt.
The question off course is, who buys all this debt. Who has endless pockets?
As it turns out the central banks.
US government bonds in 2013 were bought for 71%  by the Fed.
In Europe it is a bit more complicated. ECB cannot directly buy government bonds. To circumvent this the fed lends to European banks at 0% interest and the banks in turn buy government bonds. Everybody happy (especially the banks).
(update: the ECB launched its own 1 trillion Euro quantitative easing program. And even the head of the Dutch central bank looked at the US and Japan and was wondering if it is even working).
But this cannot go on forever. There will be a moment when the government has to return to the market. And investors will likely want to see a return on their investment.
And after 30 years of declining returns, reaching the lowest point in history, the yields will go up at one point.
That is a given.
Why is this important?
It is actually quite simple – but I have to admit I had an “Aha moment” when I first learned it.
Lets say you buy a 10- year government bond at 2%. You hold it for a year and the yield in the market rises to 5%. –Bummer!– You also want that return on investment. But you cannot sell your 2% bond. Because everybody else can buy the same bond in the market at 5%. You can only sell it at a lower price then you paid for it.
Your bond has just become worth LESS than what you paid for it…
This leads to two reasons why rising yields mean bad business in this economy.
1. The first is that all our banks, central banks, pension funds, insurance companies, governments (foreign currency reserves) and social security funds are heavily invested in government bonds. They are even required by regulations and the current prevailing portfolio theory (CAPM method) because it provides them a “risk free” rate of return.
Imagine what happens to these institutions when the main asset in their portfolio devalues with let’s say 20%…
2. But the biggest problems will be the governments themselves. They will have to pay the interested on the money the loan. Even if interest rates would return to a normal 5%, a lot of government will start to have problems paying back. They will need to borrow to pay the rent. And it will be clear for everyone to see. This will be the moment when people will lose confidence in the governments and perhaps even their paper currencies.
This has happened dozens of times in history. And capital will flow from the defaulting countries to the more stable countries or assets. There will be a time that investors might lose the confidence in major economies like Japan, Spain, Italy, France or even the United States.
And then you will hear a big POP!
Problem 3: Socialized Economies
We hear that free market capitalism is to blame for our current economic problems. This is of course nonsense.
There are no free markets.
The government in a lot of the countries in the world consists of up to 50% of the market share.
It control everything. It regulates everybody and everything. And they distort everything. But worst of all…
They make everybody participate in this system. You are forced to participate in pension programs, social securities, socialized medical care etc. And all the funds collected are invested in the stock and bond market.
While the situations worsens the governments and central banks try more and more desperate things to keep the party going. They will rather plunder every form of wealth before they accept defeat.
When one of the two scenarios above starts to enfold expect the following:
- Wealth confiscations (already happening: Cyprus)
- Plundering of pension funds (already happening: Poland)
- Increasing taxes (already happening: everywhere)
- Cutting benefits (already happening: everywhere)
- Increased money printing (yes, already happening)
The worst off will be those on welfare, pension funds or any other government paid fixed income. The most vulnerable in society have been made dependent on unsustainable promises. And their future looks grim.
In for example America almost 100 Trillion (with a “T”) has been promised to the population in Medicair, Pensions and other “entitlements”. There is zero funding for. This will NEVER be paid.
The same can be said for most European nations and countries like Japan.
We have all been told that “we” have arranged everything well and “we” take care of everybody. But once the economy collapses, don’t think for a second that you or your wealth is safe. Even if you have been an honest tax payer for all of your life.
You will suddenly realize that there is no “we”. You will be sucked dry and your capital will fligh away to a sunny place to be spend on yachts and prostitutes – in the best situation. Worst case scenario it will be spend on militarization of the police to stabilize the sheeple to “protect you” from “conspiracy theorists” and “domestic terrorists” that cannot handle the new normal.
You might be sometimes feeling like a cow, milked by the government. But when real bad times come …you will be slaughtered…
Problem 4: The Derivative Bubble
Then there is something so big and abstract that it is difficult to grasp for simple mortals. It is the derivative bubble.
Derivatives are promised that have been made to future claims. They are bets on the future of underlying values.
They are issued by banks and a commission is earned upon them.
How big are these claims exactly? They are 600 Trillion USD. That is right. Bankers are trading behind the scenes on 600 Trillion USD.
Until, of course, someone asks for actual delivery…
Problem 5: Others
There are a number of potential problems you can add to the list.
Abandoning The Dollar
The USD is the world currency. A lot of countries are not to happy with that. Why that is, I explained here: End of the US Dollar.
There will be a moment in time when the world will abandon the US Dollar. Once this starts happening there will be a run for the exit. With dramatic effect for the value of the US economy and the stock market.
And those that invested there (everybody, and their pension fund) will be toast.
A lot of what is happening around the world today needs to be viewed in a broader perspective.
There is a power shift going on from West to East. The supreme domination of the US from the last decades is over. Europe has its own problems with the EURO.
Vladimir Putin (bare-chested) stepped through the flapping doors of the saloon.
A group of Chinese stand outside in silence. Their arms folded.
And at the moment there are a lot of things going on with Russia and its areas of interest. Destabilization in Ukraine, economic sanctions, extreme inflation, the execution of Boris Nemtsov. A coincidence?
So far Putin has dodged the bullets. But nobody seems to know where he is up to.
A dangerous game is being played.
Hopefully, the situation will cool off, and the world will sit down for a drink and a game of poker (ok, maybe the last bit without Putin).
Before everybody steps inside and there will be a nice big brawl.
We briefly touched it.
The EURO was a big mistake. All these different countries with different economies forced into one currency.
It is not working and it is now being kept together with duct tape.
I think there are three scenarios:
- There will be a default or an exit of one of the Euro countries. One in the south. Once this happens, there will likely be a default on the debt obligations. This will send shock-waves through the Euro zone. It is unlikely it will be able to absorb. And even if they can, there is the change that once relieved from economic prison the country will be able to build up the economy again. And this will be watched by the other countries.
- There will be countries that are simply fed up with the costs, corruption or the enforced legislation of the EU. They will decide it is best for them to leave. Or fall into a small collaboration. With the same possible consequences as painted above.
- There will be so much can kicking by the clueless politicians and central bankers that run the EU that at one point there will be a break of confidence in their ability to manage the crisis. Then the markets will just rip it apart.
The way things are going, I give the Euro-zone five years max in the current shape. And I am not sure if the EU will survive a crash of the Euro.
A shame really. I believe the intentions were good.
But such a huge gamble with the lives and wealth of millions.
I am glad I am not part of the EU commission when the pitchforks arrive…
The Price Of Precious Metals
I like precious metals because they are a security against the turmoil described above.
There is one thing that I want to put out here, without getting to much into detail.
There are two ways that you can buy precious metals: physical and paper.
Physical means having the stuff in your home or in a safe with your name on it.
Paper is the stuff you can buy at a bank or any comparable criminal organisation. But these are often claims on gold. And the banks have sold multiple claims on the same gold. There is so much more paper gold than physical that the paper market determines the price.
Western institutional investors still believe in this stuff. But in India, Russia and China the only thing that counts is physical. And they are buying as much as they can at these low prices.
They are buying so much, that supplies are running low. At the same time, the price is so low that the mining sector has problems keeping afloat.
This goes well until the actual supply of physical will run dry, or when paper buyers want to see the actual gold they think they own.
This will be like when a group of people playing musical chairs, and suddenly all but one chair is pulled away.
It is even worse with silver. Because most of the gold mined still exists and the silver market is being used as industrial metal. And the silver market is absolutely tiny. All the paper silver in the market could buy you 25% of Mc Donalds.
Our worldwide interwoven economy faces considerable risk. In a number of different areas.
If one of the scenarios above enfolds, it will be very difficult to prevent contagion in other parts of the economy.
To me it looks like the world is at a crossroads. There is huge volatility ahead.
Our world will be violently shaken.
Lets see who and what is still standing after the dust settles.
I hope that people will look above, to their own governments as being the once letting it get out of hand. And not blame it on someone else, which often happens before bombs start flying.
Hopefully the internet will keep people informed and connected.
It might take a year for this to play out. It might take a couple of years.
I give it three years max. until one of the above scenarios is dominating the headlines (published on 6 February, 2015).
Solutions On An Individual Level
There will always be parts of the world where things will be pleasant.
When you live in an apartment in the centre of London you have a problem when the 7 Eleven runs out of food. You will suddenly understand how thin our layer of civilization is when there are twelve people and one bag of rice.
If you live in Argentina, where lately the economy implodes more often than Nicky Minaj can produce a crappy record, you will find that life will continue as if nothing happens. The society is used to it. People already learned that banks and governments can NOT be trusted.
But even on a milder note. You could move yourself or your base in a place that is booming. Like in Dubai, the economy is growing again. Same like Hong Kong and Singapore, Philippines and Indonesia.
Get your money out of insolvent European banks.
Move to a place where you do something useful for the world (like growing food). And where you can build you personal wealth.
You can position yourself there where government or less likely to rob you, where you are not forced into government programs and where you don’t pay taxes.
You can move to a place where the economy is dependent on the land. Where what happens in the stock market does not affect everyday life.
Depending on how this will play out, you can get prepared accordingly.
Learn more here.
But there will be a reshuffling of the cards.
And time is running out.
 Stock Index
 Bond Yield
 Feb Buying debt.
 US debt clock