Monday, August 17, 2015

Yet more flashing red lights about the economy

I'm sure by now I don't need to repeat my warnings about the possibility of an impending economic crisis.  I've been forecasting it for several years.  However, now the warning signs are more prevalent than ever, and even the mainstream media are beginning to take it seriously.  Consider these headlines over the weekend:

China denies currency war as global steel industry cries foul
Chinese steelmakers are preparing to flood the global market with cut-price exports as they take advantage of this week’s shock devaluation of the yuan, setting off furious protests from struggling competitors in Europe and the US.

. . .

Indian tyre-makers have issued their own warnings, fearing a fresh rush of cheap imports from China. They are already grappling with a 100pc surge in shipments over the last year as the recession in China’s car industry displaces excess supply.

The anger is a foretaste of what China may face if this week’s devaluation is the start of a concerted effort to gain market share in a depressed global economy.

Doomsday clock for global market crash strikes one minute to midnight as central banks lose control
Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.

Fears of financial instability keep demand for banknotes strong
Although people are becoming comfortable with paying for goods and services electronically, banknote production is thriving.

One reason for the enduring appeal of cold, hard cash is the global economic downturn. Giesecke & Devrient expects banknote production to rise by 5 per cent a year for the “foreseeable future”, despite projections of double digit increases in the use of cards and other forms of electronic payments.

“Cash is 100 per cent reliable in times of crisis. It’s in periods of panic where a solid financial system has to prove itself,” said Ralf Wintergerst, a Giesecke & Devrient board member. “In a crisis situation, the demand for cash typically rises sharply. The reason for this is trust in real currency.”

The latest Greek 'bailout' is likely to be as ephemeral as the previous two.  Icecap Asset Management points out the problem in this succinct graphic:

Says it all, doesn't it?  Each bailout is bigger than the last . . . and none of them solve the problem.

Finally, I've pointed out before how major investors are converting larger and larger proportions of their portfolios to cash or hard assets.  The latest to do so is billionaire Stanley Drucknemiller, who now has over 20% of his portfolio in gold.  If so many experts in the field are doing this, refusing to trust normal financial instruments, what does that say about those instruments?

(By the way, that precaution is just as useful for you and I, even though most of us aren't in the investor class at all.  I now keep two months' expenditure on hand in cash.  I can't be sure that the banks will be open when I need them, or that electronic payment networks and options will remain accessible and operational.  If Cyprus wasn't sufficient warning about this, a few years ago, then recent Greek experience should reinforce the lesson.  I suggest you plan accordingly.)

Folks, I said last week:

"I won't be surprised to see a major correction later this year - in fact, I'll be surprised if one doesn't occur."

I see nothing to make me reconsider that perspective.



Anonymous said...

You might consider doubling down on that two month expenses to four. I'm figuring that food and gasoline costs will skyrocket, much like hotel room and lumber costs go up during a hurricane evacuation. Having an extra ammount would likely not be wasted.

Thank you sir for the post. Time to take stock and prepare for what will be a bumpy ride.

Peter said...

@Anonymous: It would be nice if we all had four months' expenses in reserve . . . most don't.

Bob said...

I am not a "survivalist". However, I have stocked up(so far) with one months supply of MRE's and two months supply of freeze-dried foodstuffs from Mountain House and others.

I also have several LARGE BPH-free containers for water plus the required chemicals to insure it is bacteria-free. I even purchased a small grill and several large sacks of charcoal as a source of heat to make all those meals hot and more palatable. This is a backup for my propane fueled camp stove.

I used to have a large supply of frozen foods but now that is almost all gone. Depending on reliable electricity for food preservation nowadays is - in my view - reckless. Once Obama and his EPA zombies finish off all our coal-fired electrical plants, I expect rolling brownouts - even blackouts - everywhere.

I had purchased a 3500W AC generator some time ago to power the freezers during a blackout(we have have several already, a fairly common occurrence out here in flyover country), but there's the problem of storing gasoline for it.

I now have only one active credit card which I am paying off as fast as possible. I applied for it because of its 14 months no interest offer and transferred the other cards balances(now all at zero) onto it, The savings have been substantial.

Unfortunately, trying to save up enough cash for two - or four(as suggested above)months of bills is impossible for me, so some stuff will go unpaid. I've been using my spare cash to stock up on the above essentials.

But I imagine that - when the bottom drops out - small potatoes like me will not receive very much attention from the bill collectors for quite some time.

I'm still hoping this inevitable collapse and resulting chaos will not happen until I am gone. I am 77 years old, but in pretty good health.

Hell of a deal. Like everybody else, I'm hoping to live for many more years but hoping to die before Hell comes to earth.

Sunnybrook Farm said...

We met with our financial person at the bank this afternoon and I expressed a lot of the things that you have been bringing up over the last month and he pretty much agreed with it only he is hoping it will happen next year. He recommended that we keep a supply of cash on hand for a worst case event. He can't sleep at night for thinking about it. Kind of scary when a financial person starts talking cash.