Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why the Rich are Getting Poorer

Stock-Markets / Credit Crisis 2008 Mar 12, 2008 - 01:45 PM GMT

By: John_Browne

Stock-Markets

As our consumer dominated economy faces the threat of imminent stagflation (economic recession and financial inflation at the same time), losses will not be limited to the poor. Many get-rich-quick investors also will become poorer!

The effects of recession, falling asset prices, insolvency, inflation and a falling dollar are set to have a sometimes devastating effect on the real value of many investment portfolios, including those of the wealthy.


Why are the rich going to lose money when many have had expert professional advice? The answer is in varying and individual combinations of greed, arrogance, ignorance and a naive belief in government propaganda, both by investors and their professional advisors. Ignorance led them to believe government figures. Arrogantly, they assumed they had discovered a new world in which asset prices would continue to boom. They were tempted by the greed that held that the higher the leverage, the greater the returns. Naively, they appeared to buy into the belief that America could go on consuming more than it produced, financed by foreigners that had an endless appetite for American government debt.

There is little doubt that the vast amounts of cheap, U.S. dollar liquidity pumped into both American and international economies by the U.S. Federal Reserve Board (particularly under former Fed Chairman Alan Greenspan) averted some naturally occurring and corrective recessions and led to a series of unprecedented asset booms. The mistake was in thinking that this virtual world of financial make-believe would go on forever.

Added to the vast new Fed-inspired liquidity boom was a new type of leverage created by means of derivatives, particularly the Collateralized Debt Obligations (CDO's) used to ‘securitize' real estate mortgages. In 2006, The Economist reported that a hedge fund, investing in CDO's through property vehicles, could leverage its capital by some 52 times. In other words, a fund with paid-up capital of $100 million could command property investments of a staggering $5.2 billion.

Of course, leverage of 52 times yields massive returns, provided that the prices of the underlying assets continue to climb, as they did under Greenspan. To give some idea of the size of increases in asset values, The Economist further reported that the value of residential property in just the developed world rose by an unprecedented $25 trillion between 2001 and 2006!

Vast fortunes were made, as CDO's with a rating of ‘triple A' were sold to wealthy investors throughout the world, greedy for unusually high dollar returns.

It was not only real estate that benefited from the largesse of the American Fed Reserve Board. Auto and credit card lending boomed, adding greatly to the funds of the wealthy. Indeed, things became so good for borrowers that what became known as ‘covenant-lite' loans were made by lenders who were both greedy and foolhardy.

The abundance of liquidity boosted consumer demand and corporate profits. Increased earnings were reflected in stock market prices that climbed to new nominal record levels.

However, the real financial implications of imprudent lending and borrowing and the rising level of U.S. government debt did not go unnoticed by the foreign exchange markets. The U.S. dollar began a dramatic decline, depreciating by more than 20% percent against the Euro in the past two years.

Now, the whole vast economic model of abundant liquidity and excessive leverage is moving in reverse. The liquidity boom has morphed into an insolvency crisis, aggravated by a fall in asset values. American consumer demand is falling dramatically. In a consumer economy, where 72 percent of GDP is comprised of consumption, American domestic corporate profits and stock markets look set for dramatic falls, leading to margin calls and yet more forced asset sales.

In short, a great ‘de-leveraging' has embraced the American economy. The massive and excessive liquidity is now being squeezed out of the price of most assets. Investors, who remain owners of leveraged American domestic assets, stand to be hit hard--very hard. This financial suffering will be made worse as investors realize the effects of taxation, inflation and the debasement of their dollar currency upon any positive nominal returns they salvage.

The astute investor can insulate himself from this mounting financial dilemma. He should diversify immediately out of U.S. dollar-based assets into high (total return) yielding assets denominated in strengthening currencies of ‘producer' nations such as those of Switzerland , Australia and Canada . In light of current conditions, it is then and only then that the astute investor is likely to become richer, not poorer.

For a more in depth analysis of the inherent dangers facing the U.S. economy and the implications for U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

By John Browne
Euro Pacific Capital
http://www.europac.net/

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John_Browne Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in