Economic and Geopolitical Dangers for 2008 and 2009
Stock-Markets / Financial Markets Jun 19, 2008 - 12:40 PM
Over the years, I have used gold market behavior to track economic and political trends. The overall effect was a good take on gold markets and on currencies, which was the intent from the beginning.
We have some rather ominous conclusions about the Summer and Fall of 2008. They are economic as well as geopolitical. The actual gold focus becomes more of a point of reference, as it reacts to events that seem to be readying to occur. In addition, we foresee some rather scary trends for the entire world, going into 09. We are not going to cover all of this in this article, but to give a basic overview.
First of all, let's list some of these dangers and danger periods that we foresee coming.
• The US and Israel are getting ready to do something about the newly militant Iran. The nuclear debate is only one dimension of that issue. Another is the threat that Iran is becoming too big a bully to the other more moderate Mid East nations, and not just Israel.
• There is a very large unease again building in the world financial markets. Not only is the credit crisis not really improving (new estimates out now that financial institutions are looking at $1.3 trillion of losses) but world financial markets are actually way down over the last year. Many Asian markets and also many US stocks are down 30% and more. A building unease is accumulating that can only lead to another real big world financial sell off, lasting probably up to a month, before any settling comes in after a month long bout of central bank firefighting efforts.
• Rising inflation is unsettling financial markets, as it is unsettling the US and EU central banks. A serious friction has developed that the ECB is not coordinating efforts with the US Fed, as the ECB fights inflation, and the Fed focuses on preventing a total world financial meltdown. So far, these efforts are rather contrary to each other. The dissention is unsettling financial markets.
• Intolerably high energy and food prices. Disastrous floods in the US Mid West grain belts are going to lead to a world food crisis in 09. We have only seen hints of this in 08. World inflation will be seriously increased in the entire world as a result. The Chinese are particularly vulnerable to this issue.
There are more dimensions to this but well stop there.
Outcomes
The results of these economic and political pressures are likely to be:
• A significant risk (well over 50%, meaning more likely than not) of serious world stock and financial problems over the Summer. This makes a much higher risk of a real world financial and stock meltdown exceeding a 20% drop going into the Fall.
• We have an expectation that Israel is going to act as soon as this Summer, but by Jan 09 roughly, to do something significant to stem the Iranian nuclear problem. Israel has repeatedly stated publicly in the past that they will never tolerate a radical Islamic nation to achieve the nuclear bomb. We believe them.
• Friction between the US Fed and the ECB over inflation policy destabilizes the markets and make a real financial panic much more likely. It is not clear the central banks will be able to pull off another ‘Bear Stearns' type emergency bailout fast enough if there is a new huge financial meltdown emerging. So far, those efforts have succeeded in part, but all this means is one that more bullet has been dodged. How many times can they do that?
• A likelihood of political turmoil in many nations over the food situation. For example, Argentina is in the middle of an incredible battle between farmers and the government's policies to tax/tariff agricultural exports. The months long battle between farmers and truckers who are paralyzing their economy and a totally unrelenting government may lead to a revolution there. Other nations such as Egypt, China, and India tried to reduce budget busting food and energy subsidies but had to pull back on subsidy reductions due to widespread riots.
• China is exhibit number one in vulnerability to a food and energy shortage. There is one thing above all that China fears, that is a big viral insurrection involving the 800 million disenfranchised rural peasants. The rising food and energy prices worldwide are hammering the world's poorest, who already spend over 50% of their $2 a day income on food. The rising food and energy prices are causing worldwide riots as of now, in many disparate places, from the richer EU region, to poor Asia, to India, to South America. 09 does not look good in this respect.
• The prospects of the world having a record grain harvest in 2008 are rapidly diminishing. Although it's stated that China may have record harvests this year, the US, the world's biggest grain exporter, is seeing widespread damage to its grain crops. Without the US ability to continue huge grain exports into 09, the world will face new grain export restrictions by many other grain exporters. This will lead to a real world food crisis into 09. There is no bigger factor that will lead to world destabilization than food shortages.
• The commodity markets will continue to drive prices up, and big investment funds will continue to pump billions into these markets, making prices shoot higher. There will be a big controversy over financial gains in energy and food commodities into 09.
• A new US president will likely be tested by some military related threat. That is a typical cycle, and it's coming in 09 as well.
Some serious doubts about the EU and the Euro
The list of dangers goes on, but we also see some risk that the Euro will lose credibility if there is continued strife over EU political organization. In addition, the weaker South EU nations are in a big controversy with the stronger North (Germany) over the direction of inflation fighting. The weaker EU economies cannot tolerate a strong Euro, while Germany staunchly resists inflationary policies. We foresee some kind of break between the two factions going into 09.
A very curious story came out this week about Germans shunning non German EU Euro notes, trading out the ones from the weaker southern nation EU mints, based on the two letter mint codes on the note serial numbers. That can lead to retaliation by the other country's people, and is a very viral thing that could spread rapidly and severely harm the credibility of the Euro.
Crash risk in Summer/Fall 08
Overall, we believe that this Summer will lead to moderate market turmoil, followed by severe market turmoil in the Fall and Winter 08 as market sentiments deteriorate. It does not help that the Royal Bank of Scotland just issued a world market crash alert this week. Nor does it help that Morgan just put out a report that there is a big risk of a financial ‘catastrophic event' due to the ECB fighting the Fed regarding interest rates and monetary policy…
“We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts…” –Morgan
By Christopher Laird
PrudentSquirrel.com
Copyright © 2008 Christopher Laird
Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.
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