Dear PGM Capital Blog readers, first of all we want to wish you a Happy Holiday and a very prosperous 2012.
I think that most of you are happy that the year 2011, which will go into history as one of the most volatile and non-realistic markets dominated by fear, has come to an end.
Based on the one hand by unjustified fear about slowing BRIC Economies, European Debt Crisis, and on the other hand by false Euphoria on an improving USA Economy, caused by the media, investors fled into currently the most hazardous asset: USA Treasuries.
News like the Brazilian Economy surpassing the one of the UK and is now the 6th biggest on earth, see link: and the fact that Bernanke has admitted that he has printed an additional 7.7 Trillion USD in 2008, see link: and also the fact that ECB disclosed that they have expanded their balance sheet to a record 2.73 trillion Euros, see link: have totally ignored by the market.
The best performing assets in 2011 were Gold up 11.47% and USA Treasuries, for which the yield of the 10-year-note depreciated from approx. 3.31% to 1.87%
Making money on Gold with Central Bankers printing money at speed of light is logical, although in our opinion the appreciation of Gold in 2011 was too low and did not match the amount of printed money in 2011. But buying USA treasuries at such a low yield is totally illogical, because lending money to a country with hardly any Economic growth, a Budget deficit of approx. 50%, and a debt to GDP of over 100% against an historical low rate of 1.87 is totally irrational.
The main reason for the soaring bond prices in the USA and subsequent decreasing bond yield is the fact that the EU leaders and the ECB aren’t tackling the debt crisis in the PIIGS countries decisively enough.
Based on fear, mainly caused by the media, for a collapsing Euro and Euro-zone, Investors dumped Euros and equities and ran into US-Treasuries.
They did this without taking into consideration that the USA Economic situation has worsened in 2011, and USA Treasuries currently are a bubble which is on the brink to burst.
We believe that 2012 may be the year of truth for the United States, the year that the foreigners currently lending money to the United States will no longer be willing to lend money to the USA against the currently low yields and will start demanding higher yields. In this case the USA and its FED have two options:
- Responding to the markets by raising the (parity) yields on USA-Treasuries
If this happens it will immediately kill the already fragile housing market in the USA and send the country into a deep, hard and long depression. - The Fed to flood the market with money via Quantitative Easing programs and using this newly created money to buy USA Treasuries and by doing so maintain the yields on these bonds artificially low.
This will lead to a dilution of the value of the USD, thus creating hyperinflation, which may lead to investors fleeing the dollar and running to Gold, Silver and other hard assets, which cannot be created by Central Banks via thin air.
We strongly believe that option 2, is politically the sellable option.
Unfortunately, history has proven that (hyper) inflation is like Jeanie in the bottle, which is simple to get out of the bottle, but once out of the bottle, very difficult to get it back in. History has proven also that hyperinflation mostly ends with confiscation of assets by governments or a total reset of all paper assets.
Due to the above we think that volatility will continue in 2012 and may even become more extreme and that every investor must find for himself the proper equilibrium between a short- medium- and long-term investment and asset allocation plan.
In spite of all these facts it is uncertain how people will react or when the seriousness of the situation will prod them into action. It also depends on political decisions, which again is a matter of uncertainty
But the facts remain and will have serious effects on the markets, of which extreme volatility will certainly be the least of your problems.
In these times of uncertainty and extreme volatility having an Investment/Financial Advisor, with a track record of predicting and managing financial crisis accordingly, will be a Critical Success Factor.
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Please feel free to contact us, for us to talk with you about your future and the best investment plan than meets your profile
Yours sincerely
Eric Panneflek
Chairman
Dear reader and Mr Panneflek,
A Happy & Prosperous New Year to all of you, if not in monetary sense, then certainly in all the other aspects of human experience.
The market volatility and possible ‘crash’ of the US$ are not imaginary issues as is evidenced not only by the many articles in this vein by quite respected analysts, but are practically certain in view of the indisputable figures that are insistently shown, which spell disaster, if not in the immediate future – between 6 to 12 months – then certainly within the next 2 years. The reason is quite simple: the countries that have so far helped America in lending Uncle Sam humungous amounts of money, will stop doing this within short. There are indications that some countries (Russia, Japan, China and a few others) have started using their own currencies in trading with each other, thus making the US$ obsolete as the international currency. There has been a conference at which the USA was not invited, during which the possibility was launched to start looking for a replacement for the US$ as an international currency to facilitate international trade, especially in oil. These developments are harbingers of more far-reaching decisions to come. Once this happens the doom’s day scenario will come to pass, which may be a deep and long depression in America, based on the sudden devaluation of the US$, causing a steep inflationary reaction, creating havoc in the already depressed incomes of the American middle class, raising the number of those already living in poverty beyond the current 40% of the American population.
When this will happen is not dependent on the manic-depressive behaviour of many day traders and fear-gripped investors. Nor will it happen by those credulous investors who willingly believe the sales pitch of desperate bank officials who promote the (non-)benefits of US treasuries, and who may suddenly realize by some survival instinct that their life savings are at risk and start selling the stuff in a panic. No, this time, I think, the hammer blow will come from carefully weighted financial-political analyses by America’s jittery lenders, who will realize that there is little hope of ever recovering what they have lent to the States. It is then that the debacle will unfold. The manner in which this will take place depends on political and financial considerations that these countries will discuss. The outcome is definitive: The US$ will be reduced to a whisper of its current value, while the American economy will shrink, causing unthinkable hardships in a country that has been the example of the way of life the world has tried to emulate. It is a sad experience seeing this once great country being reduced to a shadow of what is was. My heart goes out to the millions who will suffer because their government and their financial institutions have not really worked on their behalf, but have catered to to the interest of the happy few.