Deflation In An Age of Fiat Currency: US Equities Will Have To Fall By More Than 60%. Now Is The Time To Own Cash. Everyone Will Worry About “Default”, Unfunded Liabilities, Tax Hikes and Austerity, Currency Wars in 2013.
from Russell Napier:
Napier’s presentation, “Deflation in an Age of Fiat Currency,” is thought-provoking, and the precise polar opposite of investing as usual. A wry and picaresque speaker, he starts with some conclusions. Among them:
– To reach record lows [akin to those on offer in 1921, 1932, 1949 and 1982], US equities will have to fall by more than 60%.
– Central banks are straining to produce inflation, and developments in emerging markets (i.e. China) suggest a deflation shock is now likely.
– The capital exodus from China is disrupting the creation of inflation.
– In the search for yield, cash is trash ‚ so now is the time to own cash. (This is an example of his dry contrarianism.)
– US Treasuries could repeat their 83% price decline of 1946-1981.
US stock markets aren’t cheap, not by a long chalk. Napier, like us, favors the 10-year cyclically adjusted price / earnings ratio, or CAPE, as the best metric to assess the affordability of the market. Unlike the traditional P/E ratio, CAPE smooths the near-term volatility by taking a 10-year average.
Everyone Will Worry About “Default”, Unfunded Liabilities, Tax Hikes and Austerity, Currency Wars in 2013
The key word of 2013 will not be debt, growth or recession—it will be default. No one will want to use that word and will instead use terms like “forgiveness” and “realignment of future commitments.” Here are five predictions for how this story will play out.
Unfunded liabilities like public sector pensions will come under attack by policy makers across the world in 2013. Public sector pensions in Europe, generally quite generous, will have to be renegotiated if governments are serious about getting their budgets in order over the short, medium and in particular long-term.
With U.S. federal debt topping $16 trillion and the majority of G7 countries’ Treasuries also highly indebted, 2013 is likely to see lots of discussion about currency wars. The term, first coined by Brazilian finance minister Guido Mantega, will be wheeled out every time U.S. government policy is perceived by its creditors in the emerging world as being dollar negative. The U.S. Treasury will say it is committed to a “strong dollar” policy as the Asian exporters try to stop their currencies rising and making their exports uncompetitive in the world’s biggest market. Given the dollar’s safe haven status, it is highly uncertain that U.S. authorities could manage the dollar lower, even though the total amount of debt America would owe its creditors would fall as a result.
Grover Norquist – COMING – ‘$3 TRILLION TAX INCREASE ON MIDDLE CLASS’
“After raising taxes on the rich a little bit, the Democrats will come back for serious tax revenue,” he said. “In acts two and three, the Democrats will come back for the real money – an energy tax and a value-added tax that will impact everybody, especially the middle class.”
The Coming Derivatives Panic
According to Nasdaq.com, beginning next year new regulations will require derivatives traders to put up trillions of dollars to satisfy new margin requirements.
Swaps that will be allowed to remain outside clearinghouses when new rules take effect in 2013 will require traders to post $1.7 trillion to $10.2 trillion in margin, according to a report by an industry group.
The analysis from the International Swaps and Derivatives Association, using data sent in anonymously by banks, says the trillions of dollars in cash or securities will be needed in the form of so-called “initial margin.” Margin is the collateral that traders need to put up to back their positions, and initial margin is money backing trades on day one, as opposed to variation margin posted over the life of a trade as it fluctuates in value.
So where in the world will all of this money come from?
Total U.S. GDP was just a shade over 15 trillion dollars last year.
Could these rules cause a sudden mass exodus that would destabilize the marketplace?
Let’s hope not.
But things are definitely changing. According to Reuters, some of the big banks are actually urging their clients to avoid new U.S. rules by funneling trades through the overseas divisions of their banks…
“Quantitative easing is not acting as a driver for the continuing rise in the gold price…”
From The Gold Report:
Many goldbugs like gold as a hedge against Federal Reserve policies and high inflation. Paul van Eeden, president of Cranberry Capital, says he does not fear high inflation due to Fed policies. Van Eeden is a different kind of gold bug and in this interview with The Gold Report, he explains how his proprietary monetary measure, “The Actual Money Supply,” is the reason why.
The Gold Report: Paul, your speech at the Hard Assets Conference in San Francisco was titled “Rational Expectations.” You spoke about monitoring the real rate of monetary inflation based on the total money supply.
You take into account everything in your indicator that acts as money, creating a money aggregate that links the value of gold and the dollar. You conclude that quantitative easing (QE) is not resulting in hyperinflation and is not acting as a driver for the continuing rise in the gold price. What, then, is pushing gold to $1,700/ounce (oz)?
Goldman commodity analyst Damien Courvalin is out with a big call: The top in gold is in.
The firm says that the primary driver of gold prices is real interest rates (which have been super-low in the United States, in part thanks to aggressive Fed easing) and that with the economy coming back, this era is coming to an end.
Before you get the details of this specific call, you have to understand the firm’s overall view of the economy.
Last Week, Goldman economist Jan Hatzius made a big economic call … that the era of sub-par, post-Financial Crisis growth would come to an end some time in the second half of 2013. And Courvalin, in lowering his gold outlook, is keying off of this call….
The Collapse Is Getting Even Worse: Goldman Slashes Q4 GDP Forecast To Just 1%, US Households Breached Their Debt Ceiling, Citigroup To Cut 11.000 Jobs As ADP JOBS REPORT FALLS TO 118K, And Britain’s Biggest Retailer Is Ready To Abandon Its US Expansion