Four very interesting articles that are recent reads and should be food for thought.....
People wish cash are continuing to try to hide it in physical items since the big elephant in the room is rising interest rates and default via the printing press.
Sports Clubs, Art and 'Cement Gold'
"People are becoming increasingly cautious about entrusting their hard-earned money to the banks," says Rolf Bürkl of market research institute GfK. It has yet to become a mass movement, but a significant number of people are shifting their money around, cancelling supposedly rock-solid financial products like life insurance. Some two years ago, customers had already begun criticizing the weak returns on such investments, according to Philipp Vorndran, capital market strategist for wealth management company Flossbach von Storch. "Now many people are asking themselves just what kind of products they actually own," he says.
Instead of trusting German banks, many investors are turning to tried-and-true institutions such as the Hamburg soccer club St. Pauli. Within the span of just four weeks, some 5,000 fans recently bought a total of 6 million ($7.7 million) worth of shares in the club so it could build a new stadium. They were promised 6 percent interest. The club seems like a secure kind of bank to many. After all, it's been around since 1910 and has survived the many crises that have befallen Germany since then.
Until now, polls and studies have always shown that Germans tended to save even more money than usual during uncertain times, according to market researcher Bürkl. But, lately, trust in the financial system has been flagging so rapidly that the crisis has triggered a kind of clearance-sale mood. "The fearful saver has turned into the fearful consumer," he says.
The trend hasn't yet been captured in figures, with the savings rate down only moderately so far. But consumer confidence is rising, and the pre-Christmas retail market wasn't the only area to profit.
Those who can afford it are putting their money into their own homes, in the form of better insulation or renovations. Roofers are booked out for weeks in many regions. The sector is one of the winners of the crisis, growing some 5 percent in 2011 to reach almost 8.5 billion in turnover.
Many people want to swiftly stash their money somewhere safe. Those who can afford it are investing in supposedly secure goods. Record prices are being paid at art auctions. Meanwhile, in cities with booming economies, such as Hamburg and Munich, real-estate agents are reporting bidding wars over so-called "cement gold," as property has been dubbed.
The mental shorthand of this is, things aren't really getting better. The economy isn't any better and what is largely happening is that people know their purchasing power is being eroded and thus are no longer going to continue saving their money in banks and... one of the next great big bubbles, in government savings bonds.
That too seems to be a result of the general uncertainty. Suddenly, people are no longer mincing their words -- even in the financial sector. Capital market strategist Vorndran admits: "No one can, or was ever able to, guarantee the purchasing power of your money."
He expects inflation to rise as high as 6 percent in the coming years, which means the forms of investment most dear to German hearts -- savings accounts, bonds or fixed-term deposits -- will make losses. People are sensing that they need a kind of "reset," says Vorndran. But he doesn't believe in a new currency. "The reduction of debt will take place within our monetary system."
The man standing in the elegant counter hall of the Pro Aurum gold dealing house in Berlin begs to differ. The zookeeper looks -- and smells -- a little out of place amid the gold bars arrayed behind reinforced glass. He's just come from mucking out stables at Berlin Zoo. All these unsecured loans are like toothpaste, the man said. "You can get it out of the tube, but it won't go back in."
Politicians are only making the final bankruptcy more likely by shelling out ever higher sums and setting up new rescue funds, he says. That's why he has converted his and his wife's life insurance and almost all their cash reserves into precious metal. "No one can take my gold away," he says.
Those crazy Republican redneck assholes who listen to Rush and hate all the... oh wait, we are talking about Germans here.
I guess we just have to look at their actions instead of having Jon Stewart do a nice comedy bit to help us ignore reality.
But is gold really a safeguard against poverty? In April 1933, during the global economic crisis, US President Theodore Roosevelt forbade the private ownership of gold. Philipp Vorndran also expects rigid capital controls to come into force at some point. If the crisis gets worse everyone -- and especially his customers -- will be told to pay up. "Every citizen will be affected, there will be no pain-free solution," he says.
In order to alleviate the pain, his company is storing its gold in a depot outside the euro zone. But is that safe? "Nothing is safe these days," he says.
Who does he fear coming for his purchasing power and wealth, not those pesky looters. It won't be the neighbors or a common thief. It will be the government.
The Blind Side
A lot of folks are talking up China as a big "blind side" this year because it is pretty clear they are not going to be able to grow at the same rate and due to their demographic time bomb created by their one child policy, the cheap labor is disappearing quickly. There aren't anymore young people to start up those bottom rungs of the ladder.
First, China is a rapidly growing country with a prosperous upper and middle class of roughly 300 million people, just about the same size as the US. Unfortunately, they also have another billion peasants back on the farms.
Second, the original growth model for the economy was based on very cheap labor to manufacture goods for export. I have a hard time rationalizing how you build a strong dominant global economy on the backs of peasants coming off the farms. I believe Henry Ford said, I need to pay my employees enough so that they can afford to buy a Ford. To me, that was/is the definition of middle class.
Third, the new middle class in China saves a huge amount of their earnings because there is no safety net for retirement or health care in China.
Fourth, the middle class had no place to put savings but into real estate, and besides, real estate prices never drop in China. (See California and subprime, circa 2007.)
Finally, this might be the most important: Protesting peasants still have pitchforks and torches, but they are starting to get wireless Internet.
Moving on to the scenario, there is growing evidence that real estate prices in China have peaked and are starting to rapidly decline. Patrick Chovanec, an American professor teaching at a Chinese university, writes a blog that recently has been focusing on real estate in China. This link describes how rapidly real estate is unraveling from a number of sources.
I think Chinese real estate is exactly where the US was in January 2007, except it's on steroids. Reading The Big Short, you can see that some smart guys were figuring it out by 2005-2006, but subprime didnt hit the financial press until early 2007 when the subprime mortgage originators, like New Century suddenly imploded. In March 2007, Henry Paulson declared subprime was largely contained," followed by Ben Bernanke saying in May 2007, "Subprime mortgage woes won't seriously hurt the economy." We know how that worked out.
In 2005-2006, housing companies were building new empty neighborhoods in California, Nevada, Arizona, and Florida. Chump change compared to the Chinese, who's cities built for a million people remain empty.
Everything reverts to the mean. There is no free lunch. Repeat it, live it, love it. The next part is a bit sad.
In the Western world, especially in the past few years, gold has been viewed as a store of value. In China, the middle class had few attractive choices for investment, so concrete (i.e. apartments) was the investment of choice. The big difference is that the new middle class has been paying cash for these investment apartments! The big losers in the US subprime fiasco were not the borrowers, but the institutions that bought the mortgage-backed nonsense that was packaged by US investment banks. In China, the losers look to be the middle class. Millions and millions of irate people are being driven back to poverty.
In the U.S. people cried when they gave their houses back to the bank, took the hit on their credit scores, and especially since most of them had little to no savings, went on with their lives while moving to apartments, or doubling up on housing. In China, the middle class will be gone.
This is the blind side, not to mention Apples. All you need is Apple to say it couldnt hit its quarterly numbers because of supply chain problems in China. That will end the Chinese export business model. The ramifications of being unable to trust the China supply chain will move jobs back to the Western hemisphere. Some will return to the US, others to Latin America.
Will it happen? I dont know. But if it does, there will be a resurgence in American manufacturing jobs which will only be a positive to the American economy and stock market. Of course, there is a negative side to this scenario. If the Chinese need to start selling the US Treasuries they hold, that will have a negative effect on interest rates in the US.
Interesting ramifications for sure. No one has mentioned Japan and their 200%+ percent national debt from what I've been seeing. I'd bet on them as a blind side as well.
The last two relate to the problems with the Euro
and also with the nature of Europe itself.
The both are great reads and you really should do some reading in this area because the only thing the media cares about is the horse race. The real issue is how to make sure the U.S. economy doesn't completely eat crap while running the presses hot and seeing China and Europe take a gigantic swan dive into an empty pool.
My mental shorthand on this remains the same. We need immigration reform because we need immigrants. They are a huge boon to the U.S. and our illegal immigrants are relatively compatible with our culture and out political institutions. Europe and China have huge demographic and immigration problems in comparison.
The dollar will be drastically diluted. There is no way to keep the promises the boomers made to themselves except for a subtle default by slightly hot inflation. That inflation also is how the U.S. buys the bonds the Chinese are selling or will not buy and keeps interest rates reasonable (read sub 10%.) Cash generating inflation hedges will be the way to save the day and your purchasing power. Dividend stocks, things that pay cash monthly or quarterly while retaining their inherent value will do incredibly well. (Mine is real estate of course) Savings will be for suckers but investment won't be.
The dollar will be diluted but the Euro will be destroyed and China, much like Japan will keep their centrally planned catastrophes hidden and will take decades to sort through the secrets. The world will be a crazier and poorer place but the U.S. will be the least crazy and still relatively rich though not as much as it thought it was via the bubbles.