Jas Malcolm on the Financial Markets   2 comments

Amazing Markets and Awareness of Possible Changes

I’m so amazed by what is going on in the world I feel I just have to write a paragraph about it from the perspective of investing.  It is easy to get sidetracked into watching one’s own markets and losing sight of the bigger world picture.

Since 1998 and specifically in my books which were published mid 2008 I’ve discussed the failure of our existing financial system as we know it. In order to thrive during this I’ve recommended gold and silver bullion as a ‘savings’ account. This keeps your hard earned wealth out of the financial system that is chaotically coming apart. For the more speculative minded who wish to make money on the end of this financial system as we know it, I’ve held shares in gold and silver companies across the spectrum of exploration and various stages of development and production.  This note is NOT addressing the bullion ‘savings’ account which I continue to hold until the “smoke clears”.  This note is more my current short term [six month from December 1/10] view of the stocks – the shares in gold and silver companies.  I also see a bit clearer the grander picture that is emerging from our market failures which began in 2008 and, in my opinion, are continuing.

Just like individuals, groups of individuals [called countries] participate and grow at different rates. So there are productive individuals [countries] who create wealth and there are those individuals [countries] that provide the productive people [countries] with raw materials [indirectly part of the productive phase] and there are those individuals [countries] who produce little.  In this parlance we could look at countries like China and Germany and Japan as being the productive creators.  We could look at Canada, Australia and the like as the suppliers of resources to these producers.  We could look at the wanton consumers who produce little, such as the United States, the United Kingdom and so on. These are patterns. Structures [financial and physical] have been built around these patterns.  These structures that have been in place and evolving for hundreds of years are now coming apart.

In a once in a hundred year event where old structures coming down, one wants to avoid looking at it from a narrow point of view. Here in the Canadian oil center of Calgary, Alberta, we think in terms of oil and create a “world” view of that, but our view is not really a true world view. On the other hand, the world financial system is really an interconnected worldwide phenomenon, and this financial system is much bigger than oil. When the world financial system comes down it’ll be nice to have a comfortable chair to sit in.

As noted though, there are many different levels of participants in the world financial system. There are producers, and there are providers and there are consumers.

On this big scale what we observe is that the poor underdeveloped [emerging] countries are growing fast [China and India at 8 to 10% per annum] and getting wealthier. They have low debt to GDP and they’re spending aggressively to build out infrastructure. Infrastructure spending is a big consumer of ‘input’ resources, it’s also a huge employer and it creates wealth for many generations. It’s a form of investment. On the other hand, the consumer nations, such as the US, are all about finance.  They represent an economy which is primarily a service industry.  They have been irresponsible in running their business  and industry and created all sorts of specious products [eg subprime mortgages etc] which are now destroying the very system that created them.

For some time I’ve sat inside this bubble and theorized how to best move through the chaos of the failure of the financial system, which failure will ultimately be a good thing. From my ‘small’ point of view the short answer was to invest in gold, because that is outside the system. That has been a good move and has proven its ‘mettle’ as it were [pun intended].  In some ways I have been on defense.

Of course, if you’re a country you can’t thrive by being on defense.  The financial crisis that began in 2008 is far from over.  If you’re a country you can’t just go to ‘gold’ and wait it out. You have to have a longer term vision, and it is clear that some countries do.  It is equally clear that some others don’t.

The United States and Britain, which are at the center of this web that is coming down, in large part because of their conduct, are flailing with no leadership or solid policies. They are like spoiled brats who are trying to control the media and convince us all is well. Their policy for correcting a problem of too much debt is to create more debt, allocating the ‘new money’ to the same people who created the problem.

Contrast the conduct of the US and Britain with those countries that are producing. Those countries with surpluses like Germany and China. China is taking their huge basket of depreciating US dollars and marching around the world and “investing” for the long term. Investing in resources and infrastructure and markets.  They have clearly decided that to provide for their people they’ll need resources and food and energy and they are committed to using their excess depreciating ‘fiat’ US dollars to buy these assets now.  China has targeted becoming the world’s manufacturing center, including being the dominant ‘green’ manufacturer on the planet [eg solar panels and the like].  They are building out infrastructure in South America and Africa in exchange for long term commitments of food and resources. They’re also buying resources directly in Canada and Australia to feed their industry long term. They’re also bailing out the failing countries in Greece and Ireland, and no doubt, Spain etc, but they’re doing it in exchange for these countries opening their markets to Chinese goods. Internally they’re building the most effective shipping and rail and air systems in the world so they can move ‘goods’ to all markets that they’re moving into. They’re even integrating Asia by linking rail into Vietnam and such so they can integrate Asian markets with their goods manufacture. They’re building markets so that they are lowering dependence on the US financial system. This is like watching a really smart guy investing billions of surplus dollars for future growth of their country.

Germany is less independent than China because they are part of a failing European Union. Germany is a country which also generates surpluses through manufacture. This is a country of efficiencies and structure and great wealth creation. The challenge is the European Union is filled with miniature United States clones. Ireland, for example, decided it could be a financier, and Greece and Spain and Portugal and, I suppose, Italy, went the over consumption route. The French, well they are the French, looking to be, well, French.  So Germany is faced with all of these failing nations wanting a ‘bailout’ which, just as East Germany did, taxes their economy and their people.  To think that they haven’t noticed this would be to be like me sitting on gold. They have a nation to run, so they have to be casting about for solutions. I’m sure one of the solutions they note is that if they had their own currency they wouldn’t have their lives dictated by a bunch of mandarins in Belgium. There are rumors that they are investigating with the Nordic countries [also surplus nations], the development of a new currency that would sever them from all that is failing in the European Union.

From this more macro viewpoint the world looks different than from inside my Calgary bubble.   The macro view shows us that the emerging economies, taken together, are now larger than the industrialized economies. Within the industrialized economies we have a few surplus nations such as Germany and Japan and Norway and such, and a bunch of walking financial zombies, the major one being the United States.

I believe that what we’re now seeing the early stages of is the surplus nations and the emerging economies severing themselves from America and Britain. America and Britain have ruled the world’s ‘financial roost’ for more than 100 years but that is coming to an end. American’s financial occupation of the world, using their reserve currency, is coming to an end. The emerging and surplus countries are saying ‘nyet’ to America and their dictates. America, and to a lesser extent, Britain, have enforced their financial world on everyone by using force. That too will no longer fly.

So what does this emerging sea change mean for you and me as investors?  It means the US is moving towards a time where no one will fund their treasury auctions any longer. When that happens, their financial economy will collapse. The US knows this and Quantitative Easing 2 [fancy words for money printing], will be used by the Fed to buy the US bonds that no one else will. The spin is that Quantitative easing will created jobs. That is of course, simply spin. The QE1 created no jobs. Let’s have some perspective on the US. The unemployment rate is probably north of 20% [see Williams and Shadow Stats].  Housing prices are down, on average, 34% across the nation. The median household net worth is $6,000! The big money center banks are insolvent. The defaulting debt of the banks is being bought by the Fed so the banks don’t have to write it down on their books and, to try to minimize deflation [contraction of money supply]. But you’ve got $65 trillion of debt at various levels of default, as this $65 trillion of debt is being supported by a fictitious $14 trillion dollar failing, corrupted, service economy. Many states within the union are, in actuality, bankrupt. California, for example. But California is not some small economy like Greece, it’s the 8th largest economy in the world.  The US is printing money to buy in bad debts. Paper that no one wants to own and which is truly worth much less than what is being paid for it. Contrast this with China, which is investing in future growth.

A bit more perspective. When you run a business manufacturing widgets everyone can see if you’re making a good or bad widget. If they’re bad no one buys and you go out of business. If they’re good you become successful and everyone can see your profits. The United States moved its manufacturing offshore long ago so their economy isn’t about widgets, it’s now 80% a service economy. It’s about low paying jobs of flipping hamburgers and waiting on customers.Their economy became a casino of money creation which is not easy for anyone to monitor. Fast and lose money creation leads to fast and loose morals and leads to fraud. If you dig into the US financial markets you’ll find lots of evidence of fraud:

  • The central repository the banks created for mortgages doesn’t actually hold the titles to the houses that the mortgages are on,
  • To facilitate foreclosures banks had ‘robots’ sign the foreclosure documents, so the documents aren’t truthful,
  • The sloppy lending practices of the banks enabled the banks to pass off bad paper to their clients and Fannie and Freddie Mac [quasi government entities] and the world at large,
  • JP Morgan has been sued by 25 parties now for fraudulently manipulating the silver price. Bart Chilton of the COMEX market committee has stated that there is ample evidence of fraud,
  • US banks have huge off balance sheet liabilities and leverage that their shareholders are unaware of.

I suggest the gold and silver prices have been manipulated in order that the US financial house of cards was harder for the man in the street to see.  If gold had kept up with published US inflation today it would be $2500 an oz.  If it had kept up with what US inflation really has been since 1980, it would be more like $5,000. If it had kept up with increasing US money supply it would be $50,000.  People that say gold is in a bubble don’t understand that gold is money and that real sound money [gold] can’t be in a bubble. Rising gold is a sign that people [and countries] are moving their money out of US fiat dollars into gold and real resources. This is why you see China buying all of the gold produced in its country, and they are the largest producer of gold in the world now. This is why you see China liberating the gold business for their population to own gold. This is why you see Russia building its reserves. Don’t pay attention to the IMF selling gold because the IMF gets their gold from other nations and I suspect they, like the US, have very little gold.  Instead look at who is buying the IMF gold. India, Bangladesh. Countries are moving into gold. I don’t believe the US has any in Fort Knox. I believe they spent it wildly early on when the gold window was under attack by the French during the rule of Richard Nixon.

Today, there appears to be a growing short squeeze in gold and silver. Silver is up 60% since the summer and this seems to coincide with the lawsuits raining down on the head of JP Morgan.  Two banks, JP Morgan and HSBS control something like 80% of the short position in silver. They have used paper shorts to keep the metal down in price. Does JP Morgan act on behalf of the Exchange Stabilization Fund of the United States?  Perhaps. Why else would they have trillions of dollars of off balance sheet derivatives [see notes to their financials].

So let’s see if I can draw a ‘bow’ around a complex topic.  The general consensus is that the QE2 of the United States will create runaway inflation and that is driving gold prices up.  I’m not sure the US can create inflation, it may be that their debt will contract faster than they can create new paper and get it into their economy. Certainly their money supply is currently shrinking. The creation of all of their new US paper dollars is causing the US dollar to become less valuable, but then you have the European Union failing which is causing the Euro to become less valuable faster. Yet the stock market is north of 11,000 as I write this. How can this be?

Let’s see. High unemployment. Housing prices collapsing and more to come. Negligible savings. How can anyone believe that these are signs of a growing economy?  I don’t believe the real economy is growing.  So what is the market seeing? It is supposed to represent the future, it is supposed to be a discounting mechanism.  Well it must not be seeing future profits because there is record insider selling. Mutual funds have been experiencing net withdrawals for the last eight months, yet the market is going up. Perhaps this market is like the gold and silver markets, no longer a free truthful market.  I feel this market has to correct downward. As China and Germany and Japan pull away from the United States the US market has to come down. That is what I believe has to happen and the purpose of this note is to suggest it could be very soon. Perhaps in December of 2010.

Japan is creating money just like the US and they’ve never recovered from their imploding financial system that began back in the 1980’s.

If the US markets correct to the downside in a big way, which could be triggered by Treasury bill auction results, or by China and Germany actions, or by failure of a big US bank [Wells Fargo was restricting cash withdrawals at ATMs in early November], or the currently collapsing Municipal bond market, or any number of things, then I suspect we could see the gold and silver and base metal share prices also correct. Will the correction be as violent for the gold and silver and base metals as in 2008?  I don’t think so. The retail investor isn’t so much in this market, and there may be more institutions who will buy the early dips this time. However, I don’t believe fund managers have religion, I don’t believe they believe in gold as a currency. If the correction persists their trading programs will sell this market down.  So, I believe it may be appropriate to lighten up on gold and silver and base metal company shares. [I’m assuming no one still holds the general market such as bank stocks.  I really can’t think of many things riskier than a bank stock in these markets.

Will the prices of the metals themselves correct as severely as they did in 2008?  I don’t think so. The metal markets are small. I believe there is enough smart money around that it will buy the metals themselves. So I think the metals won’t correct the 25% range we saw for gold in 2008 and the wash out we saw in copper [north of 60%], however, I would expect gold could correct 10-15% before beginning to rise again, and copper could correct 25%.  Understand that these are simply ‘arm waving’ numbers.

So my message is that perhaps having some cash around to take advantage of a correction is a prudent thing. Again, as I emphasize in my books, the failure of the financial system is a good thing. It has enabled a few to control the many for far too long. Nevertheless, your job is to be flexible and aware in how you handle the ongoing challenges and changes as you and all of humanity rise in vibration and awareness these next 15 years.

Not all of humanity is rising at the same rate. The more positive emotions are held by those in emerging countries even though they have less. They’re feeling more empowered. Countries that are looking towards the future of their peoples are going to do better than those catering to the small group of wealthy.  Notice the decimation of the middle class in the United States at the same time that the middle class in China is growing. Invest where the growth is. One way to play that growth is investing in the resources the growing emerging nations need. In the short term that could be rough sledding but in the long term that is the way I’m betting.

So in summary:

  1. I am not long these markets in any shares not related to gold, silver or base metals, except in a few situations I know extremely well. Stocks that represent the economy, like bank stocks, I refuse to touch with a barge pole.
  2. Special situations I do look at would be around clean energy, such as unique ways to improve solar, or ways to burn water. I feel oil is a sunset industry so, I don’t invest in it, no matter how attractive it may look short term.
  3. I currently believe we’re heading for a correction of the main market and I believe gold and silver and base metals will come down some, counter intuitive though that is given the short squeeze developing in them, and I certainly feel the stocks of mining companies will correct. For that reason I’m selling roughly 50% of my mining positions to have some cash if I am correct.
  4. When I do come back into this market I will emphasize resources China needs and has little of. The rare earth market has sky rocketed and huge fortunes have been made of late. I’ve stood aside this market because the Chinese have an infinite amount of rare earths. They’ve cut their exports to the west to endeavor to attract industry to their country to use the rare earths. This leaves the western world scurrying around to find rare earths and then to build mines. I suspect when the mines are built the Chinese will open the exports and drive the prices down to maintain their dominance. So I would only invest in metals China doesn’t produce. I believe the best candidate is copper because China has little production and it is getting harder to find major deposits. Also, the old mines are getting long in the tooth. Furthermore, an electrical car consumes more copper than other models. Copper is a good place to be. I’m going to buy copper companies on the correction, if it comes. I believe it is the easiest way to participate in the growth of China.
  5. I still hold my gold/silver savings account because it is outsider the financial system. If I am wrong on the correction and stocks don’t go down in the short term, my bullion will rise on the short squeeze and I’ve simply given up some ‘upside’ bets.  I will slowly liquidate my bullion only as the new financial economy emerges over the next five years. I am out of debt because in a deflating financial system debt is the one thing you don’t want.  If I didn’t own my house [eg had a mortgage] I wouldn’t be speculating at all.

You’ll notice that 1-5 are about what I’m doing.  I am not a financial advisor and am not qualified to be one. In fact, I’m staying outside the financial system as much as possible so I would think that is the antithesis of being a financial advisor. Each person must be responsible for their own decisions. Consider my note simply musings of information for you to consider with your financial advisor.

Happy days as the world and collective consciousness are shedding the old financial system and rigidity so that you and humanity can advance and remember all that you can be.  Finance isn’t happiness, it is simply one more area of awareness. If you’re good at being in the flow of money you’ll be good at relationships too. Seems to me those are great objectives.




Posted December 2, 2010 by Pure Leadership in Jas Malcolm

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2 responses to “Jas Malcolm on the Financial Markets

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  1. Jim, As usual pretty good advice! One might consider investing in potash as China has been depleting its inventories and people who have nothing to eat tend to revolt. One question – what currency to hold until the market corrections take place? Is the Canadian dollar as good as any other currency?

  2. Yes, but as you know from my books, I’m not a fan of the three mineral approach to fertilization so I’m not playing the potash game. This doesn’t mean it won’t do well. I don’t swing markets. I similarly don’t invest in uranium for similar reasons. I continue to look for long term investments consistent with my philosophy of where humanity is going.

    On the currency. Well that is no easy answer. All countries are playing “beggar thy neighbor” trying to push their currencies down to try to employ their people. If resources will be strong long term then Canadian and Aussie dollars will be stronger than others. If you believe in oil then Norwegian Krona has been best performer and also has some yield. I’ll probably sit in Canadian T-bills until I sense a correction is underway and then move liquidity into gold itself [either Gold Money if for savings account or Sprott if for temporary stashing of liquidity].

    Currencies are economies. Austrailian economy seems to be doing better than many but its currency has had even a bigger run than ours. I hold some New Zealand dollars but they are under performing as New Zealand government seems to have made a bit of a mess of the economy.

    Ultimately, when you’re comfortable with the price of gold I’d suggest storing liquidity in it. Currencies – sheesh – they’re so hard to know in this whacky world financial system failure.

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