What the Autumn may Bring ...

History has a habit of repeating itself. Markets also, follow a similar pattern as history can show. As Summer draws to close, as we enter Autumn, I feel we are in for another action packed time, similar to the close of 2008. Optimism is in the air all around with a complete turnaround of sentiment. When the majority are optimistic, its best to go against the tide and September and October are historically torrid times for the markets. There is evidence all around the globe that imbalances still exist - many worsening as time passes. China is in a rampant bubble driven by the Communist party. Many Eastern European nations are close to currency crisis, exposing many Western European countries who have lent them money. Sterling continues to worsen, as the UK leads the developed world in printing money and debauching the currency. Liquidation is put on hold, as governments believe they can avoid the inevitable. There have already been ominous signs for this month, with the classic August stock market volatility. Central Banks are planning their next moves, in the US there have been rumors regarding a second stimulus package as the first one runs out.

If we take a look at the VIX (the volatility index) it has been moving downwards since the events last October. Notice how quick it can move upwards as last year shows.


There was always going to be a market rally. Nothing ever moves straight up, or straight down. There are always periods of consolidation. If we look at Sterling, it has rallied quite substantially since its dramatic decline last year. Does this mean it has reached a low? I'm afraid not, all the fundamentals point for it to resume its bear market run, and if I was a trader I'd be looking to put shorts on Sterling as the next few months should see a deterioration once more. Sterling looks once again a basket case currency as it did during the sixties and seventies with a new generation that is fooled with the same rhetoric past politicians used to say to justify the devaluations.

30-40 years ago the politicians always justified the devaluations. We need to buy time, it will make our exports more competitive, we need to 'invest' to keep jobs and so forth. Roll forward 30 years and the same fallacies are being told. The idea that a devalued currency can bring prosperity is sheer madness, if it was that easy then no one would have to innovate or increase productivity. Over the long term this policy never works. You need a strong currency and a strong government to put the breaks on and say 'Ok, we tried to inflate, it didn't work, therefore we will stop the printing'. As painful as this would be it works. People adjust, they become more competitive, make better products, start investing. This is how you become wealthy and give your exports the edge. This is what Japan and West Germany did.

After the Second World War both these nations had worthless currencies. War torn, people had resorted to bartering rather then use government money, they had no currency reserves and their people were living in poverty. Nations usually have to get in this state before politicians get a spine and change their ways and that's what happened. Germany abandoned the flawed Reichmark and introduced the Deutsche Mark with a new emphasis on maintaining a sound currency, and so began Wirtschaftswunder, the great Germany economic miracle. Britain meanwhile became the sick man of Europe and was synonymous with the term 'Brain Drain', despite getting more American Aid than the Germans from the Marshall Plan. Germans on the other hand enjoyed a booming economy, one that had low inflation during the stagflationary seventies.

Japan also took a similar route. Their goal was to get Western Currency, and the only way they knew how to do that was to sell quality products that Westerners wanted to buy, and in return they got their pieces on paper. Did they debase the Yen to achieve this? They did the exact opposite and they created quality products. Westerners used to joke about Japanese products (similar to what they say about Chinese ones now as China tries to emulate Japan) but what do people think of when they see Sony, Toyota or Seiko now? They did this while the Yen appreciated, innovating, increasing productivity and smashing the Americans once dominance of export markets during the 1950's and 1960's. The only reason Nissan or other such companies placed their factories here in the UK is for shipping costs and the 'enlightened' tariffs governments have imposed to 'save' jobs. Even if the Chinese or whoever could do it cheaper.

Of course Japan and Germany are different entities now. Their first and second generations built their wealth and generally as the generations move on it gets wasted. They aren't the countries they used to be. Nations such as China are where Japan were back in the 1960's, a generation who still remember Communist hardship, whose parents still remember the mass poverty and killings. Following a similar model they had no currency reserves and now have amassed $2 Trillion Dollars, and are still amassing them. They have high savings rates like Japan once had and are becoming a huge creditor nation. All of this takes huge personal sacrifice. Sacrifice many current western generations are not willing to make.

So will anyone take similar action as the above for the UK? I don't believe so. Things haven't got that desperate yet. They will keep debasing telling the public the reasons above, a noose will slowly tighten around the government. Spending out of control, exports unable to pay for imports, international investors dumping the currency, tax increases on businesses driving out talent, with the process going full circle. Of course the markets will force their hand eventually. We are a way off yet, but I feel this is what it will take. A real crisis. We should see currency controls at some point in the future as the government attempts to bolster Sterling. They may even start with limiting the amount of foreign money you can take abroad.

People in the UK, I feel, are putting too much trust in David Cameron and the Conservatives, that they will win the election next year and all will be fine, however I personally think the trust is misplaced. Tory Party members have recently attacked the NHS and David Cameron has shown what he feels. He wants the NHS and is willing to spend more money on it. I don't think he has the conviction to scale back government significantly and even if he did the damage is already too bad. Mr Cameron seems to want to mimic Labour as close as he can and won't want to upset the public too much. Even if he was like Thatcher, back then the deficit wasn't as bad, we had oil and gas, and we weren't monetising our debt on the scale we are now. Thatcher would recoil in what needs to be done under our current circumstances.

In a nutshell the world still has plenty more deleveraging, which means Governments will be looking to carry on with printing more money. The UK has continued with QE and for some reason this shocked the markets recently, but it shouldn't have shocked any regular readers to this blog. It will keep on going, £200B, £300B and so on. I don't know how much but I do know there is no way they will sell it all back to the market like many believe. Not when the nation is running deficits for the next decade at least. Now the path has been embarked upon it becomes very hard to stop, and as our politicians were all too weak to take the pain from the credit crunch there is no way they will stop the monetising of government debt. You see people still don't understand and tell themselves "Well we will just wait a bit until the credit crunch passes then we will sort out this or that". It doesn't work like that. The easiest path would have been to take the pain fully as soon as the credit crunch hit. Once you postpone it, you make it worse and then politicians keep saying we will wait until this next crisis passes etc. Then the markets force their hand, and then a nation faces real hardship with no alternatives left.

In times like this there is only one asset for amateur investors - Gold. It reveals all the lies the government and media tell us. Its price tells you what is really happening. Recently the asset has been mentioned in the press, with commentators talking about it, however they still don't understand its value. They ask the wrong questions such as "Why would you place value in Gold?", rather than "Why do you place value in Sterling?". Ignorance and historic naivety, its amazing how well we have been conditioned away from Gold and Silver, free market money. Over a hundred years ago our ancestors would have gasped in horror at the financial system we live in. Four Pounds used to buy an ounce of Gold back then, now its more like 570. Gold may have made the news but what do commentators say when they mention it? Should people sell at these high prices. People are interviewed selling the stuff. When did you ever hear these people call a bubble, and now they seem to think Gold is in one. It will be in a bubble when they are all telling people to buy the stuff, its a safe investment, supply and demand and all that jazz. There's a long way to go until that moment happens.

Gold also tells you the truth of real prices. While people were hysterical regarding house prices, did they realise what was actually happening to the true price? Of course in Sterling prices shot up 200-300% but what about another currency, for example Gold, true historic value. In Gold house prices were stagnant as Gold climbed a similar amount during the same period against Sterling. You could have saved yourself all the hassle of estate agents, mortgage brokers, Tenants, property maintenance and so on, and bought gold in a few minutes online and sat back. Sterling lost its value which gave the illusion that houses were worth more. In other words we never had a housing boom. We had good old currency debasement, mass inflation. Its the same with Oil and so forth. Oil jumped ahead last summer due to demand being larger than supply, but its now still up around 300% since its low 10 years ago in say dollars, but in Gold it hasn't moved.

The governments in recent months have allowed the banks to use false accounting laws. If the market did this the company executives would be sent to jail, but when the Government changes the rules its fine, just like before the S&L crisis blew up. Central Banks have all sorts of worthless paper on their balance sheets. They are monetising the deficits. The banks they have nationalised are trying to lend further money to the economy. Easy money, ruins society. It always has throughout time. The decline of the Roman Empire as they debased their Gold Coins. The Spanish Empire as the Conquistadors drove out the Islamic Moors from what is now Andalucia and continued their conquests by discovering the Gold laden lands of South America, again easy money same effects. Latin American nations throughout the 20th Century had government after government who pursued similar mistakes, despite places like Argentina being richer than the US 100 years ago. Italy and Britain during the sixties and seventies played with easy money and look where it got them during the seventies devaluation sagas. What remained of British Industry collapsed, as companies thought they could keep selling on price, rather than quality and innovation, but eventually costs go up also as companies become sloppy relying on further devaluations to bail them out.

Politicians are too tempted to play the easy money card as the great deflationary juggernaut, China, exports low cost products, recycling their money back to the West to encourage further easy money policies here. China have studied their history well and know full well how destructive easy money is to society, and realise what they are doing to the West.

Unfortunately when Fiat currency exists it is a lot harder for the Government to face the pain and do what is right for the long term. Easy money means easy living for the short term, but it just impoverishes society in the long run and puts a greater burden on future generations. We should have another scramble for cash over the coming months, but I suspect this will be the last scramble for the fiat currencies. After that only true money that has a historic track record such as Gold will be desired. What will the Autumn bring ... we will all have to wait and see.

Labour Cuts, Tory Cuts, does it matter?

“This kind of red ink implies both spending cuts and tax hikes that could make the 1980s look like a teddy bear’s picnic.”
Niall Ferguson, British Historian, Part of comments made recently about a possible run on Sterling in the near future

As recent as two years ago politicians were avoiding talk of government spending cuts, seeing it as a poisoned chalice that should be avoided at all costs. Issues such as the environment, raising the Inheritance tax due to housing 'wealth' were the hot topics of discussion for flippant middle England. No party was seriously discussing the government fiscal deficits that were evident to people who noticed. No one was talking about off book debts, or even dared mention NHS cuts. Now all politicians want to talk about is cuts, the unsustainability of the previous spending policies. Again David Cameron has twigged onto this when it has clearly become an issue rather than stick his head out when he became the leader of the Conservative party, that would have gained him credibility. The public are still being misinformed, indeed the true severity of the situation has not been realised, with people truly believing that the deficit will be dealt with in due course and everything will run its course. It is the authors opinion that this is wishful thinking and that it is already too late to avoid the real crisis that will emerge over the coming years. Government deficits between 12.5 and 15 percent, is verging on banana republic status. Japan only obtained double digit deficits 7-8 years after its credit crunch, not months after the event such as in Ireland the US and the UK. How will the years to come look and how do we get out of this mess?

The state of California recently declared an economic state of emergency, promises to pay are being issued, positions and working hours slashed as the state is no longer solvent, in other words a lot of short term pain. They do not have their own printing press so have accountability over their spending plans. This is how it should be. Limits on government spending, the monopoly of money taken away from them, letting the market determine if they are creditworthy. It remains to be seen if they stay the course or if the US government does decide to offer some assistance.

So talks of UK Government cuts in the media still seem to be under the illusion that 'efficiency savings' or purging the Quangocrats will do the job, but much tougher decisions will have to be taken, cuts that also take time to implement especially when we are talking about vital services such as health and education for example.

If we first look at the NHS, it will be a huge burden on society as time passes, a burden the government will not be able to afford. The NHS was set up after the nation returned from war, turning their back on war leader Churchill in favour of Clement Attlee's more collective polices. Free health care for all and so on. Fast forward 60 years plus, and technology has come a long way. Medical science has ever more sophisticated tools and operations, able to diagnose all sorts of illnesses. With people living longer, more and more of us use this service as average ages have climbed. The NHS was not designed for these leaps in technology and associated costs, but no politician has had the will to reform the institution substantially. Myths are told by the left that Tory underinvestment killed the NHS during the Thatcher years but spending rose more in real terms than during the 1960's or 1970's - the perceived decline was from the above factors. This has followed on during Labour years, and despite Labour pouring money into this money pit, the result is still a shambles of a system, with many people on average wages shunning it for private health care.

If the government wishes to balance its budget at some point this will be one area they will not be able to neglect. So how bad could it be? With resources already so stretched how much more can it take? I honestly believe that people in the future will continue to look at the private sector for alternatives as the NHS crumbles and the quality of service continues to decline. It is a myth that government can simply just cut money in a matter on months from an institution like this, as the NHS still provides the majority with their basic health care needs. If cuts are too drastic people will suffer from more time off work, lowering working productivity. There needs to be further encouragement for people on reasonable incomes to move into private sector solutions. If people are penalised from opting out of the NHS then there is less incentive to get private health insurance. Its an opinion I hold myself, why pay income taxes, National Insurance etc, if opting out of the NHS is taxed as a benefit despite you doing the government a favour.

Education is a similar story. Cuts are also inevitable in this area. The government has promised the world to everyone without thinking through market needs or the costs involved. Higher education is a classic example, with quotas of students set at 50% and percentages that persecute against private schools rather than ability. Despite the waste producing graduates who end up in jobs that need no qualifications, the government pursues with this so they can claim they are improving peoples lives. It seems more like appeasing the middle class to ensure all their children go through 'higher' education. The reason why the student loan was introduced was due to these reasons as numbers began to swell during the nineties. Society just couldn't afford or had the need to send such numbers into higher intellectual pursuits, hence they imposed debts on people that wished to participate (by the way its not a real debt as so many misinterpret or whine about, its a tax as the obligation to pay is based on earnings not interest payments, in effect an extra income tax, something I do not begrudge paying). Higher education isn't a right as it has become, but a privilege where society invests in this segment of the population in order to have a skilled workforce.

Its the same story in compulsory education. Why will they move the age up to 18 from 16? Why was it at 16 in the first place? Many children are forced to go through the system for the sake of government rules, despite the fact the school won't put them in for exams as it would 'blemish' their position in the results table. Years ago they would have found a job that interested them early on. Commentators argue that we are now in the 'knowledge' economy and we need to invest in education, but its all nonsense. There are plenty of low skilled service sector jobs that require basic skills that are obtained earlier in life, but nothing taxing. Just sit back and think of all the jobs that people perform that require basic skills. The majority of jobs require no academic training, just work experience and common sense. By keeping kids in the dilapidated, overstretched state schools, it further expands a new underclass, a class of society who used to go into the workforce at 14 such as my Grandad, but now become despondent and angry, trapped in an education system that neglects them and destroys their self esteem. I think education is vitally important, in which it doesn't necessarily need a practical requirement. For years I have enjoyed reading history, but I haven't asked for society to pay for it. There is nothing stopping people pursuing intellectual activities in their own time.

Pensions will be a hot topic going forward. Why we rely on the government to provide us with a pension I will never know as the government never saves for them, just placing further future liabilities on their balance sheet. When pensions were introduced at an age of 70 one hundred years ago, you were lucky to collect one. Now it is deemed a young death if you don't reach retirement age. Real pensions are peoples saving which eventually buys an annuity. With increased capital in society this can be further invested, by financial intermediaries to build businesses and so on. Instead we have a system where pensions have become a drain on society, rather than a driver of prosperity, as the government have messed up yet again. The current public sector pensions can not be paid, they are too large and the government is already in a terrible fiscal position. They can't easily be cut either as people have made no alternative plans. Companies are already making cuts, the correct approach sooner rather than leaving it longer and allowing deficits to get too large or not giving people time to plan for alternatives like the government has done.

In the years to come interest payments are going to increase further, diverting spending away from real aspects of the economy such as education or health. The sooner the government begins the cuts the better the long term results. There is going to be hardship, but the cuts can be strategically carried forward like the post suggests. Cut University numbers, give people incentives to opt out of the NHS instead of taxing it as a benefit, some honesty regarding pension figures by bringing the numbers to the balance sheet and helping youngsters realise their potential by giving them choices. This article is not a critique of public sector workers, such as teachers, nurses or doctors as many offer a great deal to society but it is a criticism of the system they work under. Cuts are inevitable. It just doesn't have to be as painful as what I fear it will be as politicians don't like to abandon the status quo.