05-18-2012

Europe's sovereign debt crisis is starting to become a banking crisis. Capital outflows from Greece are picking up and there many ordinary citizens are believed to be taking their money out of the banks in case their precious Euros end up being replaced by Drachma. While not a full flight 'run on the banks' yet, this cannot be ruled out and similar fears exist in Italy and Spain. Since banks only have around 5% of people's savings on hand, it doesn't take much for them to fail when there is a crisis. Obviously this is unsettling investment markets and investors should be moving out of weaker assets into, dare I say it, cash.

05-16-2012

A new book has come out called the Clash of Generations that warns about the financial and demographic time bombs that afflict the USA and, by implication, all western nations. One paragraph sums it up well: "The financial meltdown that's surely coming and will do more lasting damage to our kids won't be triggered, like the last one was, by the production and sale of trillions of dollars in fraudulent securities. It will be a run on the Treasury and the Fed triggered by the global realization that Uncle Sam is in far worse fiscal shape than ever imagined." I encourage investors to be very prudent with their financial and investment decisions.

05-10-2012

Low job growth in the US, more strife in Europe following the election of anti-austerity governments and softening world markets are increasing the prospect that central banks, probably led by the US Federal Reserve, may loosen the purse strings yet again in a further round of quantitative easing. As usual, more liquidity and low interest rates should have a positive short-term impact on markets and investor sentiment, but the big question is whether QE does any good or merely postpones the inevitable.

05-07-2012

Recently I commented that some countries such as the US are deliberately keeping interest rates at below the rate of inflation as a backdoor way of devaluing their currencies and thus reducing the real value of their huge liabilities. If the value of money is going down, that is a deflationary factor. Now another deflationary factor has raised its head in the US. Latest figures show annual gains in nominal wages are among the lowest since records began in 1964. This growth in earnings is considerably lower than inflation, thus putting the purchasing power of many people under pressure. These and other signals make me worry that the western world is due for a 'lost decade' such as Japan experienced in the 1990s.

05-02-2012

Australia has dropped its official cash rate by 50 basis points in a bigger-than-expected decline to help combat a slowing economy. Meanwhile, short-term rates in the US stay close to zero and are likely to be on hold for some time. Most major economies, with the exception of various European nations struggling with sovereign debt issues, have historically low rates. This either suggests rampant deflationary pressures or, more likely given the rising prices of resources and food, there is a deliberate strategy to keep interest rates at below the rate of inflation, as a back door means of reducing the real value of money over time. The benefit of this to heavily indebted governments and central banks is that it reduces the real value of their enormous obligations as well. Either way, don't expect a rapid rise in interest rates for years to come.