From 2004-2011, the Acamar Journal covered the excesses building up within the global financial system. It warned of a US recession in the November 2006 issue, well ahead of the crisis that began in July 2007. And it predicted both the crash of 2008 and the historic bull market in gold.

The Acamar Journal provides credible and insightful information that is not generally found in the mainstream media. It is of value to those who want to know more about the global economy and how it affects them.

Written in a visual, user-friendly format, the Acamar Journal is distributed free of charge about twice a month while the website provides a regular stream of market news, charts and other useful information.
Acamar's publisher lived in Dubai for six years, working as a Director of Investments for a large investment and operating group. He obtained a B.Sc. (Hons.) in Economics at the London School of Economics and is a Canadian Chartered Professional Accountant (CPA). He has previously worked as a Chief Financial Officer of a publicly listed company in the insurance industry in Canada, and has also been a CEO of a company with a 1.9 million ounce gold deposit.

He therefore brings a unique international perspective to his readers.

Thursday 22 September 2011

Le Deluge (from the AJ Archives)

Given the events since, it is ironic that in 2000 the Congressional Budget Office (CBO) had projected that the US would pay off its entire debt by 2010.

The probability that the US will slip into a recession is rising as the economic data is increasingly tepid or negative. Bloomberg's chief economist notes that every time that GPD has fallen by more than 2% year-over-year it has led to a recession. We are currently down 1.5% year-over-year.

The University of Michigan consumer sentiment report shows sentiment is now at one of its lowest points since the 1970s and in the same range as the depth of the crisis in 2007/08. Historically plunges in sentiment are highly correlated to recessions.

Over in Europe, Germany is approaching a potential constitutional and political crisis. The Germans were highly disciplined during the financial boom. Real estate prices stayed flat and the German people did not borrow to consume, unlike their European neighbours. While German banks behaved very conservatively domestically, they invested like drunken sailors abroad, heavily investing in Wall Street's toxic debt instruments and European debt.

So the fiscally conservative German public is in no mood to bail out the PIIGS. Yet, German banks are on the line with huge potential losses on European public and private debt.

George Soros warns that unless Germany takes the initiative in launching a sizeable Eurobond offering, we are headed for a global depression. But the mood in Germany is turning sour toward bailing out profligate nations.

The German President, Christian Wulff, has accused the European Central Bank of violating its treaty mandate with the mass purchase of southern European bonds. In a cannon shot across Europe's bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem.

"I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU's workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank's independence," he said.

Mr. Wulff said Germany's public debt has reached 83pc of GDP and asked who will "rescue the rescuers?" as the dominoes keep falling. "We Germans mustn't allow an inflated sense of the strength of the rescuers to take hold," he said.

"Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts. With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult," he said.

The Bundesbank slammed the ECB's bond purchases and also warned that the EU's broader bail-out machinery violates EU treaties and lacks "democratic legitimacy". Germany's Labour Minister has suggested that countries requiring bailouts provide gold as collateral, following Finland's collateral deal with Greece which may seriously undermine European unity on debt resolution.

The combined attacks come just before the German Constitutional Court rules on the legality of the various bailout policies. The verdict is expected on September 7.

Eurosceptic law professor Karl Albrecht Schachtschneider argues that the rescue measures violated a no-bailout provision in the European Union's Lisbon treaty without sufficient justification.

He also contends that they violated German constitutional clauses protecting property and democracy, the latter by restricting the German parliament's control over its own budget.

"A union of liability and debt favouring other states has been created," he said.

While the Court is not expected to rule against the bailout, the complexity involved in trying to sort out the mess grows as German Chancellor Angela Merkel also faces challenges within her ruling coalition in approving a deal she worked out in July with other European leaders.

A crisis of confidence can, at any time, overtake the markets and create a crash that is worse than what we witnessed in 2008. Both the US and Europe will have to continue to rely quantitative easing to defer the dangerous consequences of default, making the eventual and inevitable crisis much worse.

Gold has benefitted over the last decade, firstly from the artificial boom due to low interest rates and then the fear arising from the crisis. It has risen from $ 256 in 2001 to a peak of $ 1,917. It is up 676% from its low to its recent peak, while the S&P 500 is down 3.2% since 2001.

The gold ETF, GLD, has now surpassed SPY, which was the oldest and largest ETF and which tracks the S&P500. Jim Cramer, on the TV show "Mad Money" and during market hours on CNBC, is constantly urging retail investors to have a 10-20% allocation in gold as a hedge against currency debasement.
Gold has had a substantial run in recent weeks. It has corrected sharply from its peak but further weakness is possible, as is a parabolic move to the upside if the debt crisis has an inflection moment.

In the second quarter, central banks globally were net buyers of four times more gold than last year. It was only in 2009 that central banks became net buyers of gold, for the first time since 1980.

From Japan: “Investors are seriously treating our gold ETF as a legitimate asset class, just like investing in equities, bonds and currencies,” says deputy general manager Osamu Hoshi at Mitsubishi UFJ Trust.

Lessons from History

Gold and silver used to be money in most countries throughout most of history. It is the inability of governments to print or create precious metals out of thin air that has ensured its stability and universal acceptability. But governments that run into trouble with deficits have generally debased the currency, whether diluting the gold or silver content of coins, or replacing it with paper money.

The Song dynasty first came up with widely circulated paper money in the 9th century as silver was in short supply. When Kublai Khan conquered China, his Yuan dynasty adopted the concept of printing money ceaselessly.

As Marco Polo put it: ““You might say that [Kublai] has the secret of alchemy in perfection…the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world.”

At first things went well. The money was convertible into gold or silver and widely circulated. But, as now, a lack of fiscal discipline and inflation led to a delinking from real money (as Nixon did with the dollar in 1971). Then, as now, the pernicious effect of money printing asserted itself.

“This was the most brilliant period in the history of China. Kublai Khan, after subduing and uniting the whole country and adding Burma, Cochin China, and Tonkin to the empire, entered upon a series of internal improvements and civil reforms, which raised the country he had conquered to the highest rank of civilization, power, and progress.

Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both…All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth.

These effects were not slow to develop themselves…The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.”

There have been innumerable instances in history of excess paper money printing to cover deficits ("quantitative easing" in modern parlance). They have generally ended badly.

Government debt is now the problem; money is being printed in copious quantities by many governments to paper over the problem. Holding interest rates down to negative levels did not help Japan and will cause distortions that lead to economic catastrophe if this continues.

Ironically, when Marco Polo returned back to Italy, his accounts of the riches of Asia were rejected and he became known as a "man of a million lies". The paper money he brought back as a gift from Kublai Khan was seen by the chief magistrate of Venice and the cardinal as the work of the devil and was burned.


Look at the US Dollar. This bill is denominated as $ 100 but it is (top left hand corner) a Federal Reserve Note. It is an IOU issued by the Federal Reserve Bank.

Let's say you want to redeem this paper debt. You take a ten pound note to a bank in England. The note says "I promise to pay the bearer on demand the sum of ten pounds". So, the bank will give you a ten pound note in return for your ten pounds. It sounds ludicrous until you realise that the phrase is a relic from the era where the bank would give you gold or silver in return for the note, on demand.

This is the heart of the issue, and why the price of gold is going a lot higher. Paper currency requires public confidence to continue to be used as legal tender.

As the Bank of England puts it, “the meaning of the promise to pay has changed. Exchange into gold is no longer possible and Bank of England notes can only be exchanged for other Bank of England notes of the same face value. Public trust in the pound is now maintained by the operation of monetary policy, the objective of which is price stability.”

Quantitative easing will inevitably undermine both price stability and confidence. Germany is very concerned about this after their Weimar Republic hyperinflationary experience but they are being forced into a corner as the European sovereign debt crisis grows.

Gold and silver do not present counterparty risk. Governments, if they run huge deficits and print excess money, can become insolvent and money (and the bonds representing that debt) can lose value significantly in nominal or real terms and even become worthless. Gold and silver may vary in value, depending on supply and demand, but they have never become worthless. They are not someone's liability.

In the US, Utah passed the Utah Legal Tender Act in March 2011 recognising gold and silver coins issued by the Federal Government as legal tender in Utah, the first time gold and silver have had that status in that state since 1971. Since then, ten other states are in the process of passing similar legislation.

Switzerland has legislation pending linking the Swiss Franc back to gold. China and Russia are advocating that the US dollar be replaced as the world's reserve currency by a basket of currencies and gold.

So, gold is being recognised as money again. But the dollar is backed by the full faith and credit of the US government. So how do the finances of the US government look?

While the debt is almost $ 15 trillion, the present value of future unfunded liabilities ranges from estimates of $ 75 trillion to $ 202 trillion. For a government that expects to raise just $ 2.6 trillion in revenues in 2012 and spend $ 3.7 trillion!

In the 65 years following World War II, from 1946-2011, the US has only had 12 years where they have had a budget surplus (in 3 of those years, the surplus was negligible at 2% or less). And both the Congressional Budget Office (CBO) and the Office of Budget and Management (OMB) project endless deficits into the future.

The reality is that the US either defaults or pays back its creditors in dollars that are massively debased: le deluge of more paper currency and more debt. Europe is in the same boat. Quantitative easing is the mechanism for debasement and runs the danger of creating a crisis of confidence in paper money, hyperinflation and other undesirable economic consequences.

When the Indian CEO of S&P courageously acknowledged this reality by downgrading US debt, he was immediately made to "resign".

In April 2011, the BRICS (Brazil, Russia, India, China and South Africa) countries held a summit in Hainan. They pledged to settle trade between themselves in the own currencies rather than the US dollar and to use IMF's Special Drawing Rights for interbank exchanges. China and Russia already trade oil in rubles. The dollar is rapidly losing its cherished status as the world's reserve currency.

Sunday 15 June 2008

Warning: Global Stock and Credit Collapse (from the AJ Archives)

I started writing the Acamar Journal in April 2004 on the premise that the levels of debt (government, corporate and personal) in the US were rising to unsustainable levels, and that there would be a day of reckoning. I had predicted that the U$ would fall to record lows and gold rise to record highs.
All this has happened but we are only partially through the adjustment process.

Now comes a further warning from Bob Janjuah, chief credit strategist at the Royal Bank of Scotland. Mr. Janjuah is famous in London's financial circles for predicting the credit crunch that began in July 2007.

In a research note, Mr. Janjuah says that "a very nasty period is soon to be upon us - be prepared," warning that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he says.

Meanwhile, the Bank of International Settlements (BIS) has continued to warn of a possible second Great Depression. The Bank for International Settlements, the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s. In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the U.S. sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

A separate report from Goldman Sachs last month backs him up. Predicting total global credit losses of $ 1.2 trillion, Goldman Sachs warns that Wall Street will have to write off about $ 480 billion, of which they have only taken $ 120 billion in losses so far.

If this were to happen, it will badly damage the major US banks which are thinly capitalised due to recent write-downs and which are desperately seeking to raise capital and sell assets to shore up their balance sheets (Lehman and Citigroup being prime examples)

Despite new SEC regulations designed to help investment banks delay the recognition of portfolio losses, new accounting rules may force this issue by requiring banks to mark illiquid assets to market and bring off-balance sheets items parked in Structured Investment Vehicles (SIVs) onto the banks' balance sheets.
In fact, the entire shadow banking system, which is virtually unregulated, is now estimated by the Federal Reserve to be about $ 10 trillion in assets. It is the same size as the traditional banking system, which is heavily regulated (which does not seem to have helped prevent this credit crisis!). The Federal Reserve now plans to investigate this system and subject it to the similar rules on capital, liquidity and risk management as commercial banks. The reasons the banks put these assets outside the regular system was to free up their balance sheet from reserve requirements in order to expand their ability to provide credit.

This would not only cause major write-downs but will also raise reserve requirements, preventing banks from continuing to lend at current levels. Reduced credit would further exacerbate the economic downturn.

All banks balances in FDIC-Insured institutions in the US (up to $ 100,000) are guaranteed by the Federal Deposit Insurance Corporation (FDIC), which helps to provide liquidity and confidence in the system.
The FDIC now classifies 76 banks that are deemed to be 'troubled' (up 52% from last year) yet it only has $ 58 billion in assets. Total deposits within the FDIC-Insured Institutions were $ 6.7 trillion at June 30, 2007, providing less than 1% coverage.

The Savings and Loan Crisis (1986-1995) cost US taxpayers $ 158 billion, when the total deposit base in 1995 was less than half of what it is now.

During the Great Depression, 40% all of US banks failed, leading to prolonged economic and social agony as credit completely dried up. It is this kind of aggravated credit crisis that RBS is warning about. The bank run on Northern Rock, the first run on a British bank in 140 years, may be the sign of the times to come.

The U$, the Euro and Gold

Ben Bernanke was on the horns of a dilemma and he took a calculated risk. As inflation has begun to rampage ahead on a global basis and since the Fed's mandated role is to provide price stability, he would normally have had to raise interest rates to curb inflation.

(The irony is that it is the Fed itself that causes inflation. By definition, inflation is the rate of increase in money supply. It is the rapid increase in the supply of money {in excess of GDP growth} that leads to increases in consumer prices as more money chases the same amount of goods and services).
The problem arose when the ECB suggested that it was ready to raise interest rates rather than cut them, as had been widely anticipated. This would widen the yield differentials between Europe and the US, leading to more downward pressure on the U$.

To stop the negative impact on the dollar and manage inflation expectations without raising interest rates, which would severely hurt the economy, Bernanke bluffed. He talked about the fact that the US was prepared to take measures to support the U$ without making any firm commitments to do so.

Now, the Fed is not responsible for the U$, the US Treasury Department is, and it was unprecedented that the Federal Reserve Chairman directly addressed the issue.

He wanted reassure investors that the dollar was finding a floor at this stage since the Fed stood ready to act to support it but was hoping that just talking about it would be sufficient to support the dollar by convincing investors not to sell.

The dollar rallied but absent any signs of intervention and with no mention of any coordinated support for the U$ in the recent G8 meeting, the U$ promptly began to sink again.

The credibility of the Fed is on the line, but in a US presidential year and with a sharply weakening economy, it cannot afford to raise rates and so the dollar is likely to be attacked as the market realises that the Fed has issued a challenge but cannot act to defend the dollar.

In the meantime, Europe has major issues as well. With recessions now likely in England, Ireland, France, Spain and Greece and a slowing German economy, a rise in interest rates would be traumatic. But these countries no longer have control over their own monetary policy, the ECB does.

This is likely to create major strains on the desirability of a European Monetary Union (EMU) as things get worse.

And the Germans sense it. Ordinary Germans are now exchanging Euros issued in Italy, Spain, Greece and Portugal for those issued in Germany. The notes are identical in form and value but there is a perception that this may not last as the EMU might disband, creating disparate values in the Notes.

In a recent IPOS poll, 59% of Germans polled said they did not trust the Euro!!

Wholesale inflation in Germany has now risen to 8.1%. Germans have lived through two hyperinflationary periods in 1923 and 1948, so there is more concern about raging inflation rather than economic weakness.
As inflation rages and people lose faith in paper (fiat) money whose value declines with growing rapidity, more and more people will turn to gold as a safe haven. I believe gold will rise to values in excess of $ 3,000 per ounce within the next 3-4 years.

Signs of a Depression

The damage caused by the excesses arising from easy credit (for which Greenspan bears a lot of responsibility) will be substantial and lead to a major erosion in living standards in the US.
As US homes foreclosures have risen by 48% and housing prices have fallen 14.4% since last year, the effect has been rising unemployment and falling consumer confidence. Rapidly rising food and energy prices have come as the US has sunk into a recession that may be a very painful one.

Some of the things that occurred during the Great Depression are happening today:
  • FOOD BANKS: A record 26 million people in the US now receive food stamps (a government program to assist indigent people with buying basic groceries). A growing number of people get free meals from food banks (charities that provide free meals). Demand has increased by 15-20% and these charities are facing shortages in food supplies and some are running out of funds.
  • LIVING WITH THE ENEMY: Nice suburban neighbourhoods are turning into ghettos as developers have walked away from half built houses due to lack of credit and home buyers. With record levels of foreclosures and falling prices, banks are unable to sell foreclosed homes, which lie abandoned, in disrepair and unmonitored. Drug dealers and homeless people have moved in.
    This has turned a dream of suburban ownership for some families into living nightmares. Crime rates are rising around them but they are unable to sell as there are few buyers. For some homeowners who bought bigger houses than they could afford due to low teaser rates, they now owe more on their mortgage than the house is worth, so they cannot sell and move.
  • TENT CITIES: As people lose their homes, and their credit and savings are destroyed in the process, some cannot afford to buy or even rent replacement housing. Tent cities are now springing up in major urban centers in California.
  • PAYDAY LOANS: As poorer Americans find themselves unable to make their paychecks last till the end of the month, more and more of them are turning to loan agencies for short-term loans. These loan sharks charge exorbitant interest rates, as much as 2,000 per cent per annum!!
    The California legislature tried to pass a bill to cap total interest charges at 429% per annum but was unable to get enough votes due to lobbying pressure from these agencies.
  • RISING UNEMPLOYMENT AND CRIME: Many US states, such as California, and municipalities are facing record deficits as property taxes are falling, which will lead to a decline in services including policing as they are forced to cut costs.
    Add the fact that in 17 of the top 50 cities in the US the high school drop-out rate is over 50%, and that these teenagers and young adults may turn to crime and violence as the economy worsens and you get a potent sense of how bad things could really get.

These things, which are very reminiscent of the Great Depression and conditions at the start of the 20th century when living standards were abysmal, are taking place even though the recession has not even officially begun (though in reality it has been here since the start of 2008) and job losses are not yet severe.