 Big Picture
Deliberations
DINL Perspectives
Der
Invest Informant
Randy Buss
9 August, 2004
The emperor has no clothes
but only a very few have noticed.
Summer is here, people want
to relax and enjoy the sun a bit, and maybe just forget this
crazy world for a while. So, contrary me, I thought I'd sit back
and take stock of the big picture as I see it, while my webmaster
is hiking around the Black Forest somewhere.
J.R. Rockefeller once said "If people would just spend 2
hours a week thinking about their finances, they would all end
up a lot better off than they are." I wholly agree. Equally,
I postulate, if we'd all just sit down and take a nice cup of
tea and try to sit back and get a view on the bigger picture
of where this world is possibly headed, we and our families might
also be better off should things start to break down. The "big
ticket" items I'm looking at now are some historical issues
in regard to the US Economy. As well, US Elections, US Dollar,
Terror, Commodities and Debts. O sure, there's plenty more, but
that should get us started.
But before I get started, I just wanted to mention one point
which I think needs to be said and to remind people. This has
been stated many times, and most often by Richard Russell. He's
right, too. The markets discount information. It's like a gigantic
melting pot which takes in all the good and bad news, the human
emotions, the mob psychology, the uncertainties, and, stir it
around, out pops the indices, currencies, bonds, metals, etc.
It's all there. But it's working on yesterday's news. And yesterday's
emotions. But these emotions are projecting themselves forwards
into the market. Just thought I'd mention that. In other words,
NOBODY knows for sure long term, or even mid-term, where the
markets are going. Markets are, as people, fickle. Nevertheless,
we carry on.
It is not my intention to come up with long convoluted haranguing
diatribes as to what the politicians and financiers have gotten
us into - I already think I know that - maybe you do too. But
let me at least give you my brief summary as to where I think
some of this is leading. The majority of world leaders and politicians
today grew up in the "golden age." I call that the
age between 1930 onwards. WWI behind, the Great Depression behind,
even WWII behind, the world was slowly recovering. Britain finally
had lost its empire. Europe was devastated. Only the US could
fill the new shoes of leadership. The war had brought great manufacturing
might and led a recovery. It also attracted an inordinate amount
of scientific, business and cultural wealth from war-torn, refugee-ridden
Europe. This was all put to good use in rebuilding the world
after WWII. As well, this provided the US with a "head start"
over all the others. In doing so, the US built up a full horn
of goodwill and moral leadership amongst allies and even former
enemies, Germany and Japan. Of course, part of this was equally
intended as a bulwark against communist ambitions abroad.
What this also gave the US was the de-facto driver's seat in
determining and shaping the post WWII world economy less of course
USSR and China. But for the most part, US institutions and leadership
drove the world economy. Since that time the world has become
ever more, and most recently in the last 15-20 years, increasingly
economically intertwined. By the simple way of having no serious
challengers, the US was in fact, The Empire. But empires can
stumble. As countless examples throughout history remind us,
for once at the top, one can only fall. But what or whom shall
replace it? To my mind, empires are held together by 3 main ingredients
- economic might, martial might and to a certain degree, moral
and ideological might. Former President Nixon & Co. in the
early 1970's took a decision and abolished the US gold standard.
Henceforth only the goodwill and faith in the US would be paid
out via Treasuries to investors but no gold backing it up. General
De Gaulle of France was livid. He could see the Empire wielding
its economic power. What this basically did was set up the fiat
economy we now find ourselves in - an economy where money can
simply be loaned or printed into existence with no inherent wealth
backing it up . That is serious moral grievance.
Meanwhile the Empire grew its war machine ever bigger. Allied
States could not keep up on this level. But that war machine
was the guarantor of peace for the western alliance - and the
allies were all too satisfied with that setup. Meanwhile world
economies grew more solid and expanded ever wider. Trade alliances
grew and western economies thrived. But so did debts. Because
much of the "growth" was financed via debt. That is
to say, many countries were simply living far beyond the economic
means available to them. I believe it is this interlocking of
economies and debt financing which may be the western alliances
undoing. The western alliances have become so financially interlocked,
intertwined and debt ridden that any upsetting of the status
quo could literally bring down the house of cards. In conjunction
with that, there is a now a breaking down of common political
interests across the board, especially between the EU and US.
And it these Achilles heels that Al Quaida is going for. They
would not stand a chance militarily - Bin Laden knows that. He
also knows that the entire western alliance runs on oil. But
so does China, an emerging economy which does not give a hoot
about the western idealogical values of democracy and peace.
But they "need" the west as a "buyer" of
their impending wealth.
Chinese are master tacticians and they are patient. They also
know the value of gold. But they will not shoot the goose laying
their golden eggs just yet. So the world finds itself at the
precipice. The Empire is largely debt ridden and shows serious
signs of "wear and tear" - economically it is weakened.
The Japanese and Chinese and other foreigners own 40% of Empire's
debt - a mighty lever to have in hand. Militarily the Empire
is stretched, read weakened. Where is all this taking us? Well,
the Empire will fight hard to keep its preemptive capabilities
intact. The doctrine out of Washington DC seems to be: "We
reserve the right to strike where and when we believe sufficient
cause is given." This is rattling a few sabres. And it is
stoking the fires of insecurity. The Iraqi adventure is far from
over, in fact, I would say that due to the oil commodity, a commodity
which China urgently requires to fuel its advancement, the Middle
East is just now starting to hot up. Throw in the Al Quaida threat,
and the recipe is just about right for a world-wide upheaval
of both economic and martial proportions. So what do we have?
China going for growth and needs large amounts of raw resources,
oil for manufacturing and oil for transport facilities. The West
needs oil period. Al Quaida is going for maximum fear and disruption.
Even the threat of an attack can do serious harm to the western
alliance. Who can submit to ever-lasting threats and fear? One
simply cannot fight an endless battle at huge costs and have
nothing to show for it. As well, the Empire's institutions now
seem to be in denial of their situation and that along with a
public losing enthusiasm.
Ultimately, an Empire with a constituency of 290 million people
but of which only 10% hold a valid passport, cannot be expected
to fully comprehend the geopolitics at hand nor show increased
enthusiasm for that world. That world is becoming a far more
unsafe and unwieldy place to do business. Oil is not shooting
up because of Yukos, or whoever, it is shooting up, and will
stay up indefinitely because none of these issues or scenarios
are going to go away anytime soon. It is under this scenario
that I see a "slow grinding" down of both world trade
and Wall Street's incessant bullishness. I believe some of these
concepts and ideas are starting to sink in and take hold. What
might this exacerbate? It might very well lead to a desperate
attempt by the western Central Bankers to flood the markets with
continued liquidity as did Greenspan do with the 2000 bubble
and thereby try to avert a serious structural breakdown and at
least try to maintain an organized status quo.
This capital injection would likely be led foremost by the Empire
(US). But in doing so, the other western central bankers including
China and Japan, who own large amounts of US Dollars in their
official reserves, may see a futile move at hand. This could
very well lead a stampede out of the US Dollar to less risky
currencies such as Euro or Swiss Franc. Hence a triple whammy
of increased money supply on part of the US, the ever-widening
triple deficit in the US and continued geopolitical instabilities
may cause an unforeseen breakdown in western trade and hence
cause a ripple effect to a serious world-wide downturn in trade
and a world gripped in fear. As a precursor of this, one must
watch closely the US bond prices / interest rates and US Dollar.
What is a possible interest rate level for the US Dollar? Where
will the US Dollar index find a valid level? Where does gold
play a role? Is $400 per ounce reasonable in such a world? An
economy which continues to make unsustainable debts can no longer
call the shots. The shots will be made for them. In that respect
I feel the Empire is now at a critical juncture. Neither Kerry
nor Bush have made any serious addressing of the economical situation
and both talk bullishly about the war and pre-emptive strikes.
Needless to say, the Empire has the most to lose in this global
game of chicken.
This past week has seen the key markets and indices starting
to break down in a concerted manner. Do the markets see the above
scenario? I believe they do. And they don't like what they see.
And where is the ultimate flight to safety in a world of insecurities,
of debt and of fear? My personal belief is that in the next 5
years the so-called "relic commodities" of gold and
silver will make a phenomenal comeback which at this point nobody
can even imagine. This is not because I am inherently pro-gold
or pro-silver but rather because all other avenues will have
proven themselves to have been a self-delusion. Wealth cannot
be printed into existence. GDP cannot be printed. A store holder
of last resort must always be available. Until now that has been
the US Dollar. The Empire. I think the realisation is slowly
coming that this is no longer the case. I believe that once these
facts and scenarios make it down to the consciousness of the
"little man" on the street, then the same psychology
which drove the internet bubble will also drive the commodities
bubble even further.
To put it succinctly, the emperor has no clothes but only a very
few have noticed.
 Randolph Buss
DINL Perspectives
Der
Invest Informant
Editor and Publisher
Berlin, Germany
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