{"id":9431,"date":"2011-09-26T09:04:03","date_gmt":"2011-09-26T13:04:03","guid":{"rendered":"http:\/\/www.technologyinvestor.com\/?p=9431"},"modified":"2011-09-26T09:16:28","modified_gmt":"2011-09-26T13:16:28","slug":"the-world-is-in-major-financial-crisis-where-for-stocks-where-for-gold","status":"publish","type":"post","link":"https:\/\/www.technologyinvestor.com\/?p=9431","title":{"rendered":"The world is in major financial crisis. Where for stocks? Where for gold? Where for Greece?"},"content":{"rendered":"

There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt<\/em>. – John Adams<\/p>\n

The best news: Real estate is perking up. Two syndicatications just sold. One will show a 10% IRR, the other a 15% IRR. These were both 2007 vintage. The lesson with real estate remains: the price you pay and how you structure your borrowing determines the ultimate outcome of your investment.<\/p>\n

The semi-bad news: My mortgage REITs big dividend-payers are now all under water — but their high dividends are covering their small capital declines. I remain optimistic.<\/p>\n

The semi-awful news is that gold has taken a major dive and, though I saw it as “squirrelly,” I didn’t bail. Dumb me.<\/p>\n

Fortunately, I’m out of “normal” equities, except for COST and AAPL, which are holding up.<\/p>\n

What now?<\/p>\n

Gold always suffers in financial crises. It is suffering today because of margin and redemption calls. It should bounce back.<\/p>\n

\"\"<\/a><\/p>\n

This piece from Seeking Alpha<\/a><\/strong> explains all:<\/p>\n

How Gold Performs During A Financial Crash.<\/strong><\/p>\n

Over the past couple weeks, gold has fallen from a high of around $1920\/oz to an intraday low of around $1730\/oz (about a 10% drop). On Sept. 22, 2011, alone gold fell about 3.7%. This has happened as the global economy marches ever closer to Lehman 2.0 \u2013 a three-pronged collapse of the European banking system, the US economy and the Chinese economy. I am being inundated with questions from people wondering why gold is falling as the financial crisis worsens. After all, isn\u2019t gold some sort of safe haven?<\/p>\n

The first thing investors need to understand is that gold is priced in US dollars. This means that as the dollar rises the price of gold falls, all things being equal. The dollar is quickly rising because it is a safe haven (US Treasuries are a safe haven that must be purchased in US dollars) and because asset liquidations around the world are gaining speed causing a growing shortage of dollars.<\/p>\n

The second thing investors need to understand is that gold, as an asset that has performed well, is a source of funding for margin calls made on declining assets. This means that gold is undergoing a degree of “forced selling.”<\/p>\n

One only has to go back a couple years to see how gold reacts during a financial crisis. The chart below shows the price of gold during the financial crisis that arguably began with the collapse of Bear Stearns in March 2008. (There are multiple ways to define the true start, but I had to draw a line in the sand and the first major i-bank collapse sounded like a good place to start.) During this time, gold prices fell by about 25% and subsequently recovered all losses. This was a scary ride for anyone holding gold at the time, but it\u2019s an incomplete view of gold\u2019s performance during the crisis.<\/p>\n

\"\"<\/a><\/p>\n

The second chart below shows gold during the same period priced in US dollars, euros and Canadian dollars (indexed to 100 for comparison purposes). During the 2008\/2009 crisis, as the US dollar was rising while the euro and Canadian dollar were falling and this is reflected in the different gold prices. Gold priced in Euros and Canadian dollars fell less and recovered faster than gold priced in US dollars. This is precisely because the US dollar was so strong during that period. However, as the monetary response began to unfold (QE1 announced December 2008) and trillions of US dollars were unleashed to backstop the financial system, gold in all currencies began to rally dramatically.<\/p>\n

\"\"<\/a><\/p>\n

Really, the basic steps are straightforward:<\/p>\n

+ Economic\/financial crisis leads to asset liquidation and dollar shortage
\n+ Dollar shortage leads to dollar appreciation and gold depreciation (in dollar terms)
\n+ One form of asset liquidation \u2013 forced gold selling \u2013 leads to gold depreciation (in all currencies)
\n+ Eventual monetary response creates surplus of dollars
\n+ Surplus of dollars causes dollar depreciation and gold appreciation<\/p>\n

For US investors, in my opinion, a crisis in which a skyrocketing dollar sends gold plummeting in US dollar terms could create a big gold buying opportunity, like it did in 2008. That said, the basic steps outlined above could take months to fully materialize. The market is disappointed (read: impatient) with the Fed’s lackluster curve-flattening program (i.e. Operation Twist) because it delays the possibility of additional quantitative easing. However, as the economy continues to deteriorate, the probability of QE3 rises – this process could take a long time, and the Fed won’t act until it must act. The Fed simply no longer has the credibility and political support to act boldly and pre-emptively, so it must wait until there’s blood in the streets and politicians are begging for relief.<\/p>\n

Note: For non-US investors that own gold, pay attention to the price of gold in your domestic currency because, unless you\u2019ve hedged, your exposure is relative to your home currency, not US dollars.<\/p>\n

Europe is in a mess. The politicians are scrambling to do something that won’t cost them their jobs.<\/p>\n

Australian John Hempton has been in and out of the securities. An aricle<\/strong><\/a> labeled him “the plunderer from down under.<\/em>” That’s all I know about him. He has a blog called Bronte Capital.<\/strong><\/a> He published this piece on Friday, September 23, 2011. It’s extreme, but worth reading:<\/p>\n

Models for a Greek Sovereign Default<\/strong>
\nI am on a plane – long-haul over the Pacific – and someone asked me to spell out what I thought would happen with a Greek sovereign default. As this is drafted on a plane it is designed to outline extreme views (you know the ones after two glasses of wine). If people want to explore more modest views that is for the comments. Still all options look bad.<\/p>\n

I see two broad variants – both of course stick most of the losses on Germany and France. Some variants are totally disastrous.<\/p>\n

Variant 1 – the Argentine option: Default and de-peg the currency.<\/p>\n

When Argentina defaulted not only did the government default but they forced a private default. If you had a debt in US Dollars in Argentina prior to the default you were forced to pay it back in Peso. Indeed it was illegal to make payment in US dollars.<\/p>\n

Likewise if you had a US dollar asset you got back Peso. A dollar deposit in Citigroup in Buenos Aires became a peso deposit. If you really wanted to keep your dollars you needed to make your Citigroup deposit in New York.<\/p>\n

The forced private sector default was necessary for Argentina. The Argentine banks all had lots of US dollar funding. If you devalued without forcing their default then they would all have uncontrolled defaults (a true disaster) and the country would lose its institutions. Telefonica Argentina would have failed too – failing to replay USD debts.<\/p>\n

The same applies in Greece. If the Greek Government were to devalue the new Drachma (to perhaps a third the value of the Euro) then the banks (which are loaded with Greek Sovereign paper) would default. Even Hellenic Telecom would default because they would be forced to repay their billions of Euro borrowings whilst collecting only Drachma phone bills.<\/p>\n

The Argentine economy was doing quite nicely after the devaluation. The lesson was that devaluation worked – provided you simultaneously forced private sector default.<\/p>\n

If you were Greece you would take this option without hesitation.<\/p>\n

However this option has explosive implications for Europe. You see a bank deposit in Athens is going to turn your Euros into Drachma. Overnight it will lose 70 percent of its valuation.<\/p>\n

So it has to be done quickly and with an element of surprise (as per Argentina when most people did not get their dollars over the border). Without surprise people will rush their money to Deutsche Bank in Munich.<\/p>\n

One weekend we will just find that the Greeks have done it.<\/p>\n

But now suppose Greece does pull this trick. The day after we have a Drachma – deposits are in Drachma. We might print a single 10 drachma note and allow it to settle against the Euro – then over time print more. This should work for Greece.<\/p>\n

Now if you are Irish or Italian or Portuguese (or even Spanish) you know the rules. You get to get your Euro out of the PIGS and into the core (Germany) as fast as possible. So max all your credit cards (for cash), draw all your bank deposits and load them in the boot of your car and make the drive to Switzerland or Germany. Somewhere safe. Otherwise you are going to lose half the value the day that the rest of the PIGS do a Greece.<\/p>\n

And this bank run \u2013 a run including tens of thousands of Italians driving their Fiats – will surely blow apart every Italian bank. And their Euro-skeloritic compatriots will sign the death knell for for all their banks too.<\/p>\n

If you are going to go the devaluation route you are going to have to do it all at once. Like the big-bank weekend (maybe coinciding with a week long bank holiday) in which all core European countries get their own currency back.<\/p>\n

There is a precedent. It is not a pretty one. When the Austro-Hungarian empire collapsed there was a single currency over a huge area covering much of what is now Euroland. In this case the rather Germanic Austrians were in charge (or rather were in charge until their empire collapsed).<\/p>\n

What they did was put troops on all the borders and made it illegal to take cash (or wire cash!) across borders. Then all Austro-Marks in each country was stamped – converted to Drachma for Greece, Marks for Germany, Peseta for Spain or whatever the currencies of the day were [If someone remembers the 1918 border splits better than me they are welcome to say…]<\/p>\n

In this conception all Spanish debts become Peseta debts. All German debts become Mark debts. All Greek debts become Drachma debts. Unstamped currency goes worthless.<\/p>\n

If you are going to split the currency I see no alternative to a big bang – and if you do that I see no alternative to troops at the border stopping transfers (and wire transfers) because shifting cash North looks so profitable against a sudden devaluation. Suddenly \u2013 and against all historic hope \u2013 its time again to guard the French-German (and every other European border) with troops for a week whilst the money is stamped.<\/p>\n

Note however almost every country borrowed in hard currency (Marks) and got to repay in soft currency (Drachma). This is a scheme which shifts the loss home to Germany and with little compensating benefit except that they get their beloved Mark back. Its a scheme that is way better for the periphery because they get to keep their institutions. In two years they should bounce back like Argentina bounced back after their default.<\/p>\n

Unilateral Greek default and devaluation without planning for the periphery to do the same – well that is a true mess. Too ugly almost to think about – and it would be unilateral for less than a week. The rest of Europe falls into that abyss with maximum movement of deposits and cash in the meantime.<\/p>\n

The Australian dollar is now below the US dollar. <\/strong>That makes it a good time to give the Australians a little more money on the Westpac 6%+ CD. The Australian dollar is depressed because there is talk of China’s growth easing. Australia’s business is shipping China raw materials it needs for its growth. Maybe it’ll fall a little more and put the Aussie dollar “on sale.”
\n<\/span><\/span><\/p>\n

Late Night call to Veterinarian<\/strong><\/span>.
\n<\/strong>A dog lover, whose female\u00a0was “in heat,” agreed to look after her neighbors’ male dog while the neighbors were on vacation. She had a\u00a0 large house and\u00a0thought she could keep the two dogs apart. \u00a0 However, as she was drifting off to sleep she heard awful howling and moaning\u00a0 sounds, rushed downstairs and found the dogs locked together, in obvious\u00a0 pain and unable to disengage.<\/p>\n

When her attempts to separate them failed, she was frantic, and although it was late, she called the vet, who answered in a very grumpy voice.<\/p>\n

She explained the problem to him, and the vet snapped,”Hang up the phone and place it down alongside the dogs. I’ll call you back and the ringing will make the male lose his\u00a0erection, and he’ll be able to withdraw.”<\/p>\n

“Do you really think that will work?” she asked.<\/p>\n

“It just worked for me,” he replied.<\/p>\n

\"\"<\/a>
\n<\/strong><\/div>\n

Harry Newton who is worried that the\u00a0 Euro problems, if not addressed quickly (something politicians are loathe to do),\u00a0 could develop into a major world crisis, and could engulf us all in very bad ways. When in doubt, stay well out.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt. – John Adams The best news: Real estate is perking up. Two syndicatications just sold. One will show a 10% IRR, the other a 15% IRR. These were both 2007 vintage. The lesson with real […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-9431","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/9431","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=9431"}],"version-history":[{"count":0,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/9431\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=9431"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=9431"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=9431"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}