I know, it sounds strange…
Who on earth holds a “Global Financial Summit” in Las Vegas (usually better known as the home of “how to lose your money in 3 days or less”)?
It’s not exactly the first city that comes to mind when you think of high finance…maybe Davos, or an exotic locale in Bermuda or Panama, or Singapore perhaps…but Vegas?
But luckily, those crazy freedom-loving organizers of FreedomFest decided that Vegas would be just the place, so thanks to them I was able to attend a veritable plethora of finance-related sessions last week, and now I get to share as much as I can with you!
First up on the deck is the very first session from the event, the aptly named “Global Financial Summit” panel to discuss the ins and outs of our global economy and what’s going on around the world (warning: as I’m sure you know, it’s not a pretty picture!).
In case you’re strapped for time, my big takeaways are:
- Europe is a mess (no surprise there…), is fast heading for depression, and is pulling the rest of the world along into a recession
- The threats to the euro are also threatening a collapse of our entire worldwide monetary system
- This will cause a temporary strengthening of our U.S. dollar (we are seeing this now)
- Precious metals are “going to the stratosphere”
- We can expect another 10 years of instability and chaos in the Middle East and struggles over regime changes and oil, with possible bloodshed
- China will import $1 for every $1 that they export by 2015
- There are 1.3 billion people in China alone who want to live the way we do (hence their desire and need for consumption)
- China plans to roll out a cross-border transaction system denominated in yuan in 2014
- For 18 out of the last 20 centuries, China has had the world’s largest GDP, and it will again…they have 1.3 billion people who want to live like we do
- In last 10 years, our U.S. debt levels have grown 160%…that’s 16% per year!
- Corruption abounds at the highest political levels all over the world
- Look at resources as a great potential investment area
If you’d like the details, then please read on…
The panel was moderated by none other than John Browne; former 14-year conservative member of the UK Parliament who served with Prime Minister Margaret Thatcher; worked as an investment banker for Morgan Stanley, Barclays Bank and Smith Barney; and now serves as Senior Economist for EuroPacific Capital (Peter Schiff’s firm).
He’s also a well-known author, speaker, and media personality (and has that dry British humor and accent that makes everything he says sound witty and insightful). 🙂
John kicked things off by discussing Europe (he was followed by equally illustrious panelists who briefed us on the Middle East, Asia, the U.S.A., and then history and investing implications).
John Browne – Europe
The European Union (EU) is important because it is very, very big. At $17.2 trillion GDP, it is the largest economy in the world, accounting for 25% of the world’s trade.
Its largest customer is China, so what affects Europe will also affect China, including its suppliers in other countries (e.g. Australia, New Zealand, and many others).
The euro is the 2nd largest currency in the world (second only to the dollar) and it is a fiat currency. Right now, the EU is in chaos, and it’s a very complex situation.
In order to understand Europe, we must understand Germany.
This next bit surprised me…I did not know this:
John said that Germany has two “grand strategic goals” (remember, he’s from the UK…):
1. Sound Money
(This I didn’t realize at all…Germany wants sound money? I thought the entire world was obsessed with fiat currency at the moment…)
This puts Germany on a collision course with two big monetary debasers, the U.S. and the UK, who have believed in what John called the “socialist voodoo economics” of Keynes and have therefore destroyed the wealth of the two richest countries in the world (the US and the UK…) and have brought them almost to their knees.
(This one I knew…)
Germany is a relatively young country, created in early 19th century under Bismarck.
(OK, I admit I had to look this up as my European history class was a loooong time ago, but according to Wikipedia, Otto von Bismarck unified numerous German states into a powerful German Empire under Prussian leadership and created a “balance of power” that preserved peace in Europe from 1871 until 1914. He apparently provoked wars with France and Austria and created the German empire in 1871. Don’t say you never learned any history here at Kung Fu Finance!). 🙂
Anyway, Germany was late into empire, and used the Franco-Prussian war to grab empire, and then WWI to grab the empires of all of Western Europe. WWII was another grab for land and empire, and according to John….Germany’s new ploy is the European Union, which he believes is just another attempt at grabbing empire (in this case, the empires of all of the members of the EU).
Germany accepted the euro on the following conditions:
- It was a sound currency
- The central bank of Europe would be in Germany, and
- The powers of Britain, the U.S., and France would agree to German reunification despite Russian opposition.
Germany saw that a strong euro would bring many countries in the EU to austerity, and they would plead for a rescue, and that rescue would be provided by Germany in return for increased political control.
Greece and Italy’s two prime ministers have been placed there by Germany, and only a few years ago that would have taken hundreds of divisions of soldiers to achieve that regime change.
According to John, that is the grand German plan, and it is coinciding with a massive recession in the world and a threat to our entire fiat currency system.
John sees Europe heading fast for depression and pulling the rest of the world into a severe recession, and he sees the threats to the euro currency as threatening the entire worldwide fiat monetary system.
This of course brings worldwide chaos, and a temporary boost to the U.S. dollar (which we are seeing now) before failing, and then a collapse of the monetary system, and in his opinion, precious metals hitting the stratosphere.
Tom Palmer – The Middle East
Next up was Tom Palmer, who is General Director of the Atlas Global Initiative for Free Trade, Peace, and Prosperity, and a Senior Fellow at the CATO Institute.
Tom talked about “one of the more stable regions of the world”, the Middle East… 🙂
To summarize, we’re in for a long, protracted period of instability. There are a few bright spots, but we should expect 10 or more years’ of struggle and political and economic instability as the varied political forces struggle for control of the Arab States.
He began with Tunisia, where the Arab Spring was born, and told the well-known story of a young businessman who borrowed $200 to buy produce for his vegetable business in December, 2010. The next morning, he was assaulted by local officials, beaten up, publicly humiliated, his produce overturned and destroyed, and his electronic scales confiscated.
When he went to retrieve his electronic scales, his primary capital in his business, the beaurocrats wouldn’t see him—he didn’t matter—he was “just a businessman”.
He exited the building and out of utter despair lit himself on fire—a desperate plea for economic freedom, the rule of law, dignity, and the protection of private property.
This was the start of the “Arab Spring”.
What has happened as a consequence?
Well, the Renaissance Party won enough seats to select the Prime Minister, Hamadi Jebali—the “friendly face” of radical Islam who is widely believed to work with the Sharia movement who launch attacks on movie theaters and other cosmopolitan life they deem un-Islamic.
There has been much instability, curfews, etc., and we should expect a long period of struggle in that country.
One bright spot, however, is that the first libertarian organization in Tunisia is holding their first conference in that country, bringing together top leaders in all fields to discuss how to promote freedom.
Apparently we haven’t heard much about Morocco because it’s doing reasonably well! The Constitutional reforms of July 2011 have been reasonably effective, the king is popular, and he is leading the country in the direction of more openness.
The Muslim Brotherhood won 2/3 of vote in Parliament, and was the only serious opposition the Mubarak regime had allowed (they were politically suppressed, but allowed to be active in all other regards).
On June 14th of this year, just a month ago, there was a military coup to dissolve Parliament, and now there is a very serious struggle going on that may very well lead to bloodshed in Egypt.
The struggle is between the military and the cronies, and it’s about (guess what…) money. The military controls 10-20% of the Egyptian economy and it is where the officers get their money, and they will not let that be taken away from them by a rival force.
We should expect to see no resolution for a long period of time.
Libya was a surprise… The Islamists did not win and instead a party self-described as “liberal” in the European sense won.
The Muslim Brotherhood did not do well—they are seen as Egyptian rather than Libyan and have not been active in social welfare functions as they have been in Egypt.
We should expect a long-term struggle over oil.
When the current regime falls, Syria will either develop a multi-party democracy, or 10-20 years of civil war.
In conclusion on the Middle East, there are some bright spots (ahem, you must look quite closely to find them!) but we should expect a lot of instability for the next ten years.
Keith Fitz-Gerald – Asia
Keith is the Chief Investment Strategist at Money Map Press and a bestselling financial author who has spent more than 20 years in Asia and is a frequent commentator on Bloomberg, CNBC, Fox Business, and many, many more.
He focused on China and Japan.
The “doom and gloomers” have been remarkably consistent for the last 40 years in predicting China’s demise, but Keith suggests they are betting on the wrong thing.
As Westerners, we need to bet on China’s success, because without it, the mercantilist policies of the U.S. and Europe do not work.
Everyone says China will fail if its exports crater, however, as recently as 1990, China imported $.70 to every $1.00 that they exported. Then it was $.80, and a few years ago it was $.92, and now it’s $.97…and by 2015 it will be dollar for dollar.
Japanese companies that are surviving today have nothing to do with the earthquake or recovery—the companies that are succeeding are the ones that have shifted their focus to China.
The U.S. and Asia is not quite sure what to make of each other—it’s like a high school dance with boys on one side and girls on the other and neither one not quite knowing how to talk to the other and ask each other to dance.
However, we need to learn to dance because that is what will hold the rest of the world together.
Keith sees three reasons why we will see a Chinese-led recovery, even if the West does not yet perceive it nor understand it:
1. Strong Chinese leadership
Love them or hate them, but Chinese leaders don’t run in fear, they don’t print money like Bernanke has, and you see actual “adult supervision”. The U.S. uses the dollar as a weapon and does not understand that much of the rest of the word actually likes to do business with China.
2. Chinese growth rate
Many say it’s “made up”, but Keith says, “so what?”
For 18 out of the last 20 centuries, China has had the world’s largest GDP, and it will again. It’s just a matter of numbers—there are 1.3 billion people in that country who want to live the way we do, with refrigerators, cars, and clean water. They will scour the world to achieve those things, not to “dominate”, but to survive as they have for 2000 years.
3. Chinese money is heading outside of China.
Much of our Western economy is sustained by Chinese direct foreign investment. We were scared of the Japanese yen in 1980…but eventually we bought most of that property back, and internationalization of the yuan is inevitable. China plans to roll out a cross-border transaction system denominated in yuan in 2014 (only 2 years away!).
So the question is “what happens with the dollar and the euro as it affects the yuan?” and vice versa.
David McAlvany – U.S.A.
David McAlvany is President of the McAlvany Financial Group and ICA, a 35-year-old precious metals firm, and is a featured speaker on radio and around the country.
David started off by saying that the current globalization is actually the 6th period of globalization in the last 200 years, and it’s largely a credit story (“as go the credit markets, so goes the globalization trend”).
Credit has expanded—have we reached our outer limit on credit expansion? And if we see a credit contraction over the next several years or decades, what are the implications for growth in the developed and developing world?
In the last 10 years, our debt levels have grown 160%…that’s 16% per year!
Obviously, that’s not sustainable…these fiscal issues have to be addressed. We have debt at its outer limits in the developed world and an employment issue here in the U.S.
It’s not that the unemployment rate is the highest we’ve ever seen it, but that people are remaining unemployed longer than they ever have in U.S. history, even going back to the 1920’s. The duration of unemployment exceeds 40 months, versus the average through time being 20 months—it’s the longest we’ve ever seen it.
And, if the unemployment rate is over 7.2% or 7.4%, never in U.S. history have we seen an incumbent reelected, so we should expect some games being played with that number as we approach our election later this year.
We have a fiscal issue (understatement of the year…)—we don’t have the political will to either cut our budget or to raise revenues, but we must because we also don’t have a match between what we are spending vs. what we are taking in.
Obama’s recent budget shows $3.8 trillion in expenditures vs. $2.5 trillion in revenues—we can’t do that. Not at the household level, nor the municipal level, nor the federal level…unless we print.
He spoke briefly about China, too, although his talk was on the U.S., saying that the autocratic regime there today has benefited tremendously—the top 5000 members of the Politburo have a combined net worth of $90 billion!
These are state employees who have never made a large income and yet have done very, very well for themselves. 80% of the leaders of all state-owned enterprises are direct communist party appointments.
So the issue is not that there is not an economic roadmap for the future, but that politicians have found a way to steal from their people, and this isn’t just in China—it’s all around the world.
It’s the U.S., China, Europe…there is corruption at the highest possible levels. If you look at our current deficit levels, roughly 8-10% of GDP, he said to consider that to be the equivalent of graft in our economy, direct theft from you encompassing two constituency groups and a form of political corruption.
Ultimately, the way out is not going to be fiscal responsibility…David thinks our current issues will lead to monetary madness.
Frank Holmes—Historical Context
Frank Holmes is the CEO and CIO of US Global Investors and is a frequent commentator on CNBC, CNNfn, Bloomberg TV, and more. He was instructed to give us the “historical context” for all of this data, and he did!
He noted that crises in financial markets have taken place for over 400 years, and follow a similar pattern:
Great innovation→ Profit margins expand → Everyone copies
But the real issue is that margins compress…so to get those margins and revenue up, leverage is allowed.
And leverage is the biggest difficulty in all financial crises. It is not hiring more regulators—it’s not allowing leverage to take place.
The average crisis lasts approximately 5 years, so Frank believes we have another year to go (personally I think that’s wildly optimistic…).
But he recalled the last several financial crises:
- Tax reform in 1986, and the resulting S&L crisis didn’t bottom until 1991
- In 1994, the Mexican crisis…took four years for that economy to turn around
- In 1997, the Asian crisis…
So if we look at the current huge super-cycle we are experiencing in resources, we see that oil bottomed with the Asian and Russian crisis in ’97 and ’98 when we had oil at $10 per barrel. Then four or five years later, emerging countries turned their economic engines on and all commodities started to take off, particularly oil, gold, copper, and zinc.
He said it was important to ask whether this crisis we are witnessing in Europe will turn into another Japan, but pointed out that Japan isolated itself and did not borrow abroad, thus stretching out what would normally have taken 5 years into 25 years.
The U.S. is different because we borrow abroad, and Europe is different because they also borrow abroad, so Frank believes that the odds favor that this crisis will resolve itself in a 5-year period.
He pointed out a few more differences between now and the 1970’s crisis—in the ‘70’s we had 3 billion people, and today we have 7 billion people.
In the 70s when oil hit $85 / barrel and gold hit $850, it was an entirely different cycle that drove those commodities because China and India had a global footprint of only 2%, and now they are 18% and make up 40% of the world’s population and 40% of the grad students studying math and science.
(In America, we have more students graduating with degrees in sports training than we have engineers, and more lawyers coming out of school than engineers!)
We have a structural change as to what was different in the 70’s that drove commodities vs. what is different today.
The population of the world has doubled. China and India have a global footprint and are embracing free markets in a nonlinear fashion. China is doing this with its tax-free zones.
So where are the opportunities?
It is horrible out there—everyone is apathetic towards investing.
But if you look at the S&P 500, today it is 15% resources, whereas in 1980 it was 40% resources.
And today dividend yields on resource stocks are higher than a 30-year government note, and there are 7 billion people who all want the American Dream and who all want this infrastructure, so David believes it is a very different world and there are great opportunities.
So stay positive (and look at resources!), but be wary of debt and deleveraging.
So that’s what the experts think…but what do you think? Do you think we’ll be out of this crisis by next year like Frank Holmes believes? Will China and India save us all? Are resources and commodities and their respective stocks the place to be?
Please let me know what you think in the comments, and thanks very much for reading and being an awesome Kung Fu Finance subscriber!
To your financial success,
— Kung Fu Girl