Friday, January 27, 2012
I have to say I’m really quite surprised at the resiliency in the system, or rather the lengths that the Powers that Be will go to in order to wall paper over the non-repairable cracks in the system. In truth nothing has changed over the last couple years, government and personal debt is higher, the production of phantom money continues, housing has not been allowed to discover its real bottom due to the lengthy foreclosure waits, the lack of clarity on title fraud and the huge inventory of houses on the market and hidden by banks. So while things have not unraveled as quickly as I believe they should I have seen nothing that says the problems are solved
The Euro is risky because of government debt, the spectre of QE and the huge possibility that it could soon be a splintered into several or many new currency.
The Dollar is hugely overvalued vs its risk. You have insane debt levels, nearly free Fed money, default risk on State and Municipal paper and the ever present danger someone with large Treasury holdings will put spite and vengeance ahead of self interest and torpedo the dollar. Personally I believe putting the dollar down may as well happen now as later.
Gold/Silver is the only real alternative to a dangerous currency market and with the exception of trapped money in RRSPs I’m nearly all bullion/cash. Being Canadian I have a little faith in our currency right now but were I American I’d be 100% bullion. What RRSP money I can’t move is largely into mining shares and energy
It’s my belief that we already seen the 2012 low for metals and I believe a conservative prediction for gold is $2100. Being an U.S. election year I don’t think panic mode will kick in this year, 2013 however will be madness.
I expect big things for silver this year at $70+ in large part do to the pressure of existing physical investment demand as seen in record sales for American Silver Eagles and Canadian Maples, both of which appear to have surpassed the domestic production of Silver. While neither country’s are top tier producers they are both industrialized countries that consume a great deal of silver all of which must now be imported.
Silver also has Eric Sprott to contend with and between his open letter to silver producers to abandoned cash savings for storing company value in physical silver and his 1.5 billion dollar prospectus to add 40-50 million ounces of silver to his fund, Sprott is going out of his way to squeeze the market. Savvy investors will jump at the chance to buy a better managed and fully accounted fund and drop the much maligned SLV trust. The current premium on the Sprott fund shows that a goodly part of the market sees SLV as a scam.
I’m particularly pleased to see some miners are fighting back, I hope that more companies hold onto their product until the price reflects a fairer value
While I’m stating $70 as my prediction for 2012 I would not be surprised to see Silver test $100 before some panicked manipulation slaps it back towards my goal.
We still have tensions in Nigeria, Iran, and Iraq so disruptions are quite possible, also Mexico is still on track to become a net importer instead of a net exporter (should have been last year but I don’t have the stats). Yes more heavy oil plays are being developed but nowhere near as fast as the better quality oil fields are depleted. I don’t see us going below $85 this year and we should see peaks north of $130.
Food stamps and poverty
While the numbers don’t always show us the truth about inflation everyone who’s been grocery shopping the last year or two has noticed that prices are increasing and pre-packaged foods have shrunk in volume or weight. Examples are easy to see, lighter loafs of bread, smaller jars of coffee, butter tarts and cupcakes now come in 10 packs instead of dozens. Food, energy and a weakening U.S. dollar should raise U.S Inflation to at least 4% reported and closer to 8% real.
Despite the slight decrease in food stamp recipients in Dec I still expect that the 46.3 million currently on subsidies will grow to 49 million by the end of 2012. Don’t however expect the $ value of food stamps to rise to offset food inflation. [ Please people if you have any gardening skill and charity in you at all either start gardening and donating foot to people who need it or adopt a family in need and teach them to grow their own. Poverty and hunger hurts young kids the most delaying their metal development and reducing their chances of succeeding at school. Unless you want even more poorly educated underachieving citizens don’t let kids go hungry. ]
It is my belief that government unemployment numbers like U6 are still not broad enough to capture all those wanting work. It’s damn hard to make a prediction when you can’t trust the measure you’re guessing against, that said I suspect the U6 will stay in the 15% range while the Shadow stats SGS Alternative measure will hit about 24%
Being an election year I don’t expect anyone will have the balls to propose a law retroactively legitimizing all those questionable mortgage documents and titles. I do however expect such a law to be slammed though shortly after the election regardless of who’s wins because lets face it, the banks are in charge! While it would be suicide to legalize hundreds of thousands extra foreclosures during the election cycle it would quickly become business as usual after the vote when favours are called in for all those big gooey campaign contributions.
This means foreclosures will continue to drag out in the courts and banks will continue to hemorrhage as additional people decide not to pay their mortgage, even when they can afford to. While clearly unethical who wants to pay $300k for a house valued at $200k? With their equity all eaten away people may as well stop paying and squat for 2-3 years while they build up a nest egg or pay off other debt especially student debt which can’t be ditched in bankruptcy. Many will eventually walk away from their homes with enough money stashed to start over again.
For 2012 housing will continue to teeter in the worst of the bubble markets but may strengthen slightly in other areas. This is not because of overall economic health but opportunity buying in depressed regions like Florida by a new wave of speculators. There is also significant pent up demand from Canadians looking for vacation properties down south.
While the pace of bank failures has fallen off from previous years there were still 92 FDIC insured bank failures in 2011. Banks are under conflicting pressures as they can’t quickly or cheaply foreclose on defaulted homes, when they do foreclose they may be leery of selling that home and watering down the market further, if they do sell they must admit the loss. If they sit on the house until the market improves they risk squatters and people stealing copper pipes and fixtures which often creates far more damage than the thieves recover and the banks can tolerate.
Really it looks like a no win for banks unless a sudden turn around raises home prices by 10-20% while employment rates soar. It’s not going to happen and another 100 banks should fail this year.
State and Municipal failures
There is no doubt in my mind that the trickle of municipalities filing or attempting to file for bankruptcy will both continue and turn into a raging torrent in 2012. There is also reason to believe certain U.S. states could default this year, key among those are Illinois, Jersey, Michigan, Nevada, New York, and California. This will mean hair cuts for investors and creditors, destruction of medical coverage, jobs and pension plans which will send these states into serious regional recession. The credit agencies will probably panic and lower other State credit ratings which will increase the chance of more defaults. Few if any states can maintain their debt and continue to honour all their existing obligations unless the economy turns around and as I’ve said before, it won’t.
With our high rolling commodity based currency inflation in Canada will rest almost entirely on the cost of energy, if Oil and gas stay in range this year inflation will stay modest under 3%,
Employment will trend up from its current 7.5% largely on austerity measures by the federal government destined to kill 50-60,000 jobs. This will be devastating to Ontario in a general way but will absolutely decimate employment in Ottawa. These job loses will weaken consumer confidence and retail and service jobs in the Ottawa area perhaps doubling the job losses.
Canada’s current government refuses to see the dangers of Dutch Disease as higher commodity prices drive the Looney and kills manufacturing. Rather than hoard vital resources for the long hall Canada’s all out race to produce everything for immediate export will ensure poorer quality jobs for the majority. Eventually it will also mean Canada won’t have saved any of our resources to ensure Canadians have those things we need. 40 years of exports vs 200 years of domestic consumption, which will be better for Canadians in the long run, especially once peak oil hits?
Canadian housing is far from affordable and cannot maintain these prices indefinitely, despite tight supply something has to give soon. I think and hope we will see price stagnation for the first ½ of the year followed by a slow and orderly price decline in the second. We don’t need a U.S. crash but we do need price moderation to ensure affordability. With the government austerity Ottawa will probably be the first market to slump.
Greece, Spain, Italy, Hungary, Ukraine - Unless the monetize everything and destroy the Euro a default will happen and probably this year.
EU solidarity- IMO Greece is as good as gone, it’s just a shame I can’t short the new Drachma now. If one goes the precedent will allow it to unravel.
Chinese Banks- a soon to pop housing boom and many factories operating at or below break even means bad loans will abound.
Climate change. -
It’s late January in Toronto and I’m worrying about where my umbrella is rather than the need to shovel so I can’t help but believe the real consequence of climate change are finally being seen. So far this winter we’ve had no snow to build up the water table and fill the lakes, there have been winter grass fires in the prairies, no ice fishing, no skiing, and no severe weather to kill off agricultural pests.
I know the metals community is rife with those who don’t believe in this issue but where I sit this region is changing and changing quickly, hell last year I saw my first possum in Canada, which just isn’t right. You may argue we didn’t cause it but I don’t believe anyone can honestly claim something isn’t happening. Who caused it is irrelevant but there will be financial consequences like the destroyed forests of BC, the droughts and fires in Texas, Floods in Australia and the recently unpredictable monsoons in the Indian Ocean. Climate change is a wild card that’s going to hurt someone this year, we just don’t know who and there’s SFA we can do about it.