As the black financial clouds gather on the horizon, a deep depression has moved into most investment commentary. It would seem that a "Perfect Storm" is brewing. This is taking form in the following manner:
Firstly, the Chinese economy is set for a major set back.
Secondly, the Euro as a currency and a market will cease to exist.
Finally, the safety and security of Western government gilts and bonds will be eroded.
Now in which order this will take place is open for speculation. But that it will take place is almost a certainty. Now what can you do is the question? Sending for the U.S. Coastguard is not a sensible option - this is real and not the cinema.
So let’s look at each of these events in turn.
The Chinese economic boom was created and driven by manufacturing and exporting to the West. Then along came the financial crash and recession in the West, which put the dampers on this trade. Now at this point China had over 500 million workers employed, and sudden unemployment could have ended in massive civil unrest. Therefore the Chinese government started to spend its huge financial reserves on an enormous infrastructure programme to take up the employment slack. It built dozens and dozens of new cities, airfields, ports, and thousands and thousands of miles of roads and rail track.
But what to do now?
The West is still in recession, and to add insult to injury has also started to repatriate some manufacturing back home. Much of the newly created Chinese infrastructure remains unused. They have created one enormous Property Bubble, and as the property values tumble it will have a knock on effect all around the world.
Many FTSE100 and DOW companies are heavily invested in China. Commodity prices will tumble as demand falls. Chinese banks, some with a majority of their value in Chinese property, will close and impact on Western banks that are invested in these same Chinese banks. In addition, the Emerging Markets and Japan are also reliant on the strong performance of the China Dragon.
Altogether this is a real buggers muddle.
There is not much good that can be said about the Euro, Euroland economics, and its politicians. This is a train crash waiting to happen - it’s just a question of when.
Recently Greece defaulted in any sane interpretation of the word, and very shortly other countries will be following suit. Even if it made sense to bail out these countries there simply cannot be enough money to go around. So surely Euroland will return to where it was before, and the countries will return to their original currencies. All greatly devalued with the exception of Germanys Deutschmark, which is not good news for Germany’s exporters. How this break-up will be achieved I cannot imagine. One can only hope that it happens without too much bloodshed.
A collapse of the Western World’s Gilt and Bonds must be on the cards. Yields as low as 2% must be unsustainable in the long term, and they have now been thereabouts for a long time. They have been kept down by low interest rates and Western governments acceptance of Quantitative Easing. This in turn cannot go on, and may indeed have already come to an end. So if the money to buy the gilts dries up and also becomes more expensive, the prices will fall. That safe haven then moves away over the horizon.
This why I say the "Perfect Storm" is on the way. In fact I believe it is already on the doorstep, but we are in denial.
Looking at present day politicians and hoping they will come up with a solution is hopeless – that’s rather like looking for the resurrection of Captain Smith from the Titanic and suggesting he takes us on a North Atlantic cruise.
So what to do to protect our wealth whilst this turmoil passes through and disappears over the horizon, as given time it surely will do? Well, much cleverer people than I do not appear have any clear-cut solutions.
So for the foreseeable future I will stay mainly in cash and accept the costs of inflation, for this must be the better of the two evils. I will watch the Saltydog numbers very carefully to see whether these circumstances perhaps create an upswing in the price of gold bullion. Who knows - the Gold Standard may be brought back.
Still this all speculation at the moment, so my cash is going to stay on deposit until the Saltydog numbers tell me to do otherwise.