Shall we continue with David's Compass?

I have lots of things to share, shall I continue?

What Next?

Sorry for the pause in blogging, friends. I have been very busy getting the yacht ready to sail for Spain and have had poor Internet connection since around May.

One would think, from the media, that the problems are behind us but I urge you to look at the fundamentals. Jobs are being lost. Tax revenue is falling. The Government is printing money. Government debt is increasing. The economy is shrinking. And on Friday the Bank of England stated categorically that the problems are not behind us and continued with another £50 billion print run on QE.

My advice is keep your belt tightened until you can see a real recovery.

What about Gold?

The question facing the long-term investor in gold is "when are the supplier nations (the manufacturing and commodity nations) going to demand payment in gold, or gold-backed currency"? The answer lies in the nature of the relationship that exists between supplier and user, which is symbiotic and mutually beneficial. Neither can prosper without the other; what is good for one is good for the other....up to a point. This holds true only while both parties are benefiting but as soon as either party ceases to benefit, the relationship must end.

At this time, the US dollar is holding up strongly; given dollars, you can buy anything you want. As a store of value, it is -- today -- perfectly good. So the supplier nations are still happy to be paid in dollars (or any other currency that can be exchanged for dollars on the open market). However, there is considerable concern that the dollar will lose its value by combination of deliberate actions by the Fed and factors largely outside the control of the USG (principally high levels of debt and insufficient assets).

The Euro has been exposed as a currency in at least as bad a situation if not much worse than the dollar. The Swissie is too small and needs to be linked to the EUR for trading reasons. This only leaves gold for the time being - in due course another currency might emerge and take over the baton from the dollar but that is some way off.

At this time there is no real alternative to gold as an alternative means of payment.

Presently, the value of the dollar is being supported entirely by fashion and confidence. If people lose confidence in the dollar, it will become unfashionable to hold it and its value will fall -- maybe very quickly indeed. Timescales? That's the $64,000 question but when it happens - if it happens - it will most likely happen very quickly over a period of days or weeks rather than weeks or months.

Has G20 altered the medium to long term outlook?

The main things that were agreed at the G20 summit were:-

1. The world's financial system is in a pickle
2. There will be a new 'world order' passing more influence from the US and developed countries to eastern countries
3. More central bank support is required
4. The IMF will have more money to lend probably by selling part of its gold
5. China is not happy about US QE as that is likely to devalue the dollar, and China has massive dollar holdings in treasuries

Meanwhile, the unemployment rate in the US rises to 8.5% with forecasts of 10% or more, to follow. Obama says that bankruptcy is the best way out for GM. US Treasuries fall. British Airways traffic fell 7.4% last month. UK house prices fell 1.9% in March.

I don't really think that this week has done anything for the current crisis. The publicity and support from central banks probably helped to push the stock markets a little bit higher but they show signs of wanting to fall back again. I'm afraid that the whole thing was a rather pointless waste of everyone's time -- principally because everyone had their own agenda and had already decided on the outcome.

Public Sector workers will always be paid well

It is being said that the Brown government is maintaining public sector pay rises because it is frightened of the unions. That isn't really the point. In times of unrest and dissatisfaction any government, particularly one that has poor support and popularity, has to shore-up its power base by looking after Government workers. That's why public sector workers are getting their indefensible and deeply unpopular pay rises while the private sector continues to cut pay and shed workers.

This will continue to cause real resentment in society, particularly as more and more private sector workers and pensioners suffer further cuts. This Government policy, while perfectly traditional, is likely to cause the most resentment in the usually laid-back middle classes.

G20 -- Obama and Brown marginalised

Obama and Brown are being increasingly marginalised by the rest of the world in pushing for further fiscal easing. The Chinese premier, the EU and King, Brown's own head of the UK central bank are all against further stimulus. Last night Brown seemed to be pulling back. This is from this morning's FT...

He [Brown] appeared to respond to pressure from Alistair Darling, his chancellor, and Mervyn King, Bank of England governor, in conceding on Wednesday there was little room for Britain to announce a second wave of tax cuts or spending increases.

Speaking in New York, he sought to shift the political focus from a fiscal stimulus to other mechanisms intended to kickstart the economy, amid forecasts that the UK deficit could rise to 11 per cent or 12 per cent of gross domestic product next year.

Asked at a Wall Street event about Mr King’s warning against a big new fiscal stimulus, Mr Brown said: “If you put that question to Mervyn King, he will say ... that we've got to be ready to take the action that is necessary to restore [economic] growth.”

Beware, this isn't quite the U turn you thought. This does NOT rule out further Quantitative Easing, in fact it almost rules it in. What happened is that yesterday's gilt auction (these are new 40 year Government bonds being auctioned off) failed to find enough buyers. This is very unusual and is a signal from the world's financial community that British debt isn't as safe as it could be. Since the only way that Brown can finance his proposed tax cuts and public spending rises is by borrowing, that's why he appeared to be pulling back last night but be clear, this does not rule out QE. QE is the most dangerous of the stimulus methods being used and has the risk of causing inflation. There have been many press reports in recent days that strongly suggest we are in an inflationary phase already with consumer prices rising, auto manufacturers putting up their prices significantly, and distributors announcing that once present stocks have been sold, prices will rise due to a fall in the value of the Pound.

What worries the world right now is that the US (and the UK) will inflate (devalue) away their debt. But maybe that's the only option open to them? That's why there will be considerable interest in some new reserve currency. It has to happen, and happen fairly soon. I think that it will probably be based on some kind of gold standard because there is no other way that isn't too contentious -- at least, not until the Dollar crisis plays out and the world's next obvious choice as a reserve currency emerges (the Yuan?).

I leave you with this thought. Large heavily-populated towns and cities in the USA would become literally uninhabitable without air conditioning and cars to carry people around. Imagine the consequences. They need oil in very large quantities. If Obama is going to inflate away US debt by devaluing the Dollar then clearly imported oil is going to be very much more expensive - by a factor of five times or more, taking it to truly unaffordable levels, for air conditioning. It is unthinkable that the administration hasn't already figured this out, so what are their plans?

China and US Treasuries - Update

The present position is that the US and the UK have started a policy of printing money (QE). Both governments claim that this is to counter deflationary pressures in their economies. I do not believe that there is any monetary deflation -- while prices are falling for a few things, overall, there is underlying inflation in the economies. It seems likely that the US and the UK are intent on inflating away their debt. If that is the plan, then the likely target is an 80% devaluation of the US Dollar and British Pound. The GBP/USD pair could remain fairly constant, of course. It does not seem likely that the EU can retain a strong Euro in this scenario and that will have to be devalued, also.

We are already seeing the USD decline on fears that this is the case (and gold has been rising on the same fears). Today, the Chinese have stated that China will continue to buy Treasuries despite the warnings given by the Premier Wen Jiaboa a fortnight ago. I presume that this is an attempt to stabilise the value of the USD. One assumes that there must be a tremendous dialogue taking place between Chinese and US officials constantly and the comments made public are simply the tip of a huge iceberg of discontent.

I don't see how this is going to change US or UK fiscal policy; the policy of QE, i.e. printing money to inflate away the debt, has not been halted. We would have been told, for certain, as nobody is very happy with that policy in any case.

For now, it is all happening behind the scenes but the really important issue facing us now is inflation. The recession is happening and it will get much deeper. House prices will continue to plummet. Firms will continue to go bankrupt, workers laid off (the motor manufacturers are in terrible trouble as are most banks), and tax revenues will continue to fall. This will make it impossible for either the US or UK governments to manage without 'printing' money.

I am only posting when I have something that either confirms or changes the overall outlook. I don't want this blog to become a micro-economic commentary -- there are plenty of those and many of them are excellent (and a few cranks, it must be said).