How to protect your wealth in times of global economic turbulence?

Global economic outlook

The age of economic and financial turmoil has started. I don’t see the global financial markets settling down very soon. There would be a lot of volatility in the market going forward. Bloodbath is the only word that comes to my mind for the financial markets globally. To share few financial institutions riding the market headwinds, Morgan Stanley is in a free fall. Goldman Sachs is at multi-year lows. Citigroup is looking ugly. Bank of America lost 50 per cent of its market cap in 19 days. Welcome to the uncertainty of financial markets.
Last week was one of panic in the markets. Not that investors didn’t have things to be scared about. I mean, there’s Greece, Italy and Europe, the Fed, Congress about to pass a trade war bill with China, China’s growth may be slowing. Belgian bank Dexia stopped trading, BAC and C got hammered, job losses are back above 400,000 a week, unemployed who fell off the 99-week dole now number 1.6 million and climbing, and so on. Investors may be wondering what is going on with the major firms in the financial sector. While each of these firms has different problems —vampire squids to countrywide acquisitions — they all have something in common: their balance sheets are opaque. These balance sheets are filled with toxic assets and exotic products. The Federal Reserve has announced “Operation Twist,” which saw the U.S. central bank shift from the short end of the curve into the long end. The idea is that short-term rates are so low that more Fed purchases can’t do anything more. This is the idea plagiarised from 1961.
Most mortgage and consumer-credit rates are based on long-term rates. The 10-year bond drop to below 2 per cent and the 30-year drop to near 3 per cent. The Fed’s idea is to keep longer-term rates lower for people to refinance or get mortgages at low levels. Fed also wants to flatten the yield curve. What is happening now with short-term rates near zero is that banks can rebuild their balance sheets by borrowing at zero than buying long-term bonds at higher rates. The Fed wants to force banks to lend that money or speculate by ending that trade. The US economy is falling apart. Metal prices across the spectrum are all falling at various stages, Gold, silver, and copper have fallen fast and hard. There are buying opportunities in different market including equity, bond, commodities, currencies and real estate markets. Bull and bear markets are available in all regions. Great John Templeton summed up bull market life cycles precisely when he said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Famed economist Robert Shiller from Yale University, now warns that the stock market is “still high by historic standards,” and that it has yet to witness the dramatic correction that occurred during the Great Depression. Dallas Fed President Richard Fisher says that Bernanke’s Operation Twist will be “working against job creation.” And probably the most shocking prediction comes from various economists including Roubini who thinks US economy is in deep recession. I see lot of bail outs of many banks in the coming weeks/months. My prediction has come true in 2011 as well. First major European bank Dexia is looking for bail out. It has collapsed. The giant bank is looking for funds to remain floating on the sea otherwise it would sink.

Dear Investors is your bank safe? Is it well capitalised to weather the financial storm?

First major European bank bailout of 2011 has now happened. French/Belgian banking giant Dexia has failed and both governments have pledged to participate in a rescue plan. But Dexia will not be the last major European bank to fail as I said earlier. There are many more banks to be bailed out and this would destroy tax payer’s money. It’s a big moral hazard. Let them fail and go bust. I have given advance warnings about the failure of Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, General Motors, Fannie Mae, Wachovia, Citigroup, Bank of America, and many others in 2007 and 2008.

Wealth protection strategy in the short run

Precious market insight about Gold
a) Gold – Strategic classy investment for the rich people to stay rich. It’s a real asset. The continuing buildup of U.S. government debt will devalue the dollar, and the best alternative is gold. US dollar is dead and dead dollars don’t bounce back. That is something of a contrarian view, given the euro’s 7 per cent decline against the dollar since Aug. 29 and gold’s 14 per cent drop since Aug. 22. Gold touched $1923/oz on 6th Sept-2011 and it is currently trading at 1670/oz. So Gold still has the upside of over 17 per cent or even more taking into account the favourable macro environment that we are witnessing at the moment; with Europe and US economies struggling to compete globally with their fiscal disorder. Gold has appreciated 542 per cent since 2001 when Gold was trading at $257/oz. Countries/people/policy makers are recognising the true real asset in the global financial market. Gordon Brown –former Prime minister of England sold 400 tonnes of gold in 2001 at the rate of 275/oz and was questioned by the parliament for his economic ingenuity when he was at the exchequer. The best thing to have right now is gold. Gold is real money. Everything else is merely a substitute. Gold touching $2000/oz is a very realistic figure. Gold and silver are the only real assets with no counterparty risk or default risk or devaluation risk. Investors can get insurance of their wealth by taking position in Gold and Silver to protect their precious funds in these treacherous times.
b) Silver – poor man’s gold: Silver has got much higher side in terms of its utilisation.
Silver has touched $50/oz on April 28, 2011 and is trading at $32/oz. It is still undervalued by 60 per cent from its real value. Silver is commonly used in dvd, laptops, solar panels, energy efficient doors, lcd’s, i-phones, water purification plants and much more. I would not be surprised if Silver touched $100/oz in the next 12-months. Silver is very cheap and has potential to go much higher from here because of 3 reasons
i) Real asset
ii) Short supply
iii) Industrial use

Strategic insight about
European Gold Market

A couple of weeks ago I reported that some Austrian banks had begun restricting the sale of gold and silver to 15,000 Euro [$20,000] reportedly because of money laundering issues; which were met with disbelief by many readers of financial news and information web sites. As I mentioned in my commentary many times, it is my view that governments, namely in Western nations, are making it more difficult for individuals to make gold purchases, even if they do so anonymously. It looks like this trend of restricting the peoples’ ability to acquire assets of real monetary value is expanding. If a recent report from France is accurate, and based on the French governments official web site it looks like it is, then as of September 1, 2011, anyone attempting to sell or purchase ferrous or non-ferrous metals, which includes gold and silver, will be required to pay for their purchase via a credit card or bank wire transfer if it exceeds 450€ [$600 USD]. It also proves my point that is mentioned in the Muslim holy book Quran as well that gold will remain the real asset most sought after by the investors.

Valued investment in the
currencies market

Even the euro looks better to some investors. That’s because Europe is now facing up to its fiscal crisis, while the United States just keeps on building up debt, led by the Federal Reserve. People are writing obituaries for the euro. It is premature to say what would happen to euro in the next 12-months. Markets remain very volatile and nervous.

Few people are aware of this important development that Deutschmark is being printed at a very fast pace and Germans might leave euro for others to take care of the sick children in euro zone. It implies that German tax payers are no longer in a mood to bail out inefficient and non-productive labour force of its neighbours. Many experts say Europe will have to do more to solve its debt crisis before the euro rebounds. They just need to know that there’s a bold policy response that European policy makers are willing to take to avert a meltdown. Happy investing in these volatile markets.

Shan Saeed is a financial economist and commodity expert. He has 12 years of solid financial market experience. Graduated from University of Chicago, Booth School of Business, USA & IBA Karachi. Attended Islamic Banking group discussion at Harvard Business School. Can be reached at [email protected]
Blogs at www.economistshan.blogspot.com