About 2004 I’d started to get concerned about the debt bubble in the USA and not just the one at home, so I started adding Gold to client portfolios when it was about €300 per ounce -the reason was simple, have an asset class outside the banking system, an ancient form of currency and not a fiat one. Gold today is nearly four times higher. Penguin came knocking in 2005 so I wrote the book LOOT in West Cork as a guide to SSIA maturities. Seems so long ago given that Global Financial Crisis (GFC) has happened in between, bringing with it all of the suffering it wrought on friends, neighbours and our own families. In truth the financial system itself came within a whisker of collapse and so did the Euro under Trichet in 2011.
This was the third major near miss in recent history, following the Long Term Capital Management (LTCM) burst in 1998, (a highly indebted fund with $169bn in assets) and the Dotcom collapse that wiped $5 trillion a few years later. The GFC would cost many times more and as regular readers know I don’t think we’re out of the woods. Debt has increased not decreased and if we avoid a fourth major event, most assuredly Governments, especially the USA will do what they’ve always done when excessively in debt, which is to rob creditors by devaluing what they owe them through inflation.
LOOT’s chapter from 2006 is attached, yes it’s dated but in it, I finger US debt and the Irish credit bubble, (growing year on year at the time by 30%). We all know what happened next but not too many were prepared to call it, in those times. I recall speaking at charity functions heavily attended by booming property players, a class representing 25% of the economy. It was common to be hissed at and it felt like standing in front of a waterhole with a sign up saying water poisoned, only to get trampled to death by the herd.
In 2006 I’d advised the heavily leveraged property investor to reduce debt to less than 50% of balance sheets, to switch to strongest banks because weak ones were at risk, to swap out of equities to bonds and to buy some gold, each of which had separate treatments in the book. LOOT had three chapters on property. I’ll put my hands up, I did not see the wiring underneath the global financial system that would transport the Wall Street contagion of sub-prime and NINJA mortgages (No Income No assets) to everyone’s front door, crossing the Atlantic and visiting many parts of Europe with a vengeance as the inter-bank market collapsed, because no one trusted anyone else. When I wrote LOOT I thought some sectors would hold up, those not artificially inflated, like German property. It was why I got involved in a fund, that initially invested in Germany.
That was over ten years ago now, in the meantime global debt has gone up not down and in my opinion the sub-normal rate of growth in the global economy is not enough to sustain it. It is simply the law of nature that bubbles cannot forever expand, something has to give. This is why I don’t think the present status quo of slow and low is sustainable. It has already delivered visceral political shocks because it has excessively rewarded asset owners at the expense of highly taxed workers and its ability to prop up asset prices by artificial money creation, is fading. It is either a GFC 2 or an inflationary cycle next in my assessment.
So do the rules outlined in Chapter 7 of LOOT 2006, still apply? The answer is some do and some don’t. What isn’t an option I believe is to run with the herd again. If you would like to discuss further pop an email to firstname.lastname@example.org
Clink on the link below and rotate back to 2006.