Monday, June 18, 2012

Aftermath Of Greek Elections & How It Will Affect Investors

"With many investors wondering what to expect in the aftermath of the Greek elections, today 40 year veteran, Robert Fitzwilson, wrote the following piece exclusively for King World News. Fitzwilson is founder of The Portola Group, one of the premier boutique firms in the United States. Here are Fitzwilson’s observations: “Investors and savers alike are transfixed on the election in Greece. The headline issues were whether or not Greece would retain the Euro, stay in the eurozone, return to the drachma, default on the debt owed to European entities or a combination of the above. We believed those outcomes were secondary to the much more important issues.”

Robert Fitzwilson continues:
“We believe there are really three high-level issues contained in this monetary fog. The first is ‘free money.’ From the so-called PIIGS perspective, the euro experiment was about receiving free money from the Baltic-bordered countries. Indeed, an absolute avalanche of money flooded their way, not only from their European neighbors, but also from the rest of the world as the euro was touted as an alternative to the U.S. dollar. 
The money was squandered, but it created huge new demand for products from manufacturing powerhouses, specifically Germany and China. This is called vendor financing. There is an expectation by the lenders of being paid back. Clearly, that is not going to happen....
“The amount of money which is owed is monumentally in excess of the capability of any of the debtor nations to settle their accounts, even if they were inclined to do so. With the French lowering the retirement age, Spain and Greece rioting against austerity, the emphatic answer is that they are not so inclined.
The second issue is the ‘debt as money’ (DAM) monetary system that has overtaken the world in the last 100 years. The Greek debt is held by European entities as assets on their balance sheets. Banks lend based upon their capital base. If the Greeks formally default, the lending ability of the banks is diminished, perhaps catastrophically. 
If a default occurs, how do the banks get recapitalized? What happens to the quadrillion-plus dollars of derivatives? The DAM monetary system is the core asset of those who believe in globalization. It is hard to imagine them giving that up without pulling out all of the tricks from their very creative rabbit hat. Indeed, as the election neared, the major countries released announcements that help would be forthcoming to stabilize things, regardless of the outcome.
The third issue is control of resources. While we were not ready to believe in peak oil 30 years ago, the arithmetic is undeniable, and in our view we are approaching a crisis for the materials that we consume to maintain our global economy and lifestyles. The people in governments around the world know this. Sophisticated investors know this. Behind the curtain, there is a feverous rush by key governments to acquire and stockpile resources before the rest of the world wakes up.
Control of the resources also implies control of the prices. If one is acquiring and stockpiling, stable to declining prices for those resources is very important. There was a potentially ominous development earlier this week when a Chinese entity successfully bid for the London Metal Exchange (LME). 
The LME sets global prices for base metals, with China being the biggest consumer of those metals. According to one estimate, the offer values the LME at 108 times net income. If that does not sound like a motivated buyer, we do not know what would qualify.
If you control the market itself, you can control the prices. We have certainly seen that type of control in the sovereign debt markets as interest rates have been forced down to virtually zero. The rates are decidedly negative on a real basis, regardless of which methodology for inflation is applied.
The best guess we could foolishly hazard about the impact of the election is more of the same. The major players in this game of power need stability for as long as possible. Stability in this case is defined as the absence of chaos and absolute panic.
There will be panic in our future. The arithmetic of the resource depletion, the creation of enormous debt that must be fed by more enormous debt, the derivatives and the increasing desperation and despair in populations around the world guarantees such an outcome.
So what is an investor to do in this environment? As we have suggested before, the mountain of paper and derivatives will collapse under it’s own weight at some indeterminate point. Therefore, it is incumbent upon investors to act now and transfer wealth from paper to real assets. Sadly, reports of Greeks taking cash out of the bank, but leaving it in safe deposit boxes at the same bank tells us that the Greeks have not yet reached the panic stage. They should already be there.
A senior officer in the London Fire Rescue Service was quoted as saying, ‘When people die in fires, it is not because of panic, it is more likely to be the lack of panic.’ The reality is that people generally look to their peers, waiting until the group panics, and by then it is too late.
While it may not quite be time to panic just yet, the survivors, and those who will prosper at the end of this great historic period in our financial affairs, should quietly be moving toward the exits and the safety of hard assets such as gold and silver.”

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