by Peter Leeds
August 22, 2011
ARE WE ON THE ROAD OF NO RETURN?
RALEIGH, N.C., Aug. 22, 2011 -- You've certainly heard the endless stream of negative economic news lately. America's fiscal house is in trouble, job growth has stalled, and we may be driving right into a double-dip recession.
While giving their pessimistic economic outlooks, there is one thing that the doomsayers have gotten wrong - they aren't nearly worried enough.
This isn't going to be 2008 all over again: It will be something much worse. And this time, we're starting from a more vulnerable position.
We've seen the first municipal bankruptcy - of many to come, I believe - in Central Falls, R.I., and others like Jefferson County, Ala., preparing to vote on declaring Chapter 11.
Global economies are exhausted, teetering on collapse. The entire fiat currency system of every nation is coming into question in a way that we have never experienced.
The Eurozone is on life support. French banks are broke, Italy and Greece are both in desperate need of cash, and austerity measures come attached to each subsequent bailout. Among others, Portugal, Ireland, and Spain are also hurting. The problems are being kicked down the road, but with each kick, they swell in size. Eventually, the issues become far too big to kick.
It will not be long before one of the EU nations drops the Euro, defaults on their debt, and goes back to their own currency. If one goes, others will fall like dominoes, eventually taking the majority of participants out of the EU. The Euro will spiral downward in response.
China's Dagong Global Credit Rating Company has downgraded their U.S. debt rating, from A+ to A, citing doubts over Washington's ability to pay back its debts (China's own debt rating is far lower, however, and inflation has hit 6 percent there - keeping American Treasury notes very attractive). While the other credit rating agencies have held their Triple-A scores for America intact, they also warn of possible downgrades going forward.
Rumors of a third round of quantitative easing are building fast. They want to push the $1.6 trillion in excess reserves into the economy. This will come to pass, forcing the dollar down further. Inflation will spring from the increased monetary supply, and your $1,000 retirement check suddenly buys a fraction of what it would have a few years ago.
That is, of course, assuming that you get your check at all. While coming to a debt limit deal before the recent August 2nd deadline, they averted a government shutdown by merely agreeing to overspend by less.
According to CNN, since 2008 more than 300,000 illegal immigrants left America to return to Mexico, because the job prospects were much better there. The Trends Research Institute reports that half of all black and Hispanic families own nothing besides a car. The Economic Times says that 1 in 7 Americans receive food stamps.
In a few months, extended unemployment benefits for 3.7 million Americans will come to an end. Meanwhile, U.S debt has reached 60 percent of our Gross Domestic Product, putting us in one of the weakest financial situations this country has ever known.
Any shock to the economy at this point could bring down the whole system. The potential of a brewing war between Israel and Iran, a spike in oil prices, bursting of the "China bubble," or a fragmenting of the European Union, could spell the beginning of America's economic downfall.
Watching the rise in precious metal prices, it becomes clearer by the day that investors and nations are rapidly losing faith in fiat and paper currencies. Precious metals, historically, serve as a false safe haven for money, and are an internationally recognized currency, while fiat currencies like our dollar are prone to inflation and devaluation.
I believe we're past the point of no return. In both America and globally, in less than two years, our societies will look very different and possibly be almost unrecognizable.
I expect very strong inflation, fueled by loose monetary policies and an unprecedented period of interest rates near zero. In fact, Federal Reserve chairman Ben Bernanke has said rates will be "extremely low" through mid-2013.
Greece will default, I believe. Others may follow, eventually leading to a fragmentation of the majority of the European Union. The Euro will drop significantly and dramatically in value.
The American dollar will also sink, as China and Japan slow or stop their loans to us, forcing our Federal Reserve to print billions of fresh money to pay for entitlements and government operations.
Precious metals may continue to rise, as inflation and freshly printed money both ramp up. As of August 11, with the DJIA momentarily at 10,932 and gold trading near $1,743 an ounce, the ratio of the Dow Jones Industrial Average was at 6:2.7.
My expectation is for that ratio to fall to as low as 1.0 to 2.0, through a combination of stock market declines and increases in gold prices created by the declining buying power of the U.S. dollar.
I think you will see further downgrades of America's credit rating due to unfounded concerns about our nation's ability to pay back its debts.
That process has already started with Standard & Poor's, and so far has not been followed by others but it may be. Downgrades lead to a spike in interest rates - now falling - to make American debt more intriguing to foreign creditors. That can increase borrowing costs for all American consumers and businesses.
There may be spikes in civil unrest - as we've seen in England and throughout the Arab Spring, as well as in crime, both of which reflect on the ability of a society to eat and work. I expect more unrest all across the Middle East, including Israel - and that has recently begun anew. I think we'll see more consumer hoarding here at home.
Stocks with oil drillers or precious metals miners that are not hedged to metals prices and have a long reserve life are attractive to us. Agricultural companies and related service stocks are also attractive to me.
Keep a close watch on the news, because that will provide some key warning signs. Europe, I think, will probably set off all the major troubles. Watch for increasing inflation numbers, especially in the MENA (Middle East, North Africa) region, and BRIC (Brazil, Russia, India, China) nations, because that inflation will eventually be exported here.
An ostrich can evade danger by burying its head in the sand, but unfortunately we can't. Those who emerge on the other side in good shape will be those who paid the most attention to the seriousness of our situation.
Investment analyst Peter Leeds is the owner and founder of Raleigh, N.C.-based Peter Leeds Penny Stocks and author of Invest in Penny Stocks: A Guide to Profitable Trading. Visit him at www.pennystocks.com.