Will your portfolio withstand a US recession?

Although it is something that most of us would prefer not to contemplate amid the hurley-burley of life and business, the economic world around us, may not be as sound as it seems. There are several main areas of concern which have to do with real inflation and the nature of money itself.

Valueless fiat currency The global economy is based entirely on ‘fiat’ currencies. Fiat currency is created out of nothing and without any work. It is not convertible into a physical quantity (such as gold) and is accepted as a medium of exchange due to government fiat (decree).

The real meaning of inflation The modern means of describing inflation is by how much prices of various things have risen over a particular time frame. In pure economic terms, this is nonsense as the correct economic description of inflation is simply ‘an increase in the stock of money’.

There have been monumental increases in the supply of money since the US stock market broke down in 2000. To save the day, and to keep the economy from tumbling into recession as would have occurred in the normal course of economic events, the US Federal Reserve Bank under Chairman Greenspan chose to artificially suppress the US interest rates to as low as 1%. This created an environment for torrents of ‘new money’ to be created in the form of easy credit…. In economic terms ‘inflation’.

This increase in the supply of money where it is simply lent into existence has artificially driven up real estate and even shares to some degree by making it easy for people to borrow for investment. The most obvious landing place for this new money has been in the US and other international property markets. The other very dangerous result has been a massive amount of re-financing by homeowners who have used the new money that they have extracted from their mortgages to finance personal consumption.

US consumers spend that money on imports from China, Japan, other Asian countries and the world at large. The economy of China in particular is tooled up to satisfy that demand, and their recent spectacular economic growth as a consequence has supported the economies of resource rich countries like Australia, in their search for the raw materials to produce economic goods. The demise of the US consumer, via the imminent collapse of the US housing market is set to have dire global consequences.

The housing bubble has burst

It is now being widely reported in the US and international press that property prices have not only topped, but are rapidly declining.

The US recession has arrived

“Total liabilities (funded debts and political promises made) of the US government now exceed $US80 TRILLION. Add to that debt owed by American households. The last source of ‘credit’ which could be lent into existence was the US housing ‘valuations’. They are now headed downwards.”

www.the-privateer.com capt@the-privateer.com (reproduced with permission)

Easy money has been flooding into the property and other markets as a result of the lack of the financial discipline that would have been required if the currency were to reflect the value of something real and tangible (gold), as it did before 1971 when Nixon detached the dollar from gold (the closing of the gold window). This has created a situation where inflation, correctly defined as an increase in the stock of money has gone out of control. This is a direct result of manipulation of the markets by government via their reserve banks. The result, certainly as far as the US is concerned, is that the recession has already arrived it’s just that the media haven’t told anybody yet. Why? That is obvious, it’s election year and there have been plenty of other diversions in Iraq and more recently in Lebanon and London!

What to do about it?

The obvious thing to do would be to look for investments that are real tangible assets that are not overvalued. Those types of investments could include gold and silver, shares and property.

Property - The fact that property is declining does not mean that all property is a bad investment. That depends on the price that was paid for it initially and whether or not it is mortgaged and for how much and on what terms. A clinical analysis of what is happening now with property prices in your own area is a good place to start.

Shares - It is true that a recession will have a negative effect on stock markets in general, but there remain excellent shares to buy in companies that are not overvalued, that will survive and thrive in a collapsing international market.

Gold and Silver - The asset of last resort and the salvation of a collapsing portfolio (or national economy).

It has been reported that the ECB (European Central Bank) recommendation for European Union Members is that 15% of foreign currency reserves should be held in gold. The rationale is very simple. A collapse of 30% of financial assets would be more than compensated by a three or four fold increase in the value of the gold. And what usually happens to gold when there is a major collapse? It goes up. The ECB strategy is something that you may like to consider for your own portfolio.