Freedom's 2011 Forecast & Update

 

As we near the halfway point, an update on my 2011 forecast.

First, how we’ve done so far.

Forecast: “It could be US municipal defaults, policy shifts from the Chinese, EU crisis, or an expanded war inthe Middle East.”

Check: Although not officially declared a war, the ‘kinetic military action’ in Libya is an expansion of the ongoing wars in the Middle-East. Continued shifts in Chinese policy – evident by the April agreement between the BRICS to establish mutual lines of credit in local currencies, an important step towards the initiative to reduce/end the reign of the dollar as the world’s single reserve currency. Earlier this week it was reported that The Peoples Bank of China plans to shed $2 trillion of U$D assets. While this should not be a surprise and it will likely be a multi-year plan, it is still significant.

Forecast: “As food and energy prices rise, nations will feel the sting of money printing(already happening). This will only increase the number of civil protests (RIOTS). Developing nations will feel the brunt of higher inflation, which will lead to various measures to control price increases (e.g., Russia’s recent announcement of food controls or COMEX margin hikes).”

Check: Egyptian protests began just as I finished this piece and two weeks later, on 11 February, Mubarak resigned from office. Protests have since spread to Bahrain, Syria, Tunisia, Yemen, Jordan, Saudi Arabia and even Wisconsin. There have been three COMEX margin requirement increases for silver futures since this article (four in 2011 – 1/21, 3/24, 4/24, 4/29).

Forecast: From a follow-up post (1/30) “QE2 appears to be an exercise in replacing the toxic assets purchased from the banks for Treasuries. Instead of returning any money back to the Treasury, they are exchanging the toxins for Treasuries. Thus, the Fed’s balance sheet will remain in the $2T…”

Check: Federal Reserve Chairman Ben S. Bernanke may keep reinvesting maturing debt into Treasuries to maintain record stimulus even after making good on a pledge to complete $600 billion in bond purchases by the end of June.

OK enough, let’s look at the rest of 2011.

2011: The rest of the story.

I am reaffirming my expectation for significant volatility starting in the 2nd half of2011. From my January article: “As a result, I expect significant volatility throughout 2011. The global slowdown will lead to a drop in US markets by the middle of the year, giving the Fedimpetus for more money printing. For anyone still expecting a return to ‘normal’, 2011 will be a wake-up call.”

During the April FOMC meeting, The Bernanke confirmed the end of QE2 after June. This was telegraphed to the markets and came as no surprise. The question now is whether reinvestment alone from the existing Fed balance sheet will be enough to keep the ponzi-economy growing. If the Fed cannot fill the funding gap, interest rates will rise to attractbuyers, leading to another drop in the stock market. To help find the answer to our question of whether the existing balance sheet will be enough, let’s look at funding requirements. The projected US deficit for 2011 is approximately $1.6 trillion. Reinvestment of principal payments from mortgage-backed securities plus maturing treasury holdings may account for $750B-$1T annually – so far so good. But this isn’t accounting for all the funding needs. We also have maturing debt that needs to be refinanced along with interest payments on existing debt. Even more threatening is the potential sale of Treasury Bonds by China, Japan & the Middle East. The simple fact is that while the rollover of the Fed’s balance sheet may provide funding for annual US deficits, it cannot provide the funding for existing debt or sales by foreign holders.

It is imperative that interest rates remain below the rate of inflation (i.e., negative real rates) to encourage currency velocity to feed the insolvency; otherwise, they are truly pushing on a string. My best guess is a 3-month experiment ending with a spike in long-dated Treasury rates and a contraction in GDP and the stock market sometime in the fall or winter of this year. To help fill the gap, global central banks will be the buyers of last resort. What they call it, or how it’s communicated is still to be determined, but rest assured, there will be more currency printing. Global QE continued – some real fireworks to follow, along with some bombs.

Precious Metals and Commodities

By the time rates spike and the market begins a decline, I expect oil to have hit$150/barrel, with gold nearing $1700. The increased costs of energy and food willcontribute to the US slow down. Going forward there will be repatriation of U$Ds by foreign holders, which will support higher commodity and metal prices. Baring natural disasters and geopolitical events, the precious metals bull will slow while the stock market declines. Gold will be less affected than silver, but should also take a temporary breather as the printing presses refuel. If I am correct and there is a delay between QE2.5 and Q3 (or whatever it’s called or not called), this will be an opportunity to acquire more gold & silver.

Ways to play it.

Within your investment portfolio, I have suggested 30% be stored in physical gold and silver, 30% in cash and 30% in growth. If you have followed this weighting, you have afforded yourself the most protection against a variety of financial outcomes. If in fact we have significant volatility in the 2nd half of 2011, you will have the opportunity to put some cash to work. If you are more cautious or have need for higher reserves, you could look to raise your cash position over the next couple months. Although the outcome of the USD is abundantly clear, there will be periods where it is advantageous to hold cash.

If you understand why you are holding physical monetary metal, I won’t need to tell you to hold through this period. Again, if you follow the 30% rule, you will not be forced to sell into weakness. If you have a trading position in paper gold and/or silver and miners play catch-up for the remainder of the 2nd quarter, you could take some profits. You may look at stocks/funds impacted by rising rates. As an example, in a period of rising rates, demand for mortgages and other loan products diminishes.

If I could offer one more bit of advice, it would be to reduce debt to a manageable amount. The common thought is to leverage up and inflate it away. Again, my philosophy is not about getting rich, it’s about protection. I would consider this gambling and those that gamble must be prepared to lose.

~David Freedom

david@thevictoryreport.org

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