Editorial
Big Picture Scenarios for 2012 - Most Probably, A "Deflationary Debt Trap"
The four most expensive words in the English language are, "This time it's different."
~ Sir John Templeton
Sir John knew what he was talking about. Every excessive boom in financial markets, whether it's an entire asset class or an individual stock, appears to share this common and historically repetitive characteristic. People know of imbalances. They know that under the given circumstances people will get burned. Yet they get caught up in the belief that this time things will be different, that a recovery is right around the corner, that governments will be able to turn things around, and that the good times will be back soon.
Unfortunately, this time will NOT be different. As the year 2011 is rapidly and irresistibly nearing its end, despite all the volatility, turmoil and challenges the year held in store for us, I feel urged to look forward and share a summary outlook of what might be headed in our direction in 2012.
As to not keep you from joining your families for the more important matters of Christmas and the holidays, I will try to make it very short and provide you with an overview of our current 'Big Picture Scenarios,' which we define on a regular basis as part of our four-monthly BFI MAP(TM) Big Picture Review. This review, and the scenario analysis that goes with it, is a key ingredient to our portfolio management's top-down asset allocation process.
In today's commentary, I'll provide you with an overview and brief description of how we employ these scenarios in our allocation model. I'm hopeful that this summary overview will give you some food for thought as we head into 2012. And, I look forward to discussing more of it as we enter into the New Year. I do think it is paramount that you not be fooled by the mainstream media 'sedation chimes.' This time will NOT be different. In fact, it may well be a lot worse.
BFI MAP(TM) Big Picture Scenarios
The following image provides you with a summary overview of our Big Picture Scenarios developed as part of our latest Big Picture Review in November, 2011. This is a summary of the scenarios and a reflection of our expectations on the possible economic, financial and geo-political developments over the next 3 to 24 months.
This summary overview does not purvey our more differentiated conclusions and considerations with regard to the various global regions (US, Europe, BRICS, etc.). That would go beyond the scope and scale of this Update. Although those differences are important to consider, we are also of the opinion that the global economy has become sufficiently inter-linked to work with global scenarios that summarize our expectations of the core themes and developments, which will ultimately affect all regions. That said, I do admit that the scenarios, based on the continued (albeit retracting) economic dominant influence of Western economies, are focused on Europe and America, particularly in terms of the scenario titles we have selected.
BFI MAP(TM) Big Picture Scenarios (Big Picture Review November, 2011):
The scenarios we have defined are the scenarios that we consider most possible in consideration of all the factors and trends we are aware of. Obviously, no single scenario will be completely accurate and reflect the global economy entirely. They do, however, provide us with a structure to 'play around' with different hypotheses and, based on our time horizon and probability expectations (see below), develop BFI's asset allocation models and investment strategies.
Scenario Probabilities and Suitable Asset Classes (Big Picture Review November, 2011):
Source: BFI Wealth Management Inc.; Big Picture Review November 2011
Most Probable Scenario: The Deflationary "Debt Trap"
As you will have recognized above, we consider Scenario 2 as the most probable outlook over the next 3 to 12 months. This Deflationary "Debt Trap" could be best described as a roller-coaster ride of hope-and-disillusion. Governments around the world, at times in sync, at times in controversy, can be expected to protect and defend the status quo of our global fiat-currency and banking system. In order to do that, true to the monetary QE template of the US Federal Reserve, Europe too can be expected to open up the money sluices and bank credit lines.
While this, at first sight, might conjure images of rapidly rising inflation, we consider the current deflationary pressures and patterns of de-leveraging as strong enough to, at least in the West, keep inflation relatively low, despite the accelerated monetary expansion and low to negative interest rates. A core theme and objective for governments will be to save the banks and avoid a financial system collapse, one that would be much larger in scope and scale than what we experienced in 2008.
All this will result, at best, in a sideways-up-and-down movement of financial markets, and to an economic environment in the West that is very comparable to what Japan has experienced for many years now.
Obviously, the governments, banks, stock markets and indeed most market commentators continue to be hopeful that this kind of government intervention may somehow get us back into a more positive economic landscape, one reflected in Scenario 1, a "Reflationary Stabilization". However, we expect that scenario to be a short-term and temporary scenario at best.
To the contrary, we are concerned that a multitude of events and potentially aggregated factors, ranging from war in the Middle East, to social unrest in China, to an accelerated bank meltdown in Europe, may instead abruptly push us into Scenario 3, "The Greater Depression".
The Trillion Dollar question is this: How long can central banks and governments postpone the arrival of Scenario 3? Or, may they even be able to avoid it? As you see from our expectations, we think the days are numbered and NO, they won't be able to avoid it.
Scenario 3 is currently not our most probable scenario for 2012, because we believe that both Europe and America still have considerable monetary 'firing power' left. Also, those European politicians and central bankers that have been pushing for a path of austerity to fix Europe's problems are losing ground. And, globally, the willingness for concerted intervention is still dominant.
We have also included Scenario 4, a "Hyperinflationary Collapse," in our considerations. Although we currently, over the next 24 months, consider this scenario as largely improbable, history teaches us that inflationary bouts can enter the scene harshly and suddenly. By the time high inflation becomes visible it is generally too late for moderate measures, and the gap toward super- or even hyper-inflation tends to be short and narrow, very difficult to 'manage.'
How to structure your portfolio and why gold continues to be crucial
As you've now seen in the included images, as part of our scenario analysis, we also determine the most suitable asset classes for each scenario. This is the starting point for our portfolio management team's strategic and tactical asset allocations and investment decisions.
What you will notice is that gold appears as a suitable asset class across all scenarios. I continue to hold a lot of gold, personally. And, we continue to hold an allocation of approximately 20% to 25% of gold in our core strategy, the BFI Protector(TM). Regularly, I am asked why we consider gold a good investment even though we expect a largely deflationary environment. The answer is a question: What was the environment we've been in over the past decade? And how has gold performed during that decade? You know the answer to both questions...I rest my case.
Gold needs to be part of your portfolio. It's not a mere investment, though. It's a hedge against the monetary and fiscal madness that will, most probably, be with us for a long time. We don't expect this to change anytime soon. Consequently, we don't expect gold to lose its protective and profitable character anytime soon.
What needs to be said here, and as a disclaimer for all, is that the process of asset management in this environment is one that needs to be active and alert. While a long-term perspective and top-down foundation is important, you should not construe that to suggest a passive buy-and-hold management approach. As part of our management, we very actively include a variety of risk management techniques and do adjust our allocations and exposures continuously.
All that said, you may ask yourself whether this works for us and our clients. Below, I'm sharing the net performance track record for our core strategy, the BFI Protector(TM). You can decide for yourself.
BFI Protector(TM) (USD) as per November 30th 2011
Merry Christmas and Happy New Year!
We've spent all this year talking about economics, geo-politics and investments. I would like to leave you with a quote by Henry David Thoreau: "Goodness is the only investment that never fails."
Frank Suess is CEO and Chairman of BFI Capital Group. To subscribe to BFI's weekly Mountain Vision Update, in which this column appeared, click here.
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Posted by Danny B on 12/29/11 11:12 PM
This is a trend that the Bell should look at. Millions of jobs are being lost in America. SAME is true for China and many other countries. It's automation that is killing many job niches.
Click to view link
Productive power goes up,,,, consumptive power goes down. Currency wars are started to maintain market share. The race to the bottom only produces losers.
QE was supposed to kickstart the CONSUMER economy. The feces-for-brains bankers and politicians figured that more credit would stimulate an economy that was overdosed on credit. Only employment can beget consumption in the long run. They needed to create jobs / confidence to get people to utilize credit. After doing an elegant proof that they can't create jobs,,, they had to settle for creating credit as a last-ditch effort.
As a fall-back strategy, GOV plans to create a police-state and socialism. This is their brilliant strategy to produce support for the consumer who has no productive niche.
I don't believe that eviscerating the bankers will bring back job niches lost to automation and global-wage-arbitrage.
I do believe that some kind of strategy needs to be implemented to give minimum support for the consumer who is no longer a producer. It would have to be VERY basic to make it unattractive.
One has to remember that only greed keeps things growing.
Click to view link
Socialism removes greed and motivation.
While our mechanized economy could provide everything for everybody only poverty for non-producers can avoid the usual crash caused by socialism.
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Posted by Danny B on 12/29/11 10:35 PM
It would be helpful if EVERYONE would remember that the term "inflation" only refers to an increase in the supply of money [and credit]. If you want to speculate on price changes, you have to qualify that. We are already in deflation. Credit is being withdrawn everywhere. The European banks are hoarding every cent.
Click to view link
It won't save them.
DSK says that European banks have only weeks left.
Click to view link
Japanese production is declining 2.6 % but Japan hopes to sell 145 trillion in bonds.
Click to view link
GOOD LUCK.
The Yen is at a 10 year high against the Euro and is killing exports. Akio Toyoda says that Toyota motor company will go out of business if that continues.
The shadow banking system is collapsing. That destroys credit.
The investors have left the scene. It's not just the quantity of currency and credit that causes price inflation. Many investors are on the sidelines and their money doesn't circulate. The FED may print $ trillions but, if the consumer has none of it, he won't buy anything. "Money" may spill over into commodities. It just causes volatility when the consumer is forced to cut back.
The spill-over effect from QE was supposed to create jobs. It never happened because it never got to the consumer. What little QE got to the consumer was used to pay off debt,,, NOT create new jobs.
We are in deflation. It will get much worse as the velocity of money drops. M F Global scared off a LOT of investors.
Click to view link
All that money siting on the sidelines will be out of circulation.
The U.S. is now an oil exporter because domestic consumption has declined.
Click to view link
After the European banks collapse, we will probably go deeper into deflation. Yes, we will have price inflation on goods that are necessities AND produced by a monopoly or cartel.
I suspect that an uptrend in inflation will be offset by a downtrend in velocity.
As the European banks and states default, the investors who lose money will try to conserve whatever is left. That will lower velocity also.
Ever since we entered the "Machine age" more and more of the spending is for consumer goods and a lower percentage is for necessities. As "money" circulates less and less, it will go more and more towards necessities. The investors hold most of the money. As the defaults pile up, they will lose their money. The investing middle class will be wiped out. The 1 % may have all the money but, they will see it evaporate. Money is like fertilizer. It isn't ANY good if you don't spread it around.
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Posted by bionic mosquito on 12/29/11 09:55 PM
Ingo, humorous as always. You are certainly constant. Constantly wrong.
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Posted by thiscreepingmalaise on 12/29/11 09:47 PM
tell ya what, I will hold my gold and silver (phizz) and you buy your etf's! You should use spell check when trying to convince us of something. words like plummet and lose spelled wrong makes one think, hmmm? I do, however, agree with #3 and #5.
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Posted by Bischoff on 12/29/11 07:57 PM
"Gold needs to be part of your portfolio. It's not a mere investment... "
No, it isn't. Gold is not an investment, gold is savings. Only gold is suitable as savings. True, gold doesn't pay interest, but then there are no "gold bonds" available.
It doesn't matter whether gold goes "up" or "down" in terms of USD. The "value of gold" stays constant. It is the "value of USD" that changes.
Therefore, if you have longterm savings, it better be gold.
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Posted by Agent Pete 8 on 12/29/11 06:48 PM
Good Evening All!
Great analysis Frank, thanks, and one would assume that the above may or may not be correct, but all those pretty numbers, so phist/fast becoming unscientific to the point of absurdity and irrelevance, especially when the numbers are/can be tweaked so easily, leading us to new fields.
I just found this most enjoyable clip, and just had to share. (It is even on-topic too):
Click to view link
Have a Great Game Day/Week/Month/Year/Age.
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Posted by Tony Brogan on 12/29/11 06:27 PM
One scenario not mentioned is the hyperinflationary depression. it is what we are leading to.
Vast expansion of printed money initially used to sop up the deflation of the collapse of the dirivatives markets followed by over production of the currencies printed, leading to inflation.
In the meantime under all of the above business and trade falter and so there is a depression caused by lack of money with the people and business failures. In modern inflation there is no even distribution of the money. It goes to the insiders (can you spell facism) with the working Joe getting nothing. So your money, what you have left will buy less as the cost of all thigs rise but there is a depression as few have proper work and a lot no work at all.
Result is cash is not a good savings plan except to have 3 months worth on hand at home to use in the event of a bank holiday shutdown. While property values drop or stay down as people double up. All those 3-4 bedroom homes with 2 people can absorb any number of people. Hard assets like gold and silver have been kept way below market value by government and central bank paper market suppression so they will rise to search for equilibrium and in addition have further to climb as more fiat paper is circulated and loses value (Inflation is properly defined as the devaluation of your currency)
gold will go to any number.$5000-100,000. silver will approach historical ratios or less of +or- 15% of gold say $300- 10,000 an ounce.
In the meantime live your life and enjoy as the scenarios unfold before you.
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Posted by terrang on 12/29/11 05:14 PM
Good analysis and logical conclusions.
The last Great Depression included several years of deflation after the bubble burst. The Federal Reserve has shown repeatedly that is just an accomodating tool of the banksters and that it has been very unsuccessful in evening out boom and bust cycles. In fact, it exegerates them in both extremes.
Even as debt is written off as uncollectable and asset values decline, it is likely the Fed will continue to weaken the value of the dollar - now down 96 percent since the Fed's inception - to give a narrow segment of society some aid for exporting. This would somewhat offset increased purchasing power of dollars, which are actually privately issued interest accruing Federal Reserve notes.
I keep writing to my senators and congressman about the errors of central banking and its contribution to our economic chaos... .but their hate mail reading staff members just don't get it.
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Posted by jjkorman1 on 12/29/11 02:14 PM
Gold, the canary in the mine. A confirmation of deflation worldwide, it will shrink all things financial over the next 5-10 years.
Procrustes
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Posted by jjkorman1 on 12/29/11 02:14 PM
Gold, the canary in the mine. A confirmation of deflation worldwide, it will shrink all things financial over the next 5-10 years.
Procrustes
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Posted by chad2 on 12/29/11 12:34 PM
Yes, but no.
We are few who embrace the deflationary/depression scenario. Glad to see each time I'm not alone.
What I don't understand is your investment recommendations! Gold? What? If the dollar strengthens, as is the case in deflation gold will collapse!
My investment advise:
1) Pay off debt while you have a job, so you can keep your house and maybe refi when you loose your job to have lower payments, so you might be able to afford with lessor income. Pay off house is best! Ignore those that tell you to mortgage the thing out, this is the entire reason for the crisis!
2) Dollars will buy alot of stuff in this environment as many won't have them, so hold dollars and accumulate. NOT GOLD!! Very short term treasuries is good, if you shy away from the mattress. Gold will plummit! It's such a lie that it's some type of stable currency, the gold standard will never happen... More likely they take the gold from you...
3) Invest in necessity items like food and water as crisis will bring issues here... Stock up! Buy some freeze dried food as there will be issues getting food at times. Oil supply will be low when middle east heats up, so have food in your home.
4) Short the stock market with a small amount. You can do this easily with an ETF. Don't double short, just a regular short. DOG will short the DOW. Hold it as a hedge knowing you'll loose if market recovers, but if it collapses you will have this to offset other losses.
5) Pray. Really, do you only trust in your own abilities?
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Posted by dotti on 12/29/11 12:18 PM
Yeah. I'm easily confused, too.
Isn't inflation inconsistent with a debt trap? Isn't it the other way around: debt is good going into inflation because it will be paid off in cheaper dollars; debt is bad going into deflation because it has to be paid off in more expensive dollars?
I don't have a great understanding of such things, but it seems to me that the column heading for December 22 is where the contradiction lies.
Right?
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Posted by dotti on 12/29/11 12:01 PM
i'm having a hard time unraveling the scenarios here.
Do we look at the "High" in each situation? If so, are we talking about 3 months and 12 months being a "Deflationary Debt Trap" leading into at 24 months a "Greater Depression"? In other words, can we start out with Scenario 2 and end up with Scenario 3?
In Scenario 3, the last line regarding assets is regarding inflation vs deflation. Can one effectively allocate assets--other than by hedging--if there is a question of whether there will be inflation or deflation?
Avoid countries with... high debt? Doesn't that include most of the developed/emerging markets?
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Posted by kenn on 12/29/11 10:38 AM
Mr. Suess's December 22 column at BFI "INFLATION IN AMERICA HAS ARRIVED... AND WITH IT COMES THE DEBT TRAP!" seems to contradict this column...
He writes: "The fact is that due to the latest bout of quantitative easing, the deflation scenario appears to have been eliminated for the foreseeable future. Inflationary pressures are building up and interest rates have begun to rise. While this could have detrimental implications on the fundamental economy in the next few years, it actually makes investing over the coming months a little "easier" and "more positive".
In this column he writes: While this, at first sight, might conjure images of rapidly rising inflation, we consider the current deflationary pressures and patterns of de-leveraging as strong enough to, at least in the West, keep inflation relatively low, despite the accelerated monetary expansion and low to negative interest rates.
A little confusing to me... but then I'm easily confused!
