Friday, December 30, 2011

Some Thoughts on the Economy in 2012 - Still Very Bearish

If you're a successful entrepreneur, you've probably made some money over time and you are on your way towards building wealth. More than likely, you have given some thought to protecting your wealth.

If you are following the global economy, you probably have a feeling in your gut that everything is not right with the global economic recovery, and you might be right! I don't like to be a doom and gloom preacher, but among some of the economists I follow, the consensus is that 2012 may be a highly 'volatile and dangerous market', which is very bad for our investments. 

Many big economic terms may used to explain the problem; but the way see it, the problem is centered around four things: 

1) The world 'swiped' its 'credit cards' a couple of times too many and global debt is mounting to unprecedented levels (we accept this as a problem on a consumer level but it seems to be acceptable macro-economic policy - why?),

2) Pumping too much money, through ever increasing bailouts, into the global economic system dilutes the power of money to stimulate growth and creates new problems (specifically a slumbering inflation monster) (see the following chart displaying cash and electronic cash in the US

3) The world shares a bed with the US, and the US debt problem is massive to say the least.

4) Fiat currencies are linked to nothing and the USD is a fiat currency.   

Refer to the following website for an illustration of the US debt.  

Keep in mind that all currencies are linked to the USD, which in turn is linked to NOTHING but promises. The US dollar serves as the world's reserve currency and the current EU crisis led money flowing from the EU to the USD, this lifted the US markets and depressed the gold price. somewhat.

Many think this is only a short term euphoria, I can only agree.  

The question really is, how long can the global economic 'house of cards' be propped up artificially through things like money printing, austerity measures, or whatsoever financial 'voodoo' the 'smart guys' running the show can come up with?      

Another scary thing to think about is the implication of fractional reserve banking and the possibility of bank runs. Wikipedia explains that with fractional reserve banking only a portion of the banks total deposits are kept in reserves. 

Basically, through this system, banks can lend out more money than it actually has in the vaults. This system works reasonably well, except in times of panic when everyone wants to withdraw their cash, which could actually bankrupt a bank (see bank-run).

The world economy is being kept alive using debt on steroids. I could never solve my own money problems by going into more debt. Yet, this seems to be what the world is doing.   

Now I ask you this ... are we living in a time when the probability of a global bank run is becoming more, or less likely? Are you willing to bet all your own money on your answer? It might just come to that.  

Micheal Maloney in his excellent book Rich Dad's Advisors: Guide to Investing In Gold and Silver explains the problem from a bird's eye view. 

All nations begin with real money, linking their currencies directly to gold, sliver and other real assets (this was the case with the US too). Then, governments essentially 'dupe' the population into accepting paper/token placeholders linked to real assets (we know this as paper money).  

The final step is to uncouple money from gold, silver and real assets creating a fiat currency (decreeing the backed-by-nothing money to have value). Fiat currencies ALWAYS go bust at some point, just ask these guys in history: 

Why am I telling you this? I think that as business owners and investors we have to give serious thought to capital preservation. But even more than capital preservation, we have to focus on this preservation of value/purchasing power.

If all currencies were to go bust, what will happen to your investment portfolio? Remember that educated investors can make money when markets go up and when markets going down.  

I really feel it prudent to be cautious in 2012 and thereafter.  I tend to agree with guys like Mike Maloney of, it is highly likely that the world is moving from a paper assets to physical assets cycle. That requires a shift in our investing mindsets.  

The structure of the global economy may also experience distinct metamorphosis in the coming years. The phrase 'adapt or die', may be even more relevant.  Let's keep our eyes open!

After reading some articles on yesterday, I found that some optimism has returned to the US markets. Italy's bond auction went better than expected. However, I do not think any of the real underlying problems were solved. The markets love short term chatter, this time, I am not buying it!   

If you would like to add anything,  please leave your comments below.

Some sources I found to be insightful:

1) Debt Collapse by Mike Maloney (1.5 hour video, very large download)
2) Rich Dad's Advisors: Guide to Investing In Gold and Silver (Book available from,,
3) Mike Maloney Schools Bankers on Deflation (Youtube)
4) Nouriel Roubini: Perfect Storm Coming for Global Economy in 2013 (Youtube)
5) Milton Friedman - Debunking the Myth of the Great Depression - Part 1 to 3 (Youtube)

Disclaimer: I am not a registered financial adviser. Please consult with personal financial advisers before making decisions regarding your personal finances.

Monday, December 19, 2011

My take on the US S&P 500 Index is not Pretty - Why I am VERY Bearish

Today I am posting something out of character for this blog, I am posting my technical view on the US SP500 Index. Note: I am not a professional investor or financial advisor; I follow the markets as a hobby, so please do not base your financial decisions on this view. 

I am merely asking some questions that have to be asked. If you want, maybe you could take this view to your financial advisors to discuss it with them.  

Most agree that the state of the US economy directly affects the rest of the world including South Africa. That's why it is prudent to follow the US economy. And if this technical perspective is correct the US economy may be heading for a massive reversal (crash).  

Take a look at the following chart I compiled from MSN Money, it is a long-run technical view on the US S&P 500 index; one of the largest stock exchanges in the US. This index is widely considered to be a proxy for the US economy. 

My Take on the US S&P500 Index - 19 December 2011

Being an investor, not a trader, I like to take a long-run perspective on the markets. When considering the S&P 500 from 1955, we clearly see the formation of a possible triple-top reversal pattern (note peaks 1, 2 & 3) on the chart (1995 to date). We also find a possible head-and-shoulders reversal forming from August 2009 to date (look for the H,S,H in the chart). 

Both the head-and-shoulder and triple-top patterns are very bearish signals. Many of the technical guys see the Head-and-shoulders as a reliable technical signal. When two bearish patterns are combined the position should be regarded as even more bearish.

The possible downward movement is usually projected from the top of the pattern (point 2) to the neckline (line AB on the chart). In this case,  if a bear trend starts, the DECLINE MAY BE MASSIVE! 

Another thing technical analysts look for is declining or increasing volume. In the chart,volume appears to be declining along with the formation of the Head-and-Shoulders. It is a highly bearish signal when the HSH pattern goes up and volume goes down (what appears to be happening in the chart). 

Also note that peak 3 on the chart is lower than peak 2; another very bearish signal! 

So, what I am telling you? 

I think that it is time to re-evaluate our stocks and portfolios. We had a nice run since 2008 and the US economic sentiment has improved a bit lately. But, this may just be short-term noise locking us in for the proverbial "bear falling out of the window" if I am right (hope I am not), the fall will be massive! 

Don't agree with me? I would really like to hear your view. Please comment below.

Wednesday, December 14, 2011

Don't lose sight of the kid in you! A tip for Innovation

Well, it's been a while and the past month or two was quite hectic (hence the low number of posts to this blog). I completed my MBA final year exams and started on a new project distributing Tree Lucerne (also known as Tagasaste), see if you're curious about what we're doing.

Enough about me, let's talk about something fun, let's talk about the Super Soaker Water gun. You know, the water gun that really took the world by storm in the 1990s.

I remember it well, the soaker took water gun battles to a whole new level.  What's better than a really powerful water gun? And the soaker was, and still is, just that.  

One thing that you may not know about the soaker is that the guy who invented it is actually a real life rocket scientist with a degree in nuclear engineering. Yes, this is according to the August 2010 edition of Popular Mechanics. Lonnie Johnson invented the Super Soaker after he had an idea of a pressurized water gun that would be safe for children.

The idea came to him while he was working on a heat pump. 

What can we learn from this story? Alan Duggan of PM neatly extracts three lessons for entrepreneurs and innovators:

1. Be alert to possibilities - good ideas may enter our minds while doing something completely unrelated.

2. Success requires faith, staying power, and persistence - the Super Soaker was preceded by  many failed prototypes before achieving success. We see this trend with many successful people.

3. Never lose sight of the little kid inside of you - your childhood interests and dreams often provide valuable insight into your destiny. Sometimes we have to listen to the kid inside of us.

I think that the best ideas, innovators can have, are those that make you feel like a kid all over again. This certainly worked for Lonnie Johnson; the Super Soaker is estimated to have produced retail sales of more than 8 Billion ZAR.

What a cool story! Happy innovation.