South Africa - be pragmatic

NO investment is fool-proof. The hedging [protecting] against a loss on an investment is easy, cheap and an essential ingredient in effective management. Yes, at face value, I believe the US market is in for a correction. Notwithstanding, turn over any forgotten stone and you’ll find a dooms-day forecaster proven wrong.

Here’s the gist of it:

1. The fall in oil is stimulatory and the market knows this ie: the market is building extra profits into company projections. Given this prognosis investors are paying more for stock, currently, than they would have / should be. Why? Investors are discounting high prices on the expectation of improved profits sometime in the future. The flip-side of this stratagem is just as Grampie told us on his knee – 'don’t count ‘em before they hatch…' What would happen if OPEC cut supply, drastically? We know the US shale industry is a dark-pool of goo filed 'not for your eyes' under SES [State Economic Security] or 'policy' for short. There are countless other layers to this onion which we don’t have the time to peel. Managers lump these under ‘market risk’; a catch-all for ‘we just don’t know’.
2. The ECB has mooted / announced a 1.2 trillion approx. euro rescue package; supporting European sovereign bonds in the main ie: the ECB will buy up to 30% of all sovereign bonds [paper countries issue to borrow money]. It’s a backstop other investors like and on that basis only, will continue to buy the paper even though the paper is inherently risky. These governments then have access to cheap money and will continue to bolster their respective economies by spending. Spending isn’t mending and those chickens will come home; soon. Paradoxically Greece is our shining beacon for the future. Push ‘the people’ hard enough, for the economic ineptitude of their government, ie: reckless public-spending and the government is soon replaced by the far-left advocating social change & or defiance of the status quo. It’s Capitalism feeding on itself. Denying the fact is as stupid as sweeping Greece under the table by excommunication, on the sin of delinquency, when the son is the product of the father..
3. China’s growth hasn’t stalled but is slowing; that’s if you chose to believe the data that is. Their socio-economic troubles are just beginning.  
4. If the global consumer treadmill breaks down, we, the human race, are in for the high-jump whichever way you want to spend it. The oil which soothes the grind is a media-controlled process ie: through advertising and cajoling consumers to replace / buy / ‘need’ / aspire to etc. If that bias swings in favour of logic [We’re consuming resources at a grossly UNDERSTATED rate] then ‘consumerism’ or ‘anti-consumerism', more accurately, will be the catalyst for a financial Armageddon no one wants. It’s a hamster’s wheel of dread which keeps the lights on and we’re all on it. Make no mistake.
5. SA’s corruption is entrenched and it’s difficult to see how that can change for the better, certainly not under the current circumstances. The international perception is equally trite. Infrastructural decay; a paucity of foresight / planning and an ever-widening wealth-gap concludes as follows: - SA is on the road to becoming another failed state. It is the perception, at least, we surmise from international cash flow. The fall in the rand will tell you much the same.

In the end I’m pragmatic more than optimistic. We live in SA. We save / spend / and earn our crust in SA currency. Outside of SA most rand-based savings wouldn’t buy you a pregnant goat. The fiasco that is hyper-inflation, under conditions of a currency negatively out of control, is emblazoned on the psyches of most Africans and a sad state of reality for most ex-Zimbabweans. So we’re damned if we do and damned if we don’t. Whilst we’re here and living under this hatchet, all we do is what we can. The first step is to have your wealth invested in the correct instruments and in such a way that the vagaries of the future don’t impact too negatively because when the US goes we all go too.

The chickens & the cows

'...OPEC manipulating supply to drive US shale producers into non-profit...'

Whilst I concede the facts his conclusions are wrong. Here’s the way I see it.

1. The US shale industry is here to stay, either in free-float or with Federal assistance. One of the key policy riders in the US is energy independence. That’s been the case since WW11. If OPEC depress oil  by manipulating oversupply, to such an extent, that shale producers become unprofitable, the US Federal government will subsidise the industry. As it is the tax conditions for US energy companies are being reviewed favourably anyway.
2. The US, very recently, signed an agreement with the Saudis to buy oil at a specific price for the foreseeable future. That means this is not a price war aimed at the US. The price war is, in fact, aimed at Russia. It’s OPEC and the US squeezing Russia out of the European market, destabilising Putin and deflating the political escalation along Russia’s borders.
3. What’s more interesting is a sidelined China and an even less vocal Iran. China buys most of its oil from Iran and if I was to guess they have been appraised of the price war and are being compensated for their cooperation i.e.: for turning a blind eye. The compensation in Iran’s case is pretty obvious given the relaxation of Western sanctions against that country. In China’s case I would submit that a strong Russia on their borders is not exactly in their best interests. This then their motivation for cooperation.

No sir, if OPEC wanted to punish the US the easiest way to do so  would be to demand payment for oil in any currency other than the US $. As long as the US $ remains the international currency of exchange the US controls price through debt. A weakening dollar on long-term debt makes the market progressively cheaper for the US, not so? Get the US to pay in Euros, riyal, Yen or Yuan and we would have a financial Armageddon unlike anything we have ever seen before. The US would immediately default [be unable to pay even the interest] on ALL their international debt and we’d ALL be hammered back to the stone age. 

The financial derivatives market, by way of example and for interest, has an open-interest value of $600 trillion. That means $600 trillion worth of geared debt, on global exchanges, is held by Big Banks on behalf of clients. If the markets collapse, as they did in 2008, banks cease to exist, so too global financial structures. By way of comparison US GDP is about $17 trillion and the US economy is by far and away the largest economy on earth. That means it would take 35 years to pay off the current derivative debt – an impossibility obviously.

The world has been effectively bankrupt for decades ie: ever since we went off the 'gold standard' and have legislated the printing of money without asset-backed security. We’ve made it worse by using this non-asset-based currency for debt and then compounded it further by gearing it up in the derivatives markets by more than 10 times (1000%).

One day both the chickens and the cows will return home; they’ll have to because that’s what we’ll be reduced to, subsistence.