The next phase of the collapse II

By: Hans Jørgen Lysglimt

People in general are still far from taking in the severity of this collapse. People and companies, entire economies are right now getting by through capital depletion, this will soon end. There is still inertia for change; people fundamentally will not accept change. You know this from your own experience, and on the aggregate for the entire economy it is o different. People will not change until events force them to change, for many the force phase has not yet arrived as they are living off capital. Companies can accept a quarter or two of losses, since they can deplete built up capital. But when the capital is depleted you will see dramatic change, this phase will be the tune of 2009.

GM’s signal to cut off foreign subsidiaries like Swedish SAAB is only one early beginning of this. There is a massive down scaling ahead of us in 2009 and 2010.

What I see coming:

A collapse of European banking, see yesterdays comment.
This will lead to a panic in Europe, and a massive flight out of the Euro and other European currencies. There is really nowhere else to flee but to US dollars, Yen and ultimately to gold. And among them the dollar is still the only reasonably acceptable alternative for many investors. Gold is still considered kooky, and many think it is too late for them to go into gold due to the recent rally.

I used to like the Norwegian krona, but as our fellow writer here on Farmann Geir Kokkvoll Engdahl reminds us:

I think the NOK is absolute suicide compared to the USD. Norwegian economy is very dependent on oil, and oil production is declining fast. Coupled with lower oil prices, this means a devastating effect on the economy. Norwegians have a much higher debt-to-income ratio than Americans on average… Many Norwegians also think that they are _entitled_ to a high standard of living without much effort. That will serve to make the crash much more spectacular here. The Oslo stock exchange main index was at 100 as late as 2003. That tells me it has a long way to fall still.

The Norwegian economy and the NOK is no sure bet. Norwegians should be content to be exposed to NOK just by holding a Norwegian passport.

So like the unexpected rise in the dollar in 2008 I see a new unexpected surprise rise in the dollar in 2009 to unexpected heights. This will postpone the final collapse a bit as the US economy will still have some resemblance of resolve.

This is a last and final amazing opportunity for US investors to get out of dollars.

When holders of US dollars wake up will be the time when gold will soar to USD 1500, USD 2000 and beyond. When will this happen? It could happen as we speak, or it could take years. But I do now believe the change is now fairy close. 2009 and 2010 will be so dramatic; there will be so much volatility in all financial markets that I believe the dollar at some point will be put to the test. That event will set off an avalanche of dollar selling creating a self reinforcing spiral downwards. The whole thing is so fragile right now, numerous things could trigger this. The dollar is built on a house of cards, and something will make that house fall – very soon. I now expect the dollar collapse to arrive sometime in 2009/2010.

European investors will not benefit from the rise of the dollar directly, since we are not dollar denominated ourselves. So we should be advised to go straight into gold. Gold will give us the initial dollar rise, and then a second dollar rise as the dollar collapses.

Gold is now at all time high in Euros, Pounds, SEK and NOK. I believe this reflects the true value of gold. The reason gold is still a little below all time high in dollars is due to the unexpected high demand for dollars. This will end. As the dollar collapses gold will hold up and move upwards as the dollar falls but with much stronger momentum.

This is a depression, not a recession. A recession is a temporary alignment of the economy within a rising trend. A depression is a fundamental rearrangement of the economy. We are in the rearrangement. Unfortunately the rearrangement will be for the worse. The prevailing philosophy of our age is not able understand what is going on and take the right action.

This all is not fun. We will all be much poorer from this. The world in 2016 will be much poorer than it was in 2006.

Fasten your seat belts.

19. February 2009. Oslo, Norway.

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5 Comments

  1. Olof
    Posted 19 February, 2009 at 11:45 am | Permalink

    I have been a bit too late in the search for a safe haven. I have been sitting with my money in Swedish money market funds.

    I am afraid of buying into US Dollars since the dollar has appreciated by 40 % compared to SEK since the summer.

    I am not to keen on gold either since we are in a deflationary environment right now and the buying of gold recently has been because of fear. The cash cost of producing gold is around 300-500 dollars/ounce. There is a lot of money to be made in gold mining and the supply is set to rise in 2009. The upgoing trend in the gold price could quickly reverse itself.

    The reason that I am favouring NOK is because of Norways oil resources. The production is falling but it is falling all over the world. The fall in the price of oil is only temporary and when the price starts rising again it will compensate for declining production.

    Just my five cents.

  2. Posted 20 February, 2009 at 3:00 am | Permalink

    I know that oil production is falling everywhere. I’ve been a Peak Oiler since May 2004, when oil passed USD 40 / barrel, and have watched the various oil-related events since then closely. Until this summer, I had massive positions in oil. In the long term, I’m very bullish on oil. I started buying oil again (in the form of USO shares), this week. What would have cost me more than USD 20000 last summer, now costs me less than USD 5000 to buy. That’s the risk of holding something that you think will go up long term, but down short term. If you think it’s going down in the short term, it’s silly to hold it. You get twice as much if you sell and buy back in!

    Did you know Norway’s proven oil reserves are equivalent to only 7 years of the current production (see http://en.wikipedia.org/wiki/List_of_countries_by_oil_proven_reserves)? We have the lowest reserves to production ratio of any country I know of. That ensures a dramatic collapse in Norwegian oil output in the next few years. In fact, world oil production is roughly stable, and the USA is still the third largest producer in the world. It has reached a very mature and stable output of 5M barrels per day, compared to Norway’s 2M barrels which is dropping fast.

    The other thing is that a lot of people in the USA are getting upset now about the bailout / rescue packages. The first $700 billion bailout got voted down in the Senate last fall, and they had to come up with another one before it could be passed. I’m not convinced that even more reckless packages will survive in the US senate in the future, given that the first bailout has not worked. Compare that to the spineless politicians of Norway, where NOT EVEN A SINGLE ‘stortingsrepresentant’ (member of parliament) voted against the NOK 350 billion bailout of DnB NOR – a bailout that is 5 times larger than the US one per inhabitant.

    No, I would definitely not recommend more exposure to the NOK or Norwegian securities in the coming year.

    You have to give gold one thing: It has absolutely no counterparty risk. You can own it outright. Rest assured there will be bank failures, and maybe even closures of stock exchanges in the near future. The risk of owning “paper barrels” such as USO, is that the counterparty who is issuing these shares may go bankrupt before you see any of the barrels you own. Gold does not have those issues. Storing large amounts of oil is impractical. Not so with gold.

    If you’re bullish on Norway because of the oil resources, let me mention that Canada has proven oil reserves 20x larger than Norway, in addition to large uranium, gold, lumber and natural gas resources. It is also one of very few resource-rich countries with a relatively stable goverment. When it comes to natural resources, North America (Canada + USA) is in WAY better shape than Europe (resources per capita).

  3. Farmann
    Posted 20 February, 2009 at 2:05 pm | Permalink

    Olof,
    I think you just have to bite your tongue and accept the massive losses on SEK towards USD and gold and buy into gold now still below USD 1000.
    Its terrible.
    Iceland krona down 70%
    Sweden krona down 40%
    Norway down down 40%
    Pound down 30%
    - The Euro is next.

    US savers have been extremely fortunate not to have taken the double hit, but only if they now get out of dollars and into gold. Only a small small number will make that move, they are mostly toast.

  4. Kris
    Posted 22 February, 2009 at 2:50 pm | Permalink

    Excellent articles for a long time on Farmann.no. Very impressive seen how it is turning out.

    Regarding the safeness of USD, you might be right considering todays fundamentals, but are you forgetting the creditcard debt that US citizens have been amassing last 4-5 years? Everyone just got different creditcards send in the mail with no questions asked. I might be wrong, but it seems the creditcard debt in US is bigger than the the eastern europe exposure of western banks here in europe. And the american banks are on the hook for those creditcards.

    Former GoldmanSachs chairman says that because of this creditcarddebt this is going to be worse for US than the great depression and it will be the second round.

    I spoke to some analysts and they still are upbeat about the OBama package and says we need more of them. They really don’t seem to get it. It will not help. The German package on 450bil will not help either. No package will help ,it will just increase goverment and goverment is a luxury most of our countries can’t afford.

    Go back to pure markets, let the market play out. If the market had been allowed to play out by itself in 2001-2002 the US would not have had these problems today. Those inbalances would have been wiped out. US has a last chance now, to bite the bullet and get through a SEVERE recession and do a real sacrifice. But US won’t be allowed to have a downturn now either, even though it needs it so desperatly.

    Still impressed by the norwegian housing prices went up in January, but maybe its just a last uptick? With these creditproblems all over, and knowing that no stimuli package will ever work(just make things worse in the long run), only way for norwegian houseprices are down?

    Anyone??

  5. Posted 24 February, 2009 at 3:05 am | Permalink

    The only scenario where norwegian housing prices don’t come crashing down is if we get high general inflation. The prices have to come down compared to ordinary salaries.

    This is not the time to buy a house. This is the time to set up a budget of your expenses and make some tough decisions to cut your own spending. We are entering uncharted territory and what we have today could be a walk in the park compared to what may come tomorrow. You can sacrifice a pair of fancy pants today and be able to buy bread tomorrow. If we get lucky and a magical unicorn that poops candy comes along and removes this whole mess, you will have saved some money. If we get a depression, whatever you can spare today may be what gets you through without begging for food / living in a government shelter.