Oil is over $60. Gold jumped up too. Are these signs of ‘inflation’ of the world’s money supply? No, says the financial press. They are merely signs that investors are worried about Iran, say reporters.
We would look at it in a slightly broader way. There are always potential problems – economic… financial… political… natural. An earthquake could hit California. Or, the Chinese stock market could crash.
Let us stop for a minute and consider China’s situation. The Chinese market is in a clear bubble pattern. Its national economy is directed by aging communists. Its banking sector is said to have $1 trillion in bad loans. And its cash flow depends on buying from customers who don’t have any money.
Could China “blow up”? We don’t know…could the next head of the Bank of China be Chinese? Could the next Pope be Catholic?
Typically, when trouble comes, investors try to figure out how they can get through the crisis without losing their lives or their money. But to do this they have to guess what sort of crisis awaits them. Protecting yourself from an earthquake is very different from protecting yourself from a market crash or a war.
Right now, investors with their wits about them have a generous smorgasbord of worries they can sample. A wider war in the Middle East is only one of them. A meltdown in the dollar is another. A crash in the Chinese stock market is still another.
We do not mention natural disasters, because they are probably impossible to foresee… and very difficult to protect yourself from. Should you sell your home in California because the place might be hit by a tremor? We have no opinion. But the threats investors face today come from one source – super-low lending rates that boost speculation and excess consumption. That makes them much easier to predict – and much easier to protect yourself against, too. Bubbly asset inflation is bound to be followed by bubble-popping asset deflation. The best protection is to hold cash…preferably in different currencies, and gold.
Markets and Money