Wednesday, March 28, 2012

The Year Ahead; Some Thoughts

So what of the rest of 2012? Other than a Mayan prediction of doomsday on December 12, which is utter nonsense, what can we look forward to in the financial markets?

It appears that Central Bank policy will not change. Mr Bernanke has signaled, just yesterday, that 'monetary accommodation' will continue. You see, interest rates cannot be allowed to rise. Rising interest rates mean the end-game for the US dollar. Yet another blow to savers as their returns get decimated and their purchasing power gets smashed as prices go up. In 2011, the interest bill for the US government was around half a trillion dollars. Interest rates are critical.

Oil and energy. Oil will continue to move upwards, but will likely be curtailed with all the fire-power the West can muster, as prices must not go ballistic before the US election in November. If they do, history tells us that the incumbant President will not be re-elected. Economic growth estimates are curtailing now anyway, this might save the consumer from higher gas (petrol) costs? However, with growth dwindling, oil is still around US$125 per barrel, so there are severe presures on energy costs.

Nuclear energy is now back on the table as Fukushima becomes a distant political bandwagon. The US has announced it is building its first nuclear reactor in 30 years. China and many other countries are ramping up production as well.

War, forget it. War with Iran is not going to happen. Too much at stake for the energy costs of the West. Continued bluster is the order of the day.

China? China is probably between a rock and a hard place. Their economy is contracting and they have domestic inflation and an increasingly frustrated populous to contend with. Globally, they do not want to see the US dollar lose its supremacy. At least while they hold $1.8 trillion in US debt and around $4 trillion in reserves. They will continue to purchase assets globally in order to use these reserves.

There will be increasing activity in the horn of Africa as Western interests try to bring stability there in order to take advantage of reported huge new oil reserves in the area. US and other Special Forces are doing what they do best in that region right now.

In this, the South Pacific region, we are already seing a tail-off in exports of commodiites from Australia and New Zealand as the global economy contracts. Dairy prices here will likely continue to move downwards this year, negatively impacting our economy. The same with Australian exports of raw materials. We will also see our alliances with the US and other Asian countries like Singapore grow in importance. This week there is a joint exercise in New Zealand with Australia, Singapore and US forces.

In Europe, the sovereign debt curse will continue. There is a slight hiatus right now, but where on earth will Greece get $260 billion dollars to service it's current debt load? Who knows. The ECB couldn't even supply the finance for the latest round  and Greece had to default on $100 billion of that debt. Then there is Spain, the big grey elephant in the dark corner of the European room. A huge economy thumbing its nose at the Eurocrats and refusing to cut its deficit. Spain will be the bogey this year.

So there you go, just a few thoughts on the world going forward this year. Much more to talk about I'm sure, but in the end, today we are scrambling to keep it all together and there doesn't appear to be much vision out there to move us out of this crisis.

Gold in New Zealand dollars: $2047.42 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $39.70 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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