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2017 and The Greater Collapse -- A view of the disasters ahead for 2017.

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The Greater Collapse -- Part 2

I ended last week’s bulletin by saying “real estate is usually a good place to put your money, but where should it be?” Let me try to answer that question now.

The first problem to consider is the exchange rate risk. I happen to think that buying real estate in foreign countries is a seriously risky business at the moment. Under normal circumstances exchange rates between major currencies dont vary that much. Recently, however, they have jumped about all over the place.

I have previously mentioned that the exchange rate between Portugal and the UK changed enormously between the 1960’s and the end of the century. The exchange rate went from 60 escudos to the £ right the way to 315. That represents a massive risk to capital. Those who bought property in Portugal at the beginning of that period would need to see the value of the asset increase 500% just to stay in line with UK money.

The latest upset in exchange rates is the massive drop in the value of sterling over the course of a year. This time last year while I was living in Malta the exchange rate was listed at 1.38 euros to £1. Just a few weeks ago it was 1.10 to £1. That is a serious drop which has led to a whole raft of pensioners stuck on fixed incomes returning to the UK before they starve in Europe.

In these uncertain times you need to beware exchange rate anomalies. There are various ways to deal with this problem.

The easiest way round the risk is to spend money in the same currency that you earn it. If your money comes in sterling then you live outside the sterling area at your risk.

The other way of dealing with this problem is: dont burn your boats. The last thing you want to do if your income is sterling based is to invest your home in a different currency zone. I have for years banged on about investing in tourist ghettoes. They are always over-priced, are geared to foreigners, which means you usually have to sell to foreigners, which cuts out most of your market, and the market is slow to stagnant. A quick sale is either a dream that never comes true, or a recipe for a massive drop in sale price.

As I said in an earlier bulletin, investing in a bankrupt country is much the same as investing in a bankrupt company. Just to ram home the information, the following countries are bankrupt and you should on no account invest in them: Cyprus, Greece, Spain, Portugal, Italy. At the moment France is in the doldrums. To be on the safe side you should hold off from investing there until things become much clearer.

There is one further risk in the EU, and that is that the whole edifice may well come crashing down sometime in the next five to ten years.

Let’s look at this a little closer. I have already mentioned that the banking system in all the countries listed above, and also including Germany, is in a disastrous state. Because of cross lending throughout the eurozone one failure will probably bring down most of the rest of the system, and that includes France. In short, there won’t be much left standing.

Let’s take a closer look at the major European banks. I dont think most people realise what a toxic lot they are.

A great deal is made of the stress tests they undergo, tests which have been found to be next to useless. Even after those tests have been done two or the six biggest banks in Europe failed. French banks: BNP Paribas, and Societe General. They have capital shortfalls of €10 billion and €14 billion respectively. Of course, the real shortfall is much more than that. However, the main point is, they can’t survive another shock.

Deutsche Bank is in a worse state and is short by €19 billion, and that doesn’t take into account their derivatives exposure.

In May, Spain’s Banco Popular saw its share price drop 25% in one morning after it admitted it needed to raise €2.5 billion – just one month after claiming it had “one of the best” savings reserves in Europe.

In January, Italy’s Monte dei Paschi (the oldest bank in the world) admitted that its customers had started withdrawing their savings. The bank saw its share price drop 60% in the first three weeks of 2016.

In Germany people are so dismayed by low interest rates that they’re taking their money out of banks and keeping it in safes at home. Sales at one safe manufacturer were up 25% in the first half of this year compared with 2015.

Italy’s economy is 8% smaller than it was in 2008, and is smaller even than it was at the beginning of the century. And what is really frightening is that Italian banks have taken on 85% more bad debts since the crash in 2008. In fact Italy’s banks have bad loans amounting to €360 billion. That is totally insupportable.

I have mentioned the system of bail-ins before. Here’s how it impacts on the current situation. I’m quoting from one of my news feeds.

“On 1 January 2016, legislation came into force which declares that in future EU banking crises, the investors in the bank would take the hit – i.e. the bank’s bondholders and shareholders. And also, and this is important, the bank’s depositors.

The logic of the new law was simple: no more tax payer bail-outs of failed financial institutions. No more repeats of 2008, when ordinary people paid the price of mistakes made by the extraordinarily wealthy.

But the new law faces a big problem in Italy. The problem is that bond investors in Italian banks are also savers. They aren’t rich hedge fund managers or wealth management firms. They’re pensioners who’ve stored their savings in what they thought were ‘safe’ bank bonds. According to Bank of America, 14.6% of Italian household wealth is tied up in bank bonds - amounting to €235.6 billion.

In Britain, France, Germany and Spain ordinary investors hold about 1.5% of their country's bank bonds."

There are two options available:

    1    To bail out the country’s banks. This seems unlikely given German PM Angela Merkel’s recent words: “We wrote the rules for the credit system, we cannot change them every two years. We can't do everything all over again every other year.”

   2    The Italian PM enforces the current rules and hundreds of thousands of savers who bought bank bonds see their investments wiped out. The longer they dither on this option, the worse the debt problem becomes. The International Monetary Fund summed the situation up perfectly: “It is not clear to staff whether and how the current resolution framework will be implemented. That said, delaying resolution in cases of unviable banks can be costly.”

An Italian exit from the single currency would trigger the total collapse of the eurozone within a very short period. It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.”
Why? Because Italian debt is held by banks in the Eurozone’s biggest economies. France is by a distance the most at risk of contagion, holding in excess of €250 billions’ worth. That amounts to 10% of the country’s GDP. Germany is the next highest on the list with €83.2 billion – with €11.76 billion held by Deutsche Bank alone.”

I have no idea how long this charade can be sustained, maybe several years, maybe only several months. When it topples the mess will be spectacular. I currently still have half my cash in euros. That won’t be the case by the time you read this. I no longer own any significant real estate in the Eurozone. I think investing in this area is tantamount to lunacy.

For a sterling investor I think the only sensible real estate investment has to be in a good London area, but I would not buy at the moment. I think there will be a fall when the crash comes. That will be the time to buy real estate in rock solid investment areas. Those of you who were following me back in the early nineties will have bought at such ridiculous levels you won’t have to worry about any falls. Those who will survive any crash will be the ones who have investment grade real estate that is rented out. Any drop in capital value will hardly affect your income.

The other alternative, which won’t appeal to most people, is to reverse the old saying. It’s no longer much good to ‘Go West’ to seek the good life. From now on the best bet is to ‘Go East’.

The current economic order is actually destroying the banking system. Banks operate on a very simple system. They take in money, offer depositors security, and pay them interest on the funds deposited. They then lend out money for a higher rate of interest to commercial deals.

That scenario no longer functions. If you want to develop properties, start a business, or expand one, you rarely go to the bank for a loan any more. Every single investment deal I do is via fund raisers. Your property companies now go to these fund raisers and offer them a project with security. The fund raisers act as middle-men between investors and business-men. On the other side of the table, investors no longer give their money to the banks because they are no longer safe, especially since the bail-in agreements which put deposits at risk of being sequestered to prop up the bank itself, but also because interest rates are derisorily low.

All of this means that banks no longer have a proper business model and are rapidly becoming obsolete.

We have been used to banks being the centre of our financial world. That model is no longer functioning. What takes their place is not yet certain, but already their business model has been usurped. They won’t disappear, but the businesses we used to know no longer function properly.

I am not prepared to discuss digital money at this stage despite many sources screaming that we are heading for a cashless society. I dont know how far off such a thing is, or whether it will happen, but I must admit I dread such a development. It will mean governments have total control over populations, and I can’t begin to imagine how ghastly that would be.

What is clear is that the current currency situation cannot continue. It is possible there could be some kind of financial re-set, though how that would work I dont know. What I do suspect will happen is that we will all have to pin our different currencies to Special Drawing Rights (SDRs). This will be the re-set of choice, but will lead to massive and sudden inflation.

I used to be a fan of gold as the ultimate store of wealth. I am going off that idea. We are firmly entering a digital future. Gold is about as un-digital as you can get. It is also hopelessly inflexible. SDRs can be manipulated, and they are digital. I firmly believe we will start to see them grow in stature as next year marches on.

What is also wonderful for governments is that this form of currency is not available to the general public. The currency we will be using will be tied to SDRs, but at such a level as to wipe out much of the current international debt. That can only mean one thing: sudden and serious devaluations.

What will be left standing? Does this mean personal debts will suddenly shrink almost to nothing? With a digital currency that won’t necessarily happen. Certain debts will be wiped out, but you can almost guarantee that personal debt levels will be adjusted in some way. We will all be poorer. How this will develop I do not know, but I can’t imagine for one moment that things will be better for the average person.

Next week I’ll start to look at real estate in particular.

<<< Part One

…to be continued


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