Letters by a modern St. Ferdinand III about cults

Economist Rosenberg who has been right about a lot of things in the past gives a realistic appraisal of what he thinks is going on in the markets and in the economy. No one has any idea what is going to transpire, but some good guesses can be forwarded. Gold and silver will rocket higher. We are or soon will be in another recession. Most sovereign states are technically bankrupt which should mean more downgrades and higher future interest rates. Socialism or statism, in which all aspects of life are communalized, secured and guaranteed is an unmitigated failure and its unwinding will be very messy. Just ask the O'Bama, the greatest god in history, and one of the most ardent Marxists in recent American history. Or the Euro-zone which in all likelihood will dissolve into separate currency domains.

Summary of what Rosenberg gave in a speech recently:

Gold

Gold is also rallying hard as it becomes oh-so-painfully evident, now with the ECB joining the fray, that debt monetization by the monetary authorities globally is going to be part and parcel of the solution to this leg of the crisis. Expect gold to go much, much higher as well —just to get back to prior highs in inflation- adjusted terms would mean a test of $2,300; and normalizing by world money supply points to $3,000 an ounce.

That bullion is testing new highs today with oil getting crunched as global growth forecasts come down is testament to the view that the yellow metal is trading less as a commodity over time and more sensitively as a currency unit — a classic store of value that is as correlated with deflation as it is with inflation (and we have written on this file many times over the years).

Recession is assured

........We have been saying for some time that recession risks are on the rise; in fact, we think it is a virtual lock by next year. In a market correction during a period of economic growth, brief market pullbacks of 10% or 15% are common. But in a recession, corporate earnings and the equity market both typically go down between 25% and 35% — these are averages —which would then mean a test, and possible break, of the 2010 lows (below 1,000). An $80 EPS profile for next year and a trough 12x multiple would yield a similar result.

Debt and more debt

The problem that remains is the excessive global debt burdens that were never redressed by the Great Recession. Sure the U.S. banks took writedowns and cleaned up their balance sheets, but the problem of toxic assets and home price deflation have not disappeared. Governments around the world allowed debt- strapped private entities to ride off their AAA credit ratings and now that support is gone. Private sector largesse (banks and households) was replaced with taxpayer supported debt. The total debt pie relative to GDP has simply continued to spiral up to new and now seemingly unsustainable heights. Now the U.S. has hit the wall.

China?

Those hoping and praying for a Chinese solution do not realize how debt- burdened even the second largest economy in the world is today — total banking sector credit in China relative to GDP is now 150% (180% when off balance sheet items are included). This is a 30 percentage point surge from 2008 levels (see No Plan B Exists if Growth in China Cracks on page B16 of the weekend FT).

The above is pretty sensible. China will not save us. Debt levels will continue to rise. Downgrades and even state insolvency seem assured. Gold [and silver] should continue to rise. Incomes, jobs, and economic opportunity will continue to contract. The great recession of 2008 never ended. It was just milder for 18 months. The next phase will be worse than the last. None of the issues which caused the last grave economic contraction were dealt with, but actually intensified and worsened. Soon we will all pay the price for the incompetence of our managing elites.