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Wednesday, 14 March 2012

New Record Highs... that usually means trouble

Pride Comes Before A Fall
Well the Dow Jones has re-established itself at its pre-2008 level based it seems on an increase in dividend from JP Morgan Chase. For me this has set alarm bells ringing.

As we know (or hopefully you have been following the economics posts) the banks are all bankrupt and being kept afloat solely by the relentless printing of worthless money.

The Central Banks have printed various amounts - in the US it is at least $3trillion, in the UK it is £1 trillion, even the Swiss central bank has been forced to print more money to prevent the damaging rise in the value of the Swiss Franc which was destroying exports.

Just to go back over the basics... if the value of the UK was (say) £10 trillion and they then printed another £1 trillion pounds then the value of the UK becomes £11 trillion. The UK does not actually include anything different, there are still the same amount of assets, but the value of the assets is now split between that £11 trillion effectively causing the value of everything when expressed in £s to increase by 10%.

In a global economy with every Central Bank printing money as fast as the US to ensure that their currency does not appreciate and ruin their exports there is a lot more money in circulation than there was even last year.

This is the true inflationary effect which is a result, solely, of printing currency. Such inflationary effects are not possible where gold, silver and copper are used as currency as it is not possible to simply print gold, silver or copper. This is what occurred at various points in history from Ancient Rome to Weimar Germany to Zimbabwe.

That is not such a problem if you actually own assets (gold, land, oil) but if you hold cash (savings, pensions, wages) then you have lost. There is a middle ground here that of housing which is an asset, but it is usually a mortgaged asset. In the 1970's a lot of people made a lot of money because the value of their houses went up whilst the value of their mortgage (compared to earnings) went down.

Basically cash is owned by the poorer members of Western societies (I say poorer because even the poorest is in the top 20% of the world's rich) whilst the assets are owned by the richer members of Western Society.

What is different this time is that houses are significantly over-valued. In Jersey for example an 'average family house' is far beyond the means of an 'average wage' to purchase. Estimates suggest that houses are 25% over-valued.

So the outlook is pretty bleak for the average joe. Any savings, pension entitlement or residue of value in their property is all going to be severely de-valued. This will not affect the poorest as they are unlikely to have any savings anyway and of course it will not affect the richest, noticeably. It is the middle classes that will once again face the burden. These are the same middle classes that are also being hammered by government through tax increases.

We have seen an assault on the Gold futures market with the naked shorting (i.e. selling of items that you do not actually own) forcing down the price from near $2,000 to around the $1,700 level and at the same time money has been moved back into the stock market.

So what is the price to earning (p/e) ratio of JP Morgan Chase now it has increased its dividend? Well it is 9.638%, that is a phenomenal return given that 'safe' US treasury bonds will gain you 0.5% and money in the bank will gain you 0%. You can get a better return Portuguese treasury bonds currently gain you 13% but as you know Portugal is no different to Greece and will soon be facing its own crisis.

You have to wonder why the price of the stock has not risen further still, surely even at a p/e ratio of 5% it would still be an attractive investment and there is so much more money floating around.

So why is the p/e ration so high? Well two things, firstly JP Morgan owes an awful lot of Gold to an awful lot  of people and secondly it owns an awful lot of repossessed homes that it cannot recover its loan value on. The financial reports do not adequately disclose this, but the knowledgeable trader is aware of this and factors this into his decision. They will only buy at a rate of return of 10%. Because a lower return is simply not worth the risk.

Just do a search on the subject of this post and see how loudly JP Morgan is trumpeted around the globe as the latest sign of economic recovery... maybe it is just me but I get the feeling that we are being set up.

Interestingly enough for those astrologically minded, Uranus progresses to 4 degrees Aries this weekend, last time that happened? The great stock market crash of the 1920's.