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Brace For Turmoil In Global Markets As Spanish
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Tuesday, June 26, 2012 5:52:03 AM
Brace For Turmoil In Global Markets As Spanish Domino Falls
June 26, 2012
On the heels of Moody’s downgrading 28 Spanish banks, today 40 year veteran, Robert Fitzwilson, wrote the following piece exclusively for King World News. Fitzwilson is founder of The Portola Group, one of the premier boutique firms in the United States. Here are Fitzwilson’s observations of the current crisis we face: “The monetary system is trapped. Despite various forms of quantitative easing and the forcible reduction of interest rates, the level of economic activity has begun to reverse course. The recent releases of economic indicators, in most areas of the world, have been revealing a global economy that is beginning to tank. It is clear that the levers exercised by the central banks since late-2008 are not as effective as they once were.”
“The extended Zero Interest Rate Policy (ZIRP) is wreaking havoc with retirees, savers, retirement funds, and the net interest margin of the banking institutions. Large corporations have a tremendous amount of cash, but small businesses struggle to find working capital and bank loans. Small businesses and entrepreneurs are the job creators.
Another problem is that volatility is high for risk assets. The velocity of money stagnates. The system is imploding and unless something is done soon, and on global scale, we will lapse into a downward economic spiral....
“We believe in sound money. However, there is no easy path to a return to sound money. For now we have to keep the economies and the economic infrastructure in place.
However, with ZIRP, there is no incentive to save. While Chairman Bernanke would like capital to flow into the equity markets, the increased volatility caused by ZIRP scares the average investor away. The incentive is to convert assets from cash and fixed income into real assets, but not the real estate that is also on the wish list of our Chairman and other central banks around the world.
I would also note that pension plans have been targeting 8-10% returns, in order to meet the actuarial needs for funding the obligations to the retirees. They cannot meet those goals with a ZIRP policy. They are left with the equity markets and alternative assets such as hedge funds and private equity.
The traditional equity markets are not generating the necessary returns, despite the Federal Reserve providing a tailwind. The alternative assets have been struggling in recent years, and they are certainly not the “sure bets” that plan sponsors have assumed.
Insurance companies face similar problems, particularly for life insurance. These companies have obligations on the books that were underwritten when interest rates, real estate capitalization rates and equity returns were much higher. As these obligations reach maturity, the potential exists for severe financial difficulties for the companies and the holders of these policies.
This is an enormous and global problem. Retirement funds, in the aggregate, are depleting their resources, not building them for the retirees. For public sector plans, increased taxes, particularly property taxes, are in the offing. Raising property taxes can only continue to harm real estate prices and drive higher-income citizens to other states or countries that do not choose to raise taxes.
The bottom line here is the Federal Reserve and other central banks, in developed nations, in their attempts to keep the system afloat, are destroying the very financial system they are attempting to save. The negative and unintended consequences of what the central planners are doing is leaving a trail of destruction that grows worse with each passing day.
If the Fed and other central banks continue with these artificially low interest rate policies, investors should brace themselves for unimaginable turmoil both in the markets, and in the financial system itself. In the meantime, investors need to protect themselves by owning a basket of hard assets and key sectors. For what it is worth, this is wildly bullish for gold and silver.”
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