Are you Prepared for a World heading for Populism?

Dear PGM Blog readers,
If you have watched the headlines lately, the following news headlines of the last two weeks should have captured your attention:

Today, Sunday May 6th 2012 will go into history as the day that Greece and France shifted politically from the center to respectively extreme left to left from the center.

The big questions Investors will be asking themselves are:

  • Is there a correlation between the nationalizations in Argentina and Bolivia and the results of the elections in France and Greece?
  • How will the markets react on the election results in France and Europe?

Without wishing to meddle in internal politics and political decisions in the above-mentioned countries, we should agree with each other that the above-mentioned four events are consequences of populism.

History has proven that populism and populist decisions will trigger the opposite reaction from the outside world.

In the sense that it will scare (foreign) creditors & Investors, which will result in isolation and a downward spiral for the countries with a populist leadership.

What most populist leaders forget are two very import rules of life namely:

  1. The one who pays always has the final word.
  2. Natural selection or birds of the same feathers fly together.

The basic message in today’s election in Europe is that voters in both Greece and France refuse to take more austerity measures and want to reduce the power of Germany in the Euro debt crisis.

What these voters forget is that Germany and German voters and population are the ones who are now paying for these countries to stay afloat and due to this logically demand from both Greece and France to take austerity measures in order to reduce their budget deficit and to bring it in line with the “Maastricht Treaty”.

A tough stance in both these countries might lead to Germany no longer willing to finance their deficits any longer, which will lead to a break-up of the Euro and Euro-zone as we know it today.

This will lead to the second rule, namely

birds of the same feathers will always fly together.

If this is the case, France, Spain, Portugal, Greece, Italy (and eventually Malta) will either go back to their former currency or will form a so-called “South Euro Zone”.

On the other hand Germany, The Netherlands, Luxembourg, Finland, Estonia, with eventually Slovenia and Slovakia, will form the so-called “North Euro Zone”

You don’t need to have a PhD degree in Economics to draw the conclusion that the Southern Euro will become a ‘loser’ currency with down-grading of credit-rating and devaluation against major foreign currencies

On the other hand the “Northern Euro” will be a very strong currency of Europe’s major export champions and solid economies, with the chance that Norway, Denmark and Sweden may join them in the future.

This will send a very strong signal to Euro-zone countries like Belgium & Ireland to choose position. “North or South” (“Loser or Winner”)

We foresee that the markets will dump the Euro against all mayor currencies and that French as well as Greece capital markets will go through very difficult times in the near future. The VIX or FEAR index might spike to levels comparable with the ones of the fall of 2008 or summer 2011.

Chances are that Investors who dump the Euro will flee in the short term into the USD and US-Treasuries and by doing so will send the yield of the 10-year note to a record low.

But it will be only a question of time before people will start seeing that the USA and the USA-Dollar are more or less in the same financial and debt mess as the Southern European countries, with the consequence that investors then flee into the ultimate safe-haven which is GOLD and other precious metals.

We believe that this growing populism will hasten the West going into a severe Kondratieff Winter or Depression, which due to the demography and entitlement programs in the West might be much worst that the great depresssion of 1930.

For the sake of humanity we hope and pray that we are wrong but, if after reading the above you (partially) agree with the content of this blog post, we advise you to start putting a great portion of your savings into GOLD, hold  on to “Asset Protection” vehicles, stored in low-debt, good-governed countries, with a history of asset and investors protection.

Last be but not least, before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities as well as the stocks of their producers can be very volatile and that sharp corrections might may in the short term.

Yours sincerely

Eric Panneflek

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