Golden Life Boats on the Titanic

Posted | 27/05/2015 / Views | 2507
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The chief economist of the world’s third largest bank, HSBC’s Stephen King released a report titled "The World Economy's Titanic Problem".  In it he warns:

"The world economy is sailing across the ocean without any lifeboats to use in case of emergency,"

By this he is referring to the graph below which illustrates that the US Federal Reserve has had to cut rates by over 500 basis points to right the ship in each of the recessions since the early 1970s.   He says "That kind of traditional stimulus is now completely ruled out. Meanwhile, budget deficits are still uncomfortably large,"

Golden Life Boats on the Titanic

He goes on to say We may not know what will cause the next downswing but, at this stage, we can categorically state that, in the event we hit an iceberg, there aren’t enough lifeboats to go round.

“The world economy is like an ocean liner without lifeboats.”  That is, when the next recession occurs, because all the bullets have been used to recover from the last, the GFC, but with only very limited effect and also having increased global debt by 40% to a staggering $200 trillion or almost three times the size of the global economy in the process, there is nowhere to go but down.

The scary thing is the Fed keeps talking of actually increasing rates as they try to paint a rosy picture but he warns that could be the proverbial iceberg itself and states "Many – including the owner of the Titanic – thought it was unsinkable: its designer, however, was quick to point out that 'She is made of iron, sir, I assure you she can'."

HSBC’s precious metals analysts followed up this report stating the very same scenarios outlined by Mr King would be positive for gold bullion.  The analogy of gold and lifeboats is an obvious and true one.  Don’t be caught out trying to get your life boat when everyone is rushing for the few left.