Below is Fitzwilson’s exclusive piece for KWN:

Fitzwilson:  “The 4th century B.C. city of Syracuse was the setting for one of the most memorable sayings that we associate with a precarious situation.  That saying is “hanging like a sword of Damocles”.  Damocles was a member of the court of the ruling Tyrant, Dionysius.  Damocles had the audacity to comment on what an opulent, wonderful life it was being the Tyrant. 

Dionysius invited Damocles to experience what it was like to be the ruler.  Preparations were made including allowing Damocles to sit in the Tyrant’s throne....

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“While Damocles was luxuriating in the trappings of being ruler, he happened to notice a sword hanging above his head suspended by only a horse hair.  Dionysius wanted him to see that being the ruler had enjoyable perks, but that death and disaster were a constant possibility for whoever sat in that chair.  Damocles quickly gave up the chair and returned to a life of more modest expectations.

While there is prosperity for some in these financial markets, the Sword of Damocles hangs over our financial and economic heads.  Hung by metaphorical horse hairs are the threats of rising interest rates, currency instabilities, increasing volatility of markets, violent demonstrations, scandals and war.  There seems to be no limit to the Black Swan possibilities.  Even cash holds risk in the event of a coordinated “Cyprus” event.

It is an incredibly difficult, confusing and debilitating set of conditions.  For investors, it is very easy to be fearful and be indecisive about how to allocate capital.  One never wants to suggest that powerful entities have run out of palatable options, but it seems like we are heading in that direction. 

It is water under the bridge, but the decision to protect the financial institutions, to transfer private debt to sovereign balance sheets and the inability to deal with long-term fiscal issues have led us into a dead end.  The only ways out now are both extraordinarily risky and nearly impossible to pull off without severe and perhaps catastrophic consequences.  What is required is time and sacrifice, but that is not politically acceptable.  Most people are even unaware of the predicaments.  While we can all have our opinions about who is doing what to whom, we are not even sure if there is any “plan”.

Two of the most significant observations in the past couple of weeks have been the spikes in interest rates and a possible attempt to isolate China.  The 30-year bull market in bonds caused by an historic decline in interest rates is over.  It is impossible to know whether we face a 30-year bear market in bonds, but we do know that fixed income will be toxic for years to come as rates rise.  In recent weeks, rates have spiked, to be met by counterbalancing forces.  However, there does appear to be a trend to higher levels.

We do not know if it is policy or simply a rear-guard action to moderate a rise driven by a loss of absolute control.  If it is a policy of gradually increasing rates and inflation, we need only to look to recent Japanese experience with these objectives.  Even Paul Volcker said something to the effect of “Good luck with that”.

The Chinese stimulus was a major factor in bringing the world out of an economic and financial nosedive in 2009.  It was in their best interests to do so.  It is highly improbable for them to be the engine of growth and the great consumer of commodities for the rest of the world.  Their internal monetary and demand factors preclude any such possibility. 

In addition, recent tariffs targeting the Chinese have been implemented for solar panels and are now being discussed for steel.  China is naturally making up their own list of items upon which to slap tariffs.  The currency and trade wars are continuing to accelerate.  That cannot be good for China nor for the countries that rely on China as a market for their raw materials and products. 

The other factor is that China is well-known for coveting the reserve currency crown.  That represents a life and death struggle against the status quo and the Western central banks.  The recent actions could be part of a deliberate policy to isolate and cripple China economically and geopolitically.  As Damocles found out, coveting the throne has a downside.

For investors, it is prudent to remain vigilant and cautious, but not indecisive.  It definitely feels like we are coming to a denouement, but it is not clear as of yet exactly how the end game will play out.  For now, holding cash for opportunities, staying very short-term in fixed income, and seeking out extreme value for other components of the portfolio makes the most sense.  Gold, silver and energy are certainly examples of extreme value, but enterprises with high growth potential can also be an effective way to endure what comes next as well as to prosper in the years ahead, just like we saw in the 1970s.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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