Willem Middelkoop is an investor and freelance economics reporter for the Dutch financial report RTL Z. Based on his expertise and his sources - newsletters from insiders and conversations with bankers and financial analysts - Middelkoop believes that the question is not if the current financial system is going to fail, but when.
In this interview [MP3, part 2/2 of the 2nd conversation] Middelkoop addresses the question of how you can best prepare for these circumstances.
(There are also two separate interviews with Middelkoop on current affairs).
Willem Middelkoop has a free newsletter (Dutch language).
By Daan de Wit
Daan de Wit: Most people in the world live in a city. How do you envision things playing out in an urban setting if something goes wrong?
Willem Middelkoop: 'If something goes wrong, then the masses are going to be in trouble for sure. Who had it good in the Second World War? If you were a farmer in one of the rural areas north or east of here, then you didn't have much of a problem during the war. But if you lived in the middle of Amsterdam, then you were definitely in trouble. Take New Orleans for example…if you were six miles inland, then you were fine after Hurricane Katrina hit. But if you lived 10 feet below sea level in the wrong neighborhood of New Orleans, then you knew that you could end up underwater. This was written about every year, every time a hurricane approached, they dusted off the same script: "New Orleans could get totally flooded!". And there were a lot of evacuation plans as well. So New Orleans is a really good example of what happens to people in a crisis situation. Everyone knew what the worst case scenario was. All of the people who had a car or who had money made sure to get out. It was the folks without a car, those who were dependent on the government, who had to look out for themselves, because the government failed to respond. My motto is always: 'Look our for yourself and don't count on the government'. The Netherlands is of course typical of a country where we expect everything from the government. But yeah, the government can't handle a problem like this. This kind of thing is too big for the authorities to handle - we saw this quite clearly in New Orleans - the system is just not set up for it.'
Daan de Wit: How did it come about that you started to think about these kinds of things? It's really kind of another level of thinking.
Willem Middelkoop: 'I really like to think out of the box. It never bothers me that I might have difficulty accepting some idea or whatever. I can entertain quite a lot of things. But it really began in 1987. I had just graduated and was taking a week-long road trip with my girlfriend through Europe. I drove to southern Turkey and then we had crossed over to a small island - Chios - in Greece. At that point, which was in October of 1987, I was in a store when a sort of stunned American came running in and yelled, 'Did you hear the news, did you hear the news?' I said, 'No, what's up?' 'Wall Street has crashed and it's worse than 1929!' And then he took off just as quickly as he had appeared. I wondered what was going on and went back to the beach. And so there I had time to reflect a bit. What does that mean: 'Wall Street crashed. Worse than 1929?' 'What happens then?' Well, then people start to panic, people go to the bank to withdraw their money. The banks aren't able to deal with that, so they close down. And then I thought: 'Just what in God's name is really going on?'
For the first time in my life I saw how good we have it, but is it all still going to be okay when I get back from vacation? What will I find? At that time I worked as a photographer for Reuters, and at Reuters there were of course quite a few financial journalists. So when I got back to the hotel I immediately called the editorial staff and asked what in the world was going on. And then they told me that the situation was not as bad as first expected, that the stock exchange fell by 30%, but that everything else was rolling along fine, and that I had nothing to worry about: 'Keep enjoying your vacation'. But through this experience I became familiar with the notion that the banks could close, something which I had up until then never given a second thought to. So then when I got back I realized that I still wanted to read more about this, that I definitely wanted to learn more about it, about the risks, what could happen… And then I actually came across a book by a professor from India, but who taught in America - Ravi Batra. His book The Great Depression of 1990 had just been translated into Dutch.
Because Ravi Batra is from India, he combines Eastern wisdom with Western economics. He has written a couple of accessible books on this. He even made a number of predictions based on some sociological cycles, among others that the communist system would collapse by the end of the 20th century - it had reached the end of it's cycle. Batra said that communism would collapse under its own weight and that the capitalist system could expect the same fate in the first twenty-five years of the 21st century. At that point growth limits would be reached. That was actually the first time that I had read that, and I really found that to be a captivating and remarkable idea. And then I kept reading his books during the next ten years; he came out with a new book every three years. He continually expanded on these issues. He also predicted that things would turn out badly for the stock markets towards the end of the 90's. In that period I started to speculate in real estate.
I started to get deeper and deeper into speculating, and I began borrowing a lot of money from the bank. At a given moment I had borrowed a couple million from the bank. At that point I realized, 'This will be fine as long as the market keeps going up, but then I'll need to know when the market, the housing market, won't go any higher.' So at that point I really started to devote myself to learning the cycles of the financial market - the market cycles, the economic cycles. And then at a given moment, I got it. I realized that the years that we are now in the middle of - a time in which everything, housing prices, internet shares, the stock exchange, can only go higher - are all classic symptoms of a bubble. And they are in fact the classic symptoms of the end of a bubble. When the excesses become most extreme, then the end of the action is near. And so then I went ahead and wrote about that as well, at first just to inform friends about it. After that, in 1999 - at that time I was working as the head of the photo editorial staff at the newspaper Het Parool - I started to write about the parallels between the madness on Wall Street in the 20's and the madness in the 90's. And in those articles I demonstrated that the excesses back in 1999 were actually greater than those in 1929. At that time I wrote that we could expect big things on Wall Street - I literally put it in the story. At Het Parool I always got laughed at - the adjunct editor was always hollering 'Willem is warning us again'. But six months later the market began to fall, finishing out seventy percent lower - exactly what I had described in my stories. Because stock markets always take a steep dive after a bubble. After a classic bull market ends in a bubble, stock markets always fall between seventy and ninety percent. That has happened time and time again throughout history. It's only because it's sixty or seventy years before it happens again that we forget it every time. And so it happens again after just about sixty or seventy years. Because at that point there is a new generation that hasn't experienced that and can't conceive of it.'
Daan de Wit: What are your predictions now? I ask, because back then, you were pretty much right on target...
Willem Middelkoop: 'I myself have already sold my real estate, in 2001 and 2002.' He saw that the time was ripe given the decline in market rates: 'When the markets begin their slide, you always get a peak in the housing market for a couple of years. People say that housing prices are just going to keep going up.' Middelkoop feels that this is nothing more than appearances: 'The housing market is being artificially propped up by keeping interest rates low. But in spite of this we're seeing only minimal increases in the cost of housing. The cost of a building on Amsterdam's canal belt continues to drop relative to the peak in 2000. So whoever sold in 2000 or 2001, sold at the peak. I think that housing prices will continue to fall.
What we're now seeing is that massive inflation and currency devaluation are being created by central bankers - the printing presses are rolling at full tilt… Devaluation of the currency should keep prices stable, and as a result you might still be able to get 500,000 euros for your house 10 years from now, but by then that 500,000 will be worth a lot less. So in the end what you're really talking about are rising prices. Anxiety on the stock market will persist, because it is there that you can see the effect of creating so much money. So much money is flowing toward the stock market that it seems almost as if it might never crash again. But at some point a wave of capital destruction will arrive that is typical of the bust period we are living in now. And that destruction of capital could be caused by anxiety, by some sort of doubt about the dollar, or by something geopolitical. [Not long after March 8th, when this interview held, markets worldwide began to fall sharply].
The most important trend, which I myself am trying to profit from as much as possible, is the ever-increasing value of raw materials. Because of the large amount of money that is being created right now, more and more money is in turn available. And so with that money we are trying to make more and more things above the ground, such as buildings or factories or whatever. So everything that we're making, we're making from materials that we find underground: oil, gas, but also minerals. And everything underground is becoming increasingly scarce, because we are using it all up. Earth's population is increasing all the time, that's a demographic development; the amount of money is increasing, and all those people want to travel more, consume more, and eat more. But all that stuff has to be made from things under the ground. And we're using up the things that come from underground, so by definition things under the ground are becoming more and more scarce, and it's also becoming increasingly difficult to extract. Because of this it's not hard to foresee how everything that's underground is going to become increasingly more valuable and expensive. I myself only invest in things under the ground. And gold and silver belong in that category. I have a large amount of stock in a company that is going to be developing a copper and nickel mine. I also invest in oil and gas. Actually, everything that is under the ground is becoming scarce.'
Daan de Wit: What parts of your own advice do you follow? For example, do you have a house in Brazil or in the Algarve, and do you have some silver holed up somewhere?
Willem Middelkoop: 'I've entered into the last phase of my scenario planning. I'm now really delving into what could happen, basically planning out scenarios, practically writing them down. Describing how the scenarios could play out: What should you do in the one scenario, what should you do in the other. Meanwhile, things are starting to get exciting, but it's not really exciting yet. My thought is that you should use the years up through 2010 to work through the scenarios for yourself. 'What would I want to do, and where would I eventually want to go if that's necessary? How am I going to do that?'
Because of my work I really stay on top of things, I hear everything first. Now it could still happen that I wake up one morning and can't get at my money either. But I think I have a pretty good built-in barometer, and I can sense when the anxiety is rising. There's no need to run screaming to the bank tomorrow, 'I want my money back!' But again, for people who have money, it's quite reasonable to take about 25 percent of their assets out of the bank. Precisely because silver and gold are rising in value and will continue to rise in value. When people ask me what portion of their assets they should put into gold and silver, I say: 'At least 10 percent. But 25 percent is better'. If you take a look at how quickly the value of gold and silver has shot up, then there's no reason not to put 50 or 100 percent of your assets in gold and silver. Because you're getting just as much return as you would in a regular investment fund, and in the meantime you've safeguarded all your money.'
Daan de Wit: Most of the people that I know aren't wealthy. What advice can you give us simple souls?
Willem Middelkoop: 'We've certainly become awfully egocentric and individualistic, especially in the cities. One thing that's for sure is that in times of crisis you can really find yourself in a tough spot and you have to rely on the community around you. What someone who doesn't have any money can still do, is see to it that he has people around him that he takes good care of, right now, even if they don't really need it; that you take good care of people, friends, family - a kind of network... Of course there are a lot of big city dwellers who say: 'Just leave me alone, just let me do my thing, I don't want anything to do with anyone. I've got my job or my social security check. I don't need anything from anyone'... In my opinion they could end up in bad shape at some point. Actually we need each other all the time. We've eliminated that in our culture because we have the government, and the government is the community... I used to live in a small town, and we all had the support of our neighbors there. That meant that if you were in the hospital, the townspeople would take turns driving your family members with one of the ten cars in the town to the hospital, so that your family could visit you- that was always taken care of as a community. If a farm had to be rebuilt as a result of a fire, then the whole town did that. In the city, that's what we have the government for. If we need a new refrigerator, and we're only approved for a certain level of assistance, then we get approval for more. We no longer count on the support of family or friends. But of course in an extreme situation, we're not going to be able to count on the authorities. They'll be way too busy. You'll be glad just to come across a food distribution facility somewhere...'.