Core problems of the developed world’s economies are resolving so slowly it may be 2020 before the world’s giant bear market finally recedes, writes Clem Chambers, CEO of ADVFN.com and author of investments titles such as “101 Way to Pick Stock Market Winners”.
Spanish contagion has been on the cards since 2008, yet political action has forestalled the inevitable for four years.
This could be viewed as a masterpiece of EU intervention, or, it could be seen as a political tragedy, forestalling the financially inevitable at a huge cost to growth and progress.
It doesn’t take a genius to figure that:
Spain will need more bailout money, probably five times as much as we have seen.
Italy is up next, probably due for a bail-out before the summer is out. This bail-out will be the same again, likely several tranches of six-figure billions.
It doesn’t take a Nobel prize winning IQ to see that France is then at high risk of the same fate.
This is all set to pan out in slow motion. Perhaps it will be well into 2013, April or May, before all eyes are on a distressed France. Perhaps it will be the end of 2013, as the torment drags out.
With so many people dependant on the state for their living, no one will vote for, demand or support the rebalancing of state finances necessary to solve the underlying problems: the public sector bubble that has left developed world economics anaemic.
So the deficits will go on and on, just like the bailouts. The West is used to a big state with bloated public sector. Like a family living outside its means, the only recourse is credit and denial.
By 2014, Europe-wide bond market interest rates are likely to be 6%-8% in all but Germany.
Governments will be funded by ECB printing and monetising, and not by global markets.
It is said that state debts are unsustainable at 6% interest. This didn’t use to be the case but governments have leveraged themselves up in the last decade just like their banks did.
They build up long term overheads on the basis of short term income streams, like banks lending long term and borrowing short term. It is these long term overheads that need shrinking to at least approximate income. This requires deleveraging. Crudely, it means cuts.
However, the need to cut when everyone demands otherwise is creating the double bind that is halting the resolution of the sovereign debt crisis and its subset, “Euro crisis.”
At some point, perhaps 2015, luck will run out for the US. Like the various broke Euro countries, US debt is now 125%+ GDP. Its deficits have run and run- its debt is at 18 trillion. There is no one to bail out the US.
It monetises its debt, inflation consequently soars.
Five to ten years of high inflation will follow, slashing the US debt in half, squeezing the dollar to dramatic lows, helping the trade balance to equalise, stoking employment, raising tax revenue and generally enabling a rebalancing to occur.
So I believe it will likely not be until 2020 when we finally reach some kind of base.
This is why so many economists call for measures to create growth. “Growth” is really a euphemism for money creation, and thereby inflation.
Increasing the money supply is all the public sector can do to try and create growth, as outside of that it can only drag on growth by diverting wealth to less efficient usage away from commerce.
However, throwing new money into the system isn’t an efficient way of creating growth, instead it creates asset appreciation. As private sector left weak by a draining public sector simply can’t respond that fast and probably doesn’t have access to the new money anyway.
Instead the money flows through the financial system and goes into non-productive investments which create asset bubbles.
All this leaves the investor in a tough spot. The trouble stretches out as far as the eye can see and the road is festooned with traps and uncertainty. It does mean that physical gold is probably a good haven. It probably means owning hard assets is a fine strategy. It does however mean it’s hard to find an old fashioned financial instrument, be it equity or bonds or even cash, which can truly be seen as safe, let alone a good bet.
Investing now has become a very long term game indeed, because only years of readjustment will need to pass before this giant bear market is over.