The Congressional super committee’s failure to reach an agreement coupled with Germany’s reluctance to bail out Europe is putting the world’s economy on course for a crash.
It’s easy to forget politicians are capable of not only thinking the unthinkable, but also of implementing the unconscionable; especially when it comes to saving their own hides. What is most likely to happen in the Euro crisis will be an attempt at creating the ‘United States of Europe’, using the threat, or reality, of economic implosion as leverage.
Germany will not play ball with the bulk of shopaholic Europe. Like China, Germany says it “can’t pay, won’t pay” and is refusing to prop up profligate countries, even if it comes down to it, countries like France. Germany wants a unified Europe with central budgetary control. It is not going to be the milk-cow for the rest of Europe.
In itself, a proper Federal Europe is no bad idea; aside from the fact many citizens would hate it for a generation or two. However, it is starting to appear as if the prophesy of Jacques Delors, a key architect of the European Union, is coming into play. When challenged how the euro could possibly work outside a tightly federated Europe his response was to consider that a near breakdown of the euro would be the device for pushing through the very close unification Europe lacked.
This is all well and good from a political point of view. In practice it will, economically and politically, push Europe off a cliff. The time necessary to perform this incredibly difficult political manoeuvre, along with the economy-crushing political leverage required, is unbearable.
Under the hood of all this, most countries in are in a death spiral anyway – their governments are too large and out of control to fund. Having sucked all the oxygen out of private sector wealth creators, they have gone on to lever themselves up to the ears on cheap debt and have quite literally broken the banks.
The UK is a fine example, but not an extreme one. It has a £140 billion budget deficit, which equates to £10,000 per family of debt in one year, with more to come. The UK also has a £1 trillion of loans out, roughly £60,000 per family or $100,000 USD. This is a real growing burden, one that the wealth generating sector must bear.
The governments of the West are hooked on the redistribution of wealth and all the fun that goes with it. They are not cutting back until forced. Of course, turkeys will not vote for Christmas, yet now it is Christmas Eve and they are carrying on as if nothing is about to happen.
This leaves us with the prospect of a decade, perhaps a generation, of realignment. In this projection, France is the next European state to suffer contagion, followed by Europe undergoing months of economic dislocation with interest rates rising to 7-9%. Recession and depression will follow. At this point, the Euro will partially, or wholly, disintegrate and there will be a new treaty for closer unification. Disruption may prove titanic.
The US will not escape the economic impact.
The next US administration will monetise its vast debt and try for a 5-8% inflation rate. It will cut back. The total failure of the Congressional ‘super committee’ to reach an agreement has put in motion a default plan to slash military spending and this will be only the beginning of US austerity.
BRIC (Brazil, Russia, India, China) nations will go into recession as the US spigot of cash is switched off. Commodities will implode but experience some updraft, as a haven from inflation. Gold will probably have a wild, unpredictable ‘up’ spike somewhere along the line, potentially $5000 an ounce before 2020. If the late 70’s are anything to go by, then equities will probably do alright for those prepared to take the rough with the smooth and ride a very volatile market.
It’s hard to find a strategy for this kind of turmoil; but there is one. Firstly, try not to step in front of the economic freight train. This is not the time to take financial risks. It’s the first real bear market in a generation. Bear markets make fools of us all.
Secondly, certain things will get very cheap. Whatever the product, when they are below their replacement costs, it will be safe to buy them. In the background inflation will be remodelling the values of things, in some cases violently. The downward part of these volatile moves will produce buying opportunities.
Right now, if a good company disappoints, its price implodes. It’s amazing and painful to watch. What’s more, it doesn’t bounce back like the old days – it keeps falling. This is the kind of opportunity buyers will want to snap up once the vultures are circling, long after the initial collapse. Tight value investing in familiar fields is the way to go.
In my case its stocks that I’m chasing, for others it will be real estate.
There is a crash coming. If I am right, and I really hope I’m not, we will go back to 2008 levels in the markets. Unless Germany miraculously relents we have already passed the point of no return.