From Maurice Pomery of Strategic Alpha
Take A Step Back And Look At The Macro Picture
Good Afternoon/ Good Morning America..I have decided to take a step back whilst all are so concerned with the short-term headlines and take a look at the macro picture developing. Many are questioning risk positions but as you will read below the risks remain extremely elevated and policy mistakes look more likely than ever. Currencies may just be losing their store of value and precious metals may have to take up the slack!!!! See below...
Keep the Faith....
Let’s take a step back and look at the macro picture that is developing across the globe:
In my humble opinion the global economy is facing one of the toughest times it has seen in decades and the inter-connectivity of the “global village” will actually exacerbate the problems the developed world faces. The idea that the emerging world can de-couple and save the world is quite ludicrous when they rely so heavily on exporting to the developed nations. The demand drought that is coming from the consuming, developed world is only part of the problem. The perfect storm is still building out there and the consumer is the key. Global growth expectations seem far too optimistic in my view!
The problem is that to make austerity measures work, the governments need the consumer to be strong not weak and they certainly do not need them to start deleveraging and refusing or reducing credit. This however, is exactly what austerity brings. A lack of confidence amidst rising unemployment and a reduction in benefits, coupled with falling housing prices and to some considerable extent, a loss of faith in government, does not fill consumers with an appetite for more risk. In fact the opposite is the case. Consumer confidence tells us that deleveraging will increase very soon.
However the problem does not only lie with the consumer, the banks and to some extent many sovereign nations are in deep trouble as well. What a cocktail. Economists always look back and suggest ways out of this and the Keynesian believers seem to think history can help them. I am afraid this time is different as I am not sure we have seen anything of this nature before (maybe 1929-1933) and the central banks are run by academics and economists who use models which simply do not have the scope to predict what is potentially coming, as evidenced by their disgraceful predictions based on little more than hope than knowledge recently in my view. The models at all the central banks have been proven yet again to be useless along with many economists, in predicting slowdowns, financial crisis or recessions! Unfortunately the models are designed by the economists and this needs to change quickly.
Bank regulation was seen to be needed urgently after the sub-prime issue but at the first signs of stress the calls for a softening ring out, so it looks like a return to moral hazard. The question is do some of the banks need to fail to keep the system alive? For sure the system is broken and the pain would be deep but this cannot go on in its current state. Treasury yields are at their lowest for 60 years for goodness sake and the Fed is expected to reduce yields further at the longer end! What if that does not work and to be honest a slight shaving of long-term rates will do nothing to change sentiment when a collapse in prices has failed to trigger any bargain hunting at all! Developed world rates are headed for Japanese type levels and it is clear that they have far from helped Japan! It is not all about low interest rates Ben!
To amplify this, taking a step back, we are looking at potential Nations defaulting, plus augmenting further austerity measures to try and reduce debt (which will stifle any growth for years to come), the spiral of banks coming close to nationalisation across the developed world, consumer deleveraging, rising unemployment, falling house prices and a rising loss of faith with government along with discontent and civil unrest. Why on earth would you sell gold when the outlets for safe havens are being radically reduced since the SNB move and the threat from Japan to intervene? Plus the fact that currencies offer less in the form of stores of value also. A massive shift from currency investment to precious metals could take place.
Currency wars will exacerbate this and whilst the SNB move is from a small nation, what happens if one of the big boys like Japan join in? Carnage basically and trade wars and border issues will ignite and G20 could implode. Just what the world is ill-prepared for but it looks like it is brewing. Civil unrest and regime changes around the world will add to the soup.
The stimuli we have seen are the effect not the cause both in the US and Europe and we need to get back to basics and solve these issues at their roots. However they do not look like they are helping much. For sure QE1 may have stopped a depression for a while but it may have only delayed it. What worries me is what the end game is for the Fed? If they are solely looking to save the banks then the US economy is in deeper trouble than I thought. He needs to get out into the real world and then he would realise how futile creating a “wealth effect” is in reality. Higher taxes will surely come with austerity measures and the US is already far behind the curve for reducing debt. Consumers will save and deleverage for sure and the fight, if ever we see it, against the deficits will come at a price and that will be higher unemployment and slower growth! Bond markets are beginning to price this but the Dollar is another matter. Will the US finally admit and use the Dollar as a monetary tool. I think at some point they will, especially if the currency wars spread. However until then the Dollar will be forced higher by other nations. If it affects US policy, which it will at some point, then the US may turn very insular and return the idea that the Dollar is their currency but your problem. (John Connally. US Treasury Secretary 1971). On that day all bets are off.