As The Age reports, [12] widely quoted and much-admired straight-talking strategist at Morgan Stanley, Gerard Minack had been "banging on" about the mounting risks in the global economy well before the GFC hit and laid waste to the world economy and investors' portfolios.
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Minack left Morgan Stanley some 18 months ago with the unsullied reputation of being one of the most bearish – and keenest – observers of financial markets.
Below are some key excerpts from the first expansive interview Minack has provided since he went solo.
Fairfax: That doesn't sound like the soundest base for markets to build on from here.
GM: My look forward this year is that with the Fed tightening even modestly you bring the curtain down on P/E expansion. It's going to be a poor year for US equities because earnings growth is not that strong; but at least the US has earnings growth. Outside the US you don't, which is a very problematic outlook for this year unless you want to say the world suddenly accelerates, which it may do for a quarter or two because of low oil prices, but beyond that it doesn't look great.
Fairfax: So you think the Fed will raise rates this year, despite low inflation?
GM: I think so, although falling inflation expectations may delay it. The Fed officials continue to hint middle of this year, which is as good a guess as any. What would make them back off are signs of macro weakness, not signs of low inflation, particularly if it's "good" low inflation. When the price of something you're buying is going down, that's great. The killer disinflation is when the price of things you're selling is weakening. That's Australia.
When the US heads into the next recession it's very likely to enter that recession with the lowest short rates, the lowest long rates, the lowest nominal GDP growth, and the lowest CPI it's ever entered recession with. Then you've got a problem! But that's the next downturn.
Fairfax: What are the big global risks you see out there in the coming few years?
GM: The biggest bubble out there is central bank credibility. If Draghi was a stock he'd be on a P/E of 200! Yellen's on 100. When that bubble pops, all hell will break loose again, and there you really just want to be in cash.
Fairfax: So the biggest risks are in Europe?
GM: Yep. The problem is the next crisis will not be in the periphery and it will not be in the banks; it will be economic and it will be in the core.
The big problem is the internal competitive imbalances in Europe. The problem's not [that] the euro is too high against the dollar, it's not that the euro is too high against the yen. The problem is that the French franc is too high against the deutschemark, and Mr Draghi can't fix that. From the resulting economic stress you're getting political blowback. You're getting fringe parties flourishing everywhere.
There are whole landmines of elections coming up in the next 18 months, any one of which could throw up a result that could get the crisis back as front page news.
Fairfax: So you still don't believe the euro can survive?
GM: That's still the case. You can't restore your competitiveness in a fixed-exchange-rate regime.
The solution is simple, and it's what the periphery has done: it's called having a depression. It's 20 per cent unemployment and large nominal wage cuts. The trouble is that the small economies can be bossed around, but you can't see the French taking the same medicine.
But what's quite clear is they will not take the action pro-actively. Mr Draghi bought them time with "whatever it takes", but they sat back and twiddled their thumbs. They need the cattle prod of crisis to get them to react.
I actually think that the next crisis – which is inevitable over a two or three-year horizon – will be a great buying opportunity for euro equities because they will get very cheap.
Fairfax: Isn't there the chance that the actions taken by central banks to soften, if extend, the pain will eventually lead to a more delayed and gradual return to normality, without a crisis?
GM: In a way I think we are all turning Japanese. In the 1990s when they first tackled their bubble – and it was world's best-practice bubble, it was spectacular! – initially most analysts, myself included, applauded. It looked like they had let the air out gently without a recession: rates and growth came down and unemployment did not go up.
But the point was that it was the second downturn in '97 that nailed them; only after then did the Japanese "turn Japanese".
Now, we've shot a lot of bullets in the global financial crisis and the next downturn I think will reveal most other people are turning Japanese. Unfortunately the one policy that blindingly obviously works is fiscal policy, but it's very unlikely to be doable in the next downturn; in the US due to congressional gridlock, and it will be disabled in Europe because they won't have a centralised fiscal authority.
So you're left response-less when you enter the next downturn, with monetary policy that is ineffectual, unconventional monetary policy that's just embroidery, and very close to deflation.
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The funny thing is there is a disconnect between what investors are saying and what they are doing. No one thinks all the problems the global financial crisis revealed have been healed. But when you have an equity rally like you've seen for the past four or five years, then everybody has had to participate to some extent.
What you've had are fully invested bears
