Thursday, May 31, 2012

Is the world financial system at breaking point? If so, what should you do as a normal person???

I am interested to see that views that were held by odd individuals such as myself have now become mainstream.  For example, Bill Gross of Pimco argues, in a piece at http://www.pimco.com/EN/Insights/Pages/Wall-Street-Food-Chain.aspx, that:

1.  The global monetary system may have reached a point at which it can no longer operate efficiently.
2.  Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors.
3.  Both the lower quality and lower yields of such previously sacrosanct debt represent a potential breaking point in our now 40-year-old global monetary system.
4.  Bond investors should favor quality and “clean dirty shirt” sovereigns (U.S., Mexico and Brazil), for example, as well as emphasize intermediate maturities that gradually shorten over the next few years. Equity investors should likewise favor stable cash flow global companies and ones exposed to high growth markets.

My comments are:

A.  Don't even think about Mexican and Brazilian bonds - if you want that kind of risk, why would you be in those bonds and not in equities?  For bonds, focus on US and Swiss bonds only.

B.   "Stable cash flow" companies are good, but avoid so-called "high-growth" markets (at present, there are no such markets in reality though there are such in theory).

C.  The global financial system is indeed rickety (and I have pointing out at least some of these rickety-nesses since at least the late 1900s).  However, the global system is NOT about to break down.  The Euro is in the midst of a game of chicken between, on the one hand, the Eurozone authorities and heavyweights, and, on the other hand, the euro-fringe countries such as Greece, Italy and Spain.  The latter are bound to give in to the former, but the process of their actually being willing to do so is almost impossibly painful because the Eurozone authorities and heavyweights have IMMORALLY not done anything about insisting on punishment for those individuals/ companies/ organisations which have brought these countries to this sorry pass, and because the consequences for the Eurozone countries are economically as well as positionally dire (the populations of these countries will suffer quite a lot, in addition to giving up even more of their sovereignty).  Expect continuing shenanigans (as I have said earlier) but expect the Euro to survive and for the global financial system to further strengthen the position of America and weaken the position of all economies that are exposed to commodity-price rises and falls (ahead are further price falls).  India will continue to fare RELATIVELY well among developing countries, assuming there is no internal political problem or General Election - the latest possible date for which is 2014.  America will have a few weeks of blue funk immediately preceding its General Elections in November.  Meanwhile, I continue to fear that China will collapse - if it does, the consequences will be dire for everone, and all bets are off - so continue to PRAY (because supernatural factora are all that can work) that China doesn't collapse.

D.  What else can you invest in apart from US and Swiss bonds, and "stable cash flow" equities?  As always, I urge you to prioritise small and medium-sized companies that you know personally.  Commodities will be great to invest in once the prices come down to a realistic level.  Property is a doubtful investment in general at present, though there are always bright spots in every industry. Gold is a perennially good option, but it is probably still too expensive given that industrial demand for it is falling and will fall further - however, you need to take a view on whether or not personal and corporate "hedging" demand will grow....

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