2010- What's Next?

2010 Forecast
Well what's important it's what's next. In 2008-2009 We have transferred the problem from banks to Governments. Now we have to know if Governments can pay, every payment in gov debt is based on expected growth or revenues.  As an example the US debt is close to 12 us trillion. Which is 40,000 per American, more than 110,000$ per tax payer (http://www.usdebtclock.org/) and US citizens should pay it today since it's growing with interest; this is a big issue.Consequently, governments will have to raise taxes.

US and European countries sponsored by China (Hold most of the US Debt) can simply not pay their debt at this level. They either restructure it in some way so they don't have to pay a part of it and find new resources to be able to pay it. Here are the several possibilities to do so:

1.a/ Default:
Unlikely  at a Federal level this would be a catastrophe that would afraid investors, this option is then not the most appropriate for obvious reasons besides a peaceful relationship between China and USA and their relatives alliances ,practically the whole world.

1.b/ Not paying part of it
By allowing few but not all the Municipal bonds to default, the Federal government can lease it's debt as long as the headlines do not make people panic so much, so this method can be used in a silent manner. For Europe it's more difficult to hide a country such as Greece or Spain eventual default so we can imagine the European Central bank in coordination with the IMF to bail out. That makes me think that EUR/USD will play yo-yo during a little bit more time following the headline, one day the US bonds the next week a EU country eventual default. For swing traders it can be a playground.

2/ Rise Taxes
This is the inevitable law of budget deficit and Keynesian stimulus packages, a political bluff to raise government popularity.The bad news is that usually those packages have a short term perspective and when it's time to pay, raising taxes is then inevitable leading to a lower consumption and a counter economic situation. May they invent new "eco-taxes" or whatever, the money will be used for government to pay back their debt.

3/ Depreciation
The monetary system is in danger, with China not respecting the free flow rate of exchanges and Central banks inventing funny words like "Quantitative easing" (stands for printing money like idiots) the problem is that there will be a point when inflation will show it's nose and there will be no other choice but to substantially raise interest rates that's when this cumulative bubble explodes. We have seen that over and over again but the Fed still don't understand , adding a crisis to the previous one until the whole system collapse is that the exit strategy? Should we experience Darwinian or Schumpeter's creative destruction instead by not bailing out? I don't know, we never tried. In both cases it will be a "bloody mess".
Today, money is nothing more than paper with the rest of confidence you still want to give it since it is no more backed by gold. Back in the Bretton Woods system gold was 35$/ounce. Today it's 1100$, we either needed a lot of gold lately or that's inflation (actually both).

If somebody tells me "Cash is King" I would reply "King has no clothes".The bottom line is that hyperinflation is knocking at the door and a depreciation is a fancy way to pay China with toilet paper, unfortunately robbing all citizens from their purchasing power in the process.

4/ Pay with a Mix of Assets and Cash
This may sound ridiculous but China played dumb but they are not. They are aware of this situation so what's the solution for them? Well asking for assets. In a way they already did by robbing patents from western companies, they are paying themselves with technology and now they even start to take over companies instead of paying for the useless government debt. The method: hold government debt to have a position of power and then manipulate government so they can buy everything, if you don't trust me take a look at what's happening in Africa.

We can deduce a fall in the USD that we have already seen, so maybe EUR is going to continue climbing but we may assist to what we can call "Competitive devaluation", you heard it right. After the USA, everybody launch stimulus packages and bail outs to devalue their currency. A strong Euro is no good for exportation for Europe so we will probably see a second wave of stimulus package and a bail out of nations like Greece and Spain so there will be news about random spendings or fears of default, the whole purpose is to not allow the Euro to climb too high, too fast. The question is "Where is Maastricht criteria?". For me the best currency is the Swiss franc CHF but they possibly launch stimulus packages to compete in devaluation as I said. That being said, Switzerland is maybe the only country in which the stimulus would really work because of based in Structural and not conjectural projects, competitive areas like Research and Development, biotech etc. So CHF is for me a stable currency, maybe not a rising one but at least a stable one.

Stock Market
Hyperinflation is the next issue. It will stop the economy so growth expectations won't match. Meanwhile we have seen the stock market rising pushed by cheap money (near 0% interest rates) but the companies (assets) are not really improving that much as far as their tangible value. This is the definition of what I call it  "Stock Market Inflation".
The Stock market as an indicator of the future of the economy confirms my fears of hyperinflation.
So what is going on?
The stock market rise not because of the prospective economic growth, it rises because currencies worth nothing, and when you need more currency to buy an asset (inflation) you see the asset price rise artificially. So yes the stock market may continue it's ascendancy but I would be more interested in seeing the Stock Market / inflation performance. And since I don't believe the biased inflation numbers released I would like to see the Stock Market/ Gold performance.
How much the stock market has really since March?
-here is the answer, FLAT! if not underperform..(click the image)

Old Supremacies are Dead
Power is moving, Old supremacy continents are dead and big investors play by the rule "Money has no nationality" when the orange is pressed they move on to the next place following this criteria: Growth, no taxes, security.

I would opt for a spot where all Big fortunes will want to go to hide. Somewhere with tax protection, non revolutionary environment, neutral and safe. Maybe Switzerland considering the double potential, Currency+ Stock Market but it maybe a too old trick.
Switzerland: EWL (MSCI Switzerland Index)

Everything converge to a decrease in confidence about currencies and a "false bullish market". Why false? Because in the developed world, as long as we see quantitative easing, high unemployment rates and low growth (PIB inflation adjusted). There will be nothing but stock market inflation and possible inflation that would actually not make you money, just in the best case scenario, preserve it.
In the near term Gold is the real protection, untill we see real growth. We can meanwhile see some corrections when fears of raising interest rates.
To invest in Gold:  GLD (SPDR Gold Shares), DGP (Gold Double Long).

Oil: We are probably experience what we have seen in 2007-2008. Oil prices go higher. Once again, headlines will say that this is a good sign and that this is because of the confidence in the economic growth is back BUT NOT. Oil will go higher because money worth nothing and investors will look for commodities to protect themselves. So maybe the economy will support oil, but most of it will be speculation just like in 2007-2008 in the early days of the financial crisis. If bought at a good price, oil could be a good alternative if the economy do recover it will push higher and the other way, it may be used as a protective asset commodity. Again oil sometimes moves dramatically because of professional speculators so always remember to put the stop losses.
To invest in Oil: USO (United States Oil), UCO (Ultra Crude OIL),

Emirates: I know they were having trouble lately but I think this is an opportunity not something to be scared about. Actually, I think the biggest investors use to let market crash before buying things a lot cheaper and for me the Dubai crisis is the perfect example of what big investors would buy. Large Banks are under attack from the perspective of increasing taxes from governments, and as I said Money has no country or religion so the one move you could do is to buy Emirates cheap. I will probably write more on this subject in the next days but Emirates are definitely a good investment.
To invest in Emirates: EEM (Emerging Markets)

For those who like Risk
As I said China is not going to let the fake payment happen, they are already getting their money back with technology when implanted in China and they will buy more western companies. The problem is the systemic risk of political revolution so play china can pay but it's risky. Following few ETFs:
- FXI (China 25), XPP(China 25 Ultra), EWH (Hong Kong index), FCHI (China Hong Kong listed)

You may want to have a diversification with India: EPI (Wisdom Tree India Earnings)
or a mix: FNI (Chindia) --> for this one research must be made first but it seems to be a good performer.

Please comment I would be happy to be contradicted and find arguments to make me think.

By the way I am currently looking for a job in the financial arena if someone knows a position please feel free to contact me at: JoeThierryArys@hotmail.com

No comments:

Post a Comment