Wanted to bring this to everyone’s attention. If you look at the private capital liquidity flows, they are flowing away from the risk (and rightly so) and towards perceived safety. What do they do when they realize that Germany is the Vendor in the Vendor Financing ponzi scheme and actually is in a pretty bad place if the scheme falls apart? That’s where things get interesting.
Intervention tends to precede the inevitable in these cases, especially when things are structured seemingly impossibly. If this european situation plays out the way that I think it will, the US Dollar is fine for the intermediate term. It’s rather peculiar to me to see the extent of large governments trying to micromanage the global economy to their immediate advantage. To give insight into that perspective, if you are a country, you actually want a weaker currency because it stimulates your economy by making you the low cost producer. If you are a currency issuer like the USA, it’s fairly straight forward, print and spend more. That said, I don’t think that we are anywhere close to hyperinflation because the USA public sector is leveraging up slower than the private sector is deleveraging.
There are those like Kyle Bass who forecast that the USA is in trouble in the future, but I think that he views this from the false paradigm of the perceived necessity that governments can’t sustainably run deficits. They sure can! In regards to the global competitive landscape, I would argue that this is almost necessary given that it’s one of those: “If you can’t beat them, join them” type attitudes. Since China manipulates everything at the expense of their poor laborers so that they can have mafia members and members of the party running large corporations, effectively slave labor. This kind of pushed extremes recently where the safe haven currencies have been rallying so hard that it has begun to hurt those economies because they are comparably more expensive producers then.
If we do get a large unwinding, Goldman Sachs is conservatively estimating the S&P is worth $900 which is roughly a 25% decline from where we sit today. That’s in line with my expectation that about 25% of the global economy is some sort of fraudulent activity or manipulation.
Still hoping that we can avoid this European crisis, but I don’t know. I think that things have a natural sequence of events and I still think that it is coming, but the powers that be are going to do everything they can to at least appear like they are resolving it, but at this point I am seeing far too much momentum in the direction of failure. I was short the Euro for the last 8 months but pulled the plug on the short position because I think the situation calls for a lot of Euro demand because that is what they are all short of over there.
At least the US banks have been mostly recapitalized. European banks are infinitely worse than US banks. Depositors for the most part still trust them, but this is easily changed and would be easily changed if the average person knew what Credit Default swaps are and that the default risk of their banks and their country is blowing out like a fire hose.
In simple terms, what do you do if someone owes you more than they’ll ever be able to afford to pay you? You mark it down. Extending and pretending sure is fun though. 🙂