Good news everybody. You’re all saved! Greece will have its debt-to-GDP ratio down to 124% by the year 2020, according to the terms of a new deal worked between Greece, the International Monetary Fund, and Greek creditors. The first bench-mark in Greek progress will be reducing the ratio to 175% by 2016. In exchange for meeting these commitments in the future, Greece had €40 billion worth of debt written off.
Who is negotiating on behalf of Greece? Odysseus? The wily one himself couldn’t have done a better job helping Greece escape from one near disaster after another. And so the Hellenic default-that-is-not-a-default is extended even further out in time. Come to think of it, maybe Scheherazade is on the Greek negotiating team as well.
What can investors make of this? Not much, at least in terms of actual debt being reduced. That’s what’s required before you can have real growth in Europe, America, and Japan again. You have to liquidate the bad investments from the credit boom – whether they are in housing, government debt, or some other bubble. Only then would there be a real reason to celebrate.
However one lesson we all should have learned by now is that there is no theoretical limit to the absurdity of central bank efforts to prevent debt deflation in the financial markets. They will refinance. They will reschedule. They will restructure. And when none of that works and a default seems inevitable, they’ll change the language and call it something else.
It’s a strange world when there are absolutely no consequences for financial misbehaviour, isn’t it?
Not everyone is idle though. The rich, developed, indebted, and oblivious Western world is headed down the road to ‘zero growth’ according to US fund manager Jeremy Grantham. Grantham sees the government response to the debt problem as a contributing factor to years of…well…nothing much. In his third-quarter note to clients, he wrote:
- ‘The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
- ‘Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.
- ‘Population growth that peaked in the U.S. at over 1.5% a year in the 1970s will bob along at less than half a per cent. This is pretty much baked into the demographic pie. After adjusting for fewer hours worked per person, man-hours worked annually are likely to be growing at only 0.2% a year.’
Grantham has also ‘given up’ bond market, according to the Financial Times. That includes his firms’ holdings of higher-yield Australian and New Zealand government bonds. ‘We’ve largely given up on traditional fixed income,’ says Ben Inker, who runs the asset allocation strategy for GMO’s $104 billion in funds under management.
The bond market has become a popular place because of its liquidity. Yields suck. But there is plenty of room for everyone to park their money while trying to figure out what to do. The trouble, of course, is that a fixed income payment steadily loses value in an inflationary environment. If that $15 trillion or so in central bank balance sheet expansion ever bleeds into the real economy, bonds would be a death trap.
Inker likes Japan because it’s cheap. But the big issue is where the profits will come from in the future. ‘There are places where stocks look ostensibly cheap, say Europe, Japan, emerging markets,’ he says. ‘But all of that is predicated on today’s profit margins being sustainable and we don’t think that they’re sustainable anywhere.’
Hmm. Well, if you’re looking for future profit growth, maybe defence stocks are a good place to start. Exploring the impact of geopolitical events on commodity prices, Diggers and Drillers editor Alex Cowie sent this story titled, ‘Top Economic Advisors Forecast World War’. Kyle Bass, Jim Rogers and Marc Faber all played variations on the same theme: trade wars and economic crises give rise to political extremism that manifests itself in flying bullets and bombs.
By the way, explosives maker Orica is coming off at 52-week low at $22.99. On Remembrance Day the company announced a 37% decline in full-year net profit. It wrote off $247 million in its underground mining and tunnelling business. There’s your contrarian play right there.
Please note this is not a recommendation of Orica. It’s an ironic observation. But while we’re on the subject, we might as well have a look at the chart. Orica’s ten-year chart looks like a snapshot of the commodities boom: a big run up after the low in 2003, a peak in 2008, the crash, and then a convincing recovery followed by years of dithering.
More Bang for Your Boom?
As a superficial observer, we would have expected increased iron ore and coal production volumes to lead to higher profits. If you’re digging up more stuff, you need more explosives to blow it up first, don’t you? Yet even on higher export volumes from the bulk materials industry, Orica hasn’t budged from its trading range.
We’d have to take a much closer look at the share price, the company, and the management before making any conclusions. Maybe Orica has been wasteful with its acquisitions. Maybe costs are up just like they are for everyone else. Who knows? But maybe a big old shooting war is just the thing it needs for another profit boom.
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From the Archives…
Why the Worst is Not Over For China’s Economy
23-11-2012 – Greg Canavan
Currency Devaluation: While Europe Gets Sinned, Australia Sins
22-11-2012 – Nick Hubble
The Pyramid of Real Wealth
21-10-2012 – Dan Denning
The Revival of US Manufacturing: An Update
20-10-2012 – Chris Mayer
Australia’s ‘Eggs-in-One-Basket’ Banking Sector
19-10-2012 – Dan Denning