Recession is the Solution to the Depression…
There are no more risk-free liquid assets in the market. Maybe there never were. But it’s one of those sacred cows that has never been gored before. It is now (gored, in painfully slow fashion). The dirty little secret of the bankrupt Welfare State is out: government bonds are just another liability.
The ratings agency Moody’s took it upon itself to rain on everyone’s parade yesterday. It said that the latest EU summit had failed to yield, “decisive policy measures”. It said it would review the credit ratings of 15 EU nations in the next three months. Fellow ratings agency Fitch said it expected Europe’s banking crisis to lead to, “a significant economic downturn” in 2012.
You don’t say?
Here’s a tip: the recession is the solution to the credit excess. It is the lancing of the ulcerous boil. It is the liquidation of bad debts, the reckoning for the bankers, and the justice of the markets on people who used capital poorly.
Instead we have the Interminable Intervention with the aim of more centralisation. We’ll get back to that in a moment. But meanwhile, with a downgrading of France and Germany (and the US) simply a matter of time, the bond market is a different beast now.
“Double A is the new triple A,” Raphael Gallardo at AXA Investment Managers in Paris told Bloomberg. “De facto, there are no more highly liquid, risk-free assets. It’s a dangerous problem because in a market crash, liquid AAA assets are the dam that contains the total exodus of liquidity.”
“The total exodus of liquidity” means there is nowhere safe to go, and you can’t get there anyway. If you’re invested in financial markets, there’s no real way to hedge against this. Our answer this year was simply to recommend people own fewer shares, more cash, and gold bullion (taking physical possession).
By the way, only a massive new phase of central bank money printing – quantitative easing – could avert “the total exodus of liquidity”. And even then, we’re not so sure. The central bank can buy as much of anything as it wants with new money. What it can’t do is disguise the fact that private investors are close to going on strike by refusing to buy assets in such a manipulated and unstable market.
Meanwhile the search for real assets goes on. A claim on tangible wealth is, by our reckoning, better than owning an IOU from a government. That point is certainly debateable. But as we mentioned yesterday, our colleague Dr. Alex Cowie has laid out his top six Aussie resource ideas for 2012.
Incidentally, a reader wrote in asking what Alex is a doctor of. We asked him to respond in his own words and he replied with the following:
Early on in my life, I fulfilled an ambition of graduating as a veterinarian like my father. That took five years of study at university in the UK. I worked successfully as a vet for ten years in seven different countries. This is where the doctor comes from. I use it because I like to think I’ve earned it. When it comes to being an analyst, I’ve found the scientific training, and study I had to put in to become a vet and practice were an excellent foundation for a career in finance. I suppose you could say working independently in the financial markets was my adult career ambition. As for the formal training, there’s the Graduate Diploma in Applied Finance and Investment. I’m also studying for a Masters degree in Finance on the side. I like learning and intend to make it a lifelong pursuit. What I like about the markets is that they reward results, not training. And in that respect, I’ve found that having a methodical and scientific approach to my investing has been just as valuable in financial markets as it was at the clinic.
While we’re taking reader questions and comments, here’s a few more… revolving around beer and money.
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