Thursday, November 19, 2009

Preparing For The Global Economic and Financial Collapse in 2010/2011

The Telegraph in the U.K. today reports on a note sent by Societe Generale to its clients on how to prepare for potential 'global collapse' sometime over the next two years. The note maps a strategy of defensive investments to prevent wealth destruction. It touhces on a very inetresting poit raised here as well, that all countries are engage in currency devaluation (except Australia, but this is temporary).
This is simply not possible.

The note was titled "Worst-case debt scenario". It says that overall debt is still far too high in almost all rich economies as a share of GDP (350% in the U.S.), whether public or private. It must be reduced by the hard slog of "deleveraging", for years. State rescue packages over the last year have simply transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.

"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast. Under the French bank's "Bear Case" scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105% of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade".

"The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said. Inflating debt away might be seen by some governments as a lesser of evils".

If this happens, gold would go "up, and up, and up" as the "only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7%, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s".

The note continues explaining that the current crisis has "compelling similarities" with Japan during its Lost Decade (or two), but with a big difference: "Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time".

All currencies cannot possibly drop at the same time.

"SocGen advises bears to sell the dollar and to "short" cyclical equities such as technology, auto, and travel to avoid being caught in the "inherent deflationary spiral". Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar".

"Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons".

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