European Crisis - No Way Out

PM Lee, at the recent G20 summit in Cannes, urged European leaders to adopt policies conducive to growth as a long-term solution to the sovereign debt crisis there.  My guess is that he was being polite and needed to say something encouraging after Singapore had been invited as an observer.

The fact of the matter is that there is no way out of the Eurozone debt crisis.  This has been a problem 40-years or more in the making.  Furthermore, based on traditional economics, the fact of Europe's aging population argues against any possibility of economic growth as a viable option for dealing with the debt problem.  When we add to this the fact of energy dependence and racial issues there, the lack of a realistic solution becomes crystal clear.

Now the only question is when the thing will blow up global stock markets, which appear to have been successful in pretending that the problem has a solution, thus far.  It has often been said that the stock market is for kids, and that the real adults play in the bond market.  I guess that must be true given the divergence in these 2 key markets.

Stocks - Time for Caution

In the week after the Sendai earthquake in Japan, there was a report in ST on 19 March wherein some market analysts were saying that the correction in the stock market presented a good 'buy on weakness' type of opportunity.  While some of the arguments were interesting, they appear to me to have seriously underestimated the risks from the unfolding events in the Middle East/North Africa as well as the ongoing sovereign debt crisis in Europe.

Furthermore, looking at the Singapore market action itself, there appears to be a mood of caution amongst the speculators, while the markets in the US shows hints of distribution.  The US markets, still leaders in terms of being able to influence global investor sentiments, show more signs of nearing a top than rather than good entry points for long-term holdings.  The only thing, some would argue, that is keeping the market from dropping is the billions of dollars funneled into the market by the US Fed via its QE2 programme.

As such, I would hesitate to say that now is the time for long-term investors to accumulate stocks.  This is a trading market.

EU Crisis Unabated

Talk about diminishing returns. The Greek bailout managed to calm markets for a few days. Now, even before the ink is dry on the Irish bailout, the markets are again sending credit default swap rates for various EU sovereign debts sky high. While I had expected the crisis remain unresolved, I didn't expect the market to shift its focus so quickly onto the other EU debt-ridden countries.

Result: Closed a small speculative gold position out too early.

Merkel Pledges Permanent EU Bailout Fund

The BBC has reported that German Chancellor Angela Merkel has vowed to implement a permanent bailout mechanism for the EU. As I have written earlier, the debt crisis will continue, and that's why the EU politicians deem that there is a need for a permanent bailout fund.

There was speculation earlier in the day as to the course that the Germans would take given that the continued bailouts have started to affect the country's credit ratings, as reflecting in the credit default swap market.

It seems to me that while the German people are unhappy with having to pay for the mistakes of other EU nations' banks (I believe that such bailouts benefit banks and shift the burden to taxpayers), their ruling elite has decided that the half-a-century political effort to build a united Europe and to prevent another war is worth the financial sacrifice. To make matters worse, several EU countries have started to take money from pension funds to support their fiscal shortfalls.

Given the protests that have taken place all over Europe, one has to wonder how much longer the political elite of the EU can continue to ignore the views of the people and pretend to be democratic.

In response to the Irish bailout, financial markets have sold off the Euro against the USD, and stock markets in Europe have ended Monday largely down.

Looking at the USD/SGD price chart, it would appear that the USD has reversed its downward course against our local currency. We could perhaps see the 1.40 level again if a big financial event occurs in the near future.

Debt Crisis Will Continue

Even as EU ministers rush to cobble together a bailout package for Ireland before Asian markets start trading tomorrow morning, one has to really wonder about the effectiveness of bailing out banks as a means of solving the ongoing debt crisis in the developed nations. Such bailouts merely shift the debt onto the taxpayers of the problem countries, who are themselves hard-pressed to solve their own financial troubles. Furthermore, the EU's bailout fund basically involve financial contributions from EU nations that are all in financial dire straits. Again, this does not make sense to me.

There are only 2 ways to solve problem of too much debt: Either default or monetise it. A default will likely mean a breaking up of the Euro grouping, and so politicians may be tempted to follow in the footsteps of Bernanke's 'QE2'. Who knows?

I just wonder how long more such schemes can last before the current financial system crashes once again, possibly with a ferocity that greatly surpasses that of 2008.

$10.2 trillion problem in 2011

The Wall Street Journal has reported that the developed countries of the world will need to raise US$10.2 trillion in 2011 to finance their budget deficits as well as to repay maturing bonds issued previously.

Given that many investors are now aware of the fact that most of the developed countries' governments are bankrupt, and that China may be increasingly unwilling to buy such sovereign debt as a result on the ongoing currency and trade wars, this could mean another round of shocks to the global financial system next year. If investors fail to show up for those bond auctions, there will either have to be debt default or monetisation. In the US case, the outcome is already clear - the US Federal Reserve will act as the buyer of last resort, buying up US Treasury debt in order to monetise it. As for Europe, I am not sure what will happen, as national politics between the different EU nations are involved. Austerity measures aren't getting much traction so far given the scale of protests that are happening across the EU. So, perhaps the EU may also be tempted to monetise debt? Who knows?

Whatever the case may be, it will definitely mean more 'interesting' times for investors as governments get more and more interventionist.

Singaporeans Buying Properties Overseas

Last evening, I overheard a report on the 6:30 pm Chinese news programme on Channel 8 that more Singaporeans were looking to buy properties overseas. This was also reported by Channel NewsAsia here.

What caught my attention was the following statement made by one of the developers:

"Still, buying properties in Spain now is about 50 percent cheaper than several years ago as property prices there have reached rock bottom, said property developers."

While it is true that real estate prices in Spain has declined by 50%, whether or not it has reached rock bottom remains to be seen. As the old trader's adage goes, 'cheap can get cheaper'.

The premise of the aforementioned statement by the developer appears to be that the worst of the financial crisis is over, and that we are slowly climbing back to economic growth. This is something which I disagree with.

A quick scan at the EU landscape shows increasing levels of social unrest as people express their unhappiness about the forthcoming fiscal austerity programmes imposed by their governments. Europeans accustomed to generous welfare benefits have so far been unwilling to accept the reality that high standards of living require the exertion of more than minimum efforts. This does not look to me to be a sound basis for an economic recovery.

Furthermore, despite the fact that European banks in general are more poorly capitalised than US ones, none have been closed down so far compared to hundreds in the US. Something is wrong with this picture, isn't it? Short of the ECB doing more 'quantitative easing', bank failures will hit the EU next year.

For Spain itself, more bad news as FT reports that municipal debt default has started with the town of Villajoyosa. Again, it does not look like recovery is on its way.

I don't know about you, but I never trust property developers when it comes to macroeconomic analysis.