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16. 06. 12. - 12:00

Clem Chambers - The Spanish problem

Croatian Times

Core problems of the developed world’s economies are resolving so slowly it may be 2020 before the world’s giant bear market finally recedes, writes Clem Chambers, CEO of www.advfn.com and author of investments books and novels.  (www.clemchambers.com)

Spanish contagion has been on the cards since 2008, yet political action has forestalled the inevitable for four years.

This could be viewed as a masterpiece of EU intervention, or, it could be seen as a political tragedy, forestalling the financially inevitable at a huge cost to growth and progress.

It doesn’t take a genius to figure that: Spain will need more bailout money, probably five times as much as we have seen. Also, that Italy is up next, probably due for a bail-out before the summer is out. This bail-out will be the same again, likely several tranches of six-figure billions.

It also doesn’t take a Nobel prize winning IQ to see that France is then at high risk of the same fate.

This is all set to pan out in slow motion. Perhaps it will be well into 2013, April or May, before all eyes are on a distressed France. Perhaps it will be the end of 2013, as the torment drags out.

Croatia, relatively speaking, is in a better position than embattled users of the euro currency, like Greece, Spain and Italy. Yet of course, the nation, like most others around the world, is experiencing economic challenges in the long-continuing global ‘bear’ market.  In Zadar recently there were protests, urging the government to make reforms to help people made redundant.

Union representatives noted that since the 1990’s war until today over 500 companies in the Zadar county had gone bankrupt, affecting up to 50,000 local people.

A recent survey by Raiffeisen Bank, however, found Croatia was a leader in the region in terms of the ratio of loans to GDP. Only in the sector of business lending was there potential for growth in lending activities. Despite the absence of economic recovery in Croatia over the last two years, growth in corporate loans was greater than five per cent.

Bad credit loans made up 12.4 per cent of all total loans at the end of 2011, however, and that figure was expected to continue to grow in the coming years.

With so many people across Europe dependant on the state for their living, it’s likely no one will vote for, demand or support the rebalancing of state finances necessary to solve the underlying problems: the public sector bubble that has left developed world economics so anaemic.

So the deficits will go on and on, just like the bailouts. The West is used to a big state with bloated public sector. It’s like a 1970s nationalised industry, unable to rationalise itself and grow towards the future. Like a family living above its means, the only recourse is credit and denial.

By 2014, Europe-wide bond market interest rates are likely to be 6%-8% in all but Germany.
Governments will be funded by ECB printing and monetising, and not by global markets.
It is said that state debts are unsustainable at 6% interest. This didn’t use to be the case but governments have leveraged themselves up in the last decade just like their banks did.

They build up long term overheads on the basis of short term income streams, like banks lending long term and borrowing short term. It is these long term overheads that need shrinking to at least approximate income. This requires deleveraging. Crudely, it means cuts.

However, the need to cut when everyone demands otherwise is creating the double bind that is halting the resolution of the sovereign debt crisis and it subset, "Euro crisis."
At some point, perhaps 2015 luck will run out for the US. Like the various broke Euro countries, US debt is now 125%+ GDP. Its deficits have run and run-  its debt is at 18 trillion. There is no one to bail out the US.

It monetises its debt, inflation consequently soars.

Five to ten years of high inflation will follow, slashing the US debt in half, squeezing the dollar to dramatic lows, helping the trade balance to equalise, stoking employment, raising tax revenue and generally enabling a rebalancing to occur.

So I believe it will likely not be until 2020 when we finally reach some kind of base.
This is why so many economists call for measures to create growth. "Growth" is really a euphemism for money creation, and thereby inflation.

Increasing the money supply is all the public sector can do to try and create growth, as outside of that it can only drag on growth by diverting wealth to less efficient usage away from commerce.

However, throwing new money into the system isn’t an efficient way of creating growth, instead it creates asset appreciation. As private sector left weak by a draining public sector simply can’t respond that fast and probably doesn’t have access to the new money anyway.

Instead the money flows through the financial system and goes into non-productive investments which create asset bubbles.

All this leaves the investor in a tough spot. The trouble stretches out as far as the eye can see and the road is festooned with traps and uncertainty.

It does mean that physical gold is probably a good haven. It probably means owning hard assets is a fine strategy. It does however mean it’s hard to find an old fashioned financial instrument, be it equity or bonds or even cash, which can truly be seen as safe, let alone a good bet.

Investing now has become a very long term game indeed, because only years of readjustment will need to pass before this giant bear market is over.

Visit ADVFN.com for free, real time stock prices
Visit www.clemchambers.com
Follow Clem on Twitter : @ClemChambers

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