Thursday, November 19, 2009

It's (still) all about the Benjamins...

The dollar still rules the financial markets as today the dollar strengthened in the face of weak economic data as some traders are starting to suspect maybe the dollar decline has run it's course. As I said, the other day if we get religion on spending, the dollar will probably strengthen and that's a scary prospect for stocks because the only reason people are buying equities is to defend against the falling dollar. If the dollar rebounds look for people to move their assets into the next hot thing.

Inquiring minds are reading Societe Generale's doomsday forecast in the Telegraph. They present this as their worst case scenario. We better hope they assign a low probability of this scenario occurring.

"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 105pc 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.

The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), 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.

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.

Mr Fermon said his report had electrified clients on both sides of the Atlantic. "Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried," he said.

This is one of the golden rules of research, be different and have an opinion (preferably a controversial one). Obviously, it's worked for Mr. Fermon as his report is getting a good deal of coverage today. This tends to mesh with my thinking that we're likely to take a double dip in 2010, but less because of the debt load of industrialized nations and more because of the lack of organic growth in traditional growth industries (tech, pharma, etc). I think these industries are actually still contracting so I find it hard to be optimistic about their prospects in 2010.


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