White Noise Around Strong Trends

Tuesday, April 29, 2008

It gets difficult these days to keep a check on all the crises in the world. Roller coasting financial markets mirror the nervousness that seems to have taken a solid global grip. Soaking up news stories can become overwhelming and depressing. Every new day brings a barrage of by now almost entirely bad economic and political news.
Food Crisis
Record oil prices - at the time of writing above $118 - and soaring agriculturals suddenly squeeze inhabitants of wide parts not only in Europe and the USA, but in Asia and Africa too. Food riots change the picture dramatically. Empty stomachs can become a very strong force in a short matter of time. More than 5 billion people have begun to change their eating habits, upgrading to a more nutritious diet or at least a second meal every day. This trend will not go away.
Energy Crisis
The latest attacks on Nigerian pipelines carrying highly demanded low sulfur crude and pushing multinationals into force majeure clauses as they cannot fulfill their contractual obligations (kind of counter party risk here too) may be a foretaste of what is to come. Rapid protectionist moves as recentl observed in the food sector may soon be seen in eneryg as well. Remember the OPEC member Indonesia who has become a net oil importers some years ago? Skeptical forecasters doubt that new oil finds will be able to replace or even extend current capacities on the scale that would be needed to ease a market tightness that has now been around with us for several years. But what happens once Tata has sold 10 (or 20 or 100) million Nano cars in India? 
I see no trend change here. Triple digit oil prices are here to stay. Disregard such finds as that mega oil field off the Brazilian coast for what it is: White noise in a strong bull market. Yes, there are potentially 100 of billions barrels of oil not yet discovered globally; but we do not have the technology to pump it out yet.
Banking Crisis
The banking crisis appears to become more grave with every day. Free market ideology gives way to a growing chorus that wants everything and all regulated while stubbornly refusing to accept the fact that more credit will not be a remedy for too much credit.
The most important point, recklessly growing public deficits, gets only too rarely mentioned in the mainstream discussion.
Expect a change of trend here. As soon as money gets really, really tight questions on who squandered what will prevail.
US and Europe in a Long Term Down Trend
My fears for the last couple of years have centered on the worst downturn of the US economy since the 1930s due to the highest mountain of debt ever created, leaving Europe in the advantageous position of the main technology supplier for the industrializing southern and eastern countries.
Property Crisis
Alas, this did perspective did not materialize as Europe may not only drown in a sea of US subprime investments and off balance sheet derivatives positions, but also in its homemade property crisis that may bring down France, Italy, Spain, Greece, Portugal and the UK within the next 24 months. Growth projections for Europe have been retracted recently and one may ask rightfully whether there would be any growth left if one were to apply the rate of price raises experienced everyday when paying energy and food bills.
Forecasting Crisis
Looking back the last 4 years I note that all official inflation and growth forecasts have followed a repetitive trend where an improvement was always in the cards for the coming year. But it rather appears Europe has been on a downslope since 2005. I would say, central bankers have been dead wrong for quite a while now. Will this old trend stay with us? I presume it.
Inflation Crisis
Growth has come to a virtual stop, as can be witnessed on Europe's shopping lanes. Inflation has gone parabolic since August 2008, the last time it was in line with the European Central Bank's (ECB) target rate of 2%. The latest reading, only 8 months later, stands at 3.6%. Expect this trend to remain with us for a while.
Capital Dilution Crisis
Not that the ECB was alone in painting rosy skies. European banks were quick last summer to announce that all is well and the property fallout in the USA would not sap to their own shores. RBS looking for 12 billion pounds, Deutsche Bank wanting to raise €17 billion and most others taking writedowns on a weekly basis do not exactly raise the trust into company projections.
In order to shore up their own balance sheets European banks now deny loans to commercial customers, leading to a strong decline in investments. This comes at a time when European consumers have to pinch their purses in order to counter runaway food and energy inflation, as real wages have basically been on a standstill since the introduction of the Euro 9 years ago.
Now investors will be worse off soon too. All these rights issues are basically  the biggest capital and profit dilution crisis ever seen in Europe.
This still does not answer the question what kind of rich uncle will come forward with the cash so direly needed. Or is it maybe the ECB itself, shoveling depressed bank shares into its infamous #9 position, so called "other assets?"
This crisis is so bad that I expect all dirty tricks to be played on the way into the inevitable massive shrinking of the global finance industry. 
Consumption Crisis
Bloomberg reported on Tuesday that
European retail sales dropped the most in more than four years in April as rising fuel and food prices squeezed shoppers' budgets, the Bloomberg purchasing managers index showed.
Consumers, worn out from inflation and saddled with property debts on both sides of the Atlantic, will probably accelerate this trend, downscaling their outlays to the bare minimum. Deteriorating public pension systems will aggravate this situation. Confronted with lower pension payouts European consumers will most likely channel their disposable income into pension savings, foregoing short-term consumption lures.
Red Economic Lantern for Europe
Even if the European banking system can be protected from collapse - which I highly doubt - Europe may nevertheless be left with the economic red lantern.
The old continent faces 3 gigantic hurdles on the path of future prosperity.
  1. A lack of energy and commodity resources
  2. The highest labour costs in the world
  3. Worsening demographics.
In general it has to be questioned how important 800 million mostly indebted citizens of the hitherto first world are to the rest of the world in the medium and long term. More than 5 billion inhabitants in the industrializing world will fight for growing market shares in virtually everything as consumers will want to stuff their residences with all the amenities they have seen on satellite TV.
These trends are here to stay and become stronger with every reporting period.
A good dose of ignorance and/or arrogance on behalf of Western leaders who have not yet recognized that the economic hacking order is about to be turned upside down will certainly not help. I am at a loss to explain the sanguine public mood and I am shocked to learn in conversations that people have not yet realized what trainwreck Europe may become in the short term. 
Disregard the white noise. The western world is in a long term downturn, brought upon us by too much public spending and the latest build-up of debt mountains that will be deflated with higher inflation. It was never different in the past. It will not be different in the future.


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