Why the developed world’s economies are fucked

This is the only adjective I would use to describe the current economies of the developed world.  I have set out my reasoning below, with what I am planning to do to protect my assets.

 

While it is already outlined in the “about” section, I am not a financial advisor and nothing on my website constitutes financial advice.  If you copy something I am doing without doing your own research first, you are an idiot.

 

Regional overview:

 

United States

The US Economy has passed the point of no return and will have no choice but to cut the budget in half or hyperinflate their currency, either of which will cause a depression.  Bernanke’s successive rounds of QE have been keeping a lid on things but eventually the pack of cards is coming down.  The US Dollar will tank, as will their bonds and alternative currencies will be sourced for international trade.  If this happens I am anticipating a period of chaos as currency markets attempt to find a new equilibrium.

GDP forecasts for 2013 have already been revised down, not that economic forecasters have ever been able to predict the future accurately.  It’s telling that most of the commentary still calls for growth to slow as the worst case scenario.  Try hyperinflation/depression in the US where GDP falls 10% or more YoY and takes the rest of the world down with them.

 

Eurozone

Tax-happy socialists are beginning to realise that bleeding the super-rich dry will just encourage them to leave for lower-taxation countries, such as Gerard Depardieu’s recent move from France to Russia.  Expect more of this to happen as frustrated entrepreneurs quit the US and Europe for business-friendly countries like Singapore and Hong Kong.

The European situation is just getting started, and looks like it’s going to get really ugly over the next 2 years.  The Spanish Government has invested 90% of the national pension fund into their own toxic bonds.  With youth unemployment over 50%, I hate to see what the street riots are going to look like when the pensioners cheques stop clearing.  The budget deficits are continuing, even in Germany (although very small).  Spain’s “draconian” budget for 2013 is planning to reduce the deficit to 4.5% from 6.3%.  The French deficit was 4.5% in 2012 and planned to be 3% in 2013.  They won’t balance it until 2017.

At some point, these guys are going to have to balance the books.  In all honesty, I think the Spanish and French budgets in their current state will end up next December with a greater deficit than currently forecast.

 

Japan

While the fertility rate has bounced from a low of 1.26 in 2006 to 1.39 in 2011, the death rate is accelerating, from 6.2 per in 1980 to 9.9 in 2011.  Population change is now -1.6 per 1000.  Beleaguered by expensive exports in the 2000s, the Yen has finally begun falling yet Japan still has a Debt/GDP of 230%!

Oddly enough I see life in Japan to be least affected of the 3 regions.  A yen devaluation would help exports and cost of living is already quite low thanks to low wages.  There are still plenty of question marks – they have changed Prime Ministers 7 times since 2006, tensions with China are increasing, and they have posted regular trade deficits over the past 2 years.

The real challenge in Japan is they are in uncharted territory for almost every metric.  GDP flat, debt massive, 0.1% interest rates, stubbornly strong Yen, it’s all too challenging for me to focus a lot of effort on.

 

China

Part of China’s success has been the undervaluation of the Yuan, thanks to their central bank buying treasury bonds.  If this comes to an end it will weaken China’s manufacturing strength.

Additionally, China is just too much of a black box.  Rather than try to predict what is going to happen, I am going to try and avoid it, and focus on the “surer things”: US and Europe.

 

Conclusion:

After a massive debt binge, the chickens are coming home to roost for the global economy, and anybody who gambles on things improving is likely to face big losses to their asset portfolio.  It’s not a doomsday scenario, things just need to reset, but those who are vulnerable to economic shocks are going to be in for a tough time.

While there might be opportunities in China and Japan, they are ones I am happy to leave on the table, as the bond devaluation/currency hyperinflation scenarios are much easier to work with.  Of course, living in Australia there will be domestic opportunities as well.

 

What I am planning to do

If I was living in the US or Europe I probably would have already moved somewhere else.  Fortunately Australia’s monetary policy isn’t too bad, debt is only 23% of GDP, and with most households up to their eyeballs in mortgage debt, lower interest rates will put more money in most people’s pockets.  I have been unwinding my book down to a couple of shares like BGL (which I have already reduced by 25% and plan to reduce further) , and am aggressively paying down my mortgage due to its untaxed, risk-free return.  In general I think equities are a sucker play in 2013 – the ASX will likely bumble along between 4000 and 5000, but if the world falls apart we are headed south big-time.  I don’t want to get an average return with the risk of losing half my capital.  I’m also planning to switch my super from shares to cash.

I recently bought a couple of Panerai watches 2nd hand, which should hold their value if not increase, and my living expenses are extremely low.  If the Yen crashes, I will consider moving to Japan (My wife is Japanese).  You can buy a house in the Tokyo suburbs for well under $200k at current FX, and 10 year fixed mortgage rates are 1.6%.

This makes me fairly robust, but I want my portfolio to be Antifragile.  I read Taleb’s latest book over the holidays and will be writing a post on it soon.

I plan to buy options to expose myself to upside if my projections happen to occur.  Given the chaos that I think will ensue simply shorting or going long (especially on margin) exposes me to big swings and sleepless nights.  Buying options will expose me to the bigger upside of transactions with an asymmetric payoff, and these are the positions I am currently investigating:

 

US bonds: Short

US Dollar: Short

French, Spanish bonds: Short

Copper: Short

ASX: Short

 

In the meantime, none of this is going to distract me from enjoying life.