Very few people appreciate the significance of banking money pouring into the European Central Bank (ECB) from all over Europe yesterday. There’s no reason why they should: they have lives to get on with, and if they knew how headlessly panic-stricken eurozone bankers are at the minute, it would only cause them needless anxiety.
I write ‘needless’ there, because as individuals there is nothing they can do about it. But there are things we could all do if, instead of worrying about something half-understood, we felt more prepared on the question of how to defend oneself. It’s like my father used to say about driving: “Your main task is to avoid the effects of people who don’t know what they’re at”.
Let’s hope this piece can help a little.
There are really three parties involved in this building EU crisis: sovereign nations who’ve spent too much, and need to borrow; companies who face an uncertain market outlet and thus need to both launch new products and break new markets like China; and banks, who are loaded already with dodgy debt, suspect their competitors are too….and are therefore too nervous to lend to each other -let alone anyone who wants the loan for something productively useful. (That’s why they’ve deposited a third of a trillion euros with the ECB: they see it as a safe haven).
What the indebted countries and growing companies now face is all the money moving off the table, because:
1. Non-European lenders are increasingly wary of any investment in the eurozone.
2. Indebted countries are soaking up most of the money that is available via bond issues.
3. See earlier, the banks are too nervous to lend – they fear a second sub-prime debt crisis: and on the whole, they’re probably right.
Project this situation forward, and it becomes politically untenable. Here’s why:
Let’s say the ECB just keeps on buying worthless junk bonds off Greece, followed by Spain, and then Portugal, and then……etc etc. What’s it’s going to wind up with is a lending book that makes Northern Rock 2007 look like a model of good governance. If they carry on with the policy, they will wind up the proud owners of the biggest sub-prime debt on the planet.
At the same time, however, the ECB will be spending yet more of its cash flow giving nervous banks guaranteed interest on huge flows of real money….but in a currency that’s falling through the floor right now. Not good for margins, cash flow and assets, that one.
Last but not least, whatever empty spin the Prodis and Trichets keep pouring out as balm for the markets, they simply aren’t believed any more. They’re not even believed by the ECB’s own board members – hence the growing anarchy thereupon. The Greek contagion will spread, and money will have to be thrown at the problem in the manner of the UK during 2008-9.
Now clearly, we can’t have the European Union’s Big Money Shop buying loo paper, paying interest on a declining asset and writing off vast deficits run up by southern Europe. So as we’ve been saying here for two months now, the people to pay will be the banks (who will pass taxes on to their customers) and those customers – wearing their other hat as taxpayers.
Even if we could get the Euro to rise (and solve at least part of the ECB’s dilemma) this would make the EU less uncompetitive still. It would also seal Greece’s fate.
And even if we can get the taxpayers to cough up – again – this will mean a vast reduction in their disposable income, and thus zero hope of a spending-driven recovery. (Lest we forget, 78% of German voters have already ticked the ‘no’ box on this one).
So – summing up – there’s no money for corporate borrowers, no money in the Treasuries of at least four countries (including ours), no money for sovereign borrowers, less money for economic output consumers – and while the ECB has tons of money, it is costing it tons of money to have that money.
This is the eurozone that Chris Patten referred to in the FT yesterday as ‘a spectacular success’.
As The Slog always reminds readers – because the legals insist we do – I have no licence, desire or indeed indemnity insurance to enable me to give advice. I can only tell you what I’m doing: your own course of action is entirely your affair, as indeed it should be because each individual’s circumstances are unique. That said, this is what I’m doing:
1. I’m forced to make a large transaction in Euros, and so I’ll be transferring the money for this today at the best rate I can get – around 1.20 to the £. The Euro may fall further, but there’s no point being greedy: it was at 1.08 two months ago….and as both the UK and EU are basket-cases, Sterling will drop in time anyway.
2. I’m investing more in gold. It’s been psychologically wobbly for a few weeks now, but even at $1200 an ounce I see it as a bargain bearing in mind what I think is coming down the road.
3. I’m getting into the Aussie $ while it’s still a little low. This is a medium to long term play: the currency may dive if nobody wants raw materials for a couple of years, but sooner or later they will – Australia’s got more than most….and I trust them more than Brazilians.
4. I’m not in any equities (stock markets) at all. But once Crash II has been and gone, I will be going back in to pick up bargains.
5. If I can sell one property to release cash in the next six months, I may do so. All property is going to undergo a massive correction – in fact I’ve probably already, missed the boat on this one but heh – properties are homes to enjoy: it can’t be all about money.
It’s also no longer really about growing wealth as an investor – at least for a year or five: it’s about defending the value of what you’ve got, following probably the worst period of capitalist and sovereign mismanagement by all concerned in my lifetime….and that’s a tough league to win.
Whatever you decide to do, good luck.