Taking stock: Risk on - risk off?

As the western world moves into either a 'soft-patch' or even a double-dip recession, you have to wonder where-to from here. Deleveraging seems to have surpassed our assumptions of an expansion in income. You could in fact argue that central-bank stimulus hasn't worked. Global growth, corporate earnings and end-of-year index projections have, generally, been revised lower. Currency intervention is prevalent but ineffective. It's becoming difficult to see what else can be done.

So we're at a crucial crossroads. Risks to the downside are seemingly insurmountable. The recent divergence between equities and the credit markets, as evidenced by swap prices, is a clear indication that banks could be facing a post-Lehman type freeze in the interbank exchange. The VIX, a measure of volatility or the 'fear-index' as it's called colloquially, trades at levels not seen since the financial crisis.

We all know this. Nevertheless, the merits or consequences of QE3, eurobonds and intervention in the currency markets are moot if CONFIDENCE in 'the system' doesn't improve. Companies aren't hiring; private & public debt-levels are not serviceable; commodity prices are too high; inflation is price-driven rather than wage driven and unemployment is rising. The lack of political transparency exacerbates the issue.

The message is simple and it's for ALL global leaders. Yes we know stocks are historically cheap but who really cares unless you make us believe in the system and prove to us that your plans are tangible in which we, the ordinary people, feature. Give us jobs. That's crucial. Address financial regulation and incentivise the 'hiring' of people. Don't accept the imminent layoff of another 100000 people in the banking sector. Prioritise spending on infrastructure and development. Most importantly, look to your own people first. 

Economic distress motivates desperation

Nobody condones the looting and the rioting in the UK. Opportunists, usually cowards, are by nature quite content to take advantage of any chaos for their own enrichment. The legality and moral disquiet aside, I wonder if the rioting is symptomatic of something much more dangerous.

Unemployment is here to stay unless some of the structural issues are addressed correctly. Even so, on balance, the 'reality- disconnect' between policymakers and 'the people' will enforce the status quo. If that's true, the youth are usually the demographic most at risk. The unfortunate outcome of unemployment and ineffective welfare in an inflationary environment is survival distress. We could well be at that tipping point where the economically-disenfranchised i.e: our youth, take matters into their own hands and challenge the status quo and sadly, who can blame them!

Golden baubles

Indians do it, the Chinese too. You might do it and I bet you know someone else who does. It's a cultural thing and it's socially acceptable. Yes, we've all bought gold at some stage in our lives either for ourselves or for loved ones. Even so, buying gold as a hedge against future trouble & strife seems fantastical, if not a little silly.

At face value a case can be made for an investment in gold but is it the safe-haven investment it's made out to be? For one thing there's not enough gold above or below ground to make it a meaningful asset class. It's insecure, expensive to transport and difficult to 'move' in any quantity when you 'need-the-money'. If you think volatility and risk levels are too high in equity, just wait and see what happens when gold loses it's speculative lustre. Selling a tangible product with intangible 'value' into a vacuum is, well, difficult.

Is gold worth buying? Yes it is. Long-term natural demand outstrips supply. Would I sell everything, forego re-balancing my current assets and buy into the fallacy that is gold? No I wouldn't and neither should you. 

It's time to speak with one voice.

Confirmation that the sell-off in global markets is a vote of no confidence in Global Leadership seems to have escaped our politicians. In fact half of them are on a 'well-earned' break...

We now know that the global economy requires a decisive, cohesive, centrally coordinated plan to address its structural deficiencies / inefficiencies. Relying on Bernanke and or Trichet to inject liquidity into markets will only, as has been the case over the last two years, delay the inevitable. Hoping against hope that China will pull us out of this mess is a little naive..

Some difficult decisions have to be made. Cutting spending is not necessarily the right way. Let us call on Global Leaders, in open discussion, to place jobs on the agenda; put politics on the back-burner and just this once, remember their 'fiduciary' duties in the interests of our sanity and for the future of our children.

Dragon children of China.

Now, why would you 'downgrade' US debt if you're holding $1.2 trillion's worth already? A 'prudent' investor would talk his book, surely? Isn't that what we've always done?

If you're Russian why would you 'downgrade' US debt if the short-term reaction is negative for the price of oil? Why too, if you are Russian, would you be buying more US fixed-assets than at any other time in living memory if the 'downgrade' results in a weakening of the US dollar?

If you're the good-sumaritan you say you are, why would you not assist Italy who had asked for help directly? If Italy goes then Europe falls.... You promised! I'm confused?

It's said that if you are a child of the Dragon, then going after what you want would be second nature to you. You might even destabilise the dollar, shake global markets, end the commodity 'super-cycle', weaken international bargaining power and buy more at severely reduced prices.

Unprecedented unemployment will drive humanity to the next evolutionary rung..

Somewhere in HSBC's reported pre-tax earnings of 7 billion pounds is the announcement that the bank will cut 30000 jobs before 2013. It's a shame. Cutting costs, as apposed to increasing revenue, is easy. A case could be made for weak-minded management or overtly influential, demanding shareholders or the ever-increasing reliance on technology. Either way 30000 lost jobs seems outrageous.

Nevertheless, it's in times of adversity that humankind finds the energy to 'take-it-up-a-notch'. Harnessing this strife-induced energy is key and yet perversely it's always the comfortably-employed and therefore generally less-motivated who make the structural decisions. i.e: tax-breaks, access to cost-effective funding etc.  It's an unfortunate flaw in our humanity. Even so, I suspect this time will be different. There are too many highly-skilled individuals being forced into an entrepreneurial environment by a more restrictive formal market. By definition these individuals must be innovative and or cutting-edge to compete. That takes imagination which is an inherently unique and exciting concept!

Interestingly then, it is these individuals who hold the key to GLOBAL prosperity and NOT the 'too-big-to-fails'. These have failed us already.

Zun Zhong* - my master....

It's 'Amazing Africa Season' on BBC Knowledge this week. In case you hadn't noticed it's been 'amazing Africa season' in China for years.  [indicative perhaps of how far behind the curve the western world now finds itself....] China's quest for resources knows no bounds and like good subjects it's STD practice to show them the way.. Nevertheless, moving forward, some will say that China's influence on Africa's infrastructure has been positive. Time will tell.

Africa's dependence is established. But what of China? Recent data shows that manufacturing activity expanded in May but at its weakest pace in three quarters. New orders are declining. Our mother ails... or does she?

China recently tightened its monetary policy, stirred the pot and 'turned down the heat' on inflation concerns. Chased from the kitchen, Western penchant for fast food screamed foul. Temporarily, commodity prices sold off....

Connoisseurs know, however, that the freshest resources cooked slowly, make the finest dish. A 'kitchen-sneak-peek' will prove that 'Mother knows best'.


*Zun zhong - respect