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EU and Other Tragedies

June 7, 2010

Its ironic to see how times have changed. One year back, governments of the world were throwing cash on everything, good,bad or ugly to pop the supine markets of the world.

Today, let alone, commenting and backslapping on how well they have saved the world, they are actually busy shaking their heads and mutterring, “Oh no, not again!”

The Case of EU

Politicians are usually the last creed of genteels who come out in the open and accept things have gone/is going to go wrong. Hungarian politicians have done it, this time. So there is considerable fear in the markets with another country on the verge of bankruptcy.Incidentally, this has driven the CDS spreads on EU governments even further. Diverging 5 bps further to stand at a near record 173bps. And with this, wave of fear the CDS on corporate debt has widened even more, spiking 12bps.

The verdict seems clear. The financial gods seems to be prophesizing, “I will sweep and suck the excesses, your greed and your hubris out of you. You can hide but you can’t run”

Quite befittingly, the only good action governments of the world could have done is to let the pain cleanse out the curse of excess credit from the system.

Lest I be mistaken, that excess credit is villain, allow me to put me this case, of emerging countries. If anything has worked in their favour, its the case of reasonably free credit for their citizens of these countries. Think of it even twenty years back(90s), could you indiscriminately take bank loans and finance your homes, or possibly second homes? Today, a huge bulk of households have either one or even probably two education loans supporting their wards in Western countries. Credit is good, but there has to be a system to ease out excesses.

Stock market crashes is the way to cleanse the excesses.Its the proverbial devils’ advocate, the hated conscience keeper. And when you dont let, a crash work itself out, and instead kill it, by injecting additional liquidity/credit, you kill an essential part of the system. And dont mistake me, the pus of excess credit will come out. If not through markets, then through economies. And this is what we are seeing.

German DAX Composite

The commodity market is also cooling off and rather too drastically. Copper has broken down with such a vengeance that the world is more likely to be thrown to IceAge rather than the day of global warming. Copper is 24% off its highs. Any takers for a bear market in copper? Crude is a similar story…


…Which brings us to the story of gold. Gold is a very interesting story. For one moment, if you assume that gold doesnt exist, then we have a flurry of bad news flowing in:

  • Copper off 25% from its recent highs with CMP as its base
  • Crude off 15% with 3380 as base(CMP)
  • Bond yields are inching lower (which means prices of bonds are overshooting)

    10 yr yields

  • S&P recently has broken below the 1070 levels and with high volumes. On the very same day,not a single stock on Dow could eke out a gain. Terrible stuff!
  • SPX-Recent Movement

  • And to further add to the woes, US dollar has risen to near all time highs. The currrency of a country making a new high, with fairly low export base, high import base and considerable external debt is never a good sign, especially in times like these. A pure flight to safety syndrome is adorning investors.

At times like these, when you see gold making fresh new highs coupled with the fact that US labour market has further softened down, and inflation not really moving in sync with expectations (2.24% inflation), I would rather say, its time deflationary fears start raising their ugly heads.

I would love to buy, some CDS on EU, a lot of  10 year treasury notes and well, gold just to profit from the rise, but I am not very much a converted gold bug .

India, and other emerging countries if they have to better themselves in bracing up this tectonic shift in existing global economy paradigms then, they will be well served in growing a ace class industrial base at home. There are certain, good information coming on that as well, here, here and here. The entire crux being, you have got to make things which the world needs and sell it to them. Its important so that, “they” are dependent on “you”, to stay up and running.

One Comment leave one →
  1. anon permalink
    June 8, 2010 7:15 am

    “The entire crux being, you have got to make things which the world needs and sell it to them. Its important so that, “they” are dependent on “you”, to stay up and running.'”

    That’s too parasitic for my liking – along the lines of China and even so, there can’t be two Chinas in the world. India’s already lost that war. There just isn’t that much demand – not in the next ten years perhaps with OECD in the dumps.

    In my mind, the most important thing India can do is Development 101 – fix agriculture. 60% of the populations depends on it and you can’t run without walking first.

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