Preparing for a Credit Crisis
By John Mauldin
September 10, 2011
“I am
sure the Euro will oblige us to introduce a new set of economic policy
instruments. It is politically impossible to propose that now. But some day
there will be a crisis and new instruments will be created.”
- Romano Prodi, EU Commission President,
December 2001
Prodi
and the other leaders who forged the euro knew what they were doing. They knew
a crisis would develop, as Milton Friedman and many others had predicted. They
accepted that as the price of European unity. But now the payment is coming
due, and it is far larger than they probably thought.
This week we turn our eyes first
to Europe and then the US, and ask about the possibility of a yet another
credit crisis along the lines of late 2008. I then outline a few steps you
might want to consider now rather than waiting until the middle of a crisis. It
is possible we can avoid one but, as I admit, whether we do (and the extent of
such a crisis) depends on the political leaders of the developed world (the US,
Europe, and Japan) making the difficult choices and doing what is necessary.
And in either case, there are some areas of investing you clearly want to
avoid. Finally, I turn to that watering-hole favorite, the weather, and offer
you a window into the coming seasons. Can we catch a break here? There is a lot
to cover, so we will jump right in.
The
markets are pricing in an almost 100% certainty of a Greek default (OK,
actually 91%), and the rumors in trading circles of a default this weekend by
Greece are rampant. Bloomberg (and everyone else) reported that Germany is
making contingency plans for the default. Of course, Greece has issued three
denials today that I can count. I am reminded of that splendid quote from the
British ’80s sitcom, Yes, Prime Minister: “Never believe...
Comments
Bruce Griffin
Sep. 24, 2011, 12:34 p.m.
“I do not want to own anything that looks like an index fund or long-only mutual fund. Think 2008. I want funds and managers that have an edge and have a hedge, preferably both.
I would not be long money-center bank stocks or bonds, not in the US and especially not in Europe.”
Sorry, but I’m just not following this: it sounds like it’s ruling out all bond funds. What is wrong with BND? Or VGLT? Or PLW? Didn’t all of these do well do well in 2008 in the crisis?
Alan Harris
Sep. 18, 2011, 11:01 a.m.
Heres an idea…..QE 1234 pumped fiat money into the US economy, presumably hoping demand would increase, jobs would be created and everyone would earn more money so pay more taxes. All it really achieved was more debt. Next time, pay off 1/2 of everyones debt which will mean they have more disposable income so demand will increase, jobs will increase and everyone will earn more so pay more taxes. If it fails (as all QE’s do) at least the banks will only be owed 1/2 as much so wont go bust and the populus will be a lot happier with 50% less debt.
Alan the Plumber
Alan Harris
Sep. 18, 2011, 10:47 a.m.
I hope the reader will appreciate theres a fine line between frustration and rudeness and Im just suffering from frustration.
So, what have I learned from all this: well apart from ‘the sky has already begun to fall and theres not much anyone can do to stop it landing’....not much. The above is obviously ‘quality’ stuff supported by serious research, a wealth of experience and informed comment from other learned folk as backup; indeed the author appears to encapsulate exactly the sort of knowledge base that I yearn for as a vulnerable investor. All too often Ive been fed 1/2 baked advice by wanna be journalists posing as experts: VERY EXPENSIVE ADVICE but invariably flawed. So I have to wonder who Johns audience is. One assumes other ‘in the know’ folk already know the sky is falling and dont need him to tell them nor provide learned justification. This lengthy series of articles feels like a post grad essay for the cognisentae. But I shouldnt think their total subscriptions would buy him a day out to the local beach, let alone take 7 to Tuscany. The problem is that all specialists talk in a code where innuendo and inflections speak volumes if you speak da lingo. By all means waffle on for n pages if you feel the need, but is it asking too much to have a management summary in plain English? For instance you tell me your taking avoidance steps to mitigate the problems for your company but no specific mention of what ! I do not need to be told that the bomb is ticking…Newbe or specialist, we all totally believe you. But I would like to know where I can buy the best body armour. The best we get is ’ I am personally raising more cash in my business. I usually invest money as soon as I can. Now, I am still investing, and you too should still put money to work in places that you think have the potential to do well in a crisis. Go back and see what worked in 2008 and buy more of it! Long-only funds did not work. Those that were more nimble did’.
If I had the time/knowledge to do this I probably wouldnt need to spend 2 hrs reading/attempting to read between the lines of your code. OK, so Im a lazy B…..... but it’s the lazy B’s who buy subscriptions. Which of your subscriptions quotes the tickers I should be looking at…...I’ll pay…. Honest Injun!
Rgs
Alan the Plumber.
A Fan
Sep. 10, 2011, 6:37 p.m.
Well, I’d like to see how exactly they came up with the numbers on the USB report regarding how much the leaving the Euro will cost. I have no doubt it would be extremely costly but those are astronomical figures. Well researched articles can also have “numbers pulled from our neither regions” within them. :)
On the political front, I’m not sure the monetary union has made Europe a united political power. That’s why the Euro is in crisis - they are NOT a united under a central government. I still can’t help feeling that either a strong, European level government is created under this crisis or the whole idea of a “United Europe” gets relegated to the trash heap of history.
And, for all the reasons given in the article why it would be “impossible” for an EU state to leave, with enough political will they can be overcome. Most of the same difficulties existed for the South at the time of the American Civil War. They left anyway. Is the EU prepared to keep the Euro at the potential cost of a Civil War? If Greece announced they were issuing the Drachma tomorrow, would anyone but France care? Germany is already preparing (finally) accept that they aren’t getting paid. It would be close to the same outcome, either way for them.