What we are witnessing in the European Crisis is the demise of the welfare state in the form that its in, says Jack Crooks of Black Swan Trading, one of the most respected currency analysts in North America. “It’s a global debt problem and it’s a severe debt problem in the euro zone”. The problem is huge given the Eurozone has 427% debt to GDP while the Bank for International Settlements says anything over 260% is a major drag on growth.
Jack thinks they created this problem because of the experiment of the Euro. That they allowed all these countries to borrow at German interest rates for seven or eight years while those countries did nothing to align their countries with Germany competitively. That had the effect of paying a worker who produces two widgets an hour the same amount as a worker who makes eight widgets an hour then leveling out the imbalances by bailing out the underperforming countries. Now they have a massive amount of debt when “the mood globally has turned down and we are entering a global deleveraging, deflationary environment where scant growth is going to continue to press down on these financial band-aids, resulting in good money wasted and thrown after bad.”
Productivity levels in Portugal, Italy, Ireland, Greece and Spain are abysmal compared to Germany, and France is about to lose its AAA rating. The German public has about had it bailing out the Eurozone and “now Angela Merkel can’t really do anything unless she goes back to the Bundestag for approval and if the German parliament doesn’t agree to this, its game over anyway”. In short Jack thinks they are just whistling Dixie and proving that you can’t solve a debt problem by issuing more debt.
For the economy overall, Jack is sticking with their report that they wrote 2 years ago forecasting coming global deflation. He sees that this is a different time in that people are so indebted that all the money that is being injected into the system and into peoples hands is not being used to bid up real prices. Instead the money coming into peoples hands is being used to pay off huge debts. Simply put there is a massive increase in demand for cash because people around the world are are afraid. Institutions and individuals around the globe are holding more cash for security reasons. Jack thinks this behavior is deflationary and to underscore his point directs us to “the Monetary Velocity Indicator number that the Federal Reserve Bank of St. Louis bank prints all the time, its turned down and it continues to go down. “If people are afraid, not spending money, paying down debt, that is deflationary.”
As for housing a 20 year bear market in housing something like occurred in Japan “Is very, very possible given the amount of debt in the global economy that needs to be written down, its just game over in so many areas”. Also that there is a risk that Bonds could crack. Not because of inflation but because if the US doesn’t get its house in order, continued spending problems creating a massive overhang of debt could collapse the bond market and send rates higher.
As for the implications for the broad stock markets, Jack & Black Swan have been keeping a very close eye on China, thinking that China is the next shoe to drop. “China has a massive amount of capacity now and with global demand falling in the euro zone, with the austerity in the U.S. economy , it doesn’t look like demand is going to recover for a long time. “ In his view, in an environment in which Europe is in a crisis and China ‘s official growth numbers really finally start to turn down, it’s very negative for stocks. “From an investment standpoint, stocks look like they are in big trouble because stocks in the end are growth assets and growth is not going to be here with the level of debt in the global economy.” In short, Jack thinks stocks are in a primary trend is down and will continue down for a long time.
Finally, “The Euro falling back to par from the 1.40 level longer term and the US dollar wins again by default longer term because as global deflation presses down as people demand the world’s reserve currency to pay down dollar debt.” He also see’s precious metals definitely being supported because it’s one of those where else do you go type of scenarios.