18 May 2008

Leap 2020 We are done, then?

Sorcerer's apprentices are doomed to repeat the same mistakes on and on. In 2007, the authorities' and large financial institutions' attempt to conceal the subprime crisis (1) (which had already started hitting hard on the markets in February-March 2007) resulted in a severe and sustainable shock in summer 2007. Well, in the coming weeks we will experience a “remake” of the same scenario, i.e. a serious aggravation of the January-March 2008 financial crisis at the beginning of summer 2008.

In this 25th issue of the Global Europe Anticipation Bulletin, our team therefore decided to describe five of the seven trends currently at work and soon to result in this new tipping-point of the global systemic crisis (the last two trends – Europe and Asia - will be analysed in GEAB N°26):

Real estate: A bottomless pit
Global financial bubble: Inflation only is progressing
US economy: Recession settles down
US public deficits: The big return
Dollar: The rebound that does not exist
Europe: Decoupling confirmed – The heart of Euroland resists / UK enters recession
Asia: Severe slowdown ahead

We also formulate a complete series of strategic and operational recommendations aimed at preparing oneself to the upcoming Summer-2008 shock (on subscription).

In this public announcement, we also wish to explain in what way this new operation of « euphorisation » in fact will contribute to worsen the upcoming shock.

Indeed, despite all the signs indicating that the crisis is going on (bank losses and continued process of financial asset depreciation (2), proliferation of medium-size bank failures in the US in particular (3), increasing weakness of large insurance companies (4), steady collapse of housing prices (5), contamination to real economy and non-US economies (6), pursuance of the US currency fall (7), economic slowdown in Europe (8),...), financial authorities, large banks and the international media have undertaken to profess that the crisis was under control. Powerless as they are in real-life, these sorcerers' apprentices have come to resort to a « psychological weapon » to curb the crisis. The global systemic crisis still has long to live, having nothing to do with this virtual reality where central bankers, private bankers and financial media seem to be operating. Of course large banks took advantage of today's general “euphoria” and managed to share past and future (even greater (9)) losses by launching vast operations of recapitalisation (10).

US housing: a bottomless pit - Evolution of home prices in US 20 largest cities 01/2000-02/2008 - Source : S&P Case-Shiller
This time however, contrary to last year, operators are unwilling to be fooled. According to LEAP/E2020, this is a major psychological factor, one that will contribute to emphasize the impact of the crisis once the mirage of a crisis-under-control fades away at the beginning of this summer 2008.

Indeed, the global financial system, and in particular its US pillar, is currently staking its all (though our team is not so sure the system is fully aware of it). But the credibility of the Fed and of large banks is extremely low today (not mentioning political authorities'). Operators (whether they are individuals, simple savers or sovereign funds) are suspicious and beginning to wonder if they are not being manipulated. If, as our researchers believe, they realise in a few weeks that indeed they were being manipulated and that the crisis is far from being under control but on the contrary is reemerging even bigger, then real panic movements will swoop down upon financial markets. When it comes to mass-psychology, nothing is worse than the collective feeling of having been fooled on purpose.

Here is a simple illustration that will speak to all those of you who know that banks « hold » the vast masses of investors because of the confidence savers have in their capacity to manage their investments: imagine what would be the consequences of a sudden savers' refusal to keep on letting banks manage their savings as they want, and their insisting upon switching their portfolio into less risky investments! Such a move could provoke a 20 percent drop on global financial places in just a few days. This nightmare probably haunts central banks in general, and the US Federal Reserve and the Bank of England in particular (whose economies are closely linked to stock market behaviours). Paradoxically, it is by refusing to face the direct consequences of the financial crisis that they are paving the way to an even greater shock.

Indeed, contrary to what they say (and maybe to what they really believe), there is no bottom to the pit that can stop the fall; or rather, there might be a bottom but its getting deeper day after day (11). Ironically, those who in the past years used to say that there was no limit to profit and benefit increases, are now trapped in a process where the bottom gets always deeper, where losses keep increasing endlessly as reference asset prices fall always lower, and where the only things that go always higher are energy and food prices. But isn't irony one of the only identifiable features of History?

The tragic part is the billions of people now struggling to buy their food because of soaring inflation in food commodities; or the dozens of millions of people who bought houses in the US, UK or Spain these years and find themselves with endlessly devaluating assets; or the dozens of millions of employees, individual entrepreneurs and government staff about to lose their job.

US opinion on state of the nation's economy (12/2006 – 04/2008) - Source: Washington Post/ABC News
« Was it so necessary to save « private Bear Stearns » at the price of such unprecedented financial leniency? » is the question each and everyone should be asking to financial experts. « How can we save the dozens of millions of unknown economic operators today stormed by the crisis? » will become the central question for all political, economic and financial decision-makers from this summer 2008 onward. In consideration of the virtual atmosphere according to which the manipulation of information is the utmost means of governance, our team tends to be rather pessimistic as to world leaders' capacity in providing efficient responses to the second question. But in any event, it is this second question which is important because it still belongs to the future, even if time is running out.

In the next issue of the GEAB – the summer 2008 edition, our team will describe in detail the outlook for the second semester of 2008 in each great region of the planet; as well as the options available, region by region, sector by sector and category of asset by category of asset

No comments: