16 September 2011


Anyone who has been following Vision Finance commentaries for a while knows that everything that is going on today was totally expected by us.  In many ways we do not feel the need to update our commentaries, though there is so much noise now, that we feel that we should reiterate our Vision for the world economy.

What we are currently observing is the major EM-Developed World repositioning of economic power that simply put cannot be avoided.  There is no way that the developed Europe and US can survive in the existing “status quo” where consumption is the predominant driver of the economy.  Add to this, a huge ponzi scheme of social security, utterly fake accounting standards (held to maturity investments and overprices assets), and it is not difficult to forecast what will happen next.  Yes EU will need to bail everyone out by issuing some bonds, but ultimately the major bankrupt central banks that spoke out this week in the coordinate manner, will need to get these printers to work (in today’s world all that one has to do is add more zeros to the account number one at the central bank).  Hence yes real asset inflation is on the way, and in our view the mistake being done by all the “leaders” is that they are not doing it in the managed way – via some coordinated quantitative easing programme, what poses a risk of the sudden meltdown, meaning that rather than having 10 – 15% inflation over the period of 5 years, we can experience a sudden inflation of say 30%.   The sudden meltdown worries even Vision Finance, as “developed world” is socially and structurally utterly not ready for high levels of inflation.  We do not want to go into the world of science fiction, but the movie Mad Max does spring to mind, and recent riots in London that were about plasmas and designer shoes will seem like a very mild event when it will become obvious that the supermarkets are no longer able to sell food as nobody will sell it to them.

If we look at the situation of each country as a household, it is a scenario where:

-          Husband works by delivering goods from the supermarket to home

-          Wife works by cooking that food that that is being delivered

-          Husband owns huge assets on pension funds, most of these assets are IOUs written by the wife

-          Wife has major IOUs as liabilities, but has no money to ever repay these debts

-          In a way there is a major Ponzi scheme that is being developed, but legally of course

The question is:  who produces the food, and where are the real savings?  The food is produced in EM, and there are of course no real savings.  This is also a major difference between Japan and EU/USA, implying for instance that the Japanese scenario of liquidity trap is very unlikely to happen in EU/USA – unless of course China is willing to continue to sponsor it – albeit I feel that China is quietly waiting for the right time to “strike”.  One can see this by the recent commentaries demanding their recognition as the market economy.

Extrapolate this single household to many countries (many families), and you can see why these countries are utterly unable to survive without a major restructuring, a restructuring that will like never before require entrepreneurs and talent.   Luckily for the developed world they have this talent, but one should notice that ironically because it is "the talent" it is now a global resource – and that is the problem too.

However specifically to the EURO, all the information about the break-up of EU is premature.  Ironically in situations like this, all the efforts will be more coordinated, the evil will join evil, and everything will be done to ensure that the current status quo remains.  As before, at Vision Finance we reiterate that Greece is not a Greek problem, it is the problem of Europe and the banking sector.  In fact seeing that Greece has now record deficit, and in many ways is only pretending to have cuts (aparently their gov't expenditure is up by 10% while revenues are down by 5%, meaning that they are short USD500m a week!) I have a feeling that Greece is almost asking for default as they are the ones who will lose out least on this.  They would stop all the interest payments, which would ironically cover a lot of its deficit.  It is even our believe that Greek default would not lead to its exclusion from the EURO, as the two issues are not related.  It is like saying that if Jefferson Country defaults, they will be kicked out of USD. However even being "kicked out" of EURO would only mean that Greeks would be first to inflate their economy, devalue Drachma, make it the cheapest tourist destination in EU and would in the long run return to some form of stability.  Greece is not a Greek problem, making their position very strong in any negotiations.  Indeed EURO currency might weaken a bit against USD and CHF, but lets be real:  all these countries have similar problems, so any depreciation against other bankrupt countries is temporary.  If one wants to make money on FX then buy Emerging Market currencies.

Click here for our previous report on the Greek Debt including its legal analysis.

Vision Finance recommendation are as always and consistent since our inception:

-          Sell developed world, buy emerging markets (mainly currencies, but also equities)

-          Buy commodities