23 September 2011


As Vision Finance is not bound by political correctness, but by logic and integrity, normally we have somewhat mixed opinion of the statements by the “leaders” of this world.  It is apparent for many years now that most of the leaders have little understanding of not only the current economic climate, but more importantly basic principles of economics.  If someone did not know back in 2007 that we are heading for economic disaster, when we had record leverage ratios, history high house prices compared to earnings, record double deficits, off-balance sheet borrowing, and abuse of creative accounting standards, than they either did not understand the basic economics, or were too comfortable in their existing status quo roles to shout “foul”.

The situation is somewhat different today, and IMF forum clearly confirms this.  Politicians and economists are very quick to write empty statements about needed austerity measures, about need for coordinated actions, and all the statements are saying “how bad things are”.  In many ways we are creating a new status quo of according comments, but this is good news as finally everyone is forced to recognise that there is indeed a significant problem that the global economy is facing.

The likely effect of these comments and promises of coordination, is that all countries will collectively start significant global quantitative easing, what will in effect:

a)      Provide financing for debt repayment of bankrupt countries and maybe some public works

b)      Inflate the economy, hence deleverage debt and adjust the value of assets

c)       Depreciate the currencies of the “developed world”, though this could take time as “developing countries” might defend their current attractive levels of exchange by also implementing quantitative easing

d)      Eliminate the major structural problems arising from use of accrual accounting that is simply out of sync with market value of assets

e)      Loss of savings of the Emerging Markets countries and SWFs that is invested into the “developed world” debt

Other measures such as possible pegging of global currencies (in line with CHF/EUR barrier), what may one day even enable creation of the “global bankrupt currency” can also not be discounted, though this is unlikely to be mentioned at this IMF meeting, as such idea would today appear to be “outrageous”, just as back in 2007 would the expectation of recession.

It is also interesting to see introduction of  “operation twist” which in essence decreases the duration of liabilities of the sovereign issuers, what in turn will mean that even more inflation will be needed in order to correct the system once it goes into meltdown.  This almost seems like a desperate measure that would be expected for someone who already knows that there will be problems.  There is a famous saying often used in finance that you cannot be “half dead”, meaning that people often take unnecessary risks in the event that the bad case scenario is expected.  US$2.2bn trader from UBS is a classical example of this, as his punishment would be the same .

Now to all the politicians who are writing long letters suggesting austerity measures:  please turn on TV and look at the strikes in Greece, Rome, Lisbon, Spain, recent riots in London, and basically half of Europe that is ready to go out on the streets, and please be real about your ability to implement the austerity measures.  Anyone who has a small child knows that if the parents make a mistake and miss the child's bedtime, than they will be so tired that any suggestion of going to bed will end up in hysteria.  People are no different to children, and it is simply too late for austerity measures.

Another notion that SWFs will bail everyone out is also impossible.  Yes, maybe they will help with US$8bn for interest payment for Greece, but collectively all SWFs have some US$4.2 trillion under management – most already invested into debt of USA and Europe (the only SWF that was investing openly into Africa and developing countries was Libyan Oil Fund – and see how this ended).  However even all the money of the SWFs will not be enough to save the economies of USA and Europe that have respective GDPs of some $15tn and $16.5tn.  Debt levels are in many cases already approaching 100% mark, and this does not include “performance guarantees” and “pension fund liabilities” with which debt levels exceed 200%.   Vision Finance hence estimates that it is needed to inflate the economies by at least 100% in order to bring some balance back, and the only question is what is the best way to do it (one off depreciation or ongoing inflation).  We believe that the gradual inflation is much better, as most of the developed countries are simply not ready to handle hyperinflation, but we are increasingly worried that the inertia of the politicians will mean that only the one off crush scenario will be possible.

Spread the message, and prepare yourself for the bumpy round ahead, but remember that some of the best companies in the world were created during the recessions as despereta times bring desperate measures, and everone is much more open to try new things in the recession, giving progress a chance.