Big bubble - big trouble

As I´ve mentioned in the blogs during the financial crisis, the steps taken during it only postponed the inevitable. And here we are, facing the facts. Its time to pay up, or reduce the debt -rebalance -globally.

This means lower liquidity - higher volatility - lower asset prices -default - debt writedowns -taxpayer payups - lower demand for products and services - business layoffs and bankruptcies - more defaults - more debt writedowns. This scenario is excluding China getting into trouble.
Unfortunately, there are increasing signs that it will.

That scenario is a scary one - but if it happens - and the risks are way too high for anyone to ignore it - the outcome could be massive. China is currently the worlds credit multiplier and liquidity provider. The curse of the fixed exchange rate have much to do with the creation of this monster. The unraveling of it could be something we will have to witness before long.

Any household, corporate, or global fund not trying their utmost to find ways to protect themselves against this (economic only, we hope) risk are putting the economic survival of their family, corporate or fund at stake.

The positive fact is that this time around, compared to the financial crisis, the traditional banks and the media are quick to jump on the bearish macro band wagon. Unfortunately, their macro horizon stops at Europe and the US. They still believe the fairy tale story that emerging markets and China will do well. Unfortunately - they won´t. As witnessed during the last week, commodities, carry plays and emerging markets are getting hammered. China is pulling back.

China has pursued the illusion of a diversification process whereby they have misallocated capital into silly investments, as well as different asset classes, pretending they are diversifying.
Unfortunately, I fear this will come to a horrible end as correlations - once again become 1 between asset classes. The liquidity factor for return on capital will be painfully clear as many investments will not generate any return of capital as liquidity dry up.

China; 40% undervalued currency. Export companies with a 2 %! profit margin. An economy dependent on domestic construction. Heavy credit losses disguised by liquidity. A corrupt government driven by centralised leadership.

Go figure.
I hope you all have your hedges on - if not, go get them.



As usual, good luck






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