EUROPE: MIND ON THE MARKET WHILE CHARTING A BETTER WAY FORWARD

Posted on April 12, 2015. Filed under: Uncategorized | Tags: , , , , , , , , , , |

In the immediate aftermath, by agreeing to buy Euro 60 billion worth of public and private securities on a monthly basis until September 2016, under its recently launched quantitative easing ( QE ) program, the European central bank (ECB)  has quite clearly distorted the market. Also the initiative has given once in a life time type opportunity to Euro area countries to get their fiscal house in order by borrowing for longer duration and at a record low cost without being able to provide  or required to provide any fundamental justification to the market. And also by showing a willingness to buy European governments debt as low as minus 20 basis points, the ECB is probably attempting to harmonise the cost of borrowing of the EU states. So as a consequence, we are now living in a reality, where Portuguese and Spanish 10 years sovereign bond has a lower yield  than a U.S. Treasury of the same duration.

While the benefits of the QE to the European governments can’t be understated, European financial institutions from the likes of an insurance companies or a pension fund etc, who rely on investment returns to keep their business model sustainable will most likely have to reassess, or redesign their investment model factoring the new reality of low and negative yielding sovereign debt.

The ECB is clearly aiming to push investors out of what is considered safe haven assets, but investors could also opt to very well sell the Euro denominated European sovereign bonds, and instead buy US treasuries as ECB has very limited control over how investors will allocate capital, and the overall directional flow of the capital. Non European companies with stronger balance sheet could also benefit immensely by borrowing at very low rates in Euros, and there are ample evidence of that happening already as more and more companies flock to Euro to raise capital. So there remains an inherent risk with the approach, and capital will likely flow into various asset class outside of the Euro area.

Also in the last couple of years, a sizeable portion of the profits made by euro area based banks came from their sovereign debt holdings, and in the current environment, it will be interesting to see what sort of impact the change in dynamics will have on banks profitability. Although the banks are comparatively in a much better shape than few years ago, they are still struggling to make good money from their traditional day-to-day business.

Going forward, the QE initiative of European Central Bank (ECB) should improve the overall economic dynamics of the Euro Zone, and the signs are that it is in some way or the other heading in that direction. But a QE coupled with ultra low interest rate environment over a longer than desired period  isn’t all NET positive for the general well-being  of the economy. A sustained ultra low interest rate environment over a long period of time can cause misallocation of capital, mis-pricing of risks, and can also easily become addictive without really creating a big jump in the overall economic activity of the real economy. And here is an interesting data that I believe provides an interesting perspective. Based on various reliable estimates, Japanese savers have over US$ 7.1 trillion stashed in cash, and roughly around US $ 300 billion of cash is believed to be literally stashed under the carpet  across Japanese households creating a situation where excessive savings is not being utilised by the real economy as average household aren’t able to get the return they would expect from traditional channels of investments.

There are still a large number of savers who believe in the good old savings model, where a bank provides an attractive return to its clients on deposits. Also more than half of the population of the developed as well as developing world does not actively invests on a regular basis in stocks or bonds so therefore they are unable to reap the benefits of a record high stock market. And their savings get eroded over time through low to almost negligible return on their deposits while a small percentage of sophisticated institutional investors make good money from record high stock markets mostly driven by the easy QE money, which distorts the connection between the financial markets and the real economy.

And even in an economy where a large percentage of the savings comes from the higher valuation of the house prices, if through traditional channels, a saver is not getting decent enough return from the banks, the overall confidence in the economy suffers, and it is one of the reason why the economic data remains somewhat confusion creating volatility in the financial markets.

There are limitations to what a central bank and monetary policy can deliver or achieve on their own without a sound business and investment friendly economic environment. And this is where Europe continues to struggle. Euro zone economy is showing some signs of improvement  but it still has a long away to go.

A Europe where an entrepreneur as a value creator with credible ideas or project  is able to access right capital and start the journey without getting stuck in bureaucratic red tape is still a bit far from becoming a reality. In general, the market is turning optimistic on Europe’s prospect, but the EU leaders as well as the bureaucrats will need to be focused on delivering the essential reforms in order to make sure Euro Zone as an economic growth engine starts to fire, to ensure it stays relevant and competes better. So the European policy makers will need to keep their mind on the market while charting a better way forward for Europe.

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A problem made in the HELLENIC Republic

Posted on January 26, 2015. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , |

So the topic of GREECE and what happens to Europe going forward has once again taken the centre stage, and I do wonder, when  people talk about  GREECE or other EURO area countries return to a pre-crisis period as if that was the permanent normal, and somehow the European policy makers should find a way restore it, do in fact understand the reality and the underlying causes of their current predicament?

The disappointment that people on the street across the EU feel in general is understandable, and also their frustration with the system is justifiable as the leadership have so far failed to deliver for the people. But that’s not the complete picture. The reality is, the crises that unfolded in many Euro area countries was mostly of their own making, and the life style that most people got used to  during  good times wasn’t paid for, and therefore the expectation of going back to what some people might mistakenly consider normal is not only unrealistic but also dangerous. A wholesale reorganisation of the overall economy of the Euro area countries is a must, and this has to be a continuous ongoing reality because without it, the EUROPEAN UNION as we know it today will most likely fail to remain relevant in a very competitive global economy going forward.

And  social economics isn’t about giving away freebies that a nation and its people can’t afford , but it should be about creating and giving equal opportunity to everyone so people can make their own future. A social safety net should not be designed as a net that traps people but it should serve as a spring board that provides or facilitates  a safe landing when you fall , but is also able to push people back up again.

The problem of Euro area nations including of GREECE isn’t just that the country has too much debt overhang, yes in case of GREECE , the GDP to debt ratio of 175% is certainly quite high, but Greece spends less than 4.4 %  of its GDP to service these debts, and in fact on parts of its loans, Greece currently pays no interest, also it is able to collect back the yield it pays to the ECB and other central banks who hold the country’s debt so this lowers the overall debt servicing costs further to less than 2.7%. Also the average maturity of GREEK debt is over 16 years, greater than that of Germany, France or Italy for that matter. So the write down of GREEK debt on its own isn’t going to drive growth. However, a case can made for extending the loans by another 8 to 10 years, and also create a provision that allows for a freeze in interest payment if the country’s growth starts to falter. This exercise will most certainly make the overall debt profile of the country look more sustainable, but it won’t do much with regards to growth unless and until Greece becomes an attractive investment story.

The austerity has killed consumption in the country as the disposable income is almost non existent, and also created a huge human costs in terms of long term unemployment, loss of basic healthcare support , broken families and communities and a lost young generation. But this situation can drastically deteriorate if GREECE was outside of the Euro area, a super hyper inflation followed by catastrophic bankruptcy of the country  creating a hellish type worst case scenario with a very bleak future from which coming back will require a powerful miracle.

The average people on the street have paid a very heavy price and continue to do so for the mistakes made by a reckless political class and also some of the rich and famous who continued to ( and still do in some cases )  to misuse the system driven mostly by greed. The GREEK economy was too small at the time and is even smaller today to sustain a non productive spending spree of any government. So a restructuring and reorganisation of the overall GREEK economy has to be a priority for the next government. The problem facing the  Greek economy  today wasn’t created outside but it was made and created in the HELLENIC Republic itself.

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GREECE – Discovering The Road To Prosperity In a Difficult Debt Terrain

Posted on October 15, 2012. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , |

The gruesome reality of the ongoing European Crisis is that some countries in the EU including of Greece were living way beyond their means and in the last decade benefitted the most from the European Union idea without realizing that all the rise in the living standard and good times hasn’t been paid for. For example after Greece adopted Euro the public sector wages rose by over 50% during the 8 years period ( 1999 to 2007), which is by far the fastest rise in the Euro Zone.

As evident from the unfolding events of the past few years. There is no doubt that Greece was ill-prepared to cope with the global financial CRISIS and has thus seen its real GDP growth decline year-on-year since 2008. According to Eurostat, the real GDP Growth for Greece in 09 was -3.3%, for the financial year (FY) ending 10 was -3.5% and the projection for 2011 is -6.9% and for the year  2012 its around 3.8 – 4.4% . The human cost has been enormous. And the pain and sufferings of millions has gone from bad to worse.

Although people on the streets across Greece have vented their frustrations and anger continuously by rejecting the status quo. A large percentage of the population still wants to be in the European Union. The onus is on the politicians as well as the population to fully understand and appreciate the gravity of the situation. Greece should take this once in a life time opportunity to reconfigure its economy.

The rebalancing and reconfiguration of the economy is a process that will take time and will require all the parties with vested interest to work together without losing sight of the BIG PICTURE. The solution will come from an open and honest collaboration and each party delivering their side of the bargain.

Getting GREEK debt on a sustainable downward trajectory is KEY. And this will require the lenders as well the policy makers in Greece to agree on a clear road map outlining the debt reduction plan.

Based on various media reports the troika consisting of the IMF, the European Central Bank and the European Commission is believed to be working on a Greek debt sustainability analysis and the officials are trying to figuring out ways to bring down the huge debt burden on the country. It is estimated that under the current scenario Greece’s debt to GDP ratio target set by the troika of 120% (of GDP) by 2020 is beyond reach. The median forecast for the economy is to shrink by 3.8 % in the financial year 2013, which will obviously be its sixth consecutive year of declining growth putting the overall debt to GDP ratio to around 180%. This falls way short of the initial goal and is clearly unsustainable going forward.

The need of the hour is to work out a plan incorporating the ground realities that has a real chance of SUCCESS. And creating a sustainable debt reduction strategy will require exploring all the feasible OPTIONS.

Here are some IDEAS worth considering. The suggestions below covers the debt held by troika including of the bonds held by European Central Bank (ECB), the bilateral loans as well as the IMF loans.

  • Consider recapitalising the GREEK banks through European Stability Mechanism (ESM) as planned for Spain.
  • Look at converting a portion (around 25-30%) of the agreed Euro 48 billion loan from European Financial Stability Fund ( EFSF ) marked for the recapitalisation of the banks into equity. This could be managed through the Central Bank of Greece.
  • Consider extending the overall maturity of the loan facility by additional 2 – 3 years  with a grace period on the interest payment.
  • The European Central bank (ECB) should consider taking a hair cut on the bonds it bought from the secondary market as investors or agree on a debt swap extending the overall maturity of the bonds by at least 2 years. Rules defining ECB’s role are vague and unclear but the central bank should take the initiatives here.
  • The policy makers in the EU should consider extending the bilateral state loan to Greece in the amount of euro 53 billion (already provided) by another 2-3 years with a reasonable grace period.
  • Greek government should fast track the planned privatisation process expected to bring in euro 40-45 billion and use part of the proceeds to buy-back the existing debts especially the post restructured PSI bonds that are currently trading at around 22-28% of the par value.

The above measures should reduce the overall debt burden on the Greek economy which is just over euro 330 billion but it won’t be sufficient especially if there are no clear strategy to GROW the economy and fill the fiscal hole from the revenue side. This will require a close cooperation between the Greek Government and Brussels. The politicians in Athens will have to set and drive the AGENDA forward at war footing.

The Government will have to start implementing the structural reforms including of reforming the complicated tax laws, increase competitiveness and productivity by  identifying champion sectors that will drive growth forward providing employment and support them with right legislation and tax incentives, use part of the  privatisation proceeds to support SMEs funding requirement, encourage investment in the real estate and other struggling sectors by inviting the Non- EU nationals to invest in the Economy through various programs that may include providing tax incentives and resident permits, provide flat tax rate to new foreign companies especially the GREEK Diaspora living overseas and explore all the other feasible options.

The next 6 to 9 months will be critical for Greece and the country should use this   CRISIS as an opportunity to come together with a strong resolve and  mindset that it will get over the line. And there is a road that leads to PROSPERITY but discovering it in this difficult DEBT terrain will require patience, perseverance and a right strategy.

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EUROPE in Rehab

Posted on May 14, 2012. Filed under: Uncategorized | Tags: , , , , , , |

Committing to and carrying out real structural reforms, managing citizens expectations, finding ways to grow the economy while keeping the spending on track is a BIG ask but it has been done before in Europe and it looks like this is what the policy makers in Germany want from their southern European partners.

The question is are the folks on the streets in Southern Europe willing to sacrifice their living standard and livelihood for the greater good of the European Union in the long run or will Germany offer flexibility in the short term to ease the pain and change course? Well, we will have to wait and see.

There is no doubt that folks in Southern Europe benefitted the most from the European Union idea in the last decade without realizing that all the rise in their living standard and good times hasn’t been paid for and is infact being subsidized by others specially in Germany. Yes, in the current environment it is easy to criticise Germany’s stance on Austerity but I believe it is important to point out that there is a serious trust deficit among European partners so Europe has no choice but to go through the grind. It is no secret that policy makes in Germany are tempted to use this CRISIS as an opportunity to bring about far reaching changes across Europe and although  I have always found myself siding with folks who disagreed with the severe austerity drive without any serious plan for growth there is no denying the fact that while Germany did carry out far reaching structural reforms during  its reunification period and was referred to as “The SICK man of Europe “ by the market its counterparts in southern Europe saw a big jump in their living standards and hence got busy partying. And now while most in Europe are struggling Germany is certainly ripping the rewards of the decisions made during the time of reunification which required west Germany to invest over Euro 1.3 trillion and also significant sacrifices were made by its population in terms of accepting lower wages, cut in pensions and benefits among others so may be folks in southern Europe need to do a REALITY CHECK and remember NOTHING IS FREE and good times don’t last forever.

The protests and civil disobedience across Europe are probably some of the side effects of the REHAB process that Europe needs to go through in order to get back in shape and as we all know rehab is never a quick in and out procedure. It is a process that requires strong will and commitment and this will no doubt test the resolve of the Europeans but it must be said that a good rehab programs gets an ADDICT off the addiction slowly and this is done to manage the side effects better and ease the PAIN. So its probably time for Europe to consider a balanced approached through delivered a GROSTERITY   (i.e. growth with smartly targeted cost cutting measures to bring down the deficit over a period of time) plan instead of its current front loaded severe austerity drive on all fronts.

A strong and sustainable Europe is in everyone’s interest and the solution to the ongoing European CRISIS is a more integrated and competitive Europe on all fronts and not less of Europe. From the onset European Union was a flawed idea which allowed its members to get high on an addiction where everyone assumed their living standards will rise forever without realizing that they may be sleep walking into a disaster waiting to happen because the policy makers got blinded by the BLING BLING of Europe.

Greeks and others in Europe may not like austerity but going back on the European idea is simply not a good option because they are not prepared for the aftermath. Also there is no evidence to suggest that economies like Greece will benefit immensely by having a devalued currency in fact with a devalued currency it will take Greece more than 30 years to recover especially if all the far reaching structural reforms needed to revive the competitiveness of the country is not fully implemented. And also let’s not forget the human cost that will come with exiting Euro. No doubt, a large population of Greece has seen the benefit of EUROPE so saying goodbye is probably not a viable option for them and the same applies for other countries in the Euro Zone area including of Ireland, Spain, Italy and Portugal among others.

Europe needs to come together with a strong resolve and will to get through the CRISIS. The aftermath of this CRISIS should be a strong, resolute, realistic, functional and more integrated Europe but this will depend on the policy decisions made by the European policy makers today.

Europe is capable of finding its own FIX but this will require a strong political will and sacrifice. And its probably worth mentioning as analogy that you can make a football team with different nationalities, cultural background work together and also win trophies but only if all the team member share the same vested interested.

In short Europe has to be good and should work for all its member and not just some but this will require looking beyond national interests for the greater good of the Europe Union. Also the policy makers will need to come up with a balanced approached and folks on the street will have to get realistic about their expectations but I wonder If they are able to look beyond TODAY?

The problem is we live in a world where we expect instant results and changes without realising that this crisis didn’t develop or happen overnight and fixing it will take time and also the FIX will come at a COST. The fate of the European Union is not at the mercy of the markets but its people and the ability of the policy makers to come together.

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Market Psychology and Investors Sentiment ( mood of the market ) – The Driving Force Behind the markets

Posted on April 7, 2010. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , , , , , |

A friend of mine once told me Positive Attitude is the MANTRA for success.

 Now some may say being positive is good but one has to be a REALIST too. Isn’t that just COMMON SENSE or maybe not. I believe human psychology plays a very important part in whatever we do as humans. And I do mean everything relationship, business, career etc.

Let us explore this more shall we?

Most of us who operate in the market or just watch the market have witnessed the markets going UP on bad news and vice-versa. And sometimes the strength of these irrational or unexpected moves will make you want to lose all your foresight, judgement, wisdom and commonsense. You will be tempted to abandon your own view and just follow the trend.  There are some who do follow the trend. And there is nothing wrong with that. You don’t need to beat the market consensus but just profit from it.  But sometimes bucking against the market consensus does pay well in the end.  We all know that the markets have a habit of getting either too optimistic or too pessimistic and this has a lot to do with the market psychology.  

Understanding the market psychology and how it affects the markets is never easy. But you can position yourself and also profit from it by simply looking at the bigger picture and not get carried away by the market sentiment.    For example there were folks who went into the CRISIS uncertain about the future and with a very negative frame of mind (who would blame them) but there were others who went into the CRISIS knowing well that eventually things will get better and thus had a POSITIVE frame of mind. In the aftermath of the CRISIS all the evidence shows us that the later did profit from the CRISIS and are better for it.

Things are looking and getting better. Across the globe (with the exception of few countries) in general we are seeing a positive turn in the inventory, the manufacturing sector is beginning to do better, exports are doing well, businesses are beginning to spend some money, we are also seeing signs of improvement in the job markets, consumer and business confidence in the future seems to be getting better and one could say that we may have turned the corner. Having said that we may still see some mixed numbers going forward and although the overall health of the economy is getting better it is difficult to say with certainty that we are heading into a self sustaining recovery especially in the developed world until we start getting hard evidence that the private sector has started driving the growth.  But based on the current state of the global economy where we are getting more positives then negatives I think it is safe to say that there are no tell tale sign or risk of a double dip recession going forward and the global recovery is gathering momentum with Asia leading the way. As I have said before in my post titled “Coming of Age: Emerging Markets – The Next Generation of Growth Engines “. A post that I wrote in July of 2009 the party is in the Emerging markets.

There is no doubt that the policy makers have managed to avoid a Great Depression type event by not adopting an extremely tight fiscal and monetary policy. Keeping a loose fiscal and monetary policy has surely helped. But that said the overall cost of the CRISIS on the Governments has been enormous as evident from their fiscal position. Their balance sheets are too stretched and they are getting calls from all the quarters to take immediate steps to FIX it.  Although one understands that there is an immediate need to fix the balance sheet and also address the inflationary concerns by having a clearly formulated, defined and coordinated exit strategy in place. But that said the Timing will be KEY.  I believe the policy makers would like to see credible and hard evidence that that economy will keep growing on its own after the removal of the stimulus or in other words it is evident that the recovery is solid and sustainable. And this is why I believe the chances of a double dip are now becoming extremely remote.  But that said there are still many challenges that lies ahead and any policy mistake here could jeopardise the whole recovery. 

 Although policy makers have done a good job but there is a lot that could go wrong especially if they start playing politics and listening to the popular demand. We also have the general election related uncertainties especially in the UK.  Governments are facing resistance from their citizens and labour unions on the austerity program designed to cut the huge budgetary deficit as evident in countries like Greece and other parts of Europe.  For example in Britain which has seen the worst recession since the World War II people are showing little or no appetite for the shrinking of a system that takes up almost half of the national economic output which is far greater than that of Greece, Portugal or Spain.  And all the political parties are mindful of that. So it is hard to envisage a situation where any government trying to come to power will promise the market a severe cut in the overall public spending and take radical steps to reduce the budget deficit even if they know that the markets may punish them for their inaction.

We are already seeing that European governments are taking decisions that are mostly political by design and targeted towards pleasing their own local electorate as evident from the stance taken by the German Chancellor Angela Merkel on Greece and the EU.  The message from the German Chancellor couldn’t be any clearer. It looks like if the EU nations want a currency Union with Germany then they will have to implement economic and budgetary changes and maintain a good fiscal discipline that brings their performance into alignment with Germany. Which is probably as a fair expectation but although the German proposal especially on Greece was approved by the EU countries however, it does make the future of European Union look somewhat uncertain and also undermines the common currency. No wonder why some the recent statements of the German Chancellor have been received with horror in most parts of Europe. But that said there is a merit in the German proposal especially if you look at how the EU has failed to supervise and monitor Greece effectively. At least with the IMF involvement and it playing an important role the markets should get some comfort knowing well that it will now be extremely hard for the Greek government to misrepresent the figures going forward and there will be independent supervision of the reforms and cuts proposed by the Greek Government. So a combined EU and IMF solution for Greece albeit perceived as political by the market may turn out to be a much better solution than the initial proposal.  

However, there is a genuine fear in the market that since Greece was not guaranteed explicitly by the EU there is a strong chance that Portugal , Spain or Italy won’t be helped either.  And if the EU is unable to fix its own problem or find an EU based solution for an EU problem then it surely reflects badly on the credibility of the whole European Union and undermines the common currency.  Also if the IMF decides to create a deeper austerity program for specific EU nations this may have a negative effect on the overall demand within the Euro Zone.  Which can’t be good for the German export industry but we will have to wait and see.  It is important to point out that to its credit IMF has shown a lot of flexibility when dealing with governments during this CRISIS so one can hope that we may see a sensible plan and in case of Greece they may even agree to the Greek austerity plan created by the Government.  But there is no doubt that speculators would surely try to benefit from this uncertainty by testing the market.

On the other hand we have seen the US dollar benefit on the back of the uncertainty in the EU and also the improving economic conditions in the United States. Central bankers (especially in Asia) and investors who were reluctant to buy US dollar few months ago have all of a sudden found a renewed attraction to the currency.  We have been long on USD and I am glad to say that our bets against EURO and British pound have paid off.  The reality is there is still a dark cloud of uncertainty hanging over Euro Zone and the UK which won’t help the EURO or the pound in short term and It is also very plausible that FED may start raising rates as early as third quarter of 2010 while ECB and Bank of England may have to wait a little longer.  And to add to that the upcoming elections especially in the UK are not going to help the situation. Having said that one could see the merit in the case for British Pound being undervalued especially against EURO, however, it will be hard to find a backer for British pound in the market.  But I believe a cheap pound is a blessing in disguise and it could in fact help the UK economy going forward. Although some in the markets may still hate the UK but we have had a different view based on common sense and reality. I am glad the market in now paying a lot of attention to the UK job story which I have been watching for the past six to eight months.  Here is an extract copy of the e-mail that I wrote to a dear friend ( I have edited the content and removed his name for obvious reason ) on the 20th of January 2010. I thought it will be an interesting read.

 << Hi D,

 Hope you are well.

Picking up from our last conversation on the status of the UK economy I thought I’ll share with you and also get your thoughts on a piece that I am in the process of writing regarding the UK economy. I think bucking against the market consensus does pay well sometimes. We were expecting some positives numbers from the UK and I am glad that is what we got.

 The Market probably still hates the UK and I can  understand the reasons for it but the market does have a  reputation of getting it wrong ( sometimes ) because we  as  people  do tend to get carried away and discounting  UK will be losing out. I won’t say I am turning all bullish but yes there are plenty of opportunities to make money spread across various asset/investment class.

Going forward I believe the market will start paying attention to the Job loss numbers in the UK surprisingly the job LOSS numbers have stayed well below the market expectation unlike any other previous recession? And I believe the main reason for that has been the flexibility offered by both sides the employees and the employers. And in terms of growth, going forward we could see a market beating quarterly GDP numbers and the reasons for that is simple we simple don’t know how much spare capacity is left in the economy and the inventories are so LOW that even with the existing and basic demand you will see a pickup in growth and this could PUSH the market up.

Cheers >>

 I think it will be foolish to assume even for a second that the British economy is not in a pretty bad shape but I believe the market has been way too negative on the UK.  And we are already seeing some positive revisions in the official figures from the Government and government agencies. But that said the British pound and the economy will still be under considerable pressure for some time going forward especially because the UK economy is very closely linked to its banking sector.  According to Fitch ratings major UK banks may have to refinance more than US 448 billion of Government -backed guarantees and funding over the period of two to three years which could be a huge challenge depending on the prevailing market sentiment and this could reflect badly on the economy and the pound. What’s more the market is also very wary of UK’s budget deficit but one must add that this is not just a UK problem but today most developed countries including of the US are facing a similar challenge. 

Although one mustn’t underestimate the importance of shrinking the budget deficit to sustainable levels ASAP I think it is also important not to overlook a major problem facing all the developed economies going forward. Which I believe is a slow-motion train wreck and the governments would need to address it without further ado.  And I believe the Greek Crisis may be an early warning of troubles to come. The governments around the world especially in the developed world who are committed to providing very generous pensions over an extended period of time will now be pressed by the markets to re-examine or re-visit their pension program.

To get a perspective let us look at some of pension obligations of the developed world. According to a research recently published by Washington based Cato Institute if the Greek government was to bring its pension obligation on to its balance sheet the government’s total debt in reality will be over 875 percent of its GDP which is over 7 times the official Greek Government debt level.  And France for example will see its total debt rise to over 549 percent of its GDP, Germany will see it total debt soar to over 419 percent of its GDP from the current level of just around 69 percent, and the US total debt will rise to over 500 percent of its GDP.  There are some economists who would argue that having the pension obligations on balance sheet is the correct and appropriate way to assess a country’s total indebtedness.  To service and fully fund these pension obligations countries (especially in Europe ) will have to aside at least 7 to 8 percent of its GDP which seems like an impossible task and not practical to say the least but I think it is important to add that United Kingdom has the most favourable demographic developments among other in the EU.

There is an immediate need to fix this hole. And unfortunately there is no silver bullet the solution will have to be a right combination of higher taxes, benefit reduction, and increase in the retirement age among other measures. Some countries have already started raising retirement age but that alone won’t be enough. There has to be a reality check and going forward we may see generous pensions scheme being shut.  Some pensioners have already found a solution by choosing to retire in emerging countries with a relatively low cost of living. And this could be a part of the overall solution.

Americans, Europeans and others living in the developed world are already buying a record number of second homes in developing markets although some of these second homes could classify as investment but some are genuine second homes so may be the government and the pension funds in the developed world could create and promote “ Retire in your second home initiative”. But for that to happen there will be a need to commit to provide and deliver the entire essential and necessary services and this will require investment in infrastructure and other assets to raise the living standards attractive enough for people to retire with comfort.  These assets could be co-owned and funded by governments and pension fund in the developed world in partnership with their counterparties in the developing world especially in Africa and Latin American countries which are seeing a steady decline in the population and are in serious need for investment in infrastructure and other areas to improve the living standards of the population.  Though this may not solve the problem but it could be part of the combined solution and will surely reduce the burden and stress on the entire system.

The reality is going forward the tax payers may not be able to take any additional burden and lenders no longer willing to fund the excessive borrowings. Going forward the markets would require and expect changes in government programs in order to keep financing the shortfalls.

And with regards to the market itself I am now of the opinion that just like our body the market has its own immune system which is mostly driven by confidence, investor’s sentiment and market psychology (the mood of the market). And a positive mood with a quarter of positive numbers could BOOST that immune system significantly which could translate into surprises on the UPSIDE. In other words it is similar to a doctor getting pleasantly surprised by a quick recovery made by the patient.  Also the placebo effect is well documented and I believe the positive Investors sentiment and market psychology has a similar affect on the markets. As we know Investor sentiments, confidence and market psychology do play a major role in moving the market both ways and why  shouldn’t they  after all the markets are made up of human beings and run by human beings so it will be affected by the human psychology.

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