Waiting for the crisis

I don't know how you see the current economic situation and what your prediction is for what will happen, but I think we're in a quagmire. The last two months have been extremely volatile in the stock markets: on July 22nd, the Dow Jones reached 12.718 and on September 10th it fell to 10.285. There are days when the news is good, but most of the time it's bad. Interestingly, there isn't a new fact or a new piece of bad news: the news is old and repeated, only changing in form. Greece could collapse, the next could be Spain or Portugal, or perhaps the banks with exposure to Greek debt. Greek authorities continue to talk with the troika – the European Union, the International Monetary Fund, and the European Central Bank – about the next tranche of resources they will receive. The Euro could collapse, and the German economy is ceasing to grow.

The American Congress remains divided, and there is no hope that proposals to stimulate the economy or create jobs will be approved. Although economic indicators are sending mixed signals, and therefore it cannot be stated with certainty that there will be a recession, there is sufficient evidence of a slowdown in the pace of growth: estimates show that real consumer spending grew by only 0.4% in the second quarter, much less than the 2.1% of the first quarter and much less than the 3.6% of the fourth quarter of 2010. The Republicans' only priority is to ensure that Obama is President for just one more time. On the other hand, Obama has finally returned to the scene and shown a firmness not seen since the beginning of his term. The problem is that it may be too late for him and for the economy. Finally, let's not forget that the vote to raise the debt ceiling was not a simple one and had several nuances. The most important is that Congress has to vote/decide where to cut $1.5 trillion before December, and if this doesn't happen, the increase in debt will only be $1,2 trillion. At the same time, if the cuts are not identified, there is a mechanism that implements cuts automatically and indiscriminately. In any case, the effect on the economy will not be positive.

It is impossible for emerging markets not to be affected by the problems of the developed world. Furthermore, they have their own problems. The Brazilian government – ​​while sending home its fifth minister accused of corruption – suddenly cut interest rates, causing a devaluation of more than 20% in the real, and inflation is still a threat. China will end up experiencing reduced growth since there is a limit to what can be invested in bridges, high-speed rail, highways, airports, and luxury apartments without corresponding demand. All this spending was crucial in 2008 to respond to the crisis, but it will be difficult to sustain. Moreover, it was financed by the government, leading to an increase in the debt-to-GDP ratio.

It's possible that there are people in the audience who believe in miracles, who believe there will be a solution for Greece, that the Euro won't collapse, and that jobs will be created in the United States. I doubt it.

As I've said, Europe's problem lies in its common currency, and the problem of the developed world lies in its leadership. Since 2008, these leaders have decided to implement a new form of capitalism: risk-free capitalism. If you're a bank, you can make bad loans because the government will come to bail you out. Can someone explain to me why the European Central Bank is helping the banks and not the governments? Why does the population of Greece have to suffer at the expense of those who invested in Greek bonds? Why in the United States do those already punished by the recession have to fear cuts in social programs while corporations continue to deduct millions of dollars in expenses on "entertainment"—gambling, restaurants, family trips, and so on?

Until Wednesday the 21st, I had doubts that we were on the verge of a recession, but then Bernanke spoke and announced a program to stimulate the economy. Aside from the fact that such a program will not stimulate the economy, the mere announcement indicates that the Fed does not see the economy on the right track. The IMF on Tuesday cut its global economic growth projections. Sooner or later, corporations will reduce their earnings and profit estimates, and since there will be no good solution to end the Greek tragedy, volatility will be the new norm.

I have little doubt that we are on the verge of a new crisis, only this time it's not a crisis of bank credit, but of sovereign governments. This crisis will somehow begin in Europe and probably in Greece when the government finally decides not to pay. It will spread through the banking system and will be accompanied in the United States by the inertia of the government/Congress in taking counter-cyclical measures. Emerging markets will be affected, Russia first because of the inevitable fall in oil prices, and then Brazil and India, which are trying to combat inflation and overheating. China will not be immune to the fall in international demand. I have been wrong before and I would like to be wrong now.

What can you do to protect yourself? How can you prepare for a scenario where investments will have lower returns and the stock market may fall even further? In such a situation, all asset classes are affected, and there is nowhere to hide. Conservative investors are recommending AAA-rated private bonds or shares of companies with high dividend payouts. This is a good option if you don't mind minimal returns. Aggressive investors are "shorting" the market, that is, betting against the market, against the Euro, against gold, against almost every asset class.

Remember that crisis means opportunity, and if you've read my previous newsletters—and agreed with me—you must have cash and therefore can take advantage of the opportunities that will arise. Opportunities will appear in stocks, fixed income, and real estate. My only advice… don't go buying, don't be hasty, because it's not clear where the bottom is. Patience, once again, is the greatest virtue.