A summer of fixes for gold, Greece and China
New York (Aug 18) It has been a summer of ‘fixes’ so far this year, argues FundCalibre director, Clive Hale, China’s been fixed, Greece hasn’t been and gold looks to have been ‘fixed’.
It’s summer and markets usually take a break along with the rest of us. This year this certainly hasn’t been the case in China, where speculation akin to the tech bubble in 2000 took the Shanghai indices to unsustainable levels. We are now in the fall-out phase with the government using dubious measures in its desperation to prop up the market. It has a lot of fire power but there are still many speculators nursing losses who want to get out when they can. So, although the market has fallen a long way and in the long term China will become a much bigger player from an international equity perspective, now is not the time to go back in. The analogy of trying to catch a falling knife springs to mind.
Whilst the Chinese government is working overtime, in August the Eurocrats take a break so the illusion that Greece is fixed is maintained, but here are some assumptions, dangerous or otherwise, courtesy of Mish Shedlock’s Global Economic Trend Analysis site:
* The current total accumulated bail-out for Greece is €326bn (£233bn); * Greek GDP will remain at €216bn; * The interest rate on the bailout will be 0%; * Greece can immediately achieve a surplus of 3% of GDP; * Greece will hold that 3% surplus for as long as it takes to pay back €326bn; and * Every penny of Greek debt surplus will go to pay back creditors.
Shedlock's done the maths and very few of these assumptions add up: “Three per cent of €216bn is €6.48 bn. At €6.48bn per year, it would take Greece 50 years to pay back €326bn. The interest rate will be small, but it likely won't be zero. Greece won't come close to a 3% surplus. 100% of the surplus won't go to the creditors. The only possible favourable condition in the mix is GDP. Greek GDP will eventually rise above €216bn, but that will take years. In the meantime, interest expense accrues, adding to the total amount that needs to be paid back. At 1% of GDP (€2.16 bn per year), it would take 150 years.”
It cannot work, can it? No. But, for now, enjoy the sunshine and hope that the ECB deploys its €1 trillion treasure chest to good use. The chart below shows just how effective goosing the US Federal Reserve’s balance sheet has been for the S&P 500. Could it be the same for euroland? Jupiter European, BlackRock European Dynamic and T. Rowe Price European Smaller Companies have all benefited from taking that view and should be in the vanguard if European equities continue to be favoured.