Tuesday, October 4, 2011

World Fearing a Greek-Style Implosion?

At this writing, global stocks are taking another hit on Greek default fears. Bloomberg reports that Greek Finance Minister Evangelos Venizelos said responses to a letter of inquiry to bondholders regarding a planned voluntary debt swap were being assessed. As this mess plays out, the S&P 500 closed under 1,100 for the first time in more than a year, falling below the price range that held since August and putting the gauge within 1 percent of a bear market:
“Obviously I’ve been too optimistic,” said Byron Wien, the vice chairman of Blackstone Advisory Partners LP, whose parent, New York-based Blackstone Group LP, is the world’s biggest private-equity firm. Wien said the S&P 500 would climb more than 19 percent in 2011 to above 1,500 in predictions published Jan. 3. While the former Morgan Stanley strategist says shares may fall into a bear market, he said gains are possible by year end.
Mr. Wien and many others have been way too optimistic. Chris Ciovacco sent me his comment on stocks heading lower and deflation assets higher. Even I stopped buying the dips on risk assets after getting whacked a few times. I figured out that policymakers in Europe will not come up with a speedy "Lehman-style" resolution to the European debt crisis and this crisis will spread throughout the world, wreaking havoc on developing and emerging economies. I'm more patient, picking my spots carefully when trading and see no point trying to be a hero in this wolf market dominated by high frequency trading and naked short-selling criminals aided and abated by the SEC.

On Monday, I wrote on how this market is holding on by a thread. I went over some positive and negative comments from a few of my favorite strategists. Francois Trahan is right, too many investors are worried about Europe while China might be the biggest tail risk. However, I never bought the decoupling theory to begin with and still believe the US economy remains the most important economy in the world by far and it will be the one that leads the world out of this mess or drags us all into a never before seen abyss.

I know, people love the China story. I love it too, believe they're an incredible economy, but the truth is China is toast without its export markets and still relies on US and European consumers. You can say whatever you want about the "Chinese growth miracle" but it still heavily leveraged on North American and European consumption patterns. And over here in Canada, I see major storm clouds forming, and when this Canada bubble implodes, which it already started doing, we're going to experience one of the worst recessions ever, far worse than the 1982 recession.

And what about global pensions? I won't mince my words here, they're doomed. With stocks plunging and interest rates hitting new historic lows, assets are dwindling and liabilities are exploding, wreaking havoc on pension deficits. Pension plans are ill-prepared to deal with the new era of deleveraging and deflation that's now upon us. It's going to get ugly and what's going on in Greece will pretty much be the script of what's going to be happening all over the world.

I laugh when I read analyses on "new plans" to save public pension plans. Switching over to defined-contribution (DC) plans will only speed up pension poverty for the masses. Just look at the private sector. Companies are struggling with longer lifespans and they simply do not know how to handle their pension liabilities so they're offloading the risk onto workers, leading the sheep to their slaughter. Worse still, many companies were looting their pensions for years, but workers won't see a dime of that money.

If I sound hopelessly cynical these days, it's because I'm hearing politicians peddling the same crap. The Government of Canada and other governments are in for the shock of their lives. This crisis isn't over, stocks will eventually rebound but the big picture trend remains down, and the model that's killing pension funds will continue killing them ever so slowly as we enter a dark age of global deleveraging and deflation.

And listen to me carefully, all the hedge funds, private equity funds, internal or external alpha in the world won't save pensions. They may help at the margin, but most of these "alternative investments" will get slaughtered too. Pensions are doomed because there simply won't be enough money around to pay out all those benefits. How can there be if they're is no meaningful job creation in the leading industrial economies? The public sector will scream and shout that they deserve their gold plated pensions but they will lose, just like they will lose in Greece and see their benefits slashed.

We need radical reforms in financial market regulations and pension governance if we are to keep our pension promises and avoid a Greek-style implosion. The question is will there be the political will to go through with these reforms? Time is already running out and I fear that only another great Depression will force any meaningful change. I leave you with a couple of market related interviews to watch (one is somewhat bullish and one is bearish).

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