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Commentary

Europe Back In Turmoil

Three things that should catch your attention:

Europe’s banks are seriously exposed to the sourthern banks, the stress tests have revealed. 8 of the 90 banks tested have failed the tests, which seem to be doctored to provide for a favourable result. (All such stress tests are, in reality. No one will do a stress test on a leveraged institutional framework like banking where negative news can cause an immediate bank run and a crisis, without an attempt to doctor the results towards the positive. I would be naive to believe otherwise.)

Europe is at the edge of a precipice, looking down. The US looks comparatively attractive, but if the peripheral countries leave the Euro, it will make the Euro stronger (not weaker) so watch the Forex trades. The main issue now is how long you can pretend and extend. Japan has done it till now. The US has been trying for three years and not succeeding. It’s now Europe’s turn but who will pick up the slack? India and China will take YEARS to reach the same levels of consumption, in dollar terms, as the US and Europe. (To give you an idea, India’s about $2 Trillion, China’s about $5 trillion; Europe plus US add up to $30 trillion)

The slack-picking-up can happen if the dollar/euro lose their collective value against the Indian and Chinese currencies, but that will cause a recession in these countries.

Either way, the problem now is that the shit is hitting the fan. We are going to be impacted, no matter how much we might think otherwise.

  • Manu says:

    What do a mutual fund(through SIP) investor would do in such a scenario ? Should he moved the invested units to debt fund and let the SIPs to continue ?

  • Pradeep Nalluri says:

    If you notice, none of these stress tests simulate the Six Sigma event. For example, the nuclear reactors in Japan were built to withstand Earthquakes, but nobody during design phase imagined a Earthquake + Tsunami event, which as Taleb says is a Black Swan Event, unless they test these banks rigorously with a black swan event, like China Soverign pulling out or unrest, North Korea going kaput at the same time, tension at Korea borders, don’t even bother taking these results even with pinch of salt.

    • In a way that’s true, but a black swan even is, by definition, one that you can’t predict. Effectively the only way to survive is to not become big enough to die. You have to be able to survive large disasters, and leverage is the key problem here.

  • phani says:

    Thanks for the forewarning.. will watch out!!

  • sriram says:

    “The US looks comparatively attractive…”
    not as per chris martenson

  • deb says:

    Deepak Bhai,
    What happens if $1 = 10 Rupees and $1= 2 Yuan then i think we can easily surpass the consumption of West. The youth is in Asia. It will not take time to increase the consumption. Only thing is who give the credit to us if u consume. Consumption theory is dead and so is Maynard Keynes.
    What do you think abt $1 = 10 Rupees and $1= 2 Yuan
    Thanks