My First Post – Time to pay the piper.

I write this first blog in interesting times. -- Financial markets have been incredibly volatile in recent weeks. The EUR has dropped like a stone in recent weeks, European stock markets are dropping fast, which has spilled over to US indices, and the risk trades of the past year, such as the AUDJPY carry trade have recently gone into sharp reverse (See chart below).

At times like this I believe it is essential to understand the big picture. It is in my opinion that we are on the cusp of a major deflationary cycle. I do not profess to be an expert economist, however let me explain anecdotally why I think this is occurring. To me it is clear that Debt - Sovereign, Municipal, Corporate (though perhaps less so) & Private - in the mature economies, have reached the limit of their excesses. In recent years the economies of Europe, the US and other modern economies years have seen their debts spiral. -- There comes a point where we become saturated with debt, every individual knows that there comes a time when you either repay that debt (Pay the Piper), or you declare bankruptcy and no longer have access to further debt. The upshot; - no more nice holidays or fast cars (not in the immediate future anyway). It does not matter how cheap the price of debt, you ‘ain’t gonna get it’, unless you want pay a visit to the local loan-shark and pay crazy rates, with the added risk of losing your kneecaps. – This is the situation facing the global economy (BTW the IMF would be the loan-shark). The Greek crisis has merely served as a siren to other nations and to investors with regard to what is likely to happen if debt is not brought under control. Austerity measures abound in the PIIGS countries, and whether forced or pre-empted, this is going to be a major theme within the global economy for many years. Governments will have to enact hefty spending cuts or higher taxes, or most probably a mixture of both. This will heavily impact the overstretched consumers, and will likely lead to either higher levels or more prolonged elevated levels of unemployment.

This backdrop is not going to be favourable for stocks. I do not know what the correct valuation for stocks indices are; however I bet they are not discounting a major deflationary cycle. Furthermore, with governments trying to reduce their debt obligations I do not think they will be rushing to the bailout station as rapidly as in the past 2 years. It sounds doom & gloom; I wish it was not, I have never considered myself a permabear (nor a permabull for that matter). As a trader I like to merely try and capture the moves, however it helps to be a realist, and this is the ugly background to the financial markets – in my humble opinion.