It is concerning that the Bank of England had made contingency plans for its staff to be given bicycles so they could still get around in the event of a full-scale financial meltdown. So are we heading to a financial melt down and market crash?
This could be good news for investors – this would create a buying opportunity for the prudent investor. It is fair that few economic forecasters expect the economy to go into full-scale meltdown, it appears that if it does, it won’t be long before a new economy establishes itself.
A full-scale collapse of the Euro, China grinding to a crunching halt and the US plunging over the fiscal cliff are real possibilities. There are signs from the bond markets, that the financial world is under the fear of negative pressure.
Government and Treasury Bonds, in some cases, are paying negative yields – investors in effect are now willing to pay for the privilege of lending money to the likes of Germany, Switzerland, Denmark, Holland, Finland and France, just to get their capital into a perceived safe haven.
I believe, in the case of the Eurozone, the money flowing into the stronger countries is primarily being driven by fear. How I see this – for investors, say living in the Eurozone countries such as Greece – buying the risk of a small loss on German debt is preferred to the risk of the potentially substantial loss of purchasing power, should the country leave the single currency and bring back the drachma.
The collapse of the Euro would be disastrous for financial markets.
There are also worries that the crisis in the Eurozone is distracting everyone from the real problem in the US. American Debt is expected to reach the $16.4trn cap before the end of 2012; plus the expiration of current tax cuts and $1.2trn spending reductions could push the US into recession. (The worse case scenario would be a full US default possibly caused by the debt cap.).
The outcome of this is unthinkable – most asset classes would fall significantly in value. Liquidity in capital markets would disappear, corporate bonds and property markets would re-price accordingly and equity markets would suffer a serious decline.
The exception would be expected to be some physical assets but otherwise – value would be irretrievably destroyed, even in asset classes that have traditionally been defined as offering lowest risk.
Gold maybe argued could be one of the exceptions.
The troubles of the Eurozone and potential risks of instability are also anticipated to support gold as a possible hedge or insurance against asset devaluation and potential inflation.
Summary
It is good to review the risk and potential outcome of a total melt down but how large a risk exists? I believe that there is a real and present danger but are not at the point of collapse – we almost saw this scenario at the heights of the global recession lead by banking collapse, massive bail-out programs, etc. etc.
Fear is a realistic part of our psyche and is healthy. Maybe some of the past problems have been created or at least exacerbated through the ignoring any potential down-side.
Always, I believe, we should only make decisions, including the potential to bad as well as to good – being realistic is key to success and changing our position and asset allocation to reflect what is realistic and potential. Investing is all about what will happen, while taking into consideration what has happened.
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