On A Collision Course With The Debt Supercycle

Reprinted from: The Globe And Mail
By, Larry MacDonald

Which is the best investment approach – dividend stocks, index funds, value plays or growth stories? Alas, this debate is looking like an exercise in rearranging the deck chairs. That’s because financial markets are on a collision course with the Debt Supercycle.

On A Collision Course With The Debt Supercycle

T he Debt Supercycle, a term coined by Montreal-based BCA Research, describes a persistent increase in national debt relative to gross domestic product (GDP). What this means in layperson terms is that many countries are increasingly living beyond their means, raising serious questions about the sustainability of current levels of prosperity….

…We are now in a reflationary period, when the economy is being pumped up by central bankers and other policy-makers. Substantial equity exposure may work during this time, but adhering to target allocations will be more important than ever. Indeed, instead of rebalancing to a fixed asset mix, a progressively more conservative mix might be considered as the reflation matures and moves closer to a possible tipping point.

What will also help is diversification. Equities should include a good weighting in emerging economies given the Debt Supercycle is not as advanced in those countries, advises BCA Research.

As for fixed-income securities, say others, a good percentage in short-term quality bonds is advised.

[...Read the full article at The Globe And Mail Online]


Euro Area: Watch What Policymakers Do, Not What They Say

Euro area policymakers may continue with austerity rhetoric, but their actions will differ.

Euro Area- Watch What Policymakers Do, Not What They Say

T he growth of the world’s major economies from 2010-12 can be almost perfectly explained by just one variable: the change in government deficits. Unless the private sector makes a remarkable recovery, the same story will apply in the next couple of years: government austerity will continue to drive the global growth rankings.

Austerity can paradoxically worsen a distressed nation’s solvency – for both the public and private sector. By reducing growth more than the deficit, austerity increases rather than reduces an economy’s debt problem. Therefore, it becomes self-defeating. Fortunately, euro area policymakers seem to finally understand this dynamic.

We expect that in 2013, policymakers may continue to talk tough on austerity and deficit reductions, but show leniency in their actions when it is in the interests of the aggregate euro area. Brussels has already eased the deficit targets for Spain and Greece. Now it might be France’s turn. The IMF has already paved the way, suggesting:

Whether (France’s 2013 deficit) is 3% or 3.5% matters less than whether the government can give credible assurances about the direction of policy.

Bottom Line: There are good odds that the push for austerity in Europe has peaked. Stay tuned.