I am no expert but I tend to pay attention to the behaviour of experts and those who are supposed to be experts. And I get worried when politicians start painting alarmist pictures because that indicates that they have no idea what to do.
The number of voices warning about another financial crash are increasing and getting louder. That there are always some financial pundits warning about a coming crash is nothing out of the ordinary. But the number of pundits making such projections (here and here for example) is getting worrying. The US debt is still much too large and is not really being addressed except by printing money. Japan has entered recession. Leftist governments in Europe are getting tired of austerity and good housekeeping (France, Sweden for example) and are preparing to increase public expenditure and to raise taxes. Markets seem overvalued and unless Asian countries – mainly India and China – start consuming and manufacturing again, it is difficult to see a real motor to drive the global economy. Low oil prices will help but the signs of an upswing are not visible yet. No bank is so big that it cannot fail.
It is worth noting that some big investors are also circling the wagons and building up their defenses – and not least among them is Warren Buffet. But what is even more ominous is that the political leaders of the G20 nations are beginning to make noises as if a financial crash is a real risk and outside of their control. David Cameron’s warnings yesterday about a possible financial crash were made immediately following the G20 meeting in Australia. They sound like political positioning when faced with an intractable problem. As if the G20 leaders find themselves powerless and unable to come up with any joint actions to avoid a future financial crash.
David Cameron has issued a stark message that “red warning lights are flashing on the dashboard of the global economy” in the same way as when the financial crash brought the world to its knees six years ago.
Writing in the Guardian at the close of the G20 summit in Brisbane, Cameron says there is now “a dangerous backdrop of instability and uncertainty” that presents a real risk to the UK recovery, adding that the eurozone slowdown is already having an impact on British exports and manufacturing.
His warning comes days after the Bank of England governor, Mark Carney, claimed a spectre of stagnation was haunting Europe. The International Monetary Fund managing director, Christine Lagarde, expressed fears in Brisbane that a diet of high debt, low growth and unemployment may yet become “the new normal in Europe”.
The message is that the G20 countries are just living in hope and have no concrete plans to avoid a crash. I would have thought that the bottom line is – and always will be – of living within one’s means. And that can only ultimately mean reducing public spending and reducing tax burdens. In any event it is imprudent to be relying on the politicians to avoid a crash. And that means that each individual is on his own and would be well advised to build up whatever defenses he can.
Whether a crash comes or not, and the main threat is, I think, over the next 12- 18 months, it is worth being a little circumspect over the next few months. My list of gradual actions for myself for the next 9-12 months are:
- Pay off as much debt as possible
- Call in my loans
- Protect capital by reducing overall risk exposure
- Get out of equities which may be in a bubble (say P/E >30 or where values have risen >50% in 1 year)
- Hold onto my blue chips (but check how blue they really are)
- Increase my own liquidity towards 25% of assets and in more than one “hard” currency
- Have more than one bank
- Shift away from the banks which perform poorly in stress tests
- Shift away from corporate bonds to government bonds (higher credit rating countries wherever possible)
- Buy some gold or silver (gold or silver coins not jewelry)
- Defer capital expenditure for the next 12 months wherever possible (car replacement, new kitchen, house extension…)
The k2p blog 