Forego currency support to avert Armageddon default: Tyche

As the Euro zone reels under pressure, Martin Hennecke, Associate Director, Tyche Group believes that major Western countries are also expected to face a major sovereign debt crisis in the days ahead. Hennecke warns that the worst is yet to come.

Although there isn’t any solution within the present system, Hennecke feels the most feasible solution for the euro-zone is either a default on their debt or printing more money than before. “Basically, that would be another QE3 to QE10. So either defer or sacrifice the currency stability. I think the more likely outcome will be to sacrifice the currency stability in order to prevent this Armageddon default of the major countries.” In his view, gold will be still a much safer haven even if there is the latest volatility in the commodity.  Below is an edited transcript of his interview. Also watch the accompanying video. Q: We had the G8 Summit over the weekend and the leaders retread their support for Greece. President Obama and Hollande said that growth perhaps should take priority over austerity. Do you think all of these rumblings have something material in them; do you think Greek crisis could be averted or do the markets continue to be very worried about the Greek? A: As you just said, I think they are just rumblings. The leaders even have been watching football while the whole euro zone is imploding. It’s certainly not just Greece at all; Greece is just one little tiniest tip of the iceberg. You have seen Spain revising its Budget deficits for 2011 upwards to 8.9%. Now a major French mortgage company is apparently in trouble as well. France has got not just only a big exposure to Greece, but to Italy and Spain and even Germany. Even if they wanted to, they wouldn’t possibly have enough money to bailout Spain and Italy; and don’t think for that for Greece it would be done. Italy has two trillion euros of debt as a percentage of GDP; that’s not too dissimilar from Greece. By the way, the United States if you are looking at the unfunded liabilities, social securities, medicare and the whole so called fiscal gap that the US is sitting on, which is about USD 202 trillion, they are not too dissimilar to Greece either. So what is in front of us is the major sovereign debt crisis not just in Greece, Spain, Portugal island, Italy but the major Western countries are going to face that too. So we haven’t seen the worse yet in our view. Q: You mentioned about Spain and the budget deficit which was a revised for 2011. What is the consensus opinion on what would be the most feasible solution for the euro-zone which we could possibly see in the next couple of weeks? A: Basically, there isn’t any solution within the present system. There are only two ways out of that. Basically, that is either national bankruptcies of major countries in the euro-zone not just Greece but possibly Spain, Italy, France maybe even Germany and then the United States of course as well. They may either go for national bankruptcy, write off all the debt that they can never pay back from taxable income. It is not going to work to save money; it is too late now. It is already beyond control. Either there is default on their debt or they just print a lot more money than before. Basically, that would be another QE3 to QE10, in the euro-zone a lot of LTRO tender. So either defer or sacrifice the currency stability. I think the more likely outcome will be to sacrifice the currency stability in order to prevent this Armageddon default of the major countries. This means, as an investor, you won’t want to hold any euro or euro bonds, you wouldn’t want to hold any US dollar or US dollar bonds ideally or not much. Probably, gold will be still a much safer haven even if there is the latest volatility. But what we have seen over the last week is again that safe haven investors seem to be interested in gold although initially gold sold off. But we think gold, over the next couple of years, will be a safe haven or one of the safe havens from this crisis. Relatively speaking, we think Asia is in a better position economically than the rest of the countries. Q: What is your view on crude; our country clearly suffers a lot from crude. We have seen a clear 12-13% decline in May alone in Brent crude. Do you think the growth concerns will weigh on crude prices or this is just a risk-off led correction; once risk-on returns led by liquidity, crude may go up again? A: Crude is quite a difficult call to make for us because there are many different theories. It's very difficult to know how exactly the demand supply picture looks like. Of course, Asia seems to be still relatively stable. So there is demand from there, inflation is on the upside; probably a lot more inflation soon coming from the western countries. As I mentioned, lowering inflation would be a way out or excessive money printing could drive up prices. On the other hand, on the supply side, it’s not really clear how much crude is left. Could some countries increase production? There is a possibility for Indian investors or all people who are concerned on the effects on India of a potential rise or bounce back in the oil price. We would want to suggest to hold some Russian energy stocks or some global energy stocks to hedge against that risk although not too aggressively. But as I mentioned, Russian stocks, for example, are trading at very low valuations. If you are looking at price or earnings ratio of Russian oil and gas producers, dividend yields are also coming up so holding a bit of such companies as part of their diversified portfolio can hedge against that risk. Certainly, we won’t short oil but then we are much more aggressive on the precious metals going forward; on the industrial side, be it in the industry metals or the energy sector. Q: How exactly do you expect the euro to move going forward? What sort of levels would you work with on the dollar index? A: I have got no idea where the euro is going to head against the US dollar. From an investors’ point of view, we would just say to stay out of both. Again, if you are looking at major European countries and if you are looking at the balance sheet of the US, they are not too different from Greece. You actually had the former controller of the United States auditing the books of the US government. He mentioned this year that’s on the US, we are about two years away from where Greece was when it had its crisis. So I don’t know which currency is going to go down faster. So stay out of both rather relatively Asian countries would be more attractive than commodities. Q: What is your view on India considering the global set up that we are working with? A: For the long-term, you would rather be in India than mostly in the Western markets. Although it is not the cheapest markets, it does have some advantage in the emerging markets space. But, for example, it isn’t very export dependent and then it is mostly about the domestic economy - the India story. So we do have some smaller exposures in India mostly through convertible bonds. But as I mentioned, we have a larger position in some other emerging markets where we see still a bit better value; for example China where we also see a bit Renminbi appreciation potential than Russia where the valuation are quite cheap than a few others. Also Read: As rupee stoops to 55, experts discuss Nifty's movement now