This is a guest contribution from ZeroHedge.com.
By James Melcher of Balestra Capital:
April was a month of diverging markets in Europe, China and the United States. European policymakers have been under pressure to resolve the deteriorating sovereign debt problems, exemplified by Greece, which spun out of control in recent weeks. The May 9th announcement of a rescue of Greece by the EU, IMF, and ECB has been taken by investors as a resolution of Europe’s problems – probably another triumph of hope over experience. China is addressing its inflation by tightening bank reserve requirement and lending standards, thus slowing growth. Its trade balance turned negative in March and was marginally positive in April. While facing the problems in its major export markets, China also risks deflating its speculative bubble in real estate, commodities, and equities.
The United States, while continuing to show strains from weakened consumer spending and a relatively slow employment recovery, looks more resilient. We question the strength and durability of the U.S. recovery, and are monitoring it closely. But the most important question is whether the global economy can return to growth levels that will enable fiscally challenged countries to service their debts while restraining spending. It appears that every country plans to solve its problems by increasing exports and decreasing imports; something that is obviously not possible.
We view gold as potentially the best currency; an ongoing portfolio theme based on the probability that central bankers in the U.S., Europe and Japan will continue their efforts to stimulate their economies with excessive monetary easing (printing money), while ignoring for the time being the dangerous fiscal ramifications. While deflation is the current problem, these policies increase the risk of a sudden turn to inflation. Without the return of significant global growth it is possible that we get the worst outcome in the form of stagflation.
For example, oil and other commodity producers may start to demand higher prices in debasing currencies even though unemployment remains high and wages are stagnant or falling. Our analysis of commodities markets indicates that this effect has already begun. In any event the ongoing debasement of paper currency in the major economies will continue to create distortions in financial markets and asset prices.
These factors have already created a topsy-turvy world in which the rich developed countries of the post-war era have become the slow or no growth, problem-ridden debtors, while the smaller developing economies are the ones creating growth and wealth.
