Finding opportunity in the Icelandic and Greek financial crises

Taken together, the Icelandic and Greek financial crises can be seen as the second stage of the larger global banking crisis. The first stage of the global banking crisis, which began in late 2007, was centered in the European and U.S. mortgage and mortgage derivative market. The second stage began with Iceland’s monetary and fiscal crisis in 2009 and continues with the current Greek crisis, and is centered in European sovereign debt.

The global crisis banking crisis is a multi-phase global economic crisis caused by years of over-borrowing followed by the current deleveraging. This deleveraging was, of course, set in place by all those who gambled with their own and other people’s money.

As time passes, more and more of these gamblers will be unmasked and there will be more countries, companies, industries, and individuals who will lose face and capital in coming months and years. We anticipate that these problems will continue as various sectors delever over the next six to eight years.

Many believe that the other European nations will act to bail out Greece, and then perhaps Spain or other over-levered nations in Europe who experience debt problems. We disagree. In our opinion, the International Monetary Fund (IMF) is the lender who will bail out the damaged European nations. In our opinion, it is too hard for European nations to go to their taxpayers and tell them that they are directly or indirectly guaranteeing the debt of a foreign country.

As is their custom, the IMF will extract a high price in terms of the deep cuts in expenditures and increases in taxes demanded of the borrower. In our opinion, the period of easy borrowing is over for the Greeks, and probably for several other European nations whose debt will come under attack in coming months and years.

The current chaos is creating substantial demand for gold and other precious metals. Holders of Euros are seeking to acquire more gold, and holders of other currencies such as the Japanese Yen and U.S. dollar are undoubtedly thinking of following suit. Buying gold to hedge against the probability that the Yen and U.S. Dollar will be under attack in the not too distant future is not unwise.

THE FUTURE OF THE DE-LEVERAGING CRISIS

The coming phases of the deleveraging crisis will simply be different flavors of one major phenomenon with one major cause. We are saying this because we do not believe that most investors realize how long and pervasive this deleveraging crisis will be. If this were a baseball game, we would only be in the 2nd inning (for non baseball fans among you, that means we are only 20-25 percent through the crisis).

Furthermore, crises are still brewing with respect to the solvency of U.S. states, and the legal subdivisions within the countries in the European Union. These crises have yet to become globally recognized. In order to bail out the states and other governmental entities below the national level, a huge quantitative easing (money printing) process will eventually be instituted in many countries. The effect will be to keep the developed nations economies (and their currencies) under pressure for years.

Governments are not alone. Many industries, such as banking, financial services, and insurance remain under pressure to decrease their leverage and raise capital.

Guild Investment Management, Inc., a registered investment advisor. All material presented herein is believed to be reliable. Investment recommendations and opinions expressed in these reports may change without prior notice.

You can also read their past periodic market and economic commentary articles by going to the Commentary Archive at www.guildinvestment.com.