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In a new report entitled Gold: Adjusting For Zero, Deutsche Bank analysts Daniel Brebner and Xiao Fu paint an incredibly dark picture of the bind the global economy is in right now.Brebner and Xiao are pretty frank about how levered up the financial system is at the moment, and they warn that the next shock will be totally involuntary and unexpected.
Here is what the analysts have to say about how upside down the world is right now and the risks looming on the horizon:
We believe the balance of 2012 could remain challenging for investors, given the many negative indicators and warning signs. Certainly extremes in leverage in the Western economies and questions regarding growth in China present investors with a worrying post-2012 future. However, in our view there are nearly zero real choices available to global policy makers. The world needs growth and it is willing to go to extraordinary lengths to get it. This is creating distortions where old rules don’t seem to apply and where investors face a disturbing paradox:
- Those who are right are likely to be wrong
- Those who lose, often win
- Those who are imprudent can be rewarded
- Dumb money can win
In the first instance, we believe investors are right to worry; the imbalances in the global economy are extreme and need to be urgently addressed, proactively. This is unlikely however, making a necessary future adjustment likely to be involuntary and therefore unexpected. Those who are right are likely to be wrong for a considerable period of time.
In the second instance, as has been witnessed over the past several years; those who risk and lose, often don’t in fact lose. Loss-makers are compensated by a system that is unable to tolerate the consequences of failure. Moral hazard continues to be encouraged.
In the third and fourth instance we point out that those that have borrowed too much, those who have been negligent in managing their own personal finances are not likely to suffer the bitter consequences of such folly. The financial system in fact remains oriented to encourage further leverage and risk-taking. It is better to be a debtor than a creditor.
It seems that the ‘smart’ money needs to adjust for the irrational or emotional characteristics (and therefore poor predictability) of the current economic environment. This makes investment simpler in the sense that one only needs look to what is ‘easiest’ rather than what is ‘right’.
Those are pretty pointed words, and they don’t inspire much confidence – but the message is crystal clear.
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