No Solution in Sight

Posted On Friday, May 28, 2010


LIBOR rates starting to soar, Stocks getting battered, Corporate Debt issues drying up - does this feel like dejavu, reminiscent of the build-up to the 2008 crisis?

Well, that seems to be quite a prevalent feeling these days amongst investors at large, with many questioning the probability of a following meltdown. Investors are concerned about the system, anxious to know if the sovereign-debt crisis will morph into a bigger systemic disaster.

Each one has their own reasoning of the current financial turmoil - fears of the spreading of the debt problem, expected financial regulatory reforms, liquidity crisis, bad economic data, etc.


Many cite stricter financial control by policymakers as the reason for the recent carnage in financial markets causing the unwinding of positions. Especially since, the Germans have already banned short selling and given that President Obama is likely to pass the new financial regulation bill which will tighten the reins on banks.


However, the most common reason for the current fallout has been signs of Greece’s debt contagion. In the Euro-zone again, Spain’s ailing banks signal a widening European debt crisis. Post the International Monetary Fund urging to overhaul its financial institutions, four Spanish banks are planning to combine as regulators to push lenders to merge with stronger partners. Strains evident in Spain’s banking system are signals that the Greek debt crisis may spread and significantly impact global economic growth.


Credit concerns are taking over as the driving force behind the cost-of-money in the interbank market. Doubts about government solvency have unravelled the guarantee that stabilized credit concerns and LIBOR over the past year. LIBOR has more than doubled this year as the European debt crisis fueled speculation that the quality of banks’ assets used as collateral will be impaired. Three-month LIBOR is a benchmark for about $360 trillion of financial products worldwide, ranging from mortgages to student loans. The rates paid by banks for three-month loans (in dollars) increased to 0.536%, the highest since July 7.

The issue here is that the solvency crisis is misread as a liquidity crisis. No, this is not a liquidity crisis; it’s a structural problem at hand.


All in all, signs of risk aversion are back and now it`s all about principal protection. This is almost in complete opposition to the facts that drove the market higher since last March. Just as parts of the rally, so called "Green shoots", were dubious at best, parts of current fear seem premature and even dangerous in the sense that they could trigger actions that would threaten global markets.


No Solution in sight


With the need to act fast, smart fiscal planning seems to be forgotten. The recent austerity measures aim to undo the rich pensions and early retirements. It is highly doubtful whether these measures would work. One important note here is that these governments were running deficits even in the boom years and now that the revenues have fallen significantly, can they earn surpluses? It’s a structural problem and these cuts can minimize the pain to some extent or prolong the issue but, unfortunately, can’t solve it. What is needed is for the economy to be put on a growth path built on its own fundamentals and not on temporary stimulus programs.


As Europe is being hit with new realities and forced austerity measures it`s sure to slow the global economy. This has been a dilemma for a long time, especially in America. While the U.K. and Europe are ready to make major overhauls in welfare programs, the United States is passing one spending program after another, and people are shopping with money they only saved a few months ago.


The recovery that many were talking about in the U.S is clearly on life support i.e. on back of stimulus programs. Earlier we saw higher car sales thanks to the ‘cash for clunkers’ programs of the U.S government. It is by now clearly evident that it was a temporary push. Now there are tax credits for home buyers, which are supporting housing prices; which will also end soon. While more welfare spending and easier credit can temporarily help to shore up economic activity, they could in the medium term make the problems that caused the current crisis worse. The recovery is completely artificial which is evident from the current unemployment level. Initial jobless claims have gone through the roof, and mass layoffs are still happening. How can these many people still be seeking jobless benefits, this deep into the recovery?


It is only a matter of time before we find even the U.S witnessing such debt crisis. It also has similar issues that Greece or other European economies face today - rising deficits, ballooning debts, large unfunded liabilities.

How are they going to pay them?

I heard you say, "They will print their way out".

Yes, that seems to be the obvious response. It looks like they will continue debasing the dollar. Even on individual level, savings built up in 2009 are already being wound down to support frivolous spending habits.

It seems the attitude remains:
"why work hard? The ever inviting palm of the government is there to offer food stamps and
stimulus checks."


It is probable that the debt crisis will continue to spread to other developed countries. Also, eventually it will turn inflationary as central banks continue to pump money and monetize their debt. Gold seems to be the only logical place to be, as government solvency is increasingly questioned. Going forward, you’ll definitely see some more central banks and other investors converting money to gold. A good allocation would be - 15% to gold as a hedge against globally lingering uncertainty, financial crisis and inflationary prospects. Grab your gold before the gold rush accelerates.



Disclaimer:

The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.

Investment Objective: Quantum Gold Fund’s (QGF) investment objective is to generate returns that are in line with the performance of gold and gold related instruments, subject to tracking errors. However, investment in gold related instruments will be made if and when SEBI permits mutual funds to invest in gold related instruments. The Scheme is designed to provide returns that before expenses, closely correspond to the returns provided by gold. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities including derivatives, and the scheme may invest in Money Market Instruments, short term corporate debt securities,CBLO and units of Debt and Liquid Schemes of Mutual Funds to meet liquidity needs. Terms of Issue: QGF is an open-ended Gold Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed.   Entry Load: N.A. Exit Load: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF.  It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has been cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956..The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to market risks. Please read the Scheme Information Document(s) / Key Information Memorandum(s) / Statement of Additional Information / Addendums carefully before investing. Scheme Information Document(s) /Key Information Memorandum(s)/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com / www.QuantumMF.com

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