North African Revolutions, Mining, and the Great Eurozone Depression?

North African Revolutions

This is one of the more positive developments in the world over the past decade.  Tunisia (before the revolution), Egypt, Algeria, and Yemen are all home to some of the most corrupt and authortarian regimes in the world.  People in these nations have been alienated by these governments for decades, and it’s all finally hit a breaking point.  The Tunisian government was essentially ousted and Mubarrak in Egypt has a very tenuous grip on power (at best) right now.

The markets are punishing Egypt and the Mid-East/North African area for this, but I think it’s a potentially very positive development.  The people were prevented from realizing their ambitions and this stymied economic growth and innovation.  It created widespread poverty, while the government essentially “stole” the peoples’ wealth.

There is certainly a frightening aspect to this.  Revolutions result from widespread discontent with the regime in power, but the resulting power vacuums don’t always create entities that are much better.  Iran replaced a brutal regime in 1979 with another heavy-handed regime that has stymied progress.  France replaced a wasteful, corrupt regime in the French Revolution with a militaristic one.  Russia replaced a brutal, authoritarian regime, with a weak, ineffectual regime, followed by another brutal, authoritrarian (but more economically egalitarian) regime in 1917.

It remains to be seen what will result from all this.  Let’s hope it’s open government, open markets, and a society that allows its people to realize their ambitions.


The Great Eurozone Depression?

My continued position over the past 8 months or so has been that the US economy will slowly improve, China is at risk for a giant crash, and the Eurozone is actually the most frightening and dysfunctional part of the world economically.  My view has not changed on this at all.  And in fact, I believe time is proving my views on the Eurozone correct.

Since the Greek crisis, we’ve seen Ireland slink back into near-default.  Now, Portugal is in danger and the spreads are rising on Spanish bonds.   Meanwhile, we’re seeing austerity hailed as some great solution to the problem.  Yet, austerity during such a situation actually exacerbates the crisis.  The problem is price convergence and so long as price convergence is not allowed to occur, then the PIIGS will continue to bleed, while the Germans, Austrians, Dutch, and Finns get fat.   This is not to blame the latter group; rather, it’s to suggest that the currency distortions created by the Euro are the actual cause of the Eurozone crisis; not sovereign debt (save perhaps in Greece, where it was definitely a contributing factor).

Until the distortions inherent in the Euro are fixed, Euro will continue to suffer.  The UK is now in stagflation mode with negative GDP growth and positive inflation.  Spain and Portugal will probably see growth weaken, as well, which will further exacerbate their debt problems (not solve them!).  Ireland and Greece are living on EU life support.  This could very well turn into a sort of “Great Depression of Europe” if it’s allowed to continue.

Angela Merkel can continue blaming Ireland and Spain and Portugal, but the problems are more of her doing than anyone’s.  I’d keep away from Europe until some clarity is reached in regards to the Euro; otherwise, this can go on for another decade.

The Potential Mining Bust?

I’d also be very worried about a mining bust, as well as a China bust.  Chinese equities are already priced for a recession, so it doesn’t necessarily make sense to bet against them in the aggregate, but a lot of US machinery companies (e.g. CAT) and miners could suffer greatly.  Silver, gold, palladium, platinum, copper, and many other commodities are all in boom phase again.  The floor could fall out in the next two years.

There are more signs of stress in China.  Inflation is still rising.  Real estate prices are accelerating again in Tier 2 cities.  Banks are having a liqiudity crunch right now.  Things could fall apart rather quickly at some point.

That said, I have ended my bets against gold.  Not because I’m bullish on gold; but rather, gold is an uncertainty hedge and I see the Eurozone crisis creating more near-term uncertainty.  Long-term, however, gold is still overvalued and should probably trade closer to $1000/oz.

I do think silver, copper, and platinum/palladium are much more vulnerable than gold.

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