There is no polite way to convey what Satyajit Das is saying about the world investors will face for several years, but it must be said: The unwinding of the global debt crisis will make some people extremely wealthy, but most of us will have to live with less -- in some cases, far less.
Das, a risk consultant in Sydney, Australia, has for many years been an expert on the use and abuse of credit derivatives. So while watching the world's governments, businesses and consumers binge on cheap, borrowed money -- and seeing central bankers and financial regulators doing little to stop it -- Das understood that this party would end badly.
Soft-spoken and matter-of-fact, Das told anyone who would listen that the global economy was on the precipice of a credit crash that would trigger a worldwide deleveraging and the mother of all bear markets for stocks.
That was in 2006. Five years and one global crisis later, those same governments, businesses and consumers are hamstrung.
"People wasted trillions of dollars, which now has come home to roost," Das said in a recent telephone interview.
Put simply, at this wee hour of the global economy's morning, partygoers are too hung over to have a coherent conversation about cleaning up the mess, let alone pour more drinks to get the festivities started again.
The problem child in this debt crisis and credit crunch is Europe, said Das, the author of "Extreme Money: The Masters of the Universe and the Cult of Risk."
European leaders dallied and so delayed the day of reckoning, Das said. "The real problems were never dealt with. If you never really deal with the problems, then obviously they come back to haunt you."
Now, Europe's meisters and ministers are trying to orchestrate an orderly default for Greece, one that also recapitalizes weak European banks exposed to troubled Greek debt and props them up enough to deal with an anemic global economy that will affect even China.
"In Europe the steps are extremely straightforward, if they want to do them," Das said. "Greece, Ireland and Portugal have to restructure their debts. That will lead to losses of between 35% and 75%" on bond principal, he added.
"When that happens you trigger massive losses in the banking system," he continued. "And if Greece and Ireland and Portugal go, then companies within these countries whose debt we don't talk about will also be problematic. Economies will go into deep recessions. The losses will be substantial."
The amount of money needed to shore up this crumbling wall will be enormous and may even require the recapitalization of the European Central Bank itself through money printing or funding from other central banks, Das said.
His reality check for Europe (and the big U.S. money-center banks also exposed to eurozone woes): "Let the countries fail, recapitalize the banks, put German and French balance sheets at risk and gain competitiveness. Then at least you've got a chance."
In an overly indebted world, this is what passes for "orderly" default. In a disorderly event, Das said, "self-interest dominates."
Financial markets at the moment are priced for such an orderly default, he noted, though more on the order of a 20% haircut than 50% or worse. Said Das, "They're assuming the people in charge will manage to muddle their way through."
Das said he's not convinced. "The vested interests and divisive positions that everybody has make it far more difficult to engineer that orderly crash landing," he said.
Yet at some point this financial crisis too will subside and allow a healing process to evolve, Das said. But it will require patience and cooperation from political and business leaders and ordinary people in Europe, the United States, Asia and elsewhere, who neither welcome compromise nor are happy about a new reality that looks nothing like the old.
"Economic growth is not going to go back to high levels," Das said. "I don't know why this surprises anybody. The growth was debt-fueled. If you can't have debt, which is what deleveraging means, you are going to see a massive decline in growth."
Oh yes they can and we already did. They'll do the same thing the US did and call it QE EU I or TARP EU Two. Any sovereign bank can print money to but its own debt. This new money makes existing old money go down in real value and drive up the prices of everything but usually scare commodities the most (gold, oil, silver, etc.). That's exactly what the US TARP, QE1 and QE2 did. Only keep enough cash for next 12-18 months living expenses.
Everything sounds right on except keeping a lot of cash on hand. I would say if you're taking advantage of dividend paying stocks including energy (oil) you would only have minimal cash on hand; no more than needed for a year ot two so that you can trade without being forced to sell.
