«Bumpy Road to Sustainability.»
On February 25th 2009, Visual Finance reduced the «Global Credit Risk Outlook» from ‘Red’ to ‘Orange’ based on its expectation that the economy would stabilize and recover by the end of year. We had by that time identified a lot of very interesting buying opportunities across almost all market segments but government bonds.
Our forecast was excellent. In the six months from March to August 2009 we saw a tremendous recovery in market prices. Stocks and corporate bonds performed extraordinary well (see Performance Fact Sheet PDF). The credit spreads of risky assets have fallen significantly from record highs, but are still far above the long-term average. In the same time default rates (insolvencies) continued their rising path as predicted.
The relief rally in stocks was one of the strongest in financial market history. Visual Finance is proud of having made investors aware of this nearly ‘one in a lifetime opportunity’ – The dark month of February 2009 was full of opportunities.
Out concept of Bondholder Value® helped us to navigate you successfully through the biggest crisis since the Great Depression. We are very confident that our invention will serve us well for the future in the way how to handle credit risk situations wisely.
We now recommend investors to realize their profits and to engage in
only a few selected investment stories and not in broad market instruments.
After the capitalization of corporates has risen considerably during the
last months – and taking into consideration that the volatility
of corporate profits may stay high for the next couple of years –
the valuation of stocks is not cheap anymore. Some turnaround situations
may need more time to recover than most market participants expect. Visual
Finance increases its «Global Credit Risk Outlook» today from
‘Orange’ to the highest Risk Level ‘Red’ again.
Barclays US High Yield Corporate Bond Index versus
Barclays US Treasury Index
Bond Default Rate (Issuer weighted)
Central banks will have to raise interest rates in the foreseeable future to more normal levels, which will mark the starting point of ending the biggest ‘easy-money policy’ in History. But before that happens, we will most likely experience a jump up in inflation, which will eat into the real value of the bank accounts and government bond market prices. That difficult situation would hurt the most risk-averse investors and low-budget consumers (financial repression) in an unfavorable time of fragile economic recovery.
That could mark a very critical situation, possibly leading to a sell-off in bonds erupting to a broad ‘boycott’ of debt instruments, which represent the most important source of capital for governments. Sovereigns on their part are confronted with rising budget deficits and gigantic debt burdens. The lack of liquidity would be a big new challenge for governments – They will feel the pain of mountains of debts when interest rates start to rise from these unprecedented low levels. The rating agencies, which are currently under attack by legislatives and investors, who have lost a lot of Money with much too high-rated asset-backed-securities, could have problems coping with conflicts of interest when triple-A countries should lose their first class quality labels, what was in the past a ‘license’ to borrow enormous sums of money from bond investors.
A poisonous cocktail of that kind explained above, would undoubtedly
hit the real goods market and the financial markets at the same time.
The very high unemployment and poverty rates will dampen the consumers’
sentiment and lust for shopping. We expect many emerging markets going
through a similar process of readjustment like today’s industrialized
countries. The chance that the whole world will at one point enter a –
what Visual Finance calls – ‘secular cycle of global consolidation
and economic regeneration’ is fifty-fifty. Maybe we will then
get an opportunity for a more sustainable world in which, eventually,
quality is more and quantity less!
Photo by Dani Waeger, Winterthur
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