Saturday, May 29, 2010

50% dropin commodities in next 12 months?

better than a month ago??
Europe debt fears lessen
Broadcast: 30/05/2010
ALAN KOHLER, PRESENTER: If it wasn’t so serious the tussle between bulls and bears might be entertaining.

This week was another great contest with fortunes swinging wildly. To get a sense of where the European debt crisis may be heading I turned to man who saw it coming, co-founder of the Magellan Financial Group, Hamish Douglass.

Well Hamish, when you were on the program in December you said that there'd be no free lunch for all the policies, the stimulus, that was introduced to save the world from the GFC (Global Financial Crisis) in 2008 and you predicted that there'd be a price to pay in eighteen months to two years. So is it just happening earlier than you thought or is there still another one to come?

HAMISH DOUGLASS, CEO, MAGELLAN FINANCIAL GROUP: Well, in Europe it's certainly happening probably a bit earlier than we thought, with the sovereign debt crisis in Europe, and I think that's really highlighted the fiscal positions the Governments got themselves into. So it just wasn't consumer indebtedness; it's now Government indebtedness around the world. So Europe has brought that to the forefront.

Not that we're concerned that Europe's about to collapse, a systemic collapse. We may have been four weeks ago as this was playing itself out, but they're now having to respond to that risk. America is probably going to go through still a recovery and we're still probably about twelve months away from some of the issues we were talking about in America.

So it's arrived earlier in Europe. I think we're probably still twelve months away from that scenario in America. I think we're going to have quite ...

ALAN KOHLER: But what's the risk of contagion from Europe to America and Japan? I mean, when you were here in December you were talking about Europe, America and Japan and the debt problems in those places.

HAMISH DOUGLASS: Well, ultimately the risk of contagion is very high when you have an event like this that's going on in Europe at the moment. And a lot of people were commentating, you know, Greece is a very small country, what this is all about. And I sort of say, what short memories people have. You know, Lehmann Brothers was a relatively small investment bank that nearly brought down the entire world's financial system. And should Greece been allowed to have gone bankrupt last Wednesday, without a rescue package, I think we were in a very, very similar situation to what we were with Lehmann Brothers and of course that spread globally. So the contagion risk is very high.

ALAN KOHLER: But now everyone's attention is turning to Spain and possibly Portugal and even the UK. I mean, OK, Greece is looked after. What about the rest?

HAMISH DOUGLASS: That's why they needed a very large response program and they've announced a 750 billion euro program to effectively provide liquidity to those other nations. The problem we have is it's not actually in place at the moment. It's just a proposal. It's been approved by the German parliament last Friday, very importantly, but ultimately this has to be put in place.

It's our estimate that about a trillion euros is about large enough to meet the funding requirements of the most-at-risk sovereign nations in Europe over the next three years. So we think they've got that package size about right. That's why we're sort of more optimistic than we were three weeks ago. But it's not in place at the moment and let's see the detail and there may well, I think, we're going to have jittery markets over the next month or so as we actually see the details of this sort of package get put in place. If it's not put in place then I think we really have to hold onto our chairs.

ALAN KOHLER: Well in fact the markets are very volatile. They soared at the end of this week. So how do you see ... is the volatility a sign of vulnerability?

HAMISH DOUGLASS: I think it's a sign of a few things. I think four weeks ago, most people didn't even really see this as a risk and suddenly when you announce programs of this scale and you have the Federal Reserve stepping in and you have Germany banning short selling again, suddenly people are going, 'oh my goodness there must be something really wrong here'. And I think that has really spooked people and now people are starting to focus on the policy actions and they're actually starting to look at the data of some of these countries and it's not a pretty picture.

ALAN KOHLER: So to clarify, where do you stand? I mean, are you saying that the risk has passed or are we still hostage to events?

HAMISH DOUGLASS: Four weeks ago we started cashing in on our portfolios and taking action to really protect ourselves because we saw this moving in a very ugly direction in Europe and we were very concerned about the contagion risk you spoke about and we could have had a full-blown banking crisis on our hands, not just a sovereign debt crisis, but a banking crisis in Europe that could have rapidly spread around the world.

Today we are more relaxed on that issue because we think that the German, the French government and the US government has got the totality of this problem and they've announced a package and the ECB (European Central Bank) and the Federal Reserve has come in with sufficient force that we think if it gets put in place, which we think it will, will actually put a firewall around the issue. That doesn't mean Europe's a wonderfully happy place to be. I think they've got some very tough issues over the next three to five years. But the risk of the whole banking system collapsing in Europe, which was our primary concern, I think that risk is dissipating and we were on red alert four weeks ago on that issue.

ALAN KOHLER: Commodity prices fell 15 per cent in May, not only because of Europe, but also because of the sense that there was going to be a slowdown in China. So what's your view about the outlook for commodities?

HAMISH DOUGLASS: Well, my view on the outlook for commodities when you add China which I think unless the authorities in China are going to keep going on with the policy of expanding credit and investing ahead of the curve in fixed assets, I think it's inevitable in the next 18 months you're going to have a slowdown. Plus Europe is, they've got austerity measures, it's going to further slow the European economy.

It's very hard to gauge, but I wouldn't be surprised that in the next 12 or so months to actually see commodity prices fall very dramatically. And I would say maybe a 50 per cent fall in commodity prices wouldn't be unrealistic in that scenario, which I think is pretty likely, not assured, but I think it's pretty likely. Look, out two or three years I'm not nervous about commodities. I just think we're in a confluence of events of China having to invoke policies to stop a big problem occurring and Europe slowing down.

ALAN KOHLER: Thanks for joining us, Hamish.


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