GAIM Monaco 2012: Outlook pretty dreadful, according to GLG's Jamil Baz and historian Niall Ferguson
“The crisis has not even started,” warned Jamil Baz, chief investment strategiest at GLG Partners, in what must rank as one of the most depressing panel sessions ever held.
“This crisis is going to occur over a long time and it has not even reached its full velocity, which I anticipate will occur within the next 15 or 20 years,” he told delegates at GAIM Monaco 2012.
Baz highlighted the debt to GDP ratio in the majority of G7 countries had actually increased since 2007 from 380% to 420% in 2012 despite substantial efforts to deleverage. “A total debt to GDP ratio in excess of 200% is unsustainable and governments theoretically must reduce this by around 220 percentage points. That works out at deleveraging of around 10 percentage points per year over a period of 20 years,” he said.
Such deleveraging would not be without its problems. Baz stressed annual ten percentage point reductions would facilitate disorder in those affected countries. “I would consider ourselves very lucky if we had Japan all over again.”
Central bank intervention too had failed to stabilise markets, he said, and it is only a matter of time before markets reached this conclusion too. “We have had QE1 and QE2 and the market’s response to QE2 was markedly less efficient than to QE1. It does not take a financial Einstein to figure out what the central banks are doing will not work.”
A GLG paper, co-written by Baz earlier in the year, argued that while quantitative easing could conjure currency out of nowhere to purchase debts, it added the problem was a lack of collateral and not cash. He wrote only a strong economy and not central bankers could create capital.
Risky assets should also be avoided “because the equity risk premium is far lower than consensus would have you believe. I believe the equity risk premium is less than 3% and around 2.5%.”
As if the audience was not miserable enough already by Baz’s speech, Niall Ferguson, Lawrence A Tisch professor of history at Harvard University, said the developed world had reached a stationary state, a little known concept coined by Adam Smith to describe 18th century China. “China at this stage had ceased to grow. Western economies and Japan have reached this stage today.”
However, Ferguson did provide some light relief adding China would certainly grow and overtake the US within four years.
It was not long before the panel took another downer when Ferguson outlined some of his predictions going forward. “There will be a major war. The idea of a perpetual peace can be discounted. This war will happen in the Middle East and I am fairly certain there will be civil war in sub-Saharan Africa,” he said.
And just when the audience thought it could not get any gloomier, Ferguson dropped another bombshell. “We live in a globalised world and the majority of people, particularly in APAC now live near water. We also suffer regularly from big natural disasters, which given the proximity of all of these people to water, will kill many of them.”
Whether or not GAIM delegates will bother waking up tomorrow morning remains to be seen.