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Debt drama: could the Armageddon guy be right?

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by Peter Switzer

It was another bad day on Wall Street with debt woes and worries worldwide outweighing another positive company report from a big-name corporate heavyweight in IBM.

Right now we’re in a battle between the negative forces of European debt concerns along with the ridiculous political posturing by the US Congress over the federal deficit and the related debt ceiling for the US government. And the bad guys are winning!

And with debt taking centrestage and the likes of the US economy having difficulty attaining growth, it raises the question — was the much-maligned Associate Professor of Economics at the University of Western Sydney right?

Steve Keen, who was an old colleague of mine when we both taught at the University of New South Wales, was right before the GFC in predicting a financial fallout from the rising debt levels. And he is right to claim that the current debt levels would remain a challenge to economies for a long time, but is he right that we will see another Armageddon scenario? Is he right that Australian property prices will collapse? To both I say no but we’re in troubled waters right now and the next few weeks will be critical.

Main games

The main games get down to the following:

Will the Europeans — governments and banks — see their way through this current rough patch?
Will the Yanks reach agreement in the Congress and see Wall Street rebound?
Will the company reports on profits show that the US corporate sector is healthier than the bears are predicting?
And finally will the US economy start showing that it’s growing again and will avoid a double dip recession?

Three out of four

Clearly the negatives are ascending and that’s why share prices are descending.

For me, three of the four question marks will get resolved to the positive — that’s my gut feeling.

Over the weekend, US industrial production was up for the first time in three months and that makes me think the ‘Japanese effect’ on production supplies is waning. I expect to see better US economic data between here and Christmas.

Over the next few weeks, I bet US profits will be better than expected, and even overnight IBM followed the script. And unless madness prevails in Washington, the debt ceiling will be raised and a workable resolution will emerge.

Europe concerns

So that’s three out of four I would put my money on, but the European debt disaster troubles me because the EU officials play out this drama like a B-grade foreign film. Even the lead actor — the ex-IMF boss, Dominique Strauss Kahn — gets himself into a sex scandal right in the middle of one of the biggest jobs of his entire life!

The fact that they are conducting bank stress tests in Europe is a plus for responsible management but any bad news will be digested unsympathetically by stock markets and that’s what we’re seeing now. Plus, you have to throw in the impact of uncertainty that always feeds off situations like these.

Once again, I suspect we will get through this Euro-debt horror story but it will remain a black cloud over growth and share price improvement.

So will Steve be right again? On my count, it’s three positives versus one possible negative and that’s why I think the Armageddon Guy’s scenario is too worst case scenario for me.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, July 19, 2011

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