The litmus test for the global economy

JUUGS Apr12.pngSome things are too ‘obvious’ for highly-paid professionals in the financial world to accept. If life was this simple, then clients might ask why their fees were so high. Therefore they maintain a fiction that what is obvious is not the full story.

Interest rates are a classic example of a simple issue which is over-complicated by the professionals. They really depend on just one factor:

• Do I trust you to repay the money?

If the answer is ‘no’, then I won’t lend the money. This is what happened to Greece, and now threatens the other PIIGS (Portugal, Ireland, Italy, Greece, Spain). As the chart shows, their interest rates have risen sharply since May 2010, when the blog began warning of the crisis ahead.

Spain’s new prime minister summed up the issue this week, when he warned:

“Spain is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t understand that is fooling themselves.”

Spain is the 12th largest economy in the world. Its $1.4tn GDP is larger than S Korea’s ($1tn), and similar to India’s ($1.6tn). If it is in “extreme difficulty”, then any investor is going to become even more concerned about return of capital, rather than return on capital.

Investing with the JUUGS (Japan, UK, USA, Germany, Switzerland) thus becomes an even simpler decision. As the chart also shows, their interest rates continue to fall, as more and more savers seek safety.

It really is that simple.