Gollop's Gloom

Stephen Gollop, from Bridgewater in Hong Kong, was on Asian Squawk Box spreading his usual good cheer of gloom, doom and financial apocalypse. Mr. Gollop gets some of what I think are his smaller calls correct. He has been recommending Asian equities for a while. But he has been wrong, or early, on what I believe are his bigger calls. He has been calling for astronomically high gold prices and severe sell-offs in US markets.

Today he talked about his belief that government debt from the US, UK, Germany and France will be worthless in 30-35 years. He also cited a report from S+P that says Germany debt could lose its AAA rating in as soon as 14 months.

He usually has some hard data with and this time was no exception. Throughout the 1970's, for every dollar of increase in productive GDP in the United States, there was a $4.25 increase in debt. From 2001-2004, each dollar in GDP growth took a $63.51 increase in debt. I can’t vouch for these numbers but I will assume they are accurate.

I buy into the idea (and have written about it a lot) that this century will not belong to the US but probably China or India. That our debt, along with the debt of the other countries, could go from AAA, super AAA really, to worthless in 35 years seems like a stretch to me, a big stretch.

Whether any of the above scenario could play out does not really matter for purposes of this post. What does matter is that should it happen to any degree, there would be large dislocations and movement of capital. This is what’s important. Capital moving en-masse from one area of the market to another is something that I think we have seen in the past and will see in the future. For example, although much smaller in scale, after the large cap growth bubble burst we have seen smaller and more value oriented stocks outperform for years.

If very bad things happen in the US it might be reasonable to expect capital to flow just about every where else meaning that anything denominated in other currencies would do well. This will repeat, hopefully on smaller scales, over and over. Forward looking analysis means thinking about what will go up if the thing you own goes down.