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Sebastian Lyon: Europe crisis a rehearsal for the main US event

Sebastian Lyon, the manager of the Personal Assets investment trust, has warned the US may also be headed for a fiscal crisis.

 
Sebastian Lyon: Europe crisis a rehearsal for the main US event

Fears about the eurozone have weighed heavily on markets since 2010, but Sebastian Lyon, manager of the Personal Assets investment trust, fears the crisis engulfing the Continent may only be a curtain raiser for a more severe US disaster.

Over the months ahead, Lyon expects his job of preserving investors' capital will become tougher as politicians make the difficult choice between severe austerity which is likely to trigger deeper slowdowns and reduce the taxes collected by governments or increased borrowing in the hope that it will buy stalling nations some much-needed growth.

Regardless of the choice they make, Citywire AAA-rated Lyon said the 'maths do not stack up', pointing out both approaches could lead to higher sovereign debt costs which hamper governments even more.

But this is far from Lyon's biggest concern as political leaders are still able to rely on central banks to keep countries afloat and inflation in check.

Instead, he is keeping a close eye on the situation in America, where the recovery is looking increasingly fragile following weak labour figures in May and yesterday's raft of poor economic data.

Lyon said: 'Our greatest concern is that the European challenges that have dogged markets since early 2010 are merely the dress rehearsal for the main event a US fiscal crisis. While the UK and Europe have at least tried to tame their budget deficits, the United States has pushed ever harder on the fiscal accelerator.

He added: 'Stock markets swooned last August when they got a shock preview of what might happen should the brakes be applied.'

Lyon, who over three years to the end of April increased Personal Asset's net asset value per share by 53.45% versus his benchmark's 42.22%, is not the only highly regarded investor watching the US for signs of trouble. 

Last month, Societe Generale's Albert Edwards, a key figure in the bank's strategy team and a well-known market bear, told clients to prepare for 'all hope being crushed'. He forecast America's Standard & Poor's (S&P) 500 index would fall below its March 2009 666 intraday low, while the benchmark US 10-year debt yield would fall below 1% on hard landings domestically and in China.

'The secular equity valuation bear market began in 2000 and renewed global recession will be the trigger to catalyse the third, and hopefully final, gut-wrenching phase of valuation de-rating,' Edwards said.

This week Goldman Sachs joined the US bear camp by predicting a decline of around 5% in the S&P 500.

It recommended its clients short the index, setting a target of 1,225. The S&P 500 closed at 1,325 yesterday, having dropped 1.6% on the Goldmans' warning and an unexpected decline in factory output. It is currently up 5 points today at 1,330.

Analysts at Data Explorers have also noticed increased bearish sentiment surrounding the US and a rise in the number of stocks on the S&P 500 being shorted, ie sold on the basis that their share price will fall and can be bought back at a profit.

8 comments so far. Why not have your say?

Geoff Downs

Jun 23, 2012 at 13:38

At last a more accurate view of the problems from a Fund Manager with a good track record. I am invested in one of Mr Lyon's funds. My only concern is the position he takes in index linked gilts as against conventional gilts. For me deflation is ahead rather than inflation.

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Eugen

Jun 24, 2012 at 07:08

Geoff

Yes, you are technical right to say that in a Balance Sheet Recession, deflation has a higher probability. But spikes of inflation could happen, generated by people loosing faith in the banking system who could end up in a buying spree.

When you see the goverment helicopter hoovering 'fiat money' the first reaction of a shopkeeper is to close his shop as he doesn't have a clue how much his groceries are worth.

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alan franklin

Jun 25, 2012 at 07:34

So buy gold and prepare for the worst! You won't be disappointed.

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Geoff Downs

Jun 25, 2012 at 08:51

I don't really understand or have a clue where gold is heading. What I would say though is that there are no investments that huge numbers of people get involved in that can make you rich.

By the time masses of people invest the real opportunity has gone.

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Jonathan

Jun 25, 2012 at 09:34

This article is full of arcane language:

A US fiscal crisis like europe's - what does that mean. The US is not in the same position as Greece, Spain and Ireland as the Fed can print unlimited amounts of money.

"'Stock markets swooned" - What does that mean? My definition is " 1. To faint. 2. To be overwhelmed by ecstatic joy. "

With potential unlimited controlled inflation by the Fed's printing press I doubt they will let stock markets fall far before printing a load more cash and letting monetary inflation disguise any fall in the real value of the market.

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Barry Faith

Jun 25, 2012 at 09:47

I think what is behind what Sebastian is saying, about the maths not stacking up, is that one cannot print money indefinitely without hyperinflation. Prinintg money is about hopng it will cause a regeneration of economic activity. I think a historical analysis of such attempts and when such approaches have tried and failed would be useful. The French kings tried such an approach in the 18th century, on the advice of their finance ministers and it ended up with the last one losing his head - - - - . I think any events relating to this will be after the US election. The key issue as I see it, is if, there is a US fiscal crisis, will it be a slow-motion car crash like the US, or a more sudden event? Money printing may make it slow motion, but may only offset the evil day. Money printing depends on other parts of theglobal economy continuing to grow. If Sebastian is correct, then it may well be a close run thing if money printing works. What is the safe course of action to preserve our capital is the most pressing question for many investors.

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Geoff Downs

Jun 25, 2012 at 09:51

Jonathan,

I agree with your first paragraph. The reason stock markets rise in respect of QE is because investors believe that this printing of money will solve the economic problems. As each bout of QE fails to do that markets react less positively. Eventually the markets will realise that QE will not lead to economic recovery and then the real threat will begin.

Regarding inflation, I think you are wrong. The Government Bond markets are indicating deflation. It is true Governments want to create inflation but for a number of reasons I think they will fail to do so.

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Jonathan

Jun 25, 2012 at 11:19

Geoff Downs, If Zimbabwe can create inflation by printing money anyone can, including the BOE and Fed if they want to. Deflation is no real worry to the BOE or the Fed as they can simply print as much money as they like (unlike individual countries in the eurozone). This inflation also inflates stocks and shares so they can also prevent a drop in the price of shares with this inflation.

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