Can Europe Trigger the Next Economic Crisis?

Jun 23, 2022

Vijay Bhambwani, Editor, Fast Profits Daily

In the market correction, everyone is focussed on the US market. No one seems to be paying any attention to the European market.

Did you know the world's biggest hedge fund has just taken a big bet against European stocks?

This is something you should watch out for. Don't focus on the US market alone. The next crisis could come from Europe.

Watch the video for all the details...

Hello friends. I'm Vijay Bhambwani. I have been trading these markets since 1986 and through my videos I want to help my viewers take better investment and trading decisions. And that's what this video is also all about.

You see, in a recent disclosure filing, Bridgewater Associates, quite simply the world's largest hedge fund out there, has disclosed that it has placed Euro 9 bn worth of short positions across the European stock basket.

Important: A Big Prediction of Our Senior Analyst

Now that's basically got everyone a little worried because Bridgewater is, like I said, the 600-pound gorilla in the hedge fund world, and its reputation of being highly accurate in its bets precedes it.

So what really gives? Is Europe likely to be the next flashpoint that might trigger the next market decline?

You see in 2008, it was the US housing market which triggered a global financial crisis. Many of these companies, many of the brokerage firms etc, have not really healed, so to say, for the want of a better word, because they are still on stimulus.

If you actually go back in a time, history teaches us that in 1997-1998 when LTCM went bust, 14 Wall Street high profile investment bankers were forced by the US Federal Reserve to pump money into LTCM so as to prop it up artificially for a while. Once the storm blew over, it was given a quiet burial.

Guess what? In the 2008 crisis, many of these 14 investment bankers who were forced to bail out LTCM, themselves declared bankruptcies. So you have Bear Stearns, Lehman Brothers, Merrill Lynch, Bank of America, the usual names, which came under fire. So once distressed, it takes a very long time for a company, a country, an economy, to get back on track.

Now, Europe in 2008 was very severely hit. If you were trading the markets, then you would instantly identify with the term PIIGS, Portugal, Iceland, Italy, Grace, and Spain. Now these were supposed to be the weakest spots in Europe. These countries have taken their own sweet time in recovering from the 2008 crisis, and they are still not out of the woods yet. Greece is definitely not out of the woods yet.

Recently, I read a news item about the sharp fall in Italian bond prices, which means the yields have suddenly started spiking. So concerns are definitely building up, and all it needs is one spark to set the mound of gunpowder alight.

What can be that spark? What is Bridgewater Associates betting on?

You see, the market sometimes undergoes what is known as the Butterfly Effect in behavioural finance. What is the Butterfly Effect? A very tiny event, like the flapping of the wings of a butterfly that actually triggers a cataclysmic a follow-on impact.

Let me narrate a small story to you. Before the turn of the century, a French army sniper stationed in Afghanistan was a looking out for Osama bin Laden as, of course, being the highest priority target. And he had orders to shoot Osama bin Laden down, only after confirming with his commanding officer.

Now, once he saw Osama bin Laden in his gun scope, telescope, he radioed back to headquarters, asking for permission to shoot. Unfortunately, the radio link was down, and before he could get permission to go ahead, Osama went into those caves.

Military historians now believe that had the French sniper had blanket authority to shoot Osama bin Laden, maybe 9/11 would have never happened. And we know 9/11 gave effect to the Iraq war. It gave effect to US attack on Afghanistan and whatever followed thereafter.

So that sniper not being able to kill Osama bin Laden triggered a Butterfly Effect. What can be the Butterfly Effect in Europe?

We have multiples of them. Europe is such a large place, a marketplace, a conglomerate of economies. There are so many moving parts, and any mechanical engineer will tell you that the more moving parts there are, the more of the probability of the machine breaking down.

So you have Italy whose bond yields are screaming for attention. You have Spain, which is struggling because Morocco has turned off the tap of the Maghreb natural gas pipeline. You have the Ukraine war, where the Russians are actually using gas as a geopolitical bargaining chip and weaponising it to basically hold Europe to ransom.

The Germans have already disclosed that they will be using higher amount of coal in the coming winter for heating purposes and generating electricity. Guess what? Climate change emission control norms can go to hell. So there is definitely a pressure point in Europe and Putin holding back gas, can trigger a major event.

But there is more. I have explained to you in my past videos about the cash carry trade. You have an economy A which is paying 5% interest, and you have an economy B which is paying 10% interest. Money will flow out of economy A which is giving 5% interest and go into economy B, which is giving 10% interest, all other factors remaining constant. So this is the cash carry trade.

So far, you have seen the US Federal Reserve raising rates. The Europeans are staring at a scary prospect of money flying out of Europe into America because of higher yields. Don't forget, the US dollar is a global reserve currency. At some point in time, in the near future rather than the distant future, Europeans will have to start raising interest rates.

If the German bond yields are any indication, the German markets are pressurising the Bundesbank to bite the bullet and start raising rates. If the Germans do it as the strongest European economy, what chance do Britain and France have? Britain has already started the process of raising interest rates. The French will have to follow suit. So will a whole lot of other economies.

So there you have a perfect storm. You have winter coming up where the Russians are holding back gas and you have interest rates rising, which means cost of funds are going up.

As I have already explained to you in many of my videos since the last few months, banks, NBFCs, and companies that are so heavily dependent on EMI based sales are feeling the heat.

The entire scenario is likely to be repeated in Europe in the coming few months, and I believe Bridgewater Associates is ahead of its time. It's ahead of the others in betting that the European economy is going to suffer some kind of distress.

So the moot point is, can the 2022 market decline be attributed to Europe if the 2008 crisis could be attributed to America? In my humble opinion, yes. Europe can be the Achilles heel of the global financial village, and it can possibly trigger more weakness in the financial markets ahead.

So don't just look at the American markets for cues. Also, keep an eye on Europe. This is what a 360-degree worldview means. It means keeping your eyes in the sky while you keep your boots to the ground.

If there are problems, there are also solutions. I have laid it out in my video in the recent past about what to do when the markets fall.

You basically try and seek short selling opportunities across those companies where hope has seen prices build up, along with open interest or MWPL, market wide position limits per individual stock. Those other companies that will fall the hardest and the fastest. That's where money can be made.

So, like I said whether the problem, mathematics and statistics have a solution.

On this optimistic note, I'll bid goodbye to you not before reminding you to click like on this video if you liked what you saw.

Subscribe to my YouTube channel if you haven't already done so and in the comments section, do let me know what you think of this video, and your feedback means a lot to me. Also help me reach out to fellow like-minded investors, smart investors like yourselves, by referring my video to your family and friends.

Thank you for your patience and watching my video. Till we meet again in my next, this is Vijay Bhambwani signing off for now. Take care. Bye.

Warm regards,

Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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