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Auvest Capital: It ain’t over yet

March 8, 2011 2:15 by Samuel Potter

Stay with us, because this is where it gets really tasty. Act four will see the crisis return to the developed world as the bust in emerging markets prompts concern over the sustainability of global growth, and unserviceable debt. This will finally force mass defaults and bankruptcies. “This will be the most savage part of the crisis and may lead to the nationalization of many financial institutions,” says Auvest. “Act five will be the last act of this crisis, with every man for himself as governments realize that there is insufficient global demand to create employment at home and simultaneously engage in free trade, leading to a major trade war and eventually a new monetary system.” This is about the time when you will find Kipp at the Motel-o-love with a 12 bore and a pair of Russians.

Founder and CEO of Auvest, Humayun Shahryar, said: “The world is faced with the stark reality of too much debt which will weigh on future growth. The strategy that everyone seems to be following today is to avoid any kind of debt write-off or conversion to equity in the hope that growth will come back and lead to a reduction in debt over time. The irony is that any growth in itself is now predicated on the ability of consumers to borrow and spend rather than on growth in real organic income. The inevitable collapse of this debt fuelled strategy will end in major defaults and bankruptcies.”

How seriously should we take this warning? Well, we need to add a little pinch of salt. Auvest wants headlines of course, and a report like this certainly gives it that. The firm is also playing a smart game – most people pointed the finger when the financial crisis hit, saying why didn’t anyone see it coming? By predicting doom, you cover yourself if the worse happens, and if things are good… well, when things are good who ever asks who got it wrong a couple of years back? Plus Auvest is a young player, and its whole philosophy is built around the idea that the financial crisis is not done yet – of course its research would back that up.

But that’s all the salt we’ll add, because beyond that Auvest’s conclusions are all too plausible. We’ve said before on Kipp that we don’t quite understand how this credit crisis was fixed by borrowing more cash, and we aren’t the only ones. It’s even in Auvest’s conclusion:

“The problem of too much debt cannot be solved by taking on more debt… Significant debt destruction has to happen before the global economy can get back on a path to sustainable growth. Many defaults and bankruptcies will occur as a result. “

Yeah we know, bleak. But don’t go to the window ledge just yet, Auvest also says that the world will recover from this crisis and the focus will return to the ‘real economy’ (manufacturing and trading rather than imaginary money in the financial system). According to the report, the world will eventually be able to move forward with a sense of real optimism.

Meanwhile, until the stuff hits the fan, we’ll be out back, sharpening sticks with a distant, crazy look in our eye.

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