French investment bank Societe Generale is advising customers to dump the dollar in favor of safer holdings, concerned that US federal debt poised to eclipse national GDP could be a recipe for global economic doom. SocGen recommends adopting a defensive position, avoiding European equities and choosing a portfolio of mixed commodities, utilities and fixed income as the best defense against a vulnerable dollar. For more on this, see the following article from HousingWire.
French investment bank Société Générale recommended selling the dollar as the first part of a stream of advice to its clients on preparing for a “global economic collapse.” A declining dollar might provide a means to reducing global imbalances, the firm said in a report written by seven individuals to investors.
US government debt is approaching 100% of gross domestic product (GDP) by the end of fiscal year 2010, with further increases in public expenditure expected into 2011, SocGen said. With this explosion of public debt, the current economic crisis in the us is drawing similarities with Japan in the ’90s. A return to recession at this point would mirror Japan’s “lost decade.”
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“Our central economic scenario assumes a slow recovery for the global economy, but with government debt at all-time highs, in this report we spend some time taking a hard look at the downside risks,” wrote the report’s authors, led by product manager Daniel Fermon. “Using debt as the key variable we also draw up two alternative economic scenarios (bull and bear) and consider the implications for strategic asset recommendations.”
The bearish scenario and predicted collapse will not necessarily happen, but it represents a worst-case scenario. SocGen urged its clients to “hope for the best [and] be prepared for the worst.”
The firm remains positive on fixed income and prefers defensive corporates like telecommunication and utilities that have the lowest risk of transitioning into high-yield and should continue to perform in a more risk-averse environment.
SocGen also recommended selling European equities, since markets have priced an economic recovery by the end of fiscal year 2010. Under a bearish scenario, however, that optimism might fade when fiscal stimulus dries up.
The firm urged clients to cherry-pick commodities, given the asset class’s diverse nature. Agricultural commodities look positioned to fare the best, but forecasting is difficult considering the high exposure to weather conditions. The firm said mining commodities can be used to hedge against a softening dollar.
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