Thoughts from the Frontline

Meanwhile, Back at the Ranch

By John Mauldin

May 26, 2012

Choose your language

What If California Were Greece?
The Separation of Bank and State
Coming Together or Flying Apart?
Europe in Recession
Meanwhile, Back at the Ranch
A Slowing US Economy
Where’s My Quantitative Easing?
Home for a Week! New York and Italy

It is simply hard to tear your eyes away from the slow-motion train wreck that is Europe. Historians will be writing about this moment in time for centuries, and with an ever-present media we see it unfold before our eyes. And yes, we need to tear our gaze away from Europe and look around at what is happening in the rest of the world. There is about to be an eerily near-simultaneous ending to the quantitative easing by the four major central banks while global growth is slowing down. And so, while the future of Europe is up for grabs, the true danger to global markets and growth may be elsewhere. But, let’s do start with the seemingly obligatory tour of Europe.

What If California Were Greece?

David Zervos is the managing director and chief market strategist of Jefferies and Company. He is an astute observer of Europe and brings a very interesting perspective to the trade, with his Greek heritage. I got an email this morning from him that I wish I had written. It is hard for many of us in the US to understand just how deeply flawed the structure of the…

Discuss This

9 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Carl Bechgaard

May 30, 2012, 10:53 a.m.

The article is a good description of the difficult choices the eurozone countries face. It is extremely unlikely that the voters of the northern European countries will continue to support Greece unless it clears up its problems: wide spread tax avoidance, too expensive public sector and an overregulated private sector. Fixing those problems can take years, perhaps generations, which is more than the eurozone can bear.
 
The analogy to California makes a bit difficult to understand what the essential point about Greece is. It seems to be that the Greek Central Bank of Greece can borrow with no restrictions from the European Central Bank. Later in the article it appears that the Greek Central Bank does have to post collateral, or at least a fictitious collateral in the form of Greek government bonds. But since the Greek Central Bank presumably can supply unlimited collateral of that kind it would seem that the European Central Bank has no way of stopping Greece from funding their budget deficits with European Central Bank money.

However, from an article todayâ??s Wall Street Journal â??ECB Opposes Spain Bank Ideaâ? it would seem that the European Central Bank does indeed have ways of controlling lending to national central banks. Quoting from the article: â??Although Spanish government bonds currently meet the ECB’s minimum ratings requirements, making them eligible for ECB loans, the central bank does have some leverage on the issue. ECB rules also give it full discretion to reject any collateral, even if the collateral conforms to its ratings requirements, if the central bank feels it is necessary to protect its balance sheet.â?

Bill Daugherty 19376

May 29, 2012, 6:36 p.m.

If Germany were to leave the Euro currency (an act equivalent to war?) why in heaven would they convert debts to DMarks?  If the Euro is falling and contracts call for Euro repayments, surely such would be made.  The flip side is to try to enforce Euro repayment on a departing Greece or Ireland.  Good luck with that.

David Kondner

May 29, 2012, 8:55 a.m.

Where does DEBT show up in the money equation (MV=PQ)?  I suppose that as debts are generated over time, the “M” (money supply) goes up as well as the “V” (velocity of money).  I can see the big problem for M and V if there’s a general credit contraction in society (as debts are paid off).  But, let’s say government decided to buy up obviously bad debts (to prevent a general credit contraction) and then simply repudiated that debt.  What effect would this have on “M” and “V” in the equation?  I think the answer would determine whether to expect future inflations or recessions.

Ronald Nimmo

May 27, 2012, 3:12 p.m.

What the the significance of the M1 to M2 ratio in forecasting the business cycle?
Also, I don’t think the EU government works very well for the citizens of European countries. They don’t even have 1st Amendment type rights in Western Europe, or Canada for that matter.

Roger Ellman

May 27, 2012, 5:36 a.m.

Excellent.

A long time ago a friend who wrote like nobody else, about the conomy and investments, one Bob Beckman, published a weekly newletter (yes, you had to subscribe and until near the end, it arrived like a faithful friend, ina fullscap envelope each week).
Your reports are a clear and intelligent assembly of facts, interpretations and ideas in a sea of misty, mass-mistaken waves of misconception.

Excellent! Thank you

Stan Piland

May 26, 2012, 9:23 p.m.

If Greece leaves the Euro, it will be a humanitarian crisis in addition to an economic collapse.  Without sufficient food, fuel or medical supplies, the developed world would likely be called upon to provide aid like we do to places like Haiti.  If Greece leaves the Euro, my bet is that the military takes over within a couple weeks.

Richard Fago

May 26, 2012, 8:11 p.m.

With all due respect to the excellent essay by Mr. Zervos, there is no “suppose” about California. WE, in California, are already living in what Obama’s second term will look like.  We have already had our protests and mini riots by university students (perhaps we’re still a little bit more civilized than the Greeks, but not for long).

The state of California is broke:  financially, politically and morally.

This summer I predict we’ll have here in California, and throughout the states, riots, violence and disorder courtesy of silent orders and directives from certain places like Chicago and Washington, D.C. with groups like OWS, ACORN, the S.E.I.U., NEW BLACK PANTHERS, ET AL.

Until certain politicians literally get convicted and go to jail for their roles in the sub-prime meltdown, and until certain financial honcho get convicted and go to jail for their roles in the financial blow ups, and until the ignorant public wakes up and educates itself as to what is really happening rather than being hooked on Dancing With The Stars, American Idol, Oprah, the Simpson’s, etc. we don’t stand a snow ball’s chance in hades of extricating ourselves from this mess.

WE THE PEOPLE, HAVE TO PUSH, PULL, SHOVE, CAJOLE, ETC. ALL THE POLITICIANS FROM LOCAL, STATE AND FEDERAL OFFICES TO THINK OF “COUNTRY FIRST”. NO POLITICAL AFFILIATION MATTERS. IT IS OUR COUNTRY THAT MATTERS. PERIOD. IF THE COUNTRY’S ECONOMIC AND JOB WOES ARE NOT FIXED YOU CAN FORGET ABOUT ILLEGAL IMMIGRATION, OBAMACARE, ETC.

Alan Harris

May 26, 2012, 7:59 p.m.

Can someone PLEASE explain this growth strategy thing to me. If everyone is making more and more stuff, they’ll need to sell more and more stuff. To whom? Those that can afford to buy, already have more stuff than they know what to do with. I’m a plumber….trust me, every closet I go into has 46 towels for a 4 person home. The only people left who need more stuff, haven’t got the money to buy our stuff…...and the Chinese, Indian, Pakistani etc governments are making damn sure they ring fence their home markets so that they can grow to be as wealthy as we already are. The promise of endless growth is simple pyramid selling. The world cannot grow endlessly. We must all plan for contraction. Stop spending based on the promise of tomorrows income; spend based on yesterdays surplus. Clear your debts, amass the essentials and enjoy being alive with your friends and loved ones around you. Rip up the credit card, buy an acre of land with a stream….plant food, keep chickens, put up solar power and enjoy a sustainable, debt free life. Surprisingly, I’ve not been a greenie till now, but I can see the writing on the wall.

randy spagnoletti

May 26, 2012, 6:23 p.m.

Randy Spagnoletti: Retired Real Estate Broker
What do you feel is a good safe position to be invested in should Greece default or worse yet a few European countries tank?
Great letter each week,
Randy

© 2013 Mauldin Economics. All Rights Reserved.

Thoughts from the Frontline is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.MauldinEconomics.com.

Please write to subscribers@mauldineconomics.com to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.MauldinEconomics.com.

To subscribe to John Mauldin's e-letter, please click here: http://www.mauldineconomics.com/subscribe

To change your email address, please click here: http://www.mauldineconomics.com/change-address

Thoughts From the Frontline and MauldinEconomics.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin's other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President and registered representative of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA and SIPC, through which securities may be offered. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Mauldin companies may have a marketing relationship with products and services mentioned in this letter for a fee.

Note: Joining The Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at www.MauldinCircle.com (formerly AccreditedInvestor.ws) or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs may or may not have investments in any funds cited above as well as economic interest. John Mauldin can be reached at 800-829-7273.