Thoughts from the Frontline

There Will Be Contagion

By John Mauldin

March 10, 2012

Choose your language

Sarkozy: Problem Solved, Or… Germany to Sarkozy: It’s Not Over
The ISDA Steps Up
No Winners in Ugly Greek Debt Deal, Only Lessons
And By the Way, Close Your Borders
The Next Greek Tragedy
Orlando, Stockholm, Paris, and Staying Young

… (December 11, 2009) – Greece's prime minister, George Papandreou, told reporters in Brussels on Friday that European Central Bank President Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker see "no possibility" of a Greek default, Bloomberg News reported. Papandreou also said that there was no possibility of Greece leaving the euro area, according to the report.

… (January 29, 2010) – There is no bailout and no "plan B" for the Greek economy because there is no risk it will default on its debt, the European monetary affairs commissioner, Joaquin Almunia, insisted on Friday.

… (September 16, 2010) – "Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt. People fail to see the costs to both Greece and…

Discuss This

18 comments

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

Comments

Page 2 of 2  < 1 2

Tim Warburton

March 10, 2012, 5:15 p.m.

The historical recitals at the beginning say it all.

John, what I wish you consider focusing on a bit more in a couple of your upcoming newsletters are the pros and cons of a strong dollar. While exports are important contributor to our jobs, I have not read anyone recently discuss the real economic merits of a strong dollar. The cost of raw materials would go down, including oil, which presumably would mean more disposable income for folks at home. 
Are there not strong arguments to be made that a strong dollar could also assist increasing domestic production for our people here at home as well?

We seem to constantly be told that the only way out of the debt trap is that we need a weak currency so we can pay off all our debts at lower cost. But is that really true?

By strengthening our currency we actually provide far more value to our debters. We make it sound like the big creditor is China, but is not a fact that 75% of US debt is held by Americans? Why would it be bad for them to hold strong dollars?

I understand you have other life lengthening thoughts in mind, but somehow I just don’t agree that a constantly weaker dollar will be our salvation, and I think we need some of your analysis on this subject.

Marc Arroyo

March 10, 2012, 4:49 p.m.

This week has been a tough one for me to swallow in the markets, because of some volatility trades I put on. I believe that the VIX’s close of 17.11 on Friday does not truly represent the current market that we are in. Regardless, I do feel like the contagion and looming impacts of the sovereign debt crisis are gearing up to wreak some havoc on the financial markets. The million dollar question is when. Time will tell and as John said, we don’t know what the trigger will be. Greece is clearly the first significant step in this direction.

Erik Esselstyn

March 10, 2012, 4:13 p.m.

John, Heartened to learn that you will attend a Life Extension conference. I want to be able to rely on your trail wisdom for many decades. Let me recommend two hard-nosed yet readable sceince based books that will contribute to your longevity. Each, I believe, will complement anything you learn at the healh gathering - the first, THE CHHINA STUDY; the scond, PREVENT AND REVERSE HEART DISEASE. Each will bring to your awareness that common diseases of western cultures are largely lifestyle based. Anyone with the tiger work ethic to write regular columns crouched in a airplane seat, can change a few lifestyle habits to make him a lively centurian.

Best of luck, Erik Esselstyn

Henrik Nilsson

March 10, 2012, 4:02 p.m.

There is a lot to worry about, but your statements about CDS positions are not correct. The total loss across all CDS protection net sellers will be about $3 billion. The total gain across all CDS protection net buyers will be about $3 billion. CDS contracts are net settled so only about $3 billion will change hands after the auction.
The CDS positions will not represent any problems.
The problem is the size of the government debt and the size of the bond holdings that are not hedged with CDSs.

John David Cammish

March 10, 2012, 3:55 p.m.

Thank you for another fascinating piece John.

You state “European banks are leveraged over 30 to 1, at least double that of US banks, which are nerve-wracking enough”.

Graham Summers of Phoenix Capital posted a piece on Zero Hedge at the end of last year;
http://www.zerohedge.com/contributed/guess-whoâ??s-even-more-leveraged-european-banks

In it, he stated that the US banking system is leveraged at 13 to 1 but that the Fed itself is leveraged at 53 to 1 (I seem to recall the ECB being about 37 to 1 but I can’t find a link for this). This is before the 5 central banks came together in November and the Fed agreed Dollar swaps behind the scenes.

DavidC

Alan Harris

March 10, 2012, 3:54 p.m.

John, all the way along you have been writing about number crunching. Ive written before about a little matter of the crunching effect on the peoples of Europe. Im sure Texan’s consider themselves as Americans…. but I’ll bet when the chips are down they still think of themselves as Texan’s. When push comes to shove its every governments prime responsibility to look after their own people above all else. As migration riots start, the right wing will be elected…...borders WILL close. Dreams of the United States of Europe will end. At best Europe will revert to EFTA, at worst little England, little Germany little Sweden etc.

Buy gold….buy beans…buy a gun. Yeh Yeh Yeh, Im an exaggerating lunatic. You (and I) hope so.

A

jack goldman

March 10, 2012, 3:19 p.m.

I don’t care about Greece, Europe, or Japan. I care about me, America, and my kids. What to do here in America? How can debt be cut? America has run a public debt since 1848, growing at 8% a year, paid interest only. That public debt has grown from $5 Trillion in 2,000 to $16 Trillion in 2012, and is still growing at 8% a year, interest only. I built houses through the 18% mortgages of 1980. I only see default as a solution now that the baby boomers demographics does not support 18% interest rates like it did in 1980. Dow was $850, Gold was $850 in January 1980. I can see $4,000 to $6,000 gold and $4,000 to $6,000 Dow again.

This was all foreseeable in 1971 when the currency was debased. The rich are richer and the poor are poorer due to currency debasement. The debt only expands in currency debasement. In real lawful silver coins the Dow is $650 and gasoline is 20 cents a gallon or two silver dimes. It’s a money bubble, all foreseeable in 1971 when gold was replaced by unsecured bank debt notes.

I only see default as the only solution. These levels of debt can not be paid. Sadly American corporations that made many of these problems worse, were bailed out. New York City banks should have been allowed to fail. The savers are being punished and the spenders are being rewarded.

I paid 18% interest to borrow in 1980. Now I am getting ZERO when lending. This will all end badly for citizens in nations who allowed their governments to sell their children into debt slavery to banks. The only solution is to default to the banks who foolishly thought I will counsel my children to pay for their lifestyle as wealth destroying parasites on the wealth producers.

End the Fed and parasitic subsidized banking or the Fed will end the USA as we know it.

Barry Pither

March 10, 2012, 3:19 p.m.

Markets are often inaccurate predictors of events, even if they are probably the best indicator tool at our disposal.

Niall Ferguson observed that in early July 1914 bond markets did not see international conflict as imminent - and this was two weeks after the assassination of Archduke Ferdinand at Sarajevo. German government bonds were still being traded in London at just below par. By the end of month stock exchanges started to panic before promptly being shut down by presiding governments. War, of course, came immediately afterwards.

Even by the end of 1914 when Europe was fully militarized and thousands dead Austrian bonds were still being traded - literally on the streets of London - at a 23% discount. Imagine that - more valuable than present day Greek debt.

Page 2 of 2  < 1 2

© 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.