It seems like the whole world is expecting Ben and Mario to ride in and save the day with yet more stimulus. But to what effect, I wonder. Is a short-term rise in the market a cure for the basic disease of too much debt? And, as today’s Outside the Box hilariously points out, it can even make things worse.
Joan McCullough is perhaps my favorite curmudgeon. She writes so freely and with such style and feeling, but she also gives us such exquisite bits of information that no one else seems to find. Today, as I sat in a Denver hotel, I read her and just had to laugh a few times (mostly to keep from crying). She can be a tad hard on sensitive nerves, but we are all adults here, right? Be forewarned, though, that while she may pokes at someone you don’t like today, tomorrow she may be pointing out the issues with your guy. She is an equal-opportunity skewer.
Today she has Ben and Mario in her sights, and toward the end the poor Department of Labor incurs her wrath, too. On this both Joan and I agree: Europe is going to end in tears. The longer they keep piling up debt, the worse it will be. Their choices are Disaster A and Disaster B. Try to avoid both and you get Super Disaster C.
Joan has been trading and pontificating for longer than most of us have toiled and has forgotten more than I have ever known, assuming she ever forgot anything. She works with East Shore Partners, and God Bless them for giving her free rein to write as she sees fit. The wire-house boys would just die.
But before we hand it over to Joan, here is a quick paragraph from Yanis Varoufakis, writing about Greece at http://yanisvaroufakis.eu/2012/07/28/23-crucial-days-for-greece/. This shows just how absurd things are, and also how pernicious. The Greeks are paying back the ECB on the backs of Greek and other European taxpayers. Just to keep the game going. This is wrong on so many levels.
On 20th August, the Greek government will have to borrow 3.2 billion from one arm of the Eurozone (from the EFSF) in order to repay another (the ECB). Yet Greece is insolvent. The very idea of an insolvent entity borrowing more from a community, like the Eurozone, in order to repay that same community is obscene. All it does is to shift the burden from the Central Bank to the taxpayers of Germany, Holland, Austria and Finland. This is not an act of solidarity with Greece. It is an act of irresponsible kicking-the-can-up-a-steep-hill. The simple point I have been trying to drive home for a long while now is that the Eurozone must make a simple decision: Either to give Greece a proper chance of exiting its current death spiral. Or to dump Greece now, before the Greek state loses all its remaining assets and before it gets deeper into debt. And if our Eurozone partners are not prepared to make up their minds (caught up in their own short term concerns and shenanigans), then Athens must force their hand to decide within the next 23 days. How? By announcing that Greece will NOT be borrowing on 20th August monies it cannot repay under the present scheme of things.
I am speaking tomorrow at the Financial Advisor magazine conference for my partners Altegris Investments. But first I get to be a groupie and meet George Will, who is one of the truest wordsmiths of my generation. Tonight there will be a dinner and then some fun with Altegris partner and old friend Dick Pfister and his team.
I fly home and then on to Maine to be with many more friends for the annual Shadow Fed fishing-camp meeting. I think I will be on Bloomberg at 6:30 AM with Tom Keene (he may be the only one awake!) and then on with Mike McKee at some point. They will be cutting away to Maine throughout the morning, so you might want to tune in. Some good commentary on the employment number should make for some fun TV and radio. They do tend to change the schedule at the last minute, but it will be good whatever it is.
Time to hit the send button. Good friends (including Vitaly Katsenelson) are waiting. Have a great week, and the letter will be heading your way Friday from Maine.
Your shaking my head at Europe analyst,
This will be one of the more controversial Outside the Box posts in a great long time. Indeed, I debated with myself at some length. It will make some readers mad, but I decided it is more important to make most readers think. And, as it happens, there are parts of this week’s essay that I rather aggressively disagree with. That being said, there is a great deal of truth here. This represents a serious body of thought that is being debated, and we need to hear all sides, rather than just the ones we like.
Michael Hudson is a research professor of economics at the University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College, which is a serious place, so this is no ill-informed screed. I generally like their stuff.
Hudson first lays the European crisis at the feet of banks and the institutions (ECB, IMF, and the EU) that are taking the Greek (and other) bank debt and putting it into public hands. He has a very real point. Then he points out that Greece is far better off just walking away, a la Iceland (at least read the last part of this post, on Iceland). And in polls he cites, 85% of the Greek people are against taking on the debt and paying the banks.
As I wrote last week, there is a revolution going on all over Europe, slowly building up as people realize that the “solution” being offered benefits banks and not German taxpayers or Greek creditors. Ireland will be watching. There is no easy way out. If there is a referendum on this new “troika” proposal, it is likely to lose. This is not over.
Hudson offers a a lot of facts with his analysis. This is a little longer than most Outside the Boxes, but I encourage you to take the time to read it. It will make you think, that at least I can promise.
(Thanks to Yves Smith for posting this at Naked Capitalist.) And if you like this, be aware that I read scores (if not hundreds) of pieces each week for Outside the Box (yes, even here in Tuscany). And now I'll bring you the 5-10 best of the best each week as part of my new subscription service, Over My Shoulder. If you like Outside the Box, then you're going to love Over My Shoulder. It's like having your own personal filter – with decades of analyst experience and access to exclusive resources. If your time is as valuable to you as your investments, click here to find out more about how I help you home in on the essentials.
Tuscany is renewing my soul. What a contrast. Such beauty to view while I think about the ugliness of Greek debt. My good friends and old business partners Gary and Debi Halbert just showed up to spend a few days, and we have a local sommelier coming in to do a wine and cheese tasting in a few minutes, so I am going to call it a day. Have a great week.
Your getting ready to sample some Tuscan wines analyst,
The disconnect in Europe just gets worse and worse, as I sadly predicted at least a few years ago, and have made a big deal out of over the last year, with the very pointed note that a European banking crisis is the #1 monster in my worry closet. Today, within 15 minutes of each other, I ran across the following three notes, from Zero Hedge, the London Telegraph, and the Financial Times, with a quote from Bloomberg as well. Read them all. And then try and figure out how they can all get what they want. There are going to be tears and lots of them somewhere. Greek three-year rates are now at 21%. And so I decided to link these three short pieces into your Outside the Box this week. To kick things off, a few teaser quotes and observations:
“On Saturday Jurgen Stark, an executive board member of the ECB, warned that a restructuring of debt in any of the troubled eurozone countries could trigger a banking crisis even worse than that of 2008.
“‘A restructuring would be short-sighted and bring considerable drawbacks,’ he told ZDF, the German broadcaster. ‘In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy.’” (From the Telegraph, with more below.)
“There is ‘no painless way’ for countries that sought aid to reduce debt, while a restructuring may cut off the respective country from the financial markets for an unforeseeable time, Stark was quoted as saying. The only viable path for such countries is to ‘strictly push through reform programs and repay debt in full,’ the central banker was quoted as saying. Stark did not refer to a specific country.” (Bloomberg)
Let me repeat a phrase here: “The only viable path for such countries is to ‘strictly push through reform programs and repay debt in full.’”
But in a well-done column from Zero Hedge, which discusses a controversial Citibank report, we learn that, “In addition, no country with Debt/GDP ratio of more than 150% has ever avoided a default anyways. Why would Greece be different?” Athens has said it will also implement fiscal measures worth €26bn in an attempt to reduce the budget deficit to 1pc of GDP by 2015. The plans have sparked a fresh wave of anger in Greece and more threats of strikes and marches from trade unions.
But the Greeks are not the only ones who are unhappy. I wrote about the Finns last week. Now we jump to a marvelous Wolfgang Münchau piece from the Financial Times (www.ft.com), which gives us additional insight and points out that the Germans are getting rancorous. A quote from this must-read piece: “A premature Greek default would change everything. As would the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas are in much worse shape than recognised, and that Spain cannot raise sufficient capital.”
All this bodes for a great deal of volatility and uncertainty, which markets hate. This makes for a very interesting Outside the Box, and one you should ponder and that we will be visiting in the regular letter in the future. Gentle reader, this is important. Let’s jump right in.
Your keeping one eye on Europe 24/7 analyst,
I get a lot of client letters from various managers and funds, as you might imagine. I read more than I should. But one that shows up every quarter or so makes me stop what I am doing and sit down and read. It is the quarterly letter from Hayman Advisors, based here in Dallas. They are macro guys (which I guess is part of the magnetic attraction for me), and they really put some thought into their craft and have some of the best sources anywhere. So today we take a look at their latest letter, where they cover a wide variety of topics, with cutting-edge analysis and sharp insight. I really like these guys, and suggest you take the time to read the entire letter.
Today (Tuesday) is the day I want you to start buying Endgame. The early reviews on Amazon are quite gratifying – writing a book is damn hard work, so when people say nice things it just feels good. Have a great week! Now let’s jump into the Hayman client letter.
I am back from the Forbes cruise to Mexico and starting to deal with a thousand things, but first on the list is making sure you get this week’s Outside the Box. And a good one it is. In fact, it is two short pieces coming to us from friends based in London over the pond.
Both of them have to deal with the unfolding crisis that is Europe, which is going to unfold for several years as they lurch from solution to solution. The first is from Dylan Grice of Societe Generale and reminds us why we should put no stock in what leaders say about a crisis. He has lined up the statements of leaders from one crisis after another. He finds a simple, repeating pattern. And shows where we are now.
The second is from hedge fund manager Omar Sayed, who I met last time I was in London. A very bright chap and good guy. He offers us very succinctly four paths that Europe can take. Some of them are not pretty. It all makes for a very interesting OTB. I trust your week will go well.
Your overdosed on guacamole (and it was worth it) analyst,