It is a lazy summer day here in Texas, and the market and investment news front is rather quiet as well. But that will change before too long. We should enjoy the relative calm while we can, because Europe will soon be back in full crisis mode, coming off the summer. In today's Outside the Box we'll look at three brief pieces that may give us a preview of the near future, as well as an incisive retrospective on the recent past.
The first is from Roubini Global Economics. It's part of a longer piece by Megan Greene, looking at what lies ahead in Europe. The fun & games there promise to ramp back up all too quickly. Then we have another extract from a longer piece by Kiron Sarkar, looking at Germany, that echoes some of the themes from last week's Thoughts from the Frontline. The German leadership has not really been transparent with their people, but then you can't hide trillion-dollar commitments very easily.
Finally, we wrap with Ambrose Evans-Pritchard's latest column, which I think is one of the better ones he has done in years. I would call it a must-read. Under the title "Five years on, the Great Recession is turning into a life sentence," he concludes with:
"As for our [the developed world's] debt mountain, we have barely begun the great purge. Michala Marcussen from Societe Generale says the healthy level is around 200pc of GDP for advanced economies. If so, we have 100 points to cut.
"This cannot be achieved by austerity alone because economic contraction would tip us all into a Grecian vortex. Such a cure is self-defeating.
"Much of the debt will have to be written off. Whether this done by inflation (1945-1952) or default (1930-1934) will be the great political battle of this decade. Pick your side. Pick your history."
When you come to the Endgame of the Debt Supercycle, something must indeed be done with all the excess debt that has been accumulated. Different countries will choose different options, but no matter the choice there will be pain. It remains to be seen how that pain is spread around.
In the US, Romney has evidently decided to stop playing small-ball politics and turn the discussion into a referendum on the direction of the country. Both sides think this discussion will be to their advantage, which, if it were not my home country with consequences for my kids, I would find somewhat entertaining. But, as I wrote almost two years ago, this is a national discussion we absolutely must have. The issues are complicated, and there are no easy answers when you have to move out of the realm of theory and into the messy real world. Workable solutions to our big fiscal problems will be a much harder "sell" to the American public than either side currently thinks, as the majority of Americans, according to the polls, would like to eat their cake without paying for it. It is not clear what our choices will be when the true consequences are understood. I will comment further on this topic on Friday.
In the meantime, have a great week. My congratulations to my British friends on a marvelous Olympics.
Your getting ready to kick back a little analyst,
In today's Outside the Box, the ever-philosophical Grant Williams introduces us to the ancient and profound art and science of alchemy – "the original 12-step program," as he calls it, the avid pursuit of übernerds from Hermes Trismegistus to Isaac Newton to (believe it or not) John Maynard Keynes, who referred to certain early works of econometrics as statistical alchemy (and some still are!). And we should not forget Carl Jung, who wrote the seminal work Psychology and Alchemy (for those who do not sleep or are looking for something to put you to sleep: http://en.wikipedia.org/wiki/Psychology_and_Alchemy).
Grant notes that, in contrast to the mechanically and spiritually laborious (not to mention ultimately futile) process of transmuting lead into gold, the steps to convert paper into money are only two: (1) Plugging and (2) Pushing. Nevertheless, he says, the fervid attempts by latter-day magi to concoct a successful outcome to our present economic crisis are proving no more successful than the Alchemical Work. Where alchemists got hung up, says Grant, was in the final, climactic step of the process, Projection.
Projection "was the moment when, despite all the work that went into getting to that last point in the program, hope and faith took over as the alchemist found himself having to rely on just a little bit of magic in order to get the outcome he so desperately wished for."
And Projection has much in common with Pushing. Whether it is Ben Bernanke pushing the outlandish assertion that "subprime is contained" or Spanish Prime Minister Mariano Rajoy hopefully projecting that Spain would "... stop being a problem and instead form part of the solution [to the debt crisis]," the economic alchemists have struggled. (I have a mental image of Ben Bernanke as the Sorcerer's Apprentice, with about the same results – forced to try and clean up the mess he made and ultimately being swept away in it!)
Grant wishes to speed the economic magicians in their arduous task by offering a new, slimmed-down transformational schema – it only has seven steps: Greecification, Backtrackification, Transmission, Restatigence, Bullyfication, Renegotiation, Realization. The outcome might not be any more satisfactory than it was for the conjurers of old, but at least they may learn something as they kick the Holy Economic Vessel down the road.
(See, I don't call this letter Outside the Box for nothing.)
Grant, by the way, is the best "new" wordsmith/storyteller I have seen in a dozen years. I am a huge fan. (If you want to be a Hmmm…’er too, you can subscribe for free at http://ethreemail.com/subscribe?g=bdc736be.) And I get to see him tomorrow in Singapore, where he works at Vulpes with master hedge fund manager Steven Diggle, who was with us in Tuscany for a few nights. (I am not supposed to mention how much he lost on Italian soccer, betting against Newt Gingrich, so I won't. But then, Newt has to fund his campaigns somehow. Might as well take it from a hedge fund guy who thinks he understands soccer.)
I have been in New York today (I'm writing this note from the Virgin Lounge at JFK) and did media hits all morning. Two hours of air time and never had to repeat myself. A great deal of fun. We started off at 7 a.m. with two segments with the super-serious and wicked-smart Tom Keene and crew at Bloomberg, then three segments with Matt Nesto at Yahoo Breakout (where I surprised him by agreeing with President Obama, kind of), and then finished off the trifecta with old fishing buddy and always-fun (where does he get all those obscure facts?) Mike McKee for an hour on Bloomberg Radio. You can listen on or watch at:
(Bloomberg Radio has not posted yet, but I assume it will be there when you get this. Look for the Bloomberg Radio 10 a.m. show with Mike McKee.)
They will call the first leg of my 24 hours to Singapore in a minute, so time to sign off. The next letter will come from Singapore. Have a great week.
Your still seeing Mickey Mouse and Ben Bernanke in my head analyst,
This week all eyes are on Germany, and the question is "What will Germany do?" We are going to look at four quite-short essays. Two are from GaveKal, one is from Dennis Gartman, and the last is from Kiron Sarkar – all on this very topic.
One of the reasons I really like to read the research from GaveKal is that they are very public when their analysts disagree, and you get to listen to the back and forth. Some of the best analysis I see is when Charles and Louis Gave (father and son) and Anatole Kaletsky do email battle with each other while they are on three different continents. This time it is Anatole and one of their analysts, Francois Chauchat (whom I have not had the pleasure of meeting), differing on whether Germany should (or even can!) leave the eurozone.
I should note that it is not unusual for there to be intense debates in serious research houses. Happens every day, and perhaps often during the day. When you are playing an "A"-level game at one of the best research houses, you are typically not a shy, retiring type. What is less than usual is for that debate to be played out in public for clients to see. While a strong, useful consensus may be reached, I find the sturm and drang of the debate to ofttimes be just as instructive.
Anatole thinks Germany should leave, and you find yourself nodding your head, and then you read Francois and you sit back. This is a very complicated issue.
I continue to believe that Europe in general and Germany in particular have no good choices. They can only choose between Disaster A, which is keeping the eurozone together, and Disaster B, which is breaking the eurozone apart. Either will cost trillions of euros and mean much pain. It is not a choice of pain or no pain. It is simply a decision as to what type of pain you want and in what doses you want to take it. Choose wisely.
Then Dennis Gartman weighs in this morning. For those who know Dennis, he is never shy about voicing his opinions when he writes every market day at 3 AM Eastern Time, from wherever in the world he is. But he is not married to any positions. His favorite quote seems to be from Keynes, which is (loosely), "When the facts change then so do my opinions." And then he tells everyone about the change and why. You have to love that.
But this morning he was exceptionally strong in his opening piece about Europe and Germany. After reading the notes from GaveKal, absorb Dennis's pithy analysis.
And finally there is a one-page summary note from Kiron Sarkar, which he sent me while we were exchanging emails today. (With m on my iPad 3 in Tuscany. There is an Italian company that sells a SIM card for the iPad that gives unlimited monthly data for €20. Awesome! Pay attention, AT&T).
This is a real feast for those who love to think about what's behind the headlines. I love it.
As noted above, I am back in the village of Trequanda in Tuscany. I do so love this place. Such peace and such views. Real, meaty food for the soul, while your body gets amazing Italian cuisine! The first of our guests arrived today, and the conversation while dining al fresco, gazing over the Tuscan hills soaking up the sunset, was so fascinating. My version of relaxing and recharging, even if it was with a nonalcoholic beer (sigh!).
Have a great week; I know I will. I see lots of fresh tomatoes and mozzarella in my immediate future. And lots of great conversations and time to read and think.
Your wondering why I only booked two weeks analyst,
We woke up this weekend to a €100 billion "rescue" of Spanish banks, and the initial reaction of the market was relief. But did we not just see this movie, but with Greek subtitles rather than Spanish? Was this another of those "necessary but not sufficient" plot lines that Europe is so good at? Kick the can down the road and hope for a happy ending?
Pardon my skepticism, but I see numerous problems. In the first place, €100 billion will not be enough. While the current estimates are closer to €40 billion (if you ask the Spaniards), JP Morgan estimates it will be more like €350 billion. Others estimate more or less, but €100 billion is decidedly optimistic. Even the Spanish authorities are acknowledging that there is another 35% downside for the housing market, which is the main source of the losses. It appears that has NOT been included in the guesstimates.
Secondly, this saddles Spain with yet more debt, which will force the rest of already-sold Spanish debt into a subordinated position (more on that from Louis Gave, below). It does not address the problem that Spain is running an almost 10% of GDP deficit and will need to access the markets for very large sums in the near future. For all intents and purposes, they have been shut out of the bond market, which is why they needed a "rescue."
Third, it does not address one of the fundamental problems, which is the subject of this week's Outside the Box from Charles Gave: it does not help solve the trade imbalance between Germany and the periphery nations.
Germany has two very bad choices. It can finance the multiple trillions of euros of debt of Spain and Italy (and France), converting it into eurozone debt, while giving up its own fiscal sovereignty and allowing a eurozone-wide fiscal union and taxing authority; or the Germans can spend trillions of euros allowing the eurozone to break up, either by exiting themselves or allowing the southern countries to exit.
The market is not going to finance Spain, Italy, et al. in the short term (i.e., this year). That means the ECB will have to print money or some European entity will need to have a basically unlimited blank check at the ECB, if those countries are not allowed to default on their debt. Someone, or some group of someones, is going to have to write a rather large check. The question is whether it costs more to stay or to go. Germany leaving the euro would not be good for German exports, which are 40% of their economy.
Finally, it is not clear exactly how this bailout (let's call a spade a spade) is going to come about. There will have to be, I assume, agreement from the eurozone countries if the EFSF or ESM funds are to be used. Further, if you make this deal for Spain, then Greece, Portugal, and ESPECIALLY Ireland are going to demand a reset. I am sure there is a coherent plan here somewhere, but I can't find it as of Monday night. What I did find is this quote in the Financial Times (jumping to the end of the story):
" 'Many Irish people looking at the deal this morning will be asking themselves why is there one set of conditions for us and another for Spain,' said Mr Doherty. Ireland's economic crisis closely resembles the situation in Spain, where a property crash has morphed into a banking crisis, leading to calls that Dublin should renegotiate its existing EU-IMF bail out deal. Aware that it is unlikely to persuade the troika to reopen its own bailout program, however, Dublin moved quickly on Sunday to deny that Spain's program would be less onerous than its own.
"The Spanish program could also produce political problems outside current bailout countries, particularly over the issue of which of the eurozone's two bailout funds is used for the rescue.
"Dutch and Finnish officials have warned they do not want the new bailout funded through the existing rescue system, the €440bn European Financial Stability Facility, because its lending is treated like any other private lender, meaning it has no seniority in the repayment queue." (emphasis mine)
The Spanish prime minister played the Germans very well. He got what appears to be a much better deal than the Irish. But then, he was playing hardball. This note from Joe Weisenthal at Business Insider:
"According to El Mundo, Spanish PM Mariano Rajoy sent a stunning text message to FinMin Guindos prior to the bailout negotiations. He said, according to El Muno editor Pablo Rodriguez: "Resist, we are the 4th power of the EZ. Spain is not Uganda." Translation: We're a major power, not some random IMF-case banana Republic.
"The followup message (according to Google translate) "If you want to force the redemption of Spain will prepare 500,000 billion euros and another 700,000 for Italy, which will have to be rescued after us."
"Bottom line: hold out for something good. We are powerful, and if they don't give in, the whole thing will go down. It will cost Europe 500 billion if Spain goes bust, and then another 700 billion if Italy goes bust. No wonder Der Spiegel, which represents the German point of view, has an article blasting Spanish blackmail."
And before we get to Charles's piece, let's look at this quick analysis by his son Louis Gave, the CEO of GaveKal, writing from Hong Kong (www.gavekal.com):
"As we go through the few scant details of the bank bailout offered to Spain, we cannot help but shake an uneasy feeling of deja-vu all over again:
- Banks confronting a deposit flight – check.
- Sovereign shut out from debt market – check.
- Loans provided to help sovereign deal with the situation – check.
- Potentially pushing current sovereign debt investors into a subordinated position – check.
"It is on this last point that the Spanish 'bailout' could prove to do more harm than good. Indeed, as we highlighted with Greece, when policymakers transform government debt into subordinated debt, they may as well shut down that market for good. This for a very simple reason: most investors who buy government debt do so on the premise that the paper is the most 'risk-free'. These are not equity investors, carefully weighing the risk-reward of a current asset.
"Investors into sovereign debt are all about minimizing risk. The reason one buys government bonds is first and foremost for capital preservation and portfolio diversification. Subordinated debt does not meet those requirements. Thus, Europe's policymakers, from one day to the next, could potentially not only increase the Spanish debt load by 9% of GPD but simultaneously make Spanish debt considerably more risky, and thus more unattractive. Beyond an immediate knee-jerk reaction, it seems unlikely that the Spanish contraction in spreads will be meaningful or lasting."
What Europe did over the weekend was put a band-aid on a very deep gash. To actually fix the problem, Europe must remove bank liability from the various nations and make them joint and several. But that is going to be something that Germany and other nations will fiercely resist. When the dust settles, the markets will realize, I think, that this latest move did not solve the real problems. It was just a way to stop the immediate pain. There is more to come, and it will require a lot more money and the loss of a great deal of national sovereignty if the eurozone is to hold together. It took the US decades, if not a century, to get to that place. Europe has a few years under its belt at most, and the crisis is right on top of them.
I am in New York tonight, just back from dinner with some of "the guys." (Jonathan Carmel of his eponymous hedge fund, Dan Greenhaus of BTIG, Barry Ritholtz of the Big Picture, and Rich Yamarone of Bloomberg). The topics were all over the board. I am not certain we solved any big problems ourselves; but the Chinese food at Shun Lee was sure good, and the conversation was sparkling.
It is time to hit the send button. Note: There will be no new postings on the Over My Shoulder website for the next 24 hours, as we do a major web-hosting switchover.
And now, let's turn it over to the always-incisive Charles Gave.
Your sorry to rain on Spain analyst,
Nobody, in my book, slices and dices data more thoroughly or convincingly than Greg Weldon. In this week's Outside the Box, he first dispels the illusion that either of the two most-expected outcomes of the growing eurozone crisis is really any kind of a solution – neither expelling Greece nor keeping Greece in the club is going to work, he argues – and then, in a feat of legerdemain, he conjures up an alternative that just might work – and backs up his idea as only Greg can. But is this a rabbit he's pulled out of his hat, or is it ... a Black Eagle?
This letter will print a little longer but, as is usual with Greg, it's chock full of great charts. You can learn more about his work at www.weldononline.com. For institutions and hedge funds, it should be required reading. (It is a little more than your average service, but as you can see, he really gets into the data very deeply!)
I am in Philadelphia tonight to speak for Steve Blumenthal's Advisor Forum. We did an evening at the National Constitution Center museum, where they had a Bruce Springsteen exhibit on the first floor and rather fascinating historical display of the history of the US and the Constitution. At the end is a room where there are 39 bronze life-sized statues of the men who were at the Constitutional Convention, displayed as they might have been arrayed at the signing. It got me to thinking about the times. Indeed, there was a quote from Washington about how bad things had become in 1789, sounding much like so many who now see the US as a hopeless culture, careening down a path of socialism and entropy. And certainly, the US and much of the world face some very hard choices in the next year or so; but somehow I think we will do just fine, even if we make a few bad choices and have to correct our course more than we would like.
Of course, it helps to have a Washington, Hamilton, Franklin, Adams, Madison, and Jefferson to help guide the ship on its course, but we will have to make do with what we have. Every country needs leaders with a clear vision and a love of posterity. Maybe later generations will recognize leadership where we do not. Here's hoping.
On Wednesday I get to spend much of the day with David Rosenberg, and I am sure we will go over our own poor vision of what will happen. And Thursday I get to have lunch with George and Meredith Friedman of Stratfor, in Austin, where I will listen as he gives me his latest take on the world. I always come away from my time with them with a whole lot more insight. Then it's a few afternoon meetings and on to the University of Texas for a seminar with Rosie and Rich Yamarone (with whom I had lunch yesterday in New York). It will be fun.
Your trying to get a whole lot done in a short amount of time analyst,
For this week's Outside the Box I want to share with you a singularly interesting conversation between Niall Ferguson and Ben Laurance, in the Sunday Times of London. What really grabbed me about it was the way Niall goes right out on a limb and yet makes such a convincing case that, when push really comes to shove, Germany will bite the federalist bullet, because it's overwhelmingly in their interest to maintain a united eurozone.
"I am not a federalist," says Ferguson. "But the costs of the single currency disintegrating are really so high and would impact so many people, that the only responsible thing for me to do is to argue urgently for the next step to a federal Europe. I see no alternative at the moment that isn't a great deal worse."
And the other option? "On the other hand — and this is the message to Angela Merkel — to use George Bush's phrase: this sucker's going down. We've reached that point."
Niall has never shied away from addressing the big questions. His latest tour de force, Civilization: The West and the Rest (just released in paperback in the UK, as Civilization: The Six Killer Apps of Western Power), demonstrates how Europe went from being a fractious, disease-ridden fourteenth-century backwater to global dominance, through the development of six "killer applications": competition, science, democracy, medicine, consumerism and the work ethic — and is now experiencing a precipitious decline (along with the rest of the West).
Are the stakes really that high? You bet. Everywhere I go, people are talking about and working hard on solutions to the issues that will make or break us in the coming decade.
I was part of a great conversation like that just a couple weeks ago, at the Casey Research conference I mentioned, down in Florida. When I'm at one of these things, I keep thinking, "I just wish a couple million of my best friends could be here, too." Well, the Casey people just told me that the CDs of the conference are shipping out this week, and so if you want the next best thing to being there, you can pick up a copy here.
There was a real whirlwind of press and media interviews last week while I was in New York. You can go to www.johnmauldin.com and look on the left side for the interviews I did with the Wall Street Journal, Bloomberg, and Yahoo Finance. I am off to Atlanta tomorrow for two nights and a few speeches and meetings, plus a lot of time to read and think (I hope!) about some of the speeches I have heard the past few weeks. It really has been a lot to try and absorb.
Your looking for answers to the big questions analyst,
What do the “Big Fitz,” the largest ship ever to sail the Great Lakes, and the Eurozone have in common? Hint: the former sank without a trace. Or, as Grant Williams so eloquently puts it, in his Things That Make You Go Hmmm… for Nov. 13 (this week’s Outside the Box), “One can’t help but think … that this week may well have brought us to the wall at the end of the road down which Europe has been kicking the can for quite some time now.”
Grant inspects the SS Europe from bow to stern and concludes: “The smoke has pretty much cleared now and those in charge of the SS Europe are left with a stark choice – print money or allow the break-up of the Eurozone and the end of the common currency known as the Euro. At this point it really IS that simple.”
So come on along as Grant takes us on an eye-opening and at times jaw-dropping ride – there are some real insights here. From his perch in Singapore he sees the same problems I do, just from the other side of the globe. And that perspective is worth your time.
As you read this, I am on my way to Capitol Hill to meet with a member of the Super-Committee. If there is anything I can report, you will get it this weekend. I hope I can bring good news at some point. Then it’s back to the UBS Wealth Management Conference in time to hear Ken Rogoff (and Alan Greenspan) on a panel. I am looking forward to that. Tomorrow night in my own bed again. And be looking for a special note from me on Thursday.
Your trying to figure out how we get out of this mess analyst,
Long-time readers will be familiar with Michael Lewitt, one of my favorite thinkers and analysts. He has gone off on his own to write his letter, and I am encouraging him to write even more. I call Michael a thinker because he really does. He reads a lot of thought-provoking tomes and then thinks about them. And then writes, making his readers think. The world needs more Michael Lewitts.
Today, he roams the world, commenting as he goes, starting of course with Europe. I have permission to use the first half of this most recent letter as today’s Outside the Box, leaving off the investment recommendations that he shares with his subscribers. If you are interested you can subscribe at www.thecreditstrategist.com.
I am back from the Kilkenomics Economics Festival in Ireland, where there was a lot of attendee angst about their banks. They are not happy about taking on private debt with public money, and the mood in Ireland is to tell the ECB to take their debt and (insert your favorite personal expletive). Clearly, the rest of Europe wants the Irish to pay.
I told them to be patient. When the rest of European banks are upside down sometime next year and France, Spain, et al. have to pay, the mood among voters everywhere will be quite different. I said they could probably default on their bank debt at that point and no one would notice, amidst the massive debts that are going to implode on the Continent. My remarks excited a measure of schadenfreude-tinged laughter from the crowd.
Michael Lewitt agrees. Noting this interview with Oliver Sarkozy, the half-brother of France’s Nicholas Sarkozy, he says:
“Institutional funding has a three-year average life, so European banks need to generate more than $800 billion each month to fund maturing institutional borrowings. This is, in Mr. Sarkozy’s words, unsustainable. And the markets are saying so. The CDS market for European banks is back at or above the peak levels seen during the 2008 financial crisis. While Mr. Sarkozy does not come out and say it, TCS will – the likely future for European banks is Dexia SA, which was nationalized by France and Belgium when it ran aground a couple of weeks ago.”
I will write more about what I learned in Kilkenny later this week, but Europe is getting ever closer to imploding, one way or another. There is no end of problems for the markets to focus on. I can only hope that we in the US will observe the increasingly sad state of affairs in Europe and become sufficiently motivated to fix our own problems. If we do not, we will end up in an even worse condition, which will then be worse for the entire world. I remain somewhat optimistic that we will fix what ails us, as not doing so is just too horrible to contemplate.
On that bright note, have a great week. I am off to Atlanta tomorrow and then DC this Sunday, and then home for a few months (more or less).
Your seeing too much to worry about analyst,
Folks, you hear a lot about the eurozone crisis, but what you don't run across very often is a coherent idea on how to move forward. My friends at STRATFOR, a private intelligence company, have done us all the courtesy of saying out loud what everyone else shies away from: Eject Greece from the eurozone.
It's not pretty. It belies the lovely concept of a unified and prosperous Europe. And the worst part: it comes with a big fat price tag, of the 2-trillion-euro variety. But it may be the only way to steer the train before it derails completely.
Today I have the privilege of sending you two pieces from STRATFOR. If you have a couple of minutes now, <<watch this video on preparing for Greece's (inevitable) failure>>. Then check out the written piece below, a deeper dive into the crisis as a whole. If you're interested in following all of STRATFOR's geopolitical analyses, as an OTB reader you can get a hefty discount off their subscription rate, plus a free copy of the NY Times bestseller by George Friedman (my buddy, and STRATFOR's founder).
Your hoping the Rangers take it all analyst,
This week your Outside the Box offers two views, one from the US and one from Europe, both dealing with banks and financing. First, back in July, my friend Chris Whalen at Institutional Risk Analytics wrote an important comment about how the situation in the housing market is blocking efforts by the Fed to stabilize the US economy. IRA is a rating agency that follows every US bank and consults for a number of large commercial and governmental institutions on bank performance and risk.
(You can see the IRA reports of all the failed banks since 2008 on their website. The folks at IRA have a retail website (www.irabankratings.com) that allows you to follow your bank’s performance for just $50 per year or subscribe to see all US banks for $1,000 per year. Many large corporations, investment advisors, insurers, and banks use the retail IRA bank ratings for counterparty risk management and other bank credit tasks. It is a great value for people who want to sleep soundly at night with reliable knowledge about their banks.)
One of the things that Chris has been writing about for the past several years is how the policies followed by the top four banks – Citigroup, JPMorgan Chase, Wells Fargo, and Bank of America – plus Fannie Mae and Freddie Mac, are preventing millions of American homeowners from refinancing their homes. While banks and corporate issuers of debt have benefited greatly from the Fed’s low-rate policies, consumers have been locked out. At long last, we now see President Obama and other politicians talking about the need to refinance American homeowners. Chris and his colleagues in the mortgage market, like Alan Boyce, are largely responsible for educating policy makers on this issue. Hopefully they are not too late to make a difference.
The second and shorter part of today’s OTB is two articles from Ambrose Evans-Pritchard of the Telegraph, on the current crisis in Europe. You need a scorecard to keep up with the latest developments, and he certainly provides one. Things could get very volatile, if he is even close to correct.
Have a great week, and my sympathies to all my friends who have “issues,” as in no power, etc., in the Northeast. Makes 100+ degrees seem like nothing.
Your waiting for cooler weather in Texas analyst,
For today's special-edition OTB, let's turn our fiscal eye across the pond to all that's going haywire in Europe. But not the continent's banking crisis, per se. Today's piece takes a broad look at who's really running the show. I'll give you a hint: they've done it before, and it wasn't too long ago. The folks at STRATFOR (a global intelligence publication) have spent the better part of two years saying that Germany will run Europe. The newly redesigned EFSF (European Financial Security Facility) can be considered concrete evidence of such.
From Berlin's point of view, the Eurozone is its sphere of influence, and its preservation is in Germany's national security interest. It's a new Europe, where Germany is not just the checkbook anymore, but holds some reins.
I'm sure you'll find this piece as thought-provoking as I did. Investors are always talking about geopolitical risk (but you and I talked about it first here); and if you're looking for geopolitical analysis and forecasting, I highly recommend you check out STRATFOR. OTB readers can get a hefty discount on a STRATFOR subscription, plus a free copy of (warning: more self-promotion) my book Endgame.
Your now craving schnitzel analyst,
Today, I'm sending you a week-old article. Fear not, dear reader—though the news peg is several days gone, the significance is historic... and when this author says "pay attention," I do. Today's piece is from my friend George Friedman, founder & CEO of STRATFOR.
During the week of Palestinian protests and the IMF scandal, George chose to write about an obscure decision by Poland, Slovakia, the Czech Republic and Hungary to form a battlegroup. Though you may wonder why, we're all about to care about the Visegrad Group.
The decision revolves around the new reality of a resurgent Russia, a weakened Europe and a fractured NATO. I don't think you'll wonder why you should care about Russia, Europe and NATO.
Read about this little-understood announcement and its meaning... then look for more of George & his team's writing with STRATFOR. Outside the Box readers get a 63% off discount on new subscriptions, which <<you can access here>>.
This week I thought I would give you an Outside the Box with a more European flavor, as I am in Tuscany at the moment and on to Paris later this week and then back here for a working weekend with partners. Life is tough. :-)
Dylan Grice of Societe Generale (based in London) is fast becoming one of my favorite writers. This thought-provoking piece makes us meditate on whether central banks will print money in response to the fiscal crisis in the developed world countries. I am not certain that all central banks will print with abandon, BUT we need to think about what happens if they do.
I need to hit the send button now, as we are off to watch Italy in the World Cup in a little village (Montisi) where they have set up screens in the town square. My first connection with European football live with crazy fans and all! Should be fun!
Your under the Tuscan sun analyst,
The cause célèbre these days is the potential reconstitution of the eurozone: ie, Germany leaving it, or Greece getting kicked out. To look a little deeper, today I'm sending you STRATFOR's take on these two scenarios. STRATFOR explores the geography of the continent and the historical context of the EU to understand what a German exit or a Greek expulsion might mean for the rest of the region.
After you read the article, sign up here to receive more STRATFOR global intelligence reports like this one.
With the establishment of the euro in the 1990s, speculation was abundant on how things would play out. In the last fews months we've seen that cheap credit for the Club Med countries came at a price, and now it's time to look at who will come out on top after the current economic crisis. There is a term for this type of global analysis: geopolitical intelligence. STRATFOR, a global intelligence company, uses geography, open source data, HUMINT, and a deep understanding of global affairs to produce analysis with a geopolitical perspective.
Today I'm including their take on Germany's changing role in the EU. But it is only a small sample of all they provide, so I encourage you to sign up for their free mailing list or become a member for greater access to features including Quarterly and Annual Forecasts that will put you ahead of the game.
While the US was focused on the health care drama over the weekend, over across the pond events are rapidly deteriorating in euro land. For this week's Outside the Box I offer two columns, one from the Financial Times and another from the London Telegraph. Both describe the problems that the eurozone faces. It is not pretty.
I was sent this note from a Steve Stough who translated this from a German TV news show' It is a nice set-up for the two short columns.
I was reading an interview with Germany's most-quoted economist and then, all of a sudden, his face pops up on a TV show (a panel discussion on Germany's version of Fox Business News) at the same time, so I paid close attention. Hans-Werner Sinn's remarks are apparently listened to as closely as are the Federal Reserve Chairman's remarks in the US. He said:
- The Greek drama will have a 'frightful' ('schreklich') ending no matter which course of action is taken. The objective is to avoid having a Greek default trigger another banking crisis across the EU.
- The EU member states are too financially fragile to take on any flaky Greek debt. The actual Greek deficit is running at 16% of GDP, not 12% as previously reported. Greece is in a deepening retraction, not a recovery, as previously claimed. [Germany's social security, welfare, unemployment, and health care entitlement programs are all running cash-negative or soon will be, but that is another subject entirely. Angela Merkel has a committee established to work on tax reform, meaning tax rate reductions - Steve].
- There are three bad alternatives. He recommends #3 (effectively, default):
- A Franco-German bailout. Dr. Sinn believes this is impractical and the worst of the three alternatives because the amounts required for an effective bailout are so large that it would trigger a jump in yields on French and German sovereign debt which would result in a Euro-wide financial crisis. In addition, Angela Merkel said 'no,' and so did Guido Westerwelle (her coalition partner and foreign minister).
- IMF loans. Dr. Sinn believes that this would accelerate the Greek economic contraction with a dramatic deflation of wages and prices, which could lead to civil war, revolution and a political destabilization of the area.
- Exit the Euro zone, revive the Drachma, re-denominate the sovereign bonds in Drachma, let the Drachma collapse, and rebuild after the collapse, largely on tourist remittances Assuming a small amount of domestic (internal) default, this would be the least-painful to the Greek populace, but German banks and investors would lose approximately $38 Bn in bond investments +/- what can be recovered after the Greek economy recovers. Eventually, Greece would be allowed to re-join the EU.
- A Franco-German bailout. Dr. Sinn believes this is impractical and the worst of the three alternatives because the amounts required for an effective bailout are so large that it would trigger a jump in yields on French and German sovereign debt which would result in a Euro-wide financial crisis. In addition, Angela Merkel said 'no,' and so did Guido Westerwelle (her coalition partner and foreign minister).
- Formation of an EU monetary fund is out of the question, he believes, because it requires treaty modifications that might take many years to pass.
- As an aside, he said that if German tax rates are not lowered, that Germany will slide back into recession.
As a quick aside, I know I said two weeks ago that I would do an assessment of the affect of taxes on the US economy. I decided to hold off until we can see what the health care taxes rally look like, rather than guessing. I will get to it, as I am quite curious as to the total level of the tax increases.
Now, to this week's OTB.
Today I am sitting listening to Ralph Merkle lecture on nanotechnology, part of a 9-day-long series of lectures on how accelerating change in technologies of all types will affect our world. 15-hour days and intense discussions are stretching my brain, but I still have to make sure you get your Outside the Box. Fortunately, I came across today's OTB last week from my friends at GaveKal, who offer a way to think about the Greek crisis and what it means for all European bonds.
There are a lot of allegations about manipulation of European bonds. It's those nasty traders. GaveKal shows us data that bond yields are actually quite logical, given the debt of various countries. But they also warn us, as part of their conclusions:
"As of today, there seems to be no additional risk premium related to the possible dislocation of the Eurozone. Clearly, this possibility would have such devastating effect on world financial markets that investors cannot even think of it (even if many talk about it)."
I suggest you read at least the beginning and then the end of this piece, even if the data makes your eyes glaze over. (I must admit the data made me feel all warm and fuzzy, but then I am somewhat of a wonk.)
Have a great week. I am getting overwhelmed here in California, learning about the future. It is going to be amazing, even if our bonds drop in price. We will live in what may be the most interesting and exciting period of human history. What a contrast between the financial markets and what the scientists continue to amaze us with. It is one of the reasons I think we Muddle Through, in spite of our rather negative economic environment.
You may not think that what happens in Kabul affects the sale of GM's Opel division -- but it's recognizing the connection between seemingly unrelated global events that puts you ahead of the game in investing. This week I'm sending you a video by my friends at STRATFOR. It links cars, jobs, German elections, and the situation in Afghanistan in a way that's truly insightful and informative.
Click here to watch this enlightening video. I've probably never mentioned it, but STRATFOR's founder George Friedman also has a free weekly intelligence report. I strongly suggest you sign up to receive it -- It's just the kind of unique global insight every 'outside the box' investor needs. Click here to get a mind-blowing Friedman analysis each week in your inbox. You'll enjoy it as much as I do.
Before we get into this week's Outside the Box, let me give you a few pieces of data that came across my desk this morning, which will help set the stage for the OTB offering.
Fitch (the ratings agency), in a downgrade of yet another 543 mortgage-backed securities of 2005-07 vintage, gives us the following side notes: "The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%... The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010. To date, national home prices have declined by 27%. Fitch Rating's revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today's levels."
So, what does an aging population do that has seen its retirement nest egg in the form of housing and stocks go literally nowhere for 12 years? You go back to work! David Rosenberg, now with Gluskin Sheff, offers us this insight:
"What really struck us in the employment report of a few weeks ago was the fact that the only segment of the population that is gaining jobs is the 55+ age category. This group gained 224,000 net new jobs in May while the rest of the population lost 661,000. In fact, over the last year, those folks 55 and up garnered 630,000 jobs whereas the other age categories collectively lost over six million positions. This is epic." [See chart below.]
"Moreover, the number of 55 year olds and up who have two jobs or more has risen 1.1% in the last year, the only age cohort to have managed to gain any multiple jobs at all. Remarkable. These folks have seen their wealth get destroyed by two bubble-busts less than seven years apart — the Nasdaq nest egg back in 2001 and the 5,000 square foot McMansion in 2007. Both bubbles ended in tears ... and so close together."
With that as backdrop, what are we to make of the prospects for recovery over the next decade? Not much, if we listen to Professor Paul Krugman of Princeton. He suggests that the developed world could be entering a lost decade, just like Japan after their crash. Let me quickly point out that I routinely disagree with Krugman on a large number of issues. And I usually know why I disagree and believe his policy suggestions are wrong.
That being said, one purpose of Outside the Box is to look at ideas and thinkers that we may not always agree with. Krugman certainly qualifies on that front for me. However, it must be admitted that he is a very smart man. Further, his thinking is important, because it somewhat reflects the thinking of that part of the establishment that is in charge of the Fed and the Treasury. And while we are not getting gloomy long-term forecasts from either the Fed or the Treasury, I find it remarkable that Krugman is less sanguine than his peers. And there is much (certainly not all!) within this interview that I find myself in surprising agreement with. This one made me think as I read and reread it.
If he is correct, the rosy recovery assumptions built into the already bloated budget projections are going to be far too optimistic, not just for the US, but throughout Europe as well. Krugman is interviewed very capably by Will Hutton, a veteran writer and economist for the UK Guardian (a bastion of liberal politics). The direct link is http://www.guardian.co.uk/business/2009/jun/14/economics-globalrecession.
Green shoots? Really? I invite you to read and think about what this interview means for the road to recovery. I will take this up more in next Friday's missive. (Note, I did not write a letter last week. There was a new Mauldin grandchild on Friday, and I decided that some things just take precedence.) Have a great week.
A long-time religious land bridge between the Islamic and Western worlds, Turkey now finds itself an economic gatekeeper, a US-backed contender for the EU and the only key that could unlock Europe from dependence on Russian resources. The value of your dollar is intrinsically linked to last weekâ€™s summitsâ€”the most important multinational summits in history.
Iâ€™d like to share with you an article by my friend George Friedman at STRATFOR. It delves into the Summits (G20, NATO, bilaterals) and explores the connections between finance and geopolitics. In this case, it boils down to two string-holding puppeteers: Germany and Russia. Germany, the largest exporter in the world, is happy to up its production while the US spreads its dollar paper-thin by contributing to an IMF fund that will bail out countries who will in turn spend their money in Germanyâ€™s already tremendous export sector. Russia, the largest supplier of natural gas to Europe, too stands to benefit from US contributions to the IMF pot, as their slice of the pie gets bigger with the panâ€”as long as Turkey keeps her pipes closed.
The decisions made and policies enacted at the Summits trickle down to you and me. To make sense of it all, I encourage you to read STRATFOR. George has arranged a special offer for my readers: click here to take advantage of a 2-for-1 deal; you get a 2-year Membership for the 1-year price of $349. STRATFOR is the best global intelligence service in the world, and their unbiased coverage of the G20, NATO, and other extracurricular summits is unmatched by anyone else.