I was on the ground in Spain a few weeks back, and then I ran into this piece in Spiegel Online about a small, struggling town on the Spanish border with (British) Gibraltar. This essay resonates in some of the same ways as the Michael Lewis piece on Greece. This is just one town, and Spain has many regions, some more prosperous than others; but in a country where there is 23% unemployment and 50% among youth, there is plenty of suffering everywhere. The general story is one of deep problems, especially with regard to inefficient labor laws.
The author asks a big question: "Can the demise of a single city serve as an example that reflects the crisis in the entire country, isolated like a bacterium under the microscope? A crisis that is so severe that it threatens the continued existence of the euro, if not the European Union as a whole?" The answer: probably not, but the plight of La Línea illustrates the problems and the difficult choices faced by the periphery.
Meanwhile, at the other end of the European economic teeter-totter (but just as peripheral, in its own way), we find the City, London's version of Wall St.; and while the residents of La Línea seem to be rather adept at smuggling, they can't hold a candle to the traders of Barclays (and, it would appear, other eminent financial institutions) when it comes to criminality. (There is never just one cockroach.) We have seen some egregious antics by the too-big-to-fail boys the past several years, but Liborgate really takes the cake and eats it too.
It will be hard to contain the outrage when hundreds of trillions of dollars of financial instruments are priced on this figure. A few basis points means tens of millions to the average guys. Heads should roll. And don't think for a minute that the damage – and the blame – are going to be confined to that side of the pond, either. In a deeply probing commentary yesterday on the Libor fiasco, David Kotok takes the Federal Reserve to task over the abandonment of its formal surveillance and oversight role with respect to its primary dealers (which include Barclays Capital, Inc.).
And so the global economic teeter-tottering grows more extreme and destabilizing. What will it take to restore the dynamic balance we need for continued growth? It's a big old system we're all part of, and it's not going to fly right as long as we're more interested in gaming it than growing it.
It was interesting to be at the table tonight with David Zervos of Jefferies, who invited a few local fund managers and your humble analyst to meet with a former voting member of the ECB and Greek citizen (a US-trained economist, too). I want to think more about what I learned, but I imagine my thinking will spill over into future letters. Dear God, we have dug a deep hole for ourselves. I hope at some point we can stop digging.
And finally, as an antidote to the rather somber take on Spain in today's OTB, take a few minutes and watch and listen to this flash mob in Barcelona. How can you be pessimistic for very long about a country that can do this?
Your wanting to stand on solid ground again analyst,
This week we look at a number of charts of various parts of the credit markets to see what kind of progress is being made on getting back to "normal" or to a "new normal." And my friend Prieur du Plessis shows us there is reason to believe that we have seen the worst.
"This too shall pass" are words we should all take to heart. Things will neither stay on permanently high or low plateaus. Those doom and gloomers who expect the world to keep devolving back to some pastoral age of scarcity where we will all need those guns and freeze dried food will be disappointed. We are simply hitting the re-set button on many of our institutions and businesses, and while the adjustment is painful, we will eventually get through it. Today's Outside the Box is a kind of map that tells us where we are in the process.
Dr Prieur du Plessis is chairman of Plexus Asset Management and writes the Investment Postcards from Cape Town blog (www.investmentpostcards.com). Click here to subscribe to e-mail updates to the blog.
It has long been my contention that we are entering an extraordinary period of time in which using historical analogies to plot market behavior is going to become increasingly problematical. In short, the analogies, the past performance if you will, all break down because the underlying economic backdrop is unlike anything we have ever seen. It makes managing money and portfolio planning particularly challenging. Traditional asset management techniques just simply may not work. Buy and hope strategies may be particularly difficult to navigate.
Part of the reason we are co challenged in our outlook is that we are experiencing a deleveraging on a scale in the world that is absolutely breath-taking in its scope. And to balance that, governments are going to have to issue massive amounts of sovereign debt to deal with their deficits. But who will buy it, and at what price? And in which currency? This week's Outside the Box gives us some very basic data points that illustrate the challenge very well. But the problem is that even though we can see the challenge, it is not clear what the final outcome will be, other than stressful volatility as the market reacts.
This week's OTB is by my good friends and business partners in London, Niels Jensen and his team at Absolute Return Partners. I have worked closely with Niels for years and have found him to be one of the more savvy observers of the markets I know. You can see more of his work at www.arpllp.com and contact them at firstname.lastname@example.org.
In the second installment of our special two day Outside the Box letter, we have good friend Greg Weldon's giving us his thoughts in his regular "Weldon's Money Monitor." Consumer expenditures account for approximately 2/3rds of U.S. GDP. A precursor to any underlying changes in consumer expenditures is consumer sentiment. Greg explains to us the state of the American consumer and how current federal and institutional initiatives will not help thwart the looming recession. You can read his work at www.weldononline.com.