Napoleon

There are countless examples of rampant criminality and corruption as well as blatant evidence of a two-tier system of justice in America today.  Too many to note or write about, but in this case we want to focus on this concept of “money laundering” in light of the recent shutdown of Liberty Reserve.  The crackdown on Liberty Reserve has nothing to do with “money laundering.”  It’s about a cartel of “too big to jail” banks and the fraud financial system they operate eliminating any players that try to encroach on their turf.  That isn’t capitalism, or socialism and it certainly isn’t anything close to freedom.  It is a parasitic, oligarch created feudalistic structure that must be done away with.  We often hear people say “we never learn from our mistakes.”  Incorrect.  People learn from their mistakes when there are consequences to their actions.  Of course criminals don’t learn from their mistakes when there are no serious consequences to their crimes.

To Hell With War!

So you are a large corporate with local accounts in Italy or Spain, does today's solution tickle you pink? Pass the scotch tape...

Grillo refers to Berlusconi as “the psycho dwarf.” Grillo’s vision of Bersani is a “dead man walking.” In an interview that Grillo had with the New York Times over the weekend he said he would support neither side and that doing so “would be like Napoleon making a deal with Wellington.” He went on to say that, “We can change everything in the hands of respectable people, but the existing political class must be expelled immediately.” He has called for a nationwide referendum on Italy’s participation in the European Union and indicated that while Italy will pay its debts; it might be done in Lira. Do not underestimate this man. Do not assume that Italy will go on as usual and that this is just a split between the Left and the Right because this is not the case. Grillo’s call is for a new order, a new way of doing business and a new spirit for the Italians.

Federal Reserve Bank of New York, Lexington Partners; Tudor Investment, Brevan Howard, Goldman Sachs, UBS, Bank of Korea; BNP Paribas, Fidelity Investments, Deutsche Bank,, Freeman and Co., Bank America, National Bureau of Economic Research, FDIC, Interamerican Development Bank; 4 hedge funds, BTG Pactual, Gavea Investimentos; Reserve Bank of Australia, Federal Reserve Bank of San Francisco, Einaudi Institute, Bank of Italy; Swiss National Bank; Pension Real Estate Association; Goodwin Proctor, Penn State University, Villanova University, Shroeder’s Investment Management, Premiere, Inc, Muira Global, Bidvest, NRUCF, BTG Asset Management, Futures Industry Association, ACLI, Handelsbanken, National Business Travel Association, Urban Land Institute, Deloitte, CME Group; Barclays Capiital, Treasury Mangement Association, International Monetary Fund; Kairos Investments, Deloitte and Touche, Instituto para el Desarrollo Empreserial de lat Argentina, Handelsbanken, Danske Capital, WIPRO, University of Calgary, Pictet & Cie, Zurich Insurance Company, Central Bank of Chile, and many, many more.

In the spirit of the holidays and hope for a more prosperous 2013, we thought readers might appreciate a little humor to partially offset the relentless 'cliff' doom and gloom. So please, don’t take this too seriously. But if you happen to stumble across a ‘paperbug’ or two over the holidays, perhaps you could share some of the points made here. Humor sometimes helps people realize just how hopelessly misguided they are... Quantitative easing changes nothing. Remember, the PhDs are in charge of our economies and they know exactly how much our money should be worth. Those of us concerned that our money might lose purchasing power are just being paranoid. Choice is dangerous. Think Adam and Eve and you’ll get my point. Those arguing in favour of monetary freedom, of choice in money, of repealing legal tender laws, they’re just like that nasty snake Lillith in the Garden of Eden, the source of all trouble I tell you. ‘Tis the season to borrow and spend folks, as indeed it has been since 1971.

As we approach the end of the year and the various cliffs, bungee jumps and political idiocy that is in front of us you might want to take some time and pay attention to some friendly advice.  Yes, of course you know everything, yes of course there is nothing that escapes your attention and you are personally plugged in to the inter-galactic computer that provides not only financial answers and but divine indulgences but still; keeping an open ear might be a novel experience. Take some profits. You and I have no idea what these “detached retinas” might do in Washington. If you are betting for a living then I would say that the craps table is now safer than Europe. These people have flown over the cuckoo’s nest and have become disoriented by the flight. Parties such as this are funny things; the jesters jest, the Kings lord, the Palace of Versailles is abuzz and it all goes along until someone switches off the lights. Keep your eyes on the switches!

Markets, you see, always live in this “day before” where the bend in the highway never comes, where the path is always straight and fixed and where it is generally thought that nothing of consequence will happen. Then some event takes place, something magical or wonderful or awful occurs and the world is turned on its axis and nothing is ever the same again. We are in danger, “clear and present danger” and the strategy of the “day before” is no longer appropriate. $400 billion has poured into bond funds this year, an all-time record, with yields at depressed levels indicating a quite real flight to safety. The United States lost thirty-six percent of its wealth during the American Financial Crisis and, people or institutions, the song rolls across the landscape, “We won’t get fooled again!”

The most important alliance within the EU, the one that has ultimately defined the union's course over the past few decades, is the French-German axis. It appears that this is no longer the case. The once so strong friendship is in danger of fraying ever since the socialist Francois Hollande has become president of France. Not only was he elected on an 'anti austerity' platform (disguised as a 'pro growth' agenda, which is of course one of the most laughable misrepresentations ever),  it has turned out that his big-brother, anti-free market socialist agenda wasn't merely an electoral ploy to differentiate himself from Sarkozy. He actually means it. One thing is certain: the markets have not yet fully assimilated what is going on here.

Another week of central bank watching ahead, and markets will play their customary game of chicken with the U.S. Federal Reserve and the European Central Bank.  Both central banks have policy meetings this week – the Fed’s concludes on Wednesday, the ECB’s on Thursday – and capital markets have been moving higher in recent days on the hope of coordinated action.  For investors and traders, this sets up a classic “Buy the rumor, sell the news” pattern for the week ahead - as the overarching theme is that human history repeats because human nature does not change.  But Nic Colas of ConvergEx asks the deeper question, and the one that will retard any lasting move to the upside, is how much central banks can do without help from fiscal policymakers.

Ah Moldova… the poorest country in Europe, which just so happens to have had a Communist party majority in its parliament since 1998. These two points are not unrelated. Despite having achieved its independence from the Soviet Union over 20 years ago, the state is still a major part of the Moldovan economy…from setting prices and wages to media, healthcare, agricultural production, air transport, and electricity. Under such management, it’s no wonder, for example, that Moldova has to import 75% of its electricity. It is the exact opposite of self-sustaining. The government does a reasonable job of chasing away foreigners as well. Agriculture is the mainstay of Moldova’s economy… and while on one hand they say “we welcome foreign investment in agriculture,” on the other they say “foreign investors cannot own agricultural property.” It’s genius.

I recently wrote an article that addresses the subject of sociopaths and how they insinuate themselves into society. Although the subject doesn't speak directly to what stock you should buy or sell to increase your wealth, I think it's critical to success in the markets. It goes a long way towards explaining what goes on in the heads of people like Bernie Madoff and therefore how you can avoid being hurt by them. But there's a lot more to the story. At this point, it seems as if society at large has been captured by Madoff clones. If that's true, the consequences can't be good. So what I want to do here is probe a little deeper into the realm of abnormal psychology and see how it relates to economics and where the world is heading. If I'm correct in my assessment, it would imply that the prospects are dim for conventional investments – most stocks, bonds and real estate. Those things tend to do well when society is growing in prosperity. And prosperity is fostered by peace, low taxes, minimal regulation and a sound currency. It's also fostered by a cultural atmosphere where sociopaths are precluded from positions of power and intellectual and moral ideas promoting free minds and free markets rule. Unfortunately, it seems that doesn't describe the trend that the world at large and the US in particular are embarked upon. In essence, we're headed towards economic and financial bankruptcy.

With an economy of just $3.2Tn versus the United States $14.3Tn Germany is trying to prop up a Eurozone that is more than one trillion dollars bigger than America. They just do not have the resources for the task they are undertaking and I predict serious consequences, eventually, from their efforts. Germany is “best of class” and will be the last to go but they cannot evade the European recession in the end and I think it is only a matter of time and unfortunate decisions before the austerity demands made on so many will wind their way back home to those who made the demands. They used a timeline that was much too short for the job at hand and payment will eventually be forced upon them. They obviously get the joke where Eurobonds and other ploys of this nature average the economies of Europe and the standards of living over some period of time so that Germany, in the end, will suffer most as they have the furthest to fall. They have approached the G-20, China, the emerging market countries and all polite responses to the side; the results have been about zip. The Germans are running out of both time and money and Franz is squirming in the beer hall.

Markets are rallying on the back of Greece’s approval of the austerity measures, and all I can think of is the ill-timed 1938 speech by Neville Chamberlain.  But analyzing that leads to dark places, far too dark for a Monday morning when the markets are up.  So I’ll try and lighten the mood, and only think about a book with talking animals – Animal Farm:

Do not imagine, comrades, that leadership is a pleasure. On the contrary, it is a deep and heavy responsibility. No one believes more firmly than Comrade Napoleon that all animals are equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you might make the wrong decisions, comrades, and then where should we be?

Why do I find it so easy to imagine those words coming out of some technocrat’s mouth?  Why are the Greek people faced with bailout or chaos?  There has never been an alternative to the bailout since no politician has worked on one.  There is plenty of historical evidence showing that countries can default, and not just survive, but thrive.

With the world ever more lethargic daily, as if in silent expectation of something big about to happen (quite visible in daily trading volumes), it is easy to forget that just about a year ago the Mediterranean region was rife with violent revolutions in virtually every country along the North African coast. That these have passed their acute phase does not mean that anything has been resolved. And unfortunately, as BMO's Don Coxe reminds us, it is very likely that the Mediterranean region, flanked on one side by the broke European countries of Greece, Italy, Spain (and implicitly Portugal), and on the other by the unstable powder keg of post-revolutionary Libya and Egypt, will likely become quite active yet again. Only this time, in addition to social and economic upheavals, a religious flavor may also be added to the mix. As Coxe says: "Today, the Mediterranean is two civilizations in simultaneous, rapidly unfolding crises. To date, those crises have been largely unrelated. That may well be about to change." Coxe bases part of his argument on the same Thermidorian reaction which we have warned about since early 2011, namely the power, social and economic vacuum that is unleashed in the aftermath of great social change. But there is much more to his argument, which looks much more intently at the feedback loops formed by the divergent collapsing economies that once were the cradle of civilization, and this time could eventually serve as the opposite. To wit: "The eurocrisis has been front and center for nearly two years, during which time the economic and financial fundamentals have continued to deteriorate. “The Arab Spring” came suddenly, in a series of outbursts of optimism. It may have come at the worst possible time for the beleaguered nations of the North Shore. The Mediterranean has entered one of the stormiest periods in recorded history. It is the major contributor to risk in global equity markets. It is too soon to predict how these crises will end. The Cradle of Civilization is rocking amid an array of winds and storms. “The Arab Spring” ...may have come at the worst possible time for the beleaguered nations of the North Shore."