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IceCap Asset Management On Europe: "If You Exclude All The Debt, There's No Debt Problem"
Excerpted from Keith Dicker's IceCap Asset Management,
Virtually every country in the world spends more money than they collect in taxes, and no group of countries has done a better job at this than those that formed the Euro-zone.
This collective group has so much debt, that a recent study by the Bank of International Settlements concluded it would take 20 consecutive years of surpluses to simply bring debt loads back to levels previously reached prior to the current crisis.
Considering that this has never happened before, we have little confidence that this type of spending constraint can be accepted and implemented by any of the respective governments.
There is only one way possible for any person, company or government to spend more money than they earn – they must borrow to make up the difference. And as long as the Euro-zone countries are able to borrow, they’ll be able to extend the charade a while longer.
This is the point when many investors and pro-Euro supporters will argue that all of the Euro-zone countries are able to borrow, and in fact each country is able to borrow at the lowest interest rate in history for each individual country.
This is indeed true. However, this is the point when IceCap reminds investors that there are two types of debt markets.
The first is the one where the price or interest rate you pay is determined by the open market, with no interference or influence by other forces.
In 2012, the Euro crisis reached it’s latest crescendo and each country’s ability to borrow was at the mercy of the open market.
Within a span of several months, the cost of borrowing increased from 50% to 100%. In effect, the open market said these bonds are very risky and there’s a pretty good chance, investors will not get their money back.
What happened next was a second type of debt market where prices and interest rates are directly and strongly influenced by governments via their central banks. To prevent the Euro-zone from collapsing in 2012, the ECB (European Central Bank) implicitly guaranteed borrowing for each Euro-zone country.
This second type of market is one where prices are not determined by private investors and a free market. For our economic buffs, this is similar to a centrally planned market or a closed market place. For the average investor, simply think about how products and services were priced in the Soviet Union prior to the collapse of communism.
The Table below demonstrates the key differences between these two types of markets. Anyone who argues that today’s European bond market is a free market and that current prices reflect reality, really shouldn’t be in the investment business.
Some will argue that the continued bailouts and stimulus packages from the ECB will allow the Euro-zone to continue on its merry way into eternity. We believe otherwise. None of these stimulus programs are feeding money down to the unemployed. Many are becoming extremely frustrated, and this is being reflected in the high turnover of current governments, increased popularity of extreme right and left wing parties as well as a rise in popularity of separatists movements.
Every market has a release valve, and for Europe it will be the bond market. The beginning of the end, so to speak, really starts when social unrest reaches a new level. It’s at that point confidence rapidly declines and so too will the European bond market.
Today, those that are comfortable investing in bonds issued by European governments, banks and insurance companies really don’t appreciate how far and hard this market can drop. The entire bond market is really like the Hotel California – getting in was easy, but just don’t try to leave. This is the point when the Euro bulls will discover the true market price for their Euro fixed income bonds.
The breaking of the Euro bond bubble will be much different than the breaking of the Technology bubble. The key reason for the difference is that the bond market is the funding mechanism for banks, insurance companies and governments. Any struggles in this market will absolutely ripple across to the equivalent markets in other countries.
We want to stress that this is a very complicated subject and perhaps this is the reason why it isn’t discussed by other managers, the big box banks and the main stream media.
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Full IceCap Asset Management letter below covering everything from ISIS, Ukraine, Obamanomics, Putin's strategy and sanctions blowback, Europe's deflation, and the Euro bond bubble...
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The solution to my credit card problems.
Exaclty, and that is the solution. Wipe the computer clean.
If you exclude all the oozing pustules, there is no sexually transmitted disease.
Friend of mine in College got crabs from some skanky blonde.
He said the sex was great...except for the crabs.
BTW , Icecap is an American setup.
So expectedly while blaming the pot, the kettle failed to notice, that the situation on his home turf is amazingly similar to the one he describes in Europe.
Just replace ECB with FederalReserve and you have a perfect rewrite of the article. US hypocrisy has no limits! Or is it just bitterness over someone cloning your dog and pony act?
Just chill, without the ECB doing this, Belgium could hardly afford buying YOUR debt in zillions.
Icecap, is trying to say: "Our shit is better than their shit".
I did not take this note to be a "pot calling the kettle black" type of analysis. I think the point was that all developed economies are following the same game plan, but it's more likely that Europe's experiment fails first. I did not get the sense that the unwritten message was "but the US situation is cool for cats." Everyone with a brain would agree with you - the US is doing the exact same thing.
Both people and governments have lived beyond their means by taking on debt they cannot repay. Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. Promises were made on the assumption that the advantages we enjoyed would continue.
Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Now reality has begun to come into focus and it is becoming apparent that this is unsustainable. The entitlements and promises that have piled up have become overwhelming. More on why this system will fail in the article below.
http://brucewilds.blogspot.com/2014/08/modern-monetary-theory-is-wrong-d...
Europe is a net creditor with no trade deficit.
http://freegoldobserver.blogspot.ca/2011/10/forgotten-crisis-and-what-ev...
Except when gross exposure becomes net.
Then if IceCap Management is correct the EU should move in with swat teams and arrest all the banksters for financial terrorism, wipe the slate clean and start over with crypto-currencies and open source software based governments.
Listen. In 300 years when it 'ALL' goes tits up I'll say I heard it first on ZeroHedge!
Rational thought tells a person Europe is ripe for a major meltdown. Yet central bank printing seems to keep it all going. The UK is living off of BoE printing, most people work for government, and to pay them the BoE prints money. While Washington demands Europe ruin it's fairly robust trade with Russia, whose growing market offers many European producers a chance to expand.
If I were to pick a flash point for EU crisis, I would think forced austerity in welfare payments could induce the massive immigrant communities of those living on benefits to begin slowly to rise up. Even as the EU has trouble paying benefits to immigrants, all nations maintain open borders for legal and illegal immigration, thus growing the communites most likely to come unhinged.
Who can forget London and the Midlands of England just a few years back. In a flash the immigrants hit the streets in open war on white Britain. And Sweden too, the army of unemployed welfare Muslims, attacked openly the people paying the benefits that take care of all their needs. France has an economy falling fast and one of Europes largest Muslim communities, and one that is not at peace with the level of their welfare benefits. These millions could rise up in a flash if austerity came knocking.
Basically, the EU has set itself up for low grade civil war. Bankers steal 90% of the wealth and the other 10% is stolen to pay benefits to immigrants. Regular EU citizens are forgotten in this new civil and economic model.
Imagine, this EU is fighting a proxy war to add Ukraine, all of it, to the Brussels Communist Dictatorship! The EU is a clown show, that is headed for bad outcomes. Scotland is bidding for freedom, but wait, what do they say they will do if they get freedom, YES, demand full continued EU membership as independent Scotland and full EU member.
It all seems to go on longer than one might expect.
It always does.
Excluding debt, there is no debt - funny.
Can I do that? Wait...I think I know the answer.
No way Jose!!! Only banks and governments get that privilege.
This is a good thing. Because unlike the US, Europe does not have a trade deficit.
Excluding debt means that there is no debt in the US. But it also means that there is 60 billion dollars worth of goods (some that the population needs to survive) that won't be coming in. That has been coming in for decades.
As you say, some of the 60B is necessary. I'd say the absolutely necessary stuff is half that. The rest? Maybe someone in this country can finally get off their overly fat ass and make/create.
Half? You are being WAY too generous.
The charade will go on until...it can't. Or so the expression goes.
The trouble with believing that Central Bank "printing" can keep the music playing indefinitely is this:
"Real resources" are constantly being consumed as we all eat, burn energy, etc....but these resources are not being sufficiently replaced.
These resources are not being replaced because "real investment" is not taking place.
Real investment isn't happening because there are no "real savings". That is the surpluses from current production are not replacing all the "stuff" that we consume on a daily basis.
Central Banks can print/create all the money and credit they want, but they cannot print "real stuff".
Real stuff is created when real people perform real work.
Put simply, we're fucked.
hairball
Not sure I agree with the logic. In a ‘constrained’ world with finite resources you can throw savings and/or debt at increasing the availability of resources and you will have the same problem. The problem is that it is taking more and more Dollars, Euros, etc, to extract what took less Dollars in the past. The issue is one of operating an infinite money/debt system within a finite physical system (the Earth). Even if you had savings you would still have an issue with each Dollar producing less as in the past you will have consumed all the easy to extract raw materials.
The bottom-line is that the current consumerist system and the economics of that model assumes never ending growth and that resources will always be found. The reality is that the more we change the planet and impact the environment the more we increase the potential for catastrophe. I think we have already overshot and are just keeping the pedal hard down until the tank is empty. So I agree with the 'we're fucked' bit.
You look at the commodities and their oversubscribed multiple times. When it blows they will have to close the exchanges.
I lost my assets on an Icecap asset kyaking accident.
exluding all truth , there is no truth.
As the interest rate approaches zero, the amount of debt you can fund reaches infinity.
Been done , with predictable revolutionary end .
Tomorrow crawls from bubble to bubble .
See http://andreswhy.blogspot.com/2008/07/petroleum-price.html
US comes to my mind. Second palce for japan and the thrid for Europe.
Virtually every country in the world spends more money than they collect in taxes, and no group of countries has done a better job at this than those that formed the Euro-zone.
My only advice to people is to prepare by minimizing or getting rid of debt altogether, keep the balance in gold except for a fair wad of cash under the bed.
And even the cash won't be safe because they can easily haircut even those notes under the bed by declaring that all notes have to be handed in for new notes of say half the value.
Welcome to Argentina.
The common expression used to be 'rich as an Argentine'.
But for the last 70 years Argentina has defaulted every dozen or so years like clockwork.
They'll use inflation to do the same.