Via Mark J. Grant, author of Out Of The Box,
Hamelin Still Resides In Germany
“Never believe anything in politics until it has been officially denied.”
-Otto von Bismarck
I spoke last night at the Palm Beach Strategic Forum. It was an interesting event. The former Prime Minister of Pakistan and the former President of Peru seemed to be in agreement that the lack of decent leadership in the world was the main problem. I could not quite bring myself to agree that this was issue number one but they did have a reasonable point. The Assistant Secretary-General of the United Nations called for further investment in Latin American countries and was met with some opposition in his assessment of Venezuela. I took up the plight of Europe and explained why the stated debt to GDP ratios were incorrect and I present numbers that are more accurate which included contingent liabilities, government guarantees and Derivative obligations and then addressed the leverage issues as some of the European Banks particularly Deutsche Bank at 62 times and Credit Agricole at 66 times and the danger that this represented for the financial world. I was markedly the most pessimistic of the speakers but then nobody was very happy with my predictions for Greece, Portugal and Ireland in 2010. After dinner I was accosted by some woman from Europe who claimed that the debt of the ECB and the European Union had nothing to do with sovereign debt and I could not decide if she had a few too many glasses of wine or if she had an unfortunate family background where a proper presentation of manners had been left out of her schooling. All in all; an interesting event full of quite bright people and a vast array of viewpoints and a forum that is worth attending.
As our day gets underway we find the credit-default swaps for Spain hitting another new record at 521, out 19 bps, as their 10 year yielded 6.15% in London while the CDS for Italy also gapped out to 443. Everyone will be watching the Spanish auctions tomorrow as the positive effects from the LTRO are wearing thin just four months after their inception. What might come to pass is anyone’s guess but it can be said with certainty that there is no Quantitative Easing or Monetary Easing now taking place at the Fed or the ECB and the largesse of the last four years has stopped. Each day then that passes, as the cash river runs dry, will change the dynamics of the investment world. Treasuries will trade in one fashion as the harbinger of safety while risk assets, credit assets, will begin a widening that will be most unpleasant for many portfolios. The equity markets, in my opinion, will deteriorate as bond yields rise and as the problems in Europe frighten people out of the lowest rung of the capital structure.
There are some key dates forthcoming that will shake the capital markets and you should mark them on your calendar. First are the weekly new assessments by Moodys of the world’s banks which could result in significant downgrades causing much higher borrowing rates for many financial institutions. Then there is April 22 and May 6 which are the French elections and the run-off with Francois Hollande leading Mr. Sarkozy by a wide margin so that the two largest players in the European Union, Germany and France, are likely to hold quite different views of governmental spending, the ECB and the strategy for the European Union. Then there is May 6 which is the date for the Greek elections as polls now indicate a preference for parties that are opposed to the EU/IMF austerity measures and so we may find some sort of coalition that refuses to take part, any longer, with what is demanded by the Masters in Brussels and Berlin. Finally there is May 31 which is the Irish referendum which while now looking somewhat positive for the EU could change in a heartbeat if the EU continues to refuse debt relief or if Spain or Italy show up asking for help. In short, a quite difficult time to invest in any market as political events could overshadow economic announcements by a wide margin. I continue to suggest that profits be taken, that bullets are exchanged for step-ups, fixed-to-float bonds and for bonds tied to inflation. The drop in yields and the compression against Treasuries has taken place largely because of the easing of the central banks and now that it has come to a halt; a major reversal is in progress in my opinion which is only beginning.
The biggest change that I see forthcoming on the landscape, beyond those which I have noted, I believe will take place in Germany. China is heading towards some sort of landing and most of Europe is now officially in a recession. The bite of the austerity measures will deepen the process and between the two I think we will begin to see a decline in the finances of Germany which will bring all manner of howls and screams. Germany cannot keep heading in one direction while the rest of its partners founder all around them. The demands of Berlin are self-defeating eventually as demand falls off and I think we are just at the cusp of deterioration in Germany. The problem, all along, has been that Eurobonds or other measures representing a transfer union will cause the averaging of all of the economies in Europe so that the periphery countries benefit with a higher standard of living while the wealthier nations have standards of living that decline as the result of accumulated debts for the troubled nations. This will bring out nationalism again in force as the grand dream succumbs to the grim reality of the costs for nations that have lived beyond their means. The Pied Piper always gets paid and Hamelin still rests upon German soil.
The current situation is amusing in some respects. The IMF is rushing about like a street urchin begging for more money as they turn to China, the G-20, the BRIC nations and anyone else that they can think of to bolster their finances. I think this is provoked by Germany and France who do not wish to contribute more to the various war chests because it will cause ratings downgrades and a serious questioning of the financial positions of these two countries. “Caught between a rock and a hard place” would be my assessment of Germany and France now as the possibility of a quite hard landing looms larger and larger for the European Union. I think there is a dawning realization that Europe cannot support what they have undertaken without more pain than several nations are willing to bear. Pain at the periphery, pain at the core and now Spain heading past a recession and into a real Depression which is marked by their financials, property values and unemployment numbers matching America’s during the Great Depression. I honestly believe that the fort will not hold and that serious preparation now will save you from calamity in the upcoming quarters.
“All treaties between great states cease to be binding when they come in conflict with the struggle for existence.”
-Otto von Bismarck