Waiting For Godot
From Mark Grant author of Out of the Box
We shall never know the precise moment that it happened but somewhere around World War I would be about right. Everything had been crawling in this direction for a while and then the silent sparks flew and the connection was made and will never be severed again. The financial world had become integrated so that what happens one place in the world affects the rest of the world and the improvements in technology that have happened since this time has only moved the financial institutions in the world ever closer. News is almost immediate and the communication of it is instantaneous and to hold any other view borders on the edge of holding conversations with the Easter Bunny. Consequently when I hear some of the puffy eyed on TV claiming that America has decoupled from the goings on in Europe I become amused and wonder where this poor fellow has been hiding out on the planet. I always think of East Borneo but one is never sure. There is NO decoupling and there has not been any in ninety years and that is the truth of it. There are variations and it is all a matter of focus really and the American equity market is notoriously myopic and if the immediate news of some event in Europe is ignored it will only be for a moment as the effects of each and every event careen around the planet in a variety of ways reminiscent of some out of control eight ball on the pool table.
China is slowing down, part of it is just cyclical but it is slowing down and I expect anemic growth in the third and fourth quarters of this year. Europe is a mess, both politically and economically, and the entire Continent is in recession with the exception of Germany which is about to join its brethren in the outhouse. To think that this will not affect America is a mad dash to see Cinderella and her Godmother so please allow me to drag you back from this excursion. Now look, I do not run around calling for Armageddon and “end of the world” scenarios. Yes, it is true, some brandish this sword but I do not. I honestly think we are in for some tough times over the next two years and that the world will be in a very unpleasant recession mostly generated out of Europe as they have played the Great Game quite badly but, as I told one Italian newspaper yesterday, we are not going to enter Dante’s Inferno either though we may hang around the gates for a while.
The Days of Wine and Roses
With the dismissal of Mr. Sarkozy and his regime by the French people the politics in Europe took a decided turn into a more combative sport. The poor and wounded nations beg, Ms. Lagarde, ever a femme de France, pleads for Eurobonds, more ECB bond buying and further bailouts for the troubled banks all across the Continent which the countries of the European Union could not afford even if they wanted to and which Germany, in any event, will block so that their coming recession will not be even worse than what is likely to be forthcoming. When America ran into the wall in 2008/2009 the country, with assets of 125% of all of our major banks, strained and labored behind the plow to bail them out but it got done and, regardless of the downgrades by Moodys yesterday, they are now in much better shape than they were during the financial crisis and light years ahead of the large European banks where we find Credit Agricole levered sixty-six to one and Deutsche Bank levered sixty-four to one. I fear we are about to see a repeat of what happened in Iceland and in Ireland where the banks overcame their sovereign nations. The problem is that the European banks are three hundred percent (300%) larger than the assets of the nations in the EU-17 and if one, just one, of the big international European banks roll under the skids of the bankruptcy bus then “woe is me” won’t cover it. The days of wine and roses have ended now in Europe and I fear the porridge will be cold and deficient in nutrients. Now some of you may not agree with my synopsis but I quote the famed economist Miss Holly Golightly:
“Tough beans buddy, 'cause that's the way it's gonna be.”
-Breakfast at Tiffany’s
The Continuing Antics
From one perspective, and one that I choose to take with some frequency, Europe is rather amusing. Many of the impoverished or those who enjoy wearing their tailcoats in Brussels rush about like those filling the stateroom in some Marx Brothers movie. Not enough room of course and pleas and commands to move over but all to no avail. The only person that matters is the rather austere lady in the corner that instinctively frowns at all who comes near and so controls the space that is left for everyone else. Those without present their cases, unfold schematics of grand plans, promise more unbelievable cures than any Medicine Man could ever dream up and describe magical castles floating in the air all in an attempt to get the one lady that is still clutching her purse to open it and allow everyone to dine at the Four Seasons. She has done it before, she might do it again but she is mindful of what is in her purse and knows that the bankroll has slimmed by its former use. Besides she has children to feed at home and they will come first; make no mistake about this because any other such notion that you may have will lead you down Alice’s rabbit hole.
“You're willing to pay him a thousand dollars a night just for singing? Why, you can get a phonograph record of Minnie the Moocher for 75 cents. And for a buck and a quarter, you can get Minnie.”
-The Marx Brothers, A Night at the Opera
Waiting For Godot
One truism about life is that everything is fine right up to the moment when it is not. We do not need a “Lehman Moment” to get to the “when it is not” moment. My good friend, the noted economist Paul McCulley, is the grand touter of the “Minsky Moment” and I must ask him soon to give us all a working definition of a “Lehman Moment” which none of us will understand but it is worth a shot. Now think back about the “moments” that we have had; Greece blowing up at the Parthenon, Ireland finding her bags of gold had turned to lead, Portugal running out of empanadas and now Spain fighting windmills of her own design as the Prime Minister decrees the country’s “walk of shame” a “great victory for Europe.” With this kind of reasoning it is no wonder, no wonder at all, why Europe is in such trouble. The inmates have taken over the asylum and Nurse Ratchet has fled. So you do not have to wait for Godot so he can give you a working definition of “folly;” Europe is providing the answer day by day.
In the next days Greece will present her magic tricks at court and while the Dukes and Barons cheer in the wings it will be up to the Red Queen, this would be the bearer of the Holstein emblem, to decide if the tricks performed are worth the cost. There is a very good chance of the hand wave of dismissal here and then the theatrical event of the season, “Off with their Heads,” will begin. Then the savant of Madrid will be allowed in to show his wares claiming they are all of silk but coarse wool is closer to the truth. The money, if it comes, will be provided by the EFSF by the way because the ESM is not yet in existence. Then the plan is to transfer the loan to the ESM which will be senior to the holders of the Spanish sovereign debt. So this morning you must rush out and by the debt of Spain. You love to be subjugated; you delight in the masochism of the whip. Losing money is what you live for and why you breathe. Oh no; this is not you? Well then; maybe better not.
You can't teach an old dog new tricks, but you can't teach a stupid dog old tricks either.