From Mark Grant, author of Out of the Box
It was in January 2010 that I first predicted that Greece would fall and the yield on their ten year at the time was 4.38%. I can assure you that the day after I wrote my piece that the yield did not spike up to 20%+. This is not the way the world operates. That is not the way I think. I try to look further out on the horizon past some trade or speculative move by a hedge fund and I concentrate on the grand design and where we are going. Jessie Livermore called it “the trend” and postulated that if you got this right that you would keep winning the game. I am a believer in this concept.
For more than twenty occurrences in the last few years we have had a repeating pattern. Various markets rally on the hopes and prayers that the IMF or the EU or the ECB will unveil some grand plan and fix Europe with a magical silver bullet and not one of these forays into fantasy has been correct; not one. The LTRO was probably the most successful scheme but yet, even here, prices faded back in time as the capital was utilized and spent. Never mind that this money will have to be paid back in a couple of years now and never mind that the condition of the European banks has worsened in spite of the LTRO because the ECB can always do another one but what is not focused on is that the debts build, the recession in Europe worsens and so I predict that Germany will soon join the European Recession Club and that America by the fourth quarter or the first quarter of next year will also be mired in recession. No region on Earth is unaffected by the others and Europe is an unfixed mess that is worsening not correcting and China/Asia is slowing significantly and it is just a matter of being realistic about expectations.
The newest ECB plan does do several things that must be assessed. First it proves without question that all of the talk and focus on Firewalls was an exercise in futility as the base case was to isolate Spain and Italy which were deemed too big to fail and too big to support based upon the credit of Germany and France and now Spain has fallen off the cliff and Italy has one leg in the financial abyss. Sweet, short and succinct; the Firewall concept touted so heavily by the IMF, the EU and the ECB was a bust, a failure. Second the newest ECB concept involves the Stabilization Funds which are woefully inadequate to prop up/rescue Spain and Italy. Then the question of payment is raised and I assert that Germany and France do not have the capacity, at a combined economy of just $6.4 trillion to carry the troubled nations of Europe without serious downgrades by the ratings agencies and a flight from their debt. I said quite some time ago that the first instance reaction would be a massive amount of European money invested in the bonds of Germany, France, the Netherlands et al but as this crisis worsens and there is more impairment of the core countries then capital will leave them as well as they lose their safe haven status.
There is no free lunch. There is no free money and why people continue to think that there is goes back to snake oil sellers in the American Wild West and European gypsies waving garlic around and selling it to keep the vampires at bay; never mind that there were no vampires, they had the cure just in case any showed up. It is the human condition to believe in this kind of nonsense I suppose and it always works for a while, sometimes longer than others, but then someone asks where are the vampires afterall and when no good answer is given the markets wake-up and turn the other way. The next part of the ECB proposal, to try to get Germany onboard I suspect, is to have all of the financing done in the very short term. This, of course, means a mountain of debt at the short end of the curve and it will provide a distortion in the credit markets, in the yield curve and make each new re-financing more and more difficult as capital evaporates in Europe and as many American and Asian institutions sit out on the sidelines and watch the play from the bleachers. Cries of “doing everything to save the Euro” are lovely platitudes for the citizens and grand calls for the next round of the Crusades but then what do you expect any head of the ECB to say and especially one from Italy whose country is mired in its own recession? It is just snake oil selling jargon and I advise you to look at the actual plan and pay little or no attention to the rhetoric or the pretty packaging. Snake oil is snake oil no matter the bottle in which it is presented.
“Consult us about your trouble, no matter what it is. Hearing people is our business. We study we work we think could find the way to accomplish a cure. We devoted years to this task before our methods were perfected to produce results that satisfied us. Now we are satisfied because our labor and study have succeeded. We are satisfied because we can cure your disease quicker, we can do it better and because we can satisfy you better than anyone. Our aim is not what fee we can get but how many can we cure. We cure them all. Hundreds of people here in Salt Lake City can testify to this fact. Scores of patients whose cases were considered hopeless by themselves and by other doctors have found through our hands a quick permanent complete cure in robust health. This is not an advertising lie. It is a fact.”
-Salt Lake, Utah newspaper ad in December 1902
You may recall that one of the “tricks of the trade” was the use of people in the audience. They stood up and claimed that they had taken the magic potion and were cured of rheumatism, arthritis, cancer and that ninety year old Uncle Elijah and been able to throw away his cane after imbibing the stuff. This may remind you of what is going on in Europe presently as politicians from each and every nation claim that the newest European snake oil will cure the ailments of Europe for all time, for forever and for always. Yes, well, the printing of money has a cost besides the paper and brandishing yourself as the next new Savior of Europe is the trick of Kings and countless empires on the Continent and yet here we are after being saved so many times in the past. So I will tell you this; you produce the Vampire and then I will buy the garlic and we’ll leave it at that!
“Listen to them - children of the night. What music they make.”
-Bram Stoker, Dracula