The Tempest Has Left The Teapot

The Greasy PIIG

 

No, not some new Barbecue restaurant in Kansas City or Memphis but our old favorite haunt including and surrounding Athens. In the last few days they have trooped around Europe, Aegean Fiddler’s hat in hand, asking for more time to implement their agreed upon austerity programs. That is what they claimed of course as it was one more fabricated tact to get more money. It is nothing other than that.

 

 

 

The strategy was to ask for an extension of time in sentence one and then follow up in sentence two with the argument that since they needed more time that they would need more money until the various programs were implemented. Implementation, however, is obviously not a word to be found in the Greek language or if it is then it is to be found under the heading of “old Greek legend” or “tales of brave Ulysses” or “myths of the Greek gods.”

 

 

 

Merkel and Hollande both had the same retort to all of this pretense which was that they wanted Greece to remain in the Eurozone but that there would be no extensions and that Greece had to stick to the bailout agreement. Consequently no second sentence was spoken which was the purpose of the European walk about and so the mission was a failure. There will never come a time when Berlin or Paris will say anything else other than they want Greece to remain in the Eurozone; so never expect it. The showdown will come over money and whether it will be given or not which will then either be one more bundle of Euros down the rabbit hole where its value will decrease like a shrinking Alice or the end to the handout which would force the return of Greece to the Drachma. All of this will ostensibly be decided sometime in October after the Troika report except they already have the report in all but its formal version and they are agonizing between tossing good money after bad or turning over one more losing hand in resignation. This card game cannot continue ad infinitum and it is now really a question of the politics in Germany and what that will force Ms. Merkel to do. There is increasing displeasure in Germany with this little party and the political pressures may well force an end to this game of charades where the debt to GDP ratio of Greece is thought of as anything other than an unmitigated disaster and where bills cannot be paid along with the promises. Over the weekend the Netherlands Prime Minister said he was done and the German Finance Minister has said he was done so we shall all watch how long the Faustian deal with the Devil remains in force.

 

 

 

The time has come to prove by deeds

 

that man will not quake before the pit where fantasy

condemns itself to tortures of its own creation

 

when he advances to the narrow passageway

 

about whose mouth infernal flames are blazing

 

Approach the brink serenely and accept the risk

 

 

 

 

Dexia

 

The carnage continues. I recall vividly when the Prime Minister of Belgium stated that Dexia would only affect the debt to GDP ratio for Belgium by one percent. He did not count the contingent liabilities in his calculation of course and I called him out on his projection at the time stating that it was some Belgian waffle type of fantasy. Now the fantasy is proving itself to be just that as the losses continue to mount and are $16 billion in the last eighteen months which will have to be borne by Belgium (60.5%) and France (36.5%) and Luxembourg (3.0%). The guarantees for Dexia, I predict, will continue to rise and will exceed more than $125 billion and perhaps much more than that. As contingent liabilities become real losses they will hit the balance sheets of these three countries and I think that both Belgium and France will be forced to take material hits to their ledgers which will cause both downgrades and increased costs of funding. I would be avoiding or selling the credits of these two countries now.

 

 

 

Portugal

 

I have been saying for about a year that Portugal will be forced back to the PIIGS’ trough and you may expect it now to come sooner rather than later. The projections for Portugal during the past year have been whims and fanciful merriment meant to lull the watchers into sleep and they have been fairly effective. Now, however, the real numbers begin to roll out and they are dismal. Portugal, the EU and the IMF had projected a revenue increase of 2.6%, which I have often disputed, and Portugal finally reported out actual receipts that were -3.5% as the economy continued to contract and as unemployment hit 15%. With a deficit target of 4.5% Portugal will now need to find another $3.5-4.0 billion to bridge the gap. Much of the projections for Portugal were based upon ending the 13^th and 14^th month salary bonuses but this was declared unconstitutional and was never corrected by the legislature. The Troika arrives today in Lisbon and we are already hearing the echoes of Greece calling for more time, extensions and diminished austerity measures. As is the case for Greece you may expect a second sentence which is the asking for additional funding. Expect Portugal to be back in the headlines soon.

 

 

 

China & the American Infection

 

Prepare yourself and not just for some news from a far off land but for data that will absolutely affect the United States and Europe. China is hitting the wall and whether it is caused by Europe or of their own making; the wall is no less real. Caterpillar, one of America’s bellwether companies, who relies upon China for 25% of their revenues is going to be one of the affected companies and in a major fashion. Their sales of mining equipment have plunged the most since January 2009 and this is the fifteenth month of decline. Sales of machinery for the building and construction industries are also in a serious slump. In the coal industry, now at a virtual standstill, machinery sales were off 53% in July and the total fixed income asset investments in this sector have plummeted from 19% to 3% giving you some idea of the severity of the situation.

 

 

 

If you are smart you will take a look at your holdings and note which companies receive a significant portion of their earnings from China. I make no specific recommendations but I point to any and every company where the Chinese revenues make up a meaningful part of their corporate revenues and earnings and factor in a meaningful decline because that is what I think will be occurring. I believe the decline will take place across all sectors and all industries as the growth engine that has driven so many of the markets grinds to much lower levels which I have projected to be around 4.0% and may be worse than that. We are facing a Europe in recession and China perhaps approaching one several quarters out and here is one more drag upon the United States that I think will drive the world into a global recession by the end of the first quarter of 2013.

 

 

 

Genug!

 

This is German for “Enough” and I think this will be the operative word for the rest of this year. The Prime Minister of the Netherlands over the weekend already used the Dutch word “Genoeg,” which is their equivalent word, in reference to Greece as he stated clearly and unequivocally that the Netherlands would not fund any proposed third Greek bailout. The entire concept of the protection of Firewalls has failed with the forthcoming capitulation of Spain proving that some sort of supposed protection against speculators does nothing to cure or help the nations that were meant to be protected. Spain will require around $350-400 billion in my view to right itself and the problem is actually squared as a country receiving money then can no longer contribute to the funding of other countries and so the burden then rests upon Germany, France and Italy with Italy like to be the next nation in line for assistance. Then Germany and France with a combined GDP of $6.2 trillion just do not have enough capacity to fund all of Europe without serious downgrades and vastly increased costs of funding. The first instance reaction to move capital out of the troubled nations and into the strongest of the core nations in Europe will be followed by a capital flight from even these countries as the storm clouds darken and as the financial tempest begins in Europe.

 

 

 

 

 

 

I advise you to take note of the political opposition that is coalescing in Europe. The cry across the Continent, in various languages, is “Enough.” All of the grand designs speculated about for the ECB rest upon the use of the EFSF and/or the ESM as stated specifically by Mr. Draghi. Over the weekend the Bundesbank was absolutely critical of any such plans and they were supported by several statements made by Ms. Merkel. It is now dubious, in my view, whether Austria, the Netherlands, Finland and perhaps Germany would support not pledges but more actual money to be used for Greece, Portugal and Spain. The rub is on and the size of these potential programs will, without doubt, affect the funding nations in Europe along with the nations that need the capital. Muddling is no longer possible, delay has run out of road, postponement is no longer an option as recession grips the Continent and as each solvent nation seeks to defend itself.

 

 

 

 

 

 

 

 

 

 

 

 

 

                       -William Shakespeare, The Tempest