The Lessons Of 'Catch-Fools'

Via Mark J. Grant, author of Out of the Box,

Events are rapidly unfolding in Europe which may bring something more than the “blink, wink and nod” of the famous children’s poem to the forefront of everyone’s thinking. The Prime Minister of Spain and his band of merry men are under investigation on charges of graft. Each time they respond to the charges the responses are louder, higher pitched and stronger in their denial which is leading me to the conclusion that there might be something there. This is often the way of it in politics and when the dial gets turned up to the present level of decibels then there are likely some grains of truth in the allegations. If much more comes to the public attention then Mr. Rajoy’s government could come under a suspicion that is so prevalent that it may topple, first as set-off by the corruption and then as a result of the economic conditions that are now present in Spain. If you paid attention to the equity and bond markets then you would think that the economy is improving but this is, without question, not the case. Spain’s unemployment has hit 26% and is vying with Greece as being the highest in Europe. Catalonia and several other provinces are eyeing  succession while the Spanish economy is deteriorating at a remarkable pace given the projections of the IMF and the European Union. Of course betting upon the projections of these two entities during the last four years would have bankrupted any money manager in Europe or America but they keep on with the fantasies none-the-less as political considerations overshadow common sense by a wide margin.
It is not just the Don Quixote game of windmills now in Spain that many truths, if discovered, would lead to the downfall of this government. The Spanish banks, by their own admission, deal in “dynamic provisioning” where capital reserves are surely moved by political will and not economic principles so that when you look at the financial condition of any of their banks, any of them, suspicion is high that funny accounting is the normal course of business in Spain and so the huge and real fear that if the IMF/EU/ECB showed up and did an actual inspection of not just the banks’ books but the sovereign’s records that all kinds of charades might become unmasked. I suspect that the EU is fully aware of the issue which is why they do not wish to come in either as they prefer the blind eye to finding out what they do not wish to know. Capital flows from the central banks, yields drop, reliefs are sighed but it can be no more than a temporary position as actual economic statistics may not only cause social unrest in the spring but have a way of catching up with the perpetrator at some point. It may well be that the leaders in Madrid, Brussels and Berlin think that they are fighting with windmills, it certainly is true that the printing of small pieces of green and blue paper with wild abandon has overshadowed financial fundamentals and that the Draghi promise of unlimited funds has lulled the markets into a restful state where no “unsettling event” will ever happen again but never fear, reality will eventually raise her thorn-pocked head, and then we will all stare once again into the brutish light of a glaring sun. There will be consequences; there are always consequences!
The olive oil is flowing, elections are coming and the slope is looking increasingly slippery. “Bunga-Bunga” is echoed once again in the marbled hallways of Florence and Rome, rather remarkable antics may be preferable to the bowing to Berlin that was the hallmark of the Monti administration. There is a general rebellion against austerity by parties of the left and the right and the Italians, with an unemployment rate of 11.1% are, one could state accurately I think; are dissatisfied. The polls are turning rapidly from the hopes of the policy makers in the EU and there is now a general concern in the capitals of Europe. Of course it may be just like Spain where debt limits are ignored, where economic policies have no more value than the paper on which they are written and where extensions are granted as a matter of course because no one has the stomach to do anything else. The debt grows, everything is fine and getting better and the fairy tales increase in grandeur and in number. Cinderella’s foot fits the glass slipper, Sleeping Beauty is resting comfortably and Carlo Collodi’s 1886 famous character, Pinocchio’s, nose is growing in a remarkable fashion but then the Italians are fond of distinctive noses.
There is great wisdom in Pinocchio actually beyond what is generally known. At one point the puppet heads into the “Field of Miracles” where he plants his gold and waits for it to grow. There is some disappointment with this outcome in the book as he returns to garner his gold and finds that it has disappeared. Pinocchio then heads off to “Catch-fools” which is a place where everyone has done something exceedingly foolish and suffers as a result. The puppet pleads for restitution with the citizens of “Catchfools” but receiving none; departs. You may recall that later Pinocchio ends up turning into a donkey in Toyland where “everyone plays all day and never works” which is, as the squirrel said in the book, what happens to boys who behave in this manner. Then you may further recall that it wasn’t until the end of the story, after many unpleasant adventures, that Pinocchio was reunited with Geppetto after escaping from the stomach of the “The Terrible Shark.” I fear that this fiction may be foretelling events once again as we appear to be leaving “Catchfools” now and heading into our own rather unpleasant adventures that I believe are to come. You may not have read this book since your childhood but you may wish to review it once again.
The world presently believes that there is no “event risk” and upon this foothold and the money poured into the streets by the central banks the markets rest in peace. Roads do not go on forever, the day eventually fades into the night and the peace of the morning is often shattered by the shrill cry of the dove being attacked by the falcon. The Great Game is not “Toyland” and great care is now called for before we awaken to find that we have turned into donkeys, or worse, ourselves.
"You know, my dear, it isn't safe for a little girl to walk through these woods alone."
                       -The Big Bad Wolf