The Fat Lady Is Clearing Her Throat

Submitted by Mark Grant, author of Out of the Box

A Loss of Credibility

Once at a social gathering, Gladstone said to Disraeli:

"I predict, Sir; that you will die either by hanging or of some vile disease".

Disraeli replied,

"That all depends, sir, upon whether I embrace your principles or your mistress."

We have reached a point where the shepherd has shouted “wolf” one too many times, where the theatre goer has shouted “fire” one too many times and the crowd no longer believes the jargon and is standing pat. From one politician to the next in Europe the words are strikingly the same; “bold actions, courageous decisions, decisive plans” which are meant to stoke the propaganda machine and assure the world that all is well. We have had the bank stress tests; the first pockmarked by inaccurate data checked by no one and the second humiliated by an inaccurate construct which discredited it by its own shameless manipulation. We face a world where contingent liabilities, promises to pay and guarantees of debts are NOT counted and where asset guarantees, illusionary firewalls and unfunded rescue programs ARE counted and in some cases counted more than once. Europe has, in fact, provided a complex system of hoaxes, inaccurate data and false financial reports that have been for the most part believed but that belief system is now crumbling as every quarter presents new data that proves the inaccuracy of what we have been told.

“In my youth, I, too, entertained some illusions; but I soon recovered from them. The great orators who rule the assemblies by the brilliancy of their eloquence are in general men of the most mediocre political talents: they should not be opposed in their own way; for they have always more noisy words at command than you. Their eloquence should be opposed by a serious and logical argument; their strength lies in vagueness; they should be brought back to the reality of facts; practical arguments destroy them. In the council, there were men possessed of much more eloquence than I was: I always defeated them by this simple argument; two and two make four.”


                                                  -Napoleon Bonaparte

In America we are also suffering from a hoax; just one of a different variation. The notion that the United States, myopic in its vision, will escape the quite real recession in Europe and that there will be a decoupling of some sort is the same fantasy to be found in Cinderella and here comes the Prince to whisk you off to the castle. There is no fairy godmother coming to save us and I am afraid we are bound to labor for our wages just like everyone else. There is always variance between markets of different nations and regions but the last historical decoupling probably took place sometime before World War I and has not and will not be seen again in anyone’s lifetime. The world fought with rifles once and then tanks and now there are nuclear bombs and just get on with it because there is no way back. Recession in Europe will bring recession to China, will bring recession to America and just get it through your heads and plan accordingly.

The American jobs data on Friday shocked everyone; there was not one call from any corner that provided an accurate reflection of the result and yet what did anyone expect? Every country in Europe is in a recession except Germany and I can virtually guarantee you that Germany will be in one soon as they cannot avoid the contagion any more than America can. Germany and the United States, best of class in their own way, will be the last to suffer the slings and woes of misfortune but we will suffer from them in the end. The past monetary easing by the Fed and the ECB helped to delay it all but we are at a point now where any new easing won’t do much. This is because of our interest rates being at almost zero and where do you think we are going; citizens and institutions paying the government to hold our money? No, I don’t think so and this, coupled with plenty of liquidity now in the world so that any new injection of liquidity will provide only a very momentary buoyancy so that easing, any type of easing, will do very little to stop a decline in equities, a widening of credit spreads, a rise in Treasury prices and all of the other things that one finds in a recession which will be more severe than predicted by most and so the world, along with Europe, is meeting reality and will find it a quite unpleasant experience.

Looking Backwards

If the American experience taught us anything it should be first that ”best of class” will sink right along with the “rest of class” and that looking backward, when facing a financial decline has about the same benefit as dipping your body in the Ganges river and hoping for salvation. In a recession what was will not be and all of your attention has to be shoved forward to look at what will come and not what has come.

Percentage Increase, 1922-29

Industrial Production: +70%
Gross National Product: +40%
Per Capita Income: +30%
Output per factory man hour: +75%
Corporate Profits: +62% (1923-1929)

"Financial storm definitely passed."


                                -Bernard Baruch, cablegram to Winston Churchill, November 15, 1929

Greece has hit the wall and its financial engine lies in tatters. Spain has hit the wall and just not made the announcement yet. Portugal has hit the wall and will bang it again for good measure. Ireland has hit the wall and is bathing in its national self-pity. Germany is staring at the wall, declared “no Eurobonds under any circumstances” over the weekend while Monti says Eurobonds “will come” and so we are about to have a re-do of the Battle of Verdun. France is warming up to the wall and wants to spend even more to climb the damn thing. America is in self-denial that there is any wall at all. China is about to hit the wall and is adjusting its parachute.

Treasuries are the needle on the speedometer and if there is one clear indication of very serious trouble ahead you can read it there.

The fat lady is about to sing. If you don’t wish to listen then don’t show up later and say I didn’t warn you.