Where to start..
Firstly, apologies for not posting sooner. I will post some technical charts up after this brief comment.
France, Germany and Italy made a joint statement out of Frankfurt today that the ECB will remain independent and that there would be no undue pressure from sovereign states to enforce the ECB to monetize debt in the same way as the US and Uk have already done. Merkel today made an additional statement that there would be no joint euro bonds. Just as the statements were given Portugal’s debt was downgraded to junk status by Fitch and Italy’s 10 year debt’s rates have risen back over 7%.
We can only put political comments into perspective by looking back at the history of how political leaders have kept their promises previously. Fiat currencies are based only on faith. Throughout history the last people to throw in the towel re confidence in that fiat currency are its leaders. (Whether they privately do something else is another matter of course). So just as Mexico’s 1976 leader poured cold water on ever devaluing the peso, some 10 days later he devalued the peso. Just as Norman Lamont insisted the pound’s peg to the emu would be held no matter, what some 24 hours later the peg was relinquished. If you base your investment decisions on what central bankers and political leaders say you will end up with nothing is the clear lesson from the history books.
It is clear that European leaders have consistently ‘not got’ what is occurring. They have remained behind the curve during the entire crisis. They have employed stop gap measures drip feeding money into the monetary wound that is their sovereign debt dilemma. Yesterday ratings agencies warned again on France’s triple A. They said (im paraphrasing) one more straw will break France’s back and she will have to lose her triple A credit score. Moments after this warning Dexia came out and declared they needed much more capital. Where will this capital from? France and Belgium are seeking yet another off balance sheet solution to the capital problems by, once again, guaranteeing the bank’s obligations. The UK famously did this with its banks. But the UK can do this as she has a printing press which France does not. The difference is clear and the market is starting to question just how sound all these off balance sheet promises are.
The US is barely any better with its ‘super committee’ proving less somewhat less than ‘super’. The UK is badly struggling in spite of the endless qe she is pumping into her debt markets. The UK and US are ahead of the curve in respect of understanding how to run a ponzi debt based system. They understand how the system functions. That immigrants and students etc are the best candidates to take on more debt. And that newco banks free of the bad debts of the bad banks are the best vehicles to increase debt/money supply. Some sectors of the Uk economy will do very well as the money flows in spite of debasement issues the UK will face. The Europeans to compare are novices at running this sort of system. Average personal debt in euroland remain low. Savings remain high. Europe is starting to grapple with this problem of bending its consumers to borrow and spend by gradually introducing student loans etc. Spain is finally threatening to remove free university tuition as a right and make students take loans. In spite of the euro chaos Europe has further to travel down Hayek’s road than does either the UK or US.
For now we have the euro crisis which will continue to take center stage until the ECB or IMF print to resolve the deep structural problems within the eurozone. I’ve been deeply researching the possible scenarios that could resolve this euro crisis. Rather than run through all the options, I recite to you the preferred option here.
The Germans/ECB/Bundesbank must accept debt monetization as the only ‘reasonable’ solution to these deep systemic problems. But their must be a pound of flesh paid for the Germans to accept this monetization strategy. I suggest only the closest ally states to Germany will see monetization support from the ECB. The dead wood must be cut away so the debt monetization is kept as small as possible and for as short a period as possible. I would suggest Ireland, Portugal & Greece will be almost certainly cut from the euro. Spain is a 50/50. Spain has very low government debt. Her people have very low consumer debt. Her people save nearly 12% of their salaries every year. Spain’s problems are structural in that they spend far too much and their economy is based only on tourism and agriculture. Spain could kick off a consumer boom given the debt levels are low but her banks are zombie banks for now and would need masses of capital to enable them to lend again. Spain is a big problem and frankly, if i were involved, i would let Spain sink with the others. A pact of Germany, France, Italy, Austria, Holland, Belgium etc would suffice as a euro core. An ECB treaty change to enable debt monetization and bank bailouts (tarp) would be conditional upon these states being removed from the euro. The remaining states would have to sign up to new fiscal constraints. Europe would divide and many French and Germany banks would need to be bailed out to take the hit that Portugal, Greece, Ireland, Spain leaving the system would entail. These states would have to immediately see their euro denominated debts take a hair cut. This would be great for these states and very bad for the banks. The UK would take a large hit from Irish debts. This is fine they have their own printing press.
How this affects us is a very good question. I would not want to be holding a lot of euros in a Spanish account at present. But we have some time, as the crisis will worsen before we get to the end game of monetization by the ECB due to the false ‘confidence’ of the political elite that we see above. Each county’s citizen’s accounts would have to be treated differently. To stop a bank run from Spanish and Greek accounts it is possible that your residency or citizenship determines what euros you are entitled to. This would stop Spanish citizens from transferring their assets to German banks and therefore avoiding the debasement. These sorts of issues would need to be worked through and may directly affect us.
The ‘final solution’ measures will inevitably come with Tobin taxes, capital controls, price controls and various other cross boarder travel issues. Its wont be a pretty solution but it will work in supporting the core and allow the insolvent states to address their structural problems ie a massive devaluation alongside cutting their euro debt mountain. (As their own currencies debase and debase these debts may, in fact, never be repaid as although their nominal euro value is cut their local currency value surges. Continued core banking tarps may be needed as these non core euro states debase again and again.
Asset markets wise. Don’t misunderstand me i’ve not transformed in to a super bear over night. I believe more than ever that equity markets rather than currencies and or debt is the place to remain. If you have a share of say VW, as just one example, you are hedged in many senses. You own a stake in a company with world leading assets. This is far better than any currency or government debt paper. Gold and silver, in spite of their volatility are safer than currencies. But what is very clear is that the ability to hedge is a vital skill and that all of us would do well to brush up on these skills as the storm approaches.
Upon that note, technical charts next..
All the best Rich
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