Saturday, August 11th, 2012
CONSUELO MACK: This week on WealthTrack, why rock climbing government bond investor Robert Kessler says we still haven’t seen the peak of the generational bull market rise in U.S. treasury bonds and why other investment routes are much more dangerous to your financial health! Great Investor Robert Kessler is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Three years into an economic recovery, it sure doesn’t feel like one. We are even beginning to hear the dreaded “R” for recession word here in the U.S. A recent headline in the Financial Times read: “Blue-Chips Raise Recession Fears.” The FT reported that “estimates of revenue growth for the largest us companies are being scaled back sharply by Wall Street analysts, signaling a mounting risk that the world’s largest economy may enter recession later this year.”
It is a development we have talked about with many WealthTrack guests. Sales and earnings estimates are being scaled back by analysts and companies alike as the global outlook becomes murkier. Recession is already happening in Europe. The so-called peripherals- Greece, Spain and Italy- are there. Even mighty Germany is feeling the pressure from its weaker neighbors. Germany’s central bank recently estimated its economy had grown “moderately” in the second quarter. According to The Wall Street Journal, that’s “shorthand for growth between zero and five tenths of a percent.” Not exactly reassuring for Europe’s largest economy, which its finance minister rightly describes as the “Eurozone’s anchor of stability.”
So if global economies and company sales and earnings are slowing, what does it mean for the markets? That is a source of heated debate and both sides are being reflected in the stock and bond markets. On the one hand, investors have been buying dividend paying blue chip stocks for their dividend income and their financial strength. The S&P Dividend Aristocrats Index, which is made up of 30 companies that have consistently raised dividends for at least 25 years, has traded around record highs recently. How well will their prices and dividends hold up in a global slowdown?
On the other hand, yields on U.S. treasury bonds have extended their multi-decade long decline over the last year, lifting the prices of the underlying bonds, as global investors sought their safety and liquidity. It has also helped that Federal Reserve Chairman Ben Bernanke has clearly spelled out the Fed’s intentions to keep interest rates low. And he has reiterated time and again that the Fed is “prepared to take further action as appropriate to promote a stronger economic recovery.” As PIMCO bond guru Bill Gross put it, in explaining why he is holding 35% treasuries in his PIMCO Total Return Fund: “don’t underweight Uncle Sam in a debt crisis.”
This week’s WealthTrack guest has been overweighting Uncle Sam in his portfolios for the ten years plus that I have been interviewing him. It’s been an extremely profitable run and he is sticking with it. He is Robert Kessler, founder and CEO of Kessler Investment Advisors, a manager of fixed income portfolios for institutions and high net worth individuals with a concentration in U.S. treasury debt. I began the interview by asking him about his long standing and contrarian investments in treasuries. What is he seeing that Wall Street is not?
ROBERT KESSLER: I think Wall Street is seeing all the same things I’m seeing. We’re just really interpreting those things a little bit differently. I look at the interest rate environment that we’re in right now, and most people think that this is created by Ben Bernanke, the Central Bank, and zero is some artificial number. The fact of the matter is, zero is a number that exists all over Europe now, and, in fact, that number is negative in five, or six, or seven countries in Europe.
CONSUELO MACK: So this is zero interest rates or negative interest rates on government debt, short-term government debt.
ROBERT KESSLER: Short-term government. Actually, even longer term. In Switzerland, it’s minus .25. So people who have a lot of money, and they want to park it someplace, they actually have to pay the government to put it there. Now, we haven’t seen that before. If you look at the way Wall Street’s interpretation of that is, they’ll say that that’s totally artificial. That’s not reality. And the reality really is that big money right now doesn’t want to go anyplace with it. It doesn’t matter if it’s corporate money, where they’re sitting with trillions of dollars, or individuals. What they want to do with it is make sure it’s totally safe. And money has a real value. Most people don’t look at money properly.
Money is a commodity. Just like gold, or like grain, or corn, or anything else. To store it someplace, it costs you some money. So if you want to store it in Switzerland, they’re going to charge you a quarter of one percent. When we look at zero in the United States, to make this really interesting, and people say, “Well, where do you think interest rates really are going?” And now I really look at everyone and say, “I don’t know. But they certainly could go negative,” meaning that the whole treasury curve, which is two-year, five-year, ten-year, thirty-year, all of that curve could all go down to zero. And everyone thinks there’s so much out there to buy. Look at all those treasuries. Come on. We have so much debt. Someone has to support it. What actually is there is, if I don’t want to sell my treasuries and you don’t want to sell your treasuries, there aren’t that many treasuries. And that’s why rates really can go quite a bit lower.
CONSUELO MACK: I know that you hear from other people on Wall Street. And if someone on the other side were looking at you and saying, Robert, okay, so interest rates are at zero. Short-term interest rates are at zero. Investors have other choices. Zero is not a good rate. That’s what they’re saying. It’s not a good return. Therefore, even Ben Bernanke, who is keeping short-term interest rates at zero, which is a reality, and is saying that, I’m going to keep interest rates at zero probably through 2015, if not beyond; even he is saying the reason that I’m keeping interest rates so low, one of the reasons is I want people to invest in risk assets. I want people to go and buy stocks and, you know, finance the economy, where they get a higher return. I’m going to make investing in treasuries so unattractive that I want them to buy something else, and, therefore, help the economy.
ROBERT KESSLER: In the environment we’re in, which is a deleveraging, deflating environment, a real return on money may actually be negative, meaning that if inflation actually goes negative, one percent is a pretty good return. And the only reason all of this is happening is because there’s no demand in the marketplace. And as much as Japan tried to do something, you can’t create that demand. And that’s exactly what Ben Bernanke’s talking about. He’s saying, “If I get these rates low enough” … there was a Swedish experiment, which is interesting, when Sweden had a very difficult time, the Central banker said, “You know, we ought to think about going negative.” Imagine that. The rate overnight won’t be zero. It will be minus 50.
CONSUELO MACK: Right. So I pay you for the privilege of owning a Swedish government bond.
ROBERT KESSLER: A half of one percent. That will certainly induce everyone to go buy something else. And the answer is, when there’s no demand from the private sector, I don’t care how much money you produce, I don’t care how much you print- if the private sector doesn’t want to borrow it, you have no marketplace. We have what we call no velocity. No movement of money. So that’s the environment we’re in. And as to what an investor needs to look at, is not what the real return is on a treasury against inflation from last year, but where will it be next year. And next year looks like we’re going to be looking at, if not deflation, certainly lower prices.
CONSUELO MACK: Let’s talk about kind of, there are different things that you’re looking at. So one of the things that Wall Street would say is that, you know, number one, inflation isn’t going to continue to go down, because, like, it never does for any length of time, and, therefore, at least in our recent experience, and all our models are predicated on the fact that we’re going to get some inflation, and with all the stimuluses the Fed is doing, central banks around the world are doing, we will get inflation. You’re saying, no, the reality is we’re in a deflationary environment, and, in fact, you know, we’re not going to get inflation for a long time. Why?
ROBERT KESSLER: Let me give you the Japan example. The Japan example is a very good example, because we claim in this country that we would never do what Japan did.
CONSUELO MACK: Right. No one wants to be a Japan. That’s the blanket statement everyone makes.
ROBERT KESSLER: We are doing exactly what Japan did. And interestingly enough, in 1997, that’s seven years after the deep recession/depression hit Japan, an administration came in, 1997, and said, we’ve got to contract the economy. We’ve got too much stimulus out here. We’ve got to tighten things up. That will make things better. The rates on the ten-year in Japan at that point were around two percent. Within a year or two they dropped to .8, and the deficit went straight up, even though everyone wanted to bring it down.
And the reason was, you can tighten everything up, but again, if there’s no demand and people perceive that prices are coming down, cash looks very good. And now we’re talking money. And money is really important, because money takes on a tremendous value in a deflating economy. If you’re a gold bug, the argument is inflate, inflate, because that’s a terrific thing to happen. All of this stimulus is going to cause inflation. And, in fact, in this kind of an economy, it doesn’t matter what stimulus you put in, because stimulus only works if someone wants to spend the money. And the fiscal side of it, which is the government side of it, right now, looks like, as we get into the fiscal cliff that people love to talk about, the fact is that will be very contractionary on the economy. So I would argue that if we get into that position, you will see rates go even further down.
CONSUELO MACK: One of the realities that you’ve identified at Kessler Investment Advisors as well is that zero interest rates can stay zero for a long time, or go lower for a long time.
ROBERT KESSLER: I think in this particular case, there are so many people who keep saying we’ve never seen this before. We’ve never seen this exact same thing, but we’ve seen this before. And I suspect that interest rates will stay extraordinarily low until we get out of this balance sheet problem of individuals getting rid of some of the debt. It’s 25% of homeowners are underwater. You have this huge unemployment problem, and the number that came out today, the Philadelphia Fed Index, actually had an employment number that would suggest, in this month coming up on the employment news, that employment could go negative again. Now, if you stop and think about that, the argument has been quantitative…
CONSUELO MACK: You mean job growth could go negative.
ROBERT KESSLER: Job growth will go negative. If you stop and think about how serious that is, we’ve had quantitative easing one, quantitative easing two, and probably something more. None of that has helped. And it’s simply because money is going no place. And the people who have it are buying whatever sovereign they feel safest in.
CONSUELO MACK: So Robert, another reality that you have identified at Kessler Investment Advisors is that instead of what Wall Street is telling you- I’m going to make you money, and that the traditional investments that make money, like stocks, that have over the last, you know, 40 years, whatever it is, in the post-World War II period- that, in fact, that investors are saying, “No. No. No. You don’t understand. My first principle is I don’t want to lose money.”
ROBERT KESSLER: We have an enormous number of investors leaving the stock market now and going into fixed income. Obviously, they feel that that’s too volatile, and that slow transition is probably going to continue for some time. But the concept of an investor saying, “I don’t want to lose money,” it usually means I want to make a lot of money, but I don’t want to lose any money. And you have to be able to explain to make a lot of money you’re going to be at risk to lose a lot of money. I would suggest the big problem we all seem to have is we can’t distinguish between a savings account, your pension account, your IRA, and an investment account.
CONSUELO MACK: And you’re saying it’s very important to differentiate between your investing and your savings. What’s the difference?
ROBERT KESSLER: The purpose of a savings account, as we all grew up, and we saved something, is to know it will be there. So, obviously, the return isn’t important. It’s the return of the money. And so I look at a savings account or a pension account, you cannot lose there. And that’s why I’ve suggested for years that you buy a zero coupon U.S. Treasury, meaning that the treasury will pay off in a certain period of time, because you have to have that money. That’s a savings account. An investment account is, have a good time.
The odds are, these days, for the last ten years, no one has made any money in the stock market unless you happen to buy at the right time, sell at the right time, and buy… and none of us do that. We’re all random buyers, so we all make mistakes. So the average person really doesn’t distinguish between those two pockets of money, and I would suggest that’s becoming very relevant now, because suddenly, if you look at the average homeowner, let’s take the homeowner, you have a decrease of $7 trillion in the value of what they had over the last two, three, four years. $7 trillion. An enormous amount of money. And if you look at their median net worth of that same homeowner, it’s gone from $126,000, that’s the average person, down to 77. That means they lost 39% of their money, of what they really thought they had. So all of these questions become extremely relevant if we talk reality, and I think that’s what we should be talking.
CONSUELO MACK: The fact that rates are coming down all over the world gives fuel to the argument on the other side, and that is, I can’t tell you how many people have told me that somewhere around 60% of the companies in the S&P 500 now are offering dividend yields that are greater than the yields on the ten-year Treasury note, and this is a once-in-a-lifetime opportunity.
ROBERT KESSLER: And they should. And they should, because everyone has done terrible with all of these companies. So they should give you some of your money back. But the best argument I can use is that these are the same companies that don’t know what to do with the cash they have, and they’re not out there buying any other companies. There are mergers going on, but they’re not spending the money. So if they’re not spending the money, what are you spending the money for? And then at the same time, there are no big dividend payers. There are no big cap stocks that are not going to be affected by a global deterioration in the economies that we’re looking at. They all will be. And if the stock market comes down, which I suspect it probably will, they’ll come down, too.
What do you care if you’re getting 4% if it drops 40%? That is the risk you take. So you think, well, this is a terrific deal, because in the long term, four percent looks good. It doesn’t look that good if you go back to 2008. You had an AT&T that was paying a very nice dividend, and it dropped 47%. I don’t think that’s what you want. And so I suspect that if you didn’t want any of the other stocks, you probably don’t want those stocks either.
And, again, I’m back to the subject, you do not want to lose money, because in an economy where prices are coming down, there’s tremendous opportunity. Everyone thinks that I’m being pessimistic about this. If you have money, and the price keeps coming down, the money gets more and more valuable. That’s why people are parking it where they think they can get it back, which ends up being in sovereign debt or good sovereign debt.
CONSUELO MACK: So Wall Street would say this is an example of extreme pessimism, and the times of extreme pessimism are when you make the most money by buying the securities that everyone else is shunning.
ROBERT KESSLER: But that has to be the excuse that we use, otherwise you wouldn’t buy anything from Wall Street. It’s a silly argument. We’re faced with a real serious problem in this country, as it is in Europe, but in this country, especially right now, because we have a disorganized kind of Congress, we have a situation where no one can get together on what to do, and I suspect there really is a reason for that. No one knows what to do. You can take this side, or you can take this side. It really doesn’t matter. The net result is, there are no simple solutions, and we’re certainly not going to get one, from what I can see.
And so this thing is going to linger, and the question is, do you need a crisis to begin to really try to solve this? Maybe that’s what happens. Maybe you do get a crisis. But this is not being pessimistic. I’m just telling you what’s happening. And the only reason we can make money in this market is because we really don’t care about what anyone else says. The key to this market right now is to follow whatever your own instinct is. If you don’t understand it, and it doesn’t make sense, and you can’t sell your house, and all the terrible things that we all know are happening, happen, well then, why do you want to go out and buy stocks? I mean I’m not doing this just because I want to hit the stock market. But this is a very serious period of time, and I don’t think people are treating it as serious as they should.
CONSUELO MACK: So most investors, most individuals, in their retirement savings, have gone the traditional route, and they certainly do not own a lot of treasury securities. So what are you advocating? That they basically, you know, liquidate, pay the taxes, everything, and put them into treasuries? I mean, you know, what are our options?
ROBERT KESSLER: I’m going to do the same thing I did last time you were kind enough to have me on the show, I think, at the end last year, and I said, go out and buy long-term 20-year, that’s a good thing to do, zero coupon U.S. Treasuries. They will yield about 280, 2.8 percent. Nothing terrible about that. In the last six months, since I’ve said that, they have returned 11%.
CONSUELO MACK: In six months.
ROBERT KESSLER: In six months. Better than the stock market and everything else. I will make the assumption that 280, 275 is not a terrible return. If you have this opportunity that I’m talking about, that rates actually come down, because if rates come down, a lot of people feel that 30-year, 20-year treasury will come down a point; if they come down a point, then you make 25% return. Worst-case scenario? You’re making 280. Not so terrible. That’s your retirement fund. That’s your serious money.
As far as the other money goes, I would be in this wait-and-see attitude. I’m really not trying to be pessimistic, and I know it sounds pessimistic, when I’m saying negative things, but those negative things are happening regardless of what I tell you. They’re happening in Europe. And this doesn’t even count the fact that we could have an oil disruption. We could have all the usual things that seem to be on our plate all the time. So sure, I think for a retirement fund, right now I’d be out buying all the treasuries I could get my hands on. I mean, but I think when you talk about the investment money, the money that you have to invest, I think you want to stay very, very cautious.
CONSUELO MACK: All right. Very cautious at this point. So the One Investment for long-term diversified portfolio is?
ROBERT KESSLER: I would say zero coupon treasury, if it’s a retirement fund. If it’s in a retirement fund, there’s absolutely– there’s no issue about time. You’re keeping it for a long period of time. But the other money that you have is money that really has to be put to use now, and you don’t want to waste it. It’s not going to be there necessarily 20 years from now. It’s money you’re going to invest in. Well, I can’t find anything to invest in. So keep it in cash. I know I’m kind of escaping by saying that, but I don’t think there’s anything wrong with cash.
CONSUELO MACK: So, you know, you said earlier in the interview that you’re really not a pessimist, that you’re actually an optimist. So what are you optimistic about?
ROBERT KESSLER: I think that people needed to go through this change in attitude towards how they spend money, what they think of money, and that change is taking place. There’s a realism coming into the marketplace. I think that makes for a better country, and that makes for a better people in the end. It doesn’t mean it’s easy, and it doesn’t mean this is going to be a very comfortable change. But it will probably be, as it usually is, for the better. What we don’t want to see is some serious kind of crisis that makes it worse.
I think the problems in the United States are solvable, if we can get a Congress to probably do something together. There are things to do here. But you can’t have 20 million people without a job, 45 million people on food stamps, and a bunch of people without healthcare, and then say, “Well, we don’t really have any problems here, and I think we should buy some stocks.” I think that attitude is exactly the wrong attitude. I think the problem becomes you have to pick up demand, and there is no demand in our system right now, and with good reason. People are pessimistic.
CONSUELO MACK: So what is it going to take to turn around demand?
ROBERT KESSLER: I don’t know. I don’t know. It’s a process. And the process is this horrible deleveraging, this pay down the debt, and people have to consciously understand when you pay down the debt, you’re increasing the value, in this case, of the currency. Because remember, the currency can buy everything cheaper. The U.S. dollar is the place to be. I’m very optimistic about the dollar. I think that’s a great place. I think the treasury market looks terrific here. That is the country. In between, there are problems that have to be solved.
CONSUELO MACK: Well said. Robert Kessler, thank you so much for joining us from Kessler Investment Advisors. And we will have you on again, you know, in a year, and see how you’ve done, as you have done extremely well over the last seven years on Wealth Track. So thanks for joining us again.
ROBERT KESSLER: Thank you. Thank you for having me.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. As we did last week, we are recommending a book for summer reading. This one is the choice of guest Robert Kessler. It’s called The Great Depression: A Diary . It’s by Benjamin Roth and it was published by his son in 2010, many years after his death. Roth’s diary is a compelling and eye opening account of the Depression seen through the eyes of an ordinary middle -class American. You will recognize the policy debates about inflation, skepticism towards big government, and worries about too much stimulus, that as Kessler says were “prevalent, recurring, and in the end, all wrong.” You can make up your own mind.
I hope you can join us next week for a shocking discussion about the cost of investment fees. According to our two guests- legendary financial consultant Charles Ellis, who is exclusive to WealthTrack, and top financial advisor Mark Cortazzo- fees are much higher than you think. They’ll tell us how to fight back. If you would like to watch this program again, please go to our website, wealthtrack.com. It will be available as a podcast or streaming video no later than Sunday evening. And that concludes this edition of WealthTrack. Thank you for watching. Have a great weekend and make the week ahead a profitable and a productive one.
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Tags: Blue Chip Stocks, Blue Chips, Bond Markets, Consuelo Mack, Earnings Estimates, Eurozone, Finance Minister, Financial Health, Financial Times, Global Economies, Global Outlook, Government Bond, Recession Fears, Robert Kessler, S Central, U S Treasury, U S Treasury Bonds, Wall Street Analysts, Wall Street Journal, Wealthtrack
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Friday, July 6th, 2012
Many told me that French president Francois Hollande was making idle campaign pledges on tax hikes and worker rules, and the he would not follow through. Well he did, at least on taxes.
The Financial Times reports Wealthy hit hardest as France raises taxes
France’s socialist government announced a big one-off increase in wealth taxes on Wednesday, by far the biggest single element in a €7.2bn package of new levies aimed at meeting this year’s budget deficit target that also included surcharges on banks and energy companies.
The supplementary 2012 budget, required to ensure the government hits its deficit target of 4.5 per cent of gross domestic product this year, was weighted overwhelmingly towards taxes on the rich and big companies as ministers said planned spending cuts would mainly take effect from next year.
An extra €2.3bn will be raised by an exceptional tax charge on all those with net wealth of more than €1.3m.
Citing an “an extremely difficult financial and economic situation”, Pierre Moscovici, the finance minister, said: “The wealthiest households and the big companies will be asked to contribute. In 2012 and 2013, the effort will be particularly large.”
Further tax increases for next year, when the government is expected to have to find €33bn in savings to bring the deficit down to 3 per cent of GDP, will be spelt out in the autumn. They will include President Francois Hollande’s election pledge of a 75 per cent marginal rate on annual incomes of more than €1m – and permanent increases in wealth taxes.
Overall, public spending as a proportion of GDP, second only to Denmark in Europe, will rise slightly this year to 56.2 per cent before falling slowly to 53.4 per cent in 2017. The tax burden will, however, keep rising to 46.5 per cent – also one of the highest in Europe.
France Poised to Implode
On June 16, in “France Has At Most Three Months Before Markets Make Their Mark” says German Official I wrote …
If socialists take control of both houses in French parliament as expected, president François Hollande would have free rein to carry out his stated policies such as hire more public workers, raise taxes on the rich, and Wreck France With Economically Insane Proposal: “Make Layoffs So Expensive For Companies That It’s Not Worth It”
Socialists did win both of Parliament.
Now that Hollande has followed through on his pledge to hike taxes, there is every reason to believe he will follow through on his inane proposal to make it nearly impossible for businesses to fire people. If he continues with that promised path, France will implode.
Tags: Annual Incomes, Budget Deficit, Campaign Pledges, Deficit Target, Economic Situation, Election Pledge, Energy Companies, Europe France, Finance Minister, Financial Times, Francois Hollande, French President, Gross Domestic Product, Levies, Marginal Rate, Marginal Tax Rate, Pierre Moscovici, Public Spending, Socialist Government, Top Marginal Tax Rate
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Sunday, May 20th, 2012
Presenting the best weekly self-contrarian segment from everyone’s favorite Gluskin Sheff-based skeptic – David Rosenberg:
DESPAIR BEGETS HOPE
… Over half of the 2012 price advance has been reversed in barely over a month as the broad market drifts down to its lowest level since February 2nd. The Financial Times makes the point that the 10-day relative strength index at 29.2 is deeply into oversold territory. The Canadian TSX index is officially in bear market terrain, having declined 21% from its cycle high (posted in April last year) and is back to levels prevailing on October 2011.
Fading risk appetite is also underscored in the credit markets where BB-rated corporate spreads have widened to 450 basis points from the recent low of 420bps. Until we see some resolution to the latest round of euro area angst, one can reasonably expect spreads to widen further, but we would look at this as a nice buying opportunity as the link between the problems there and corporate default rates here is extremely loose. The fact that gold and other commodities are slipping while core government bond markets — gilts, bunds and Treasuries — are rallying strongly suggests that deflation risks are getting repriced into various asset classes. Greek bonds are trading at pennies right now and implicit probabilities in peripheral bond markets are highly discounting exits from the monetary union by year-end. Spanish bond yields have blown through 6% (Italy getting closer too) and 10-year spreads off Germany have hit a new record high of 485bps.
This is where the LTRO has proven to have actually been a dismal failure. Domestic banks used the program as a carry trade to play the yield curve and are now choking on losses on the sovereign government bonds they were enticed to buy. So thanks a lot, Mr. Draghi — ECB policies are at least partly responsible for why it is that euro area bank shares have sunk all the way back to March 2009 lows. Non-domestic investors have been dumping the peripheral government bonds just as the Italian and Spanish banks have been loading up — these foreign entities, we see in the FT, have been net sellers of Italian government bonds to the tune of 200 billion euros in the past nine months and 80 billion of Spanish debt over the same time frame. And guess what? They can unleash even more supply damage because they still own roughly 800 billion euros worth of combined bonds of both basket-case countries.
The most bizarre quote we have seen in quite a while came from a strategist in the FT. Get this:
We can take comfort from the fact that while the Greek electorate are against austerity, the support for staying within the eurozone is even stronger”.
I can replace that with this real-life comment:
We can take comfort from the fact that while my three sons are against doing their homework, the support for getting a passing grade is even stronger”.
How utterly lame.
If the Greeks want to stay in the eurozone, it’s probably because they know they can continue to suck at the teat of the Troika. More bailouts please and on easy terms since “austerity” is the new dirty nine-letter word globally.
The best lines actually came from the FT Lex column:
“All balled-out eurozone countries will ultimately have to decide whether they can make the fiscal adjustments and achieve economic growth more quickly in, or outside, the euro. That is where Greece now finds itself.”
Now that is a thoughtful comment.
There was another really good zinger in the Markets and Investing section. To wit:
“it’s naïve in the extreme to think you can limit the knock-on effect. As soon as Greece leaves or defaults, contagion will pass like a cannon going off in Spain”.
That was from an executive at a U.K. bank.
Arvind Subramanian penned a truly brilliant piece in the FT as well, titled Why Greece’s Exit Could Become the Eurozone’s Envy. In a nutshell, Greece’s challenge is that it is woefully uncompetitive and as such needs wages and prices to adjust sharply lower. You either do that organically or you devalue the currency — which then sharply boosts exports and fosters import substitution. Of course, the initial impact is recessionary and deflationary, but only for one to two years, if history is a guide, followed by a boom. This is exactly what happened to Asia a decade ago. As Arvind concludes, “the ongoing Greek tragedy could yet turn out not too badly for the Greeks. But tragedy it might well be for the eurozone and perhaps the European project”.
Indeed, the cost estimates I have seen published for the euro area would be in the neighbourhood of 400 billion euros — in terms of immediate direct financial losses. Second round impacts are far more difficult to assess, but would be enormous. While there are a myriad of legal complexities surrounding a Greek departure, it is not an impossible task. The bigger issue would be how the ECB would manage to ring-fence the banks in Portugal and Spain and prevent a contagion.
But let’s talk about what we do know with some certainty.
The Greeks voted against the status quo. It isn’t working for them. An election is likely around mid-June, and the party in the lead is dead-set against the initial bailout terms. The government, meanwhile, runs out of cash by early August when a bond payment comes due and that could well be the trigger for default and exit. It is tough to see this process being orderly — confusion, turmoil and volatility all come to mind. But if we do get a cathartic event, we will be able to buy assets for our client base at excellent prices. There always is a silver lining. You just have to find it.
We also know that Angela Merkel this far is not being swayed by her party’s recent electoral setbacks — at least that is the indication we are getting from her latest rhetoric.
Tags: Bond Yields, Broad Market, Bunds, Carry Trade, Credit Markets, David Rosenberg, Default Rates, Dismal Failure, Domestic Banks, Domestic Investors, Draghi, Financial Times, Gilts, Government Bond Markets, Government Bonds, Greek Bonds, Relative Strength Index, Risk Appetite, Sovereign Government, Yield Curve
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Friday, May 11th, 2012
Gold ‘Will Go To $3,000/oz’ – David Rosenberg
Highly respected economist and strategist David Rosenberg has told that Financial Times in a video interview (see below) that gold “will go to $3,000 per ounce before this cycle is over.”
Markets are repeating the downturns of 2010 and 2011 and it is time to search for safety, David Rosenberg of Gluskin Sheff tells James Mackintosh, the FT Investment Editor.
Rosenberg sees a “very good opportunity in gold” as it has corrected and seems to be “off the radar screen right now”.
He sees gold as a currency and says the best way to value gold is in terms of money supply and “currency in circulation.”
As the “volume of dollars is going up as we get more quantitative easing” he sees gold at $3,000 per ounce.
Mackintosh says that Rosenberg’s view is a “pretty bearish view”.
To which Rosenberg responds that it is “bullish view on gold and gold mining stocks.” Mackintosh says that it is “bearish on everything else”.
Rosenberg says that it is not about being “bullish or bearish,” it is about “stating how you view the world” and he warns that the major central banks are all going to print more money and keep real interest rates negative “as far as the eye can see.”
This is “critical” as one of the key determinants of the gold price are real short term interest rates.
The longer they stay negative “the longer the bull market in gold is going to be.”
Rosenberg sums up that “this is not about being bullish or bearish, it is about how do we make money for our clients.”
The interesting interview can be watched here.
Tags: Central Banks, David Rosenberg, Determinants, Economist, Editor Rosenberg, Financial Times, Gold Mining Stocks, Gold Price, gold stocks, Mackintosh, Money Supply, Nbsp, Ounce, Quantitative Easing, Radar Screen, Sheff, Strategist, Sums, Term Interest, Video Interview
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Thursday, March 15th, 2012
Demand for access to basic needs, an emerging middle class and a never-ending use of global resources—these are the primary drivers of major infrastructure projects over the next several years, says GE.
In its Investor Meeting last week, the firm highlighted a few macro slides on world growth. One slide pins major global infrastructure plans totaling $4 trillion over the next 2 to 20 years.
Emerging markets across Africa, Asia, the Middle East and South America are overwhelmingly the ones pulling out their checkbooks. A number of projects are expected in Brazil, including the PAC 2 investment program totaling $872 billion, Petrobras Oil & Gas project of $225 billion, and the infrastructure spending for the World Cup and Olympics expected to cost $668 billion. Brazil’s PAC 2 will mostly be spent on energy and the remainder on subsidized housing, urbanization, sanitation and electricity distribution, says Financial Times.
India and Russia also have tremendous infrastructure plans, as each country is expected to be a half of a trillion dollars. China’s 12th Five-Year Plan is expected to spend $840 billion on the power industry and another $180 billion on health care.
In GE’s presentation, the president & CEO of Global Growth & Operations, John Rice, says many of these countries’ governments face extraordinary pressure “to increase standards of living and reduce the wealth disparity.” Of the world’s population of 7 billion, GE says 1.5 billion have no access to basic needs, such as health care, electricity and water. In addition, in the next 20 years, another 3 billion people will be added to the middle class, according to GE. That equates to 150 million people each year who will have the means and “the same kind of demands in terms of basic living conditions and infrastructure” available in the U.S., says Rice.
This trend is what I refer to as the American Dream Trade. When the boomers were babies, President Dwight D. Eisenhower signed the 1956 Federal-Aid Highway Act. The “great road program” was said to be the most intense road construction period in U.S. history, altering where Americans chose to live, vacation and work. A 62-day trip in 1919 from Washington D.C. to San Francisco was reduced to two days due to the U.S. interstate system. This helped sustain a more than tenfold increase in the U.S. GDP, according to the U.S. Department of Transportation.
A pursuit of the American Dream from the U.S.’s emerging middle class led to the success of many well-known U.S. companies. Restaurants including McDonald’s and Dairy Queen and automobile manufacturers Ford and GM prospered following this infrastructure spend.
The infrastructure plans taking place across emerging markets emulate a 1950s America. As these governments help their residents pursue the American Dream of better homes, health care and quality of life, I believe the companies with a strong footprint in these growing markets stand to benefit.
Tags: Africa Asia, American Dream, Boomers, Brazil, Checkbooks, Electricity Distribution, Emerging Markets, Financial Times, Five Year Plan, Global Growth, Global Infrastructure, Global Resources, Infrastructure Projects, Investment Program, John Rice, Middle Class, Russia, Sanitation, Slide Pins, Subsidized Housing, urbanization, Wealth Disparity
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Monday, February 20th, 2012
Emerging Markets Radar (February 20, 2012)
- Chinese Premier Wen Jiabao said the nation needs to start fine-tuning economic policies this quarter, the first indication of a timeframe for an adjustment he has pledged since October.
- China has instructed banks to roll over loans to local governments as the principal on much of the debt can’t be repaid, the Financial Times reported.
- China pledged to invest in Europe’s bailout funds and sustain its holdings of euro assets.
- India’s inflation was down to 6.55 percent year-over-year in January from 7.47 percent in November on lower food prices and a nearly 7 percent appreciation of the rupee in January. Markets reacted positively to this.
- Colombia’s exports rose 43 percent to $5.5 billion in December, the national statistics agency said.
- Despite very cold weather in Europe, Polish PMI at the end of January reached 52.2 and industrial production increased by 9 percent.
- Wuhu city stopped its recently announced housing tax relief programs, probably under pressure from the Beijing central government which insists on housing market curbs. In fact, Wuhu is a third-tier city and, therefore, never had housing purchase restrictions. Although China reiterated frequently that its housing tightening policy wouldn’t change, it has lowered mortgage rates for first-home buyers and the People’s Bank of China said it would make sure enough funds are available for mortgage lending.
- Spain was downgraded for the third time in two months by Moody’s, as it was revised down to A3 this week and maintained a negative outlook, citing fiscal slippage and vulnerability to market stress.
- The chart below shows there were almost no railway projects awarded since the second quarter of 2011 due to the Wenzhou rail accident in July. With the investigation report out last month, JP Morgan believes the drought in new projects will end very soon. From a low base in 2011, construction revenues should look much better this year.
- Many people thought China had overinvested in railway and that there is not enough demand for rail. BCA, in its recent research, has shown that the length of the railway system in China increased by 50 percent since 1995, a remarkable gain, but passengers travelling on the country’s railway system per year doubled, and railway freight increased by 150 percent during the same period.
- Japan announced this week that it would expand its asset purchase program by JPY 10 trillion and made a formal announcement of its inflation target of 1 percent in an attempt to stave off deflation and weaken the currency in the face of monetary easing in the U.S. and other developed markets.
- In March, Brazil plans to ease a tax increase charged on imported cars for automakers investing to build local assembly plants. The surcharge of as much as 30 percent was implemented last month, amid protests from Chinese automakers, to stem a surge of imported cars being sold in Latin America’s largest economy. “The tax was used as an emergency brake, now we will lower it,” head of the Brazilian Industrial Development Agency, Mauro Borges Lemos, said in an interview this week. “It’s an incentive to speed up investments.”
- Recent reports from China show that new loans are below expectations, which will probably not improve liquidity in the economy.
- The Globe and Mail reported that optimism grew late this week that Greece had finally done enough to secure a second bailout despite worsening relations with Germany, but doubts remained over lenders’ demands for tighter supervision of how Athens will implement the deal. Greek officials say they have done everything asked of them for eurozone finance ministers to sign off on the €130-billion euro rescue package on Monday, a month before Athens needs the money to make €14.5 billion of debt repayments due on March 20 or go bankrupt.
Tags: Bailout, Bank Of China, Chart Below Shows, Chinese Premier Wen Jiabao, Cold Weather, Economic Policies, Financial Times, First Home Buyers, Food prices, Investigation Report, Jp Morgan, Local Governments, Market Curbs, National Statistics Agency, Negative Outlook, Premier Wen Jiabao, Rail Accident, Railway Projects, Slippage, Weather In Europe
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Tuesday, February 14th, 2012
Japan’s 4th Quarter GDP Unexpectedly Contracts at 2.3% Annualized Rate
The Financial Times reports Japan’s GDP shrinks in fourth quarter
February 13, 2012
Japan’s economy shrank for the third time in four quarters between October and December, after floods in Thailand damaged production, and a strong yen and subdued overseas demand hurt exports.
Preliminary government figures showed that real gross domestic product fell 0.6 per cent between the third and the fourth quarters, dragged down by a 3.1 per cent fall in exports and a 0.3 per cent decline in private inventories.
That is equivalent to a 2.3 per cent fall in GDP on an annualised basis, significantly worse than consensus forecast of a 1.3 per cent decline. The data also showed sluggish public investment, which fell 9.5 per cent on an annualised basis.
Hollowing Out of Japanese Economy
This is somewhat dated news from late January, but news that Japan ‘More Than Hollowing Out’ With First Trade Gap Since 1980 fits in nicely to help explain the article that follows.
Jan 25, 2012
Japan’s first annual trade gap since 1980, driven by an energy-import surge as nuclear plants shut down and by a shift of manufacturing overseas, threatens to undermine the nation’s status as the world’s largest creditor.
A third straight monthly merchandise trade deficit in December capped an annual shortfall of 2.49 trillion yen ($32 billion), the finance ministry said in Tokyo today. The data reflect the impact of the record earthquake in March, which sparked a nuclear crisis that shut most reactors, as well as longer-term shifts such as Nissan Motor Co.’s decision to move some production to lower-cost Thailand.
“This is more than hollowing out — the government hasn’t found any solutions to electricity and at this point I don’t see that we’re going to have nuclear power back again,” said Masaaki Kanno, chief economist in Tokyo at JPMorgan Securities Japan Co. The deficit will “expand in coming years,” he said.
Japan Announces $130 Billion QE Program, One Percent Inflation Target
The previous two articles will help explain this: Japan Announces $130 Billion QE Program, One Percent Inflation Target
Feb 13, 2012
In a move that surprised markets, the central bank added 10 trillion yen ($130 billion) to its asset buying and lending scheme, under which it buys government and private debt and lends cheap funds against various types of collateral. The entire increase amount will be for purchases of long-term government bonds, the BOJ said.
The BOJ also said it will set consumer inflation of 1 percent as its price goal for the time being, making a clearer commitment to end deflation than before when it defined the level as its “understanding” on long-term price stability.
BOJ Governor Masaaki Shirakawa was grilled in parliament last week by lawmakers threatening to revise the BOJ law to give the government more scope to intervene in monetary policy, while the economics minister urged the bank to explore ways to make its price commitment easier to understand.
The central bank has pledged to keep ultra-low interest rates until an end to deflation is in sight, and defined desirable long-term price growth as consumer inflation of 2 percent or lower with the median for the nine-member board at 1 percent.
It had described this as the board’s “understanding” of desirable inflation rather than an explicit price target, for fear of having its hands tied on policy. But this has drawn criticism as too vague compared with the Fed’s 2 percent inflation target announced last month.
Lawmakers Threaten to Take Over Monetary Policy
In case you missed the key sentence, here it is:”BOJ Governor Masaaki Shirakawa was grilled in parliament last week by lawmakers threatening to revise the BOJ law to give the government more scope to intervene in monetary policy”
The one thing worse than having central banks be responsible for monetary policy would be to turn it over to politicians.
If I Only Had a Bank!
As much as I despise central banks (and I do think they should all be eliminated – to be replaced by free markets), bureaucrats in the US or Japan would likely do much worse on monetary policy than the central banks.
Please consider this scary video by Ellen Brown.
The idea that North Dakota, a small loosely-populated farm state is in good shape only because it has a state bank is preposterous. Worse yet, Brown takes that absurd position to the extreme, with a proposal to end the Fed and put California politicians (state politicians in general) in charge of printing money to support union causes.
Should populist Ellen Brown get her way, I would have to rethink my US hyperinflation position. Sadly, Brown is another one of those who understands various problems with the Fed, but proposes a solution that is worse, putting state politicians in charge of printing presses.
Such economically insane ideas are much further along in Japan.
Mike “Mish” Shedlock
Tags: Chief Economist, Finance Ministry, Financial Times, Floods In Thailand, Government Figures, Import Surge, Inflation Target, Japan Co, Japanese Economy, Jpmorgan Securities, Masaaki, Merchandise Trade Deficit, Nissan Motor, Nissan Motor Co, Nuclear Crisis, Nuclear Plants, Private Inventories, Public Investment, Quarter Gdp, Trade Gap
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Wednesday, February 1st, 2012
Last month, European banks tapped the ECB for €489bn in a long-term refinance operation dubbed LTRO. On February 29, another round of LTRO is coming up and expect banks to go for the gusto. Banks like cheap money to speculate and that is exactly what they will do.
The Financial Times reports Banks set to double crisis loans from ECB
European banks are preparing to tap the European Central Bank’s emergency funding scheme for up to twice as much as the ECB supplied in its debut €489bn auction last month, providing further evidence of the sector’s liquidity squeeze.
Several of the eurozone’s biggest banks have told the Financial Times that they could well double or triple their request for funds in the ECB’s three-year money auction on February 29.
“Banks are not going to be as shy second time round,” said the head of one eurozone bank at last week’s World Economic Forum in Davos. “We should have done more first time.”
Three bank chief executives, all of whom asked to remain anonymous, said they were planning to increase their participation twofold or threefold.
Unlimited Money for Three Years at One Percent
The ECB is offering unlimited money to banks for three years, at one percent. Banks are salivating because the first round went well.
The money is supposed to go for bank lending but it won’t. Why should banks lend? They have a guaranteed profit by speculating in Spanish or Italian bonds, assuming of course Spain and Italy do not need bailouts coupled with a writedown on government debt.
However, that’s quite a risk, and in my opinion Spain will need such a writedown. If so, Germany will be on the hook once again.
For a discussion about how futile this is, please see Premature Dollar Obituaries and Mainstream Economists’ Monetary Insanity; Keynes-Inspired Great Depression; Lessons Not Learned
Money Supply Will Soar, Lending Won’t
Don’t expect the next LTRO to make it into the real economy. It won’t. Rather the LTRO will fuel more bank speculation and more leverage in government bonds. Money supply will soar, lending won’t and this rates to be good for gold.
In the meantime, please sing along with Bachman Turner Overdrive (and the ECB).
Link if video does not play: Bachman Turner Overdrive – You Ain’t Seen Nothing Yet .
Mike “Mish” Shedlock
Tags: Biggest Banks, Cheap Money, Chief Executives, Davos, ECB, European Banks, Eurozone, Financial Times, Government Debt, Great Depression, Gusto, Insanity, Keynes, liquidity, Mainstream Economists, Money Supply, Second Time, Squeeze, Trillion, World Economic Forum
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Sunday, January 8th, 2012
Energy and Natural Resources Market Radar (January 9, 2012)
- First Quantum Minerals Ltd. resolved a long-running dispute with Eurasian Natural Resources Corporation Pls (ENRC) for $1.2 billion over mines in the Democratic Republic of the Congo (DRC). The controversial dispute over ownership of the Kolwezi project will be settled with ENRC paying $750 million plus a deferred consideration of $500 million as part of the settlement with First Quantum, the former owner of the project until its license was revoked by the DRC in 2009.
- Crude oil futures (WTI) moved higher by nearly 3 percent this week to close at $101.56 per barrel as geopolitical tensions surrounding Iran continued to escalate.
- Barclay’s highlighted that China raw coal production in November rose 4.4 percent year-over-year to reach 321 million tonnes while total output in the first 11 months of the year rose 11.6 percent to 3.46 billion tonnes.
- Weekly data released by the U.S. Department of Energy indicates that 4-week trailing total demand for oil and oil products is down 7.2 percent year-over-year and gasoline demand is down 4.9 percent year-over-year.
- Alcoa Inc., the biggest U.S. aluminum producer, will close 12 percent of its global smelting capacity after the price of the lightweight metal slumped amid a global surplus.
- Indonesia, the world’s largest exporter of power-station coal, cut the benchmark price for sales in January by 3 percent to the lowest in 13 months. The Directorate General of Coal and Minerals at the ministry said on its website today in Jakarta that the cost of coal with a gross energy value of 6,322 kilo calories per kilogram was set at $109.29 a ton on free-on-board basis at vessel compared with $112.67 a ton in December.
- This week on the front page of the Financial Times, it was reported that a cut in Saudi posted prices to Asia is seen as a signal that Asian buyers are looking for new sources to reduce their dependence on Iran as U.S. pressure builds over sanctions. However, RBC Capital highlighted that Saudi looks to be the most willing to offer incentives, as International Oil Daily reports that the United Arab Emirates has increased February prices, albeit only by a nominal 2 cents per barrel.
- The Chairman of the China Iron and Steel Association said this week that China’s total apparent crude steel consumption is expected to rise about 4 percent to 700 million tonnes this year.
- Tudor Pickering reported that preliminary estimates show global oil production rebounded significantly quarter-over-quarter following third quarter maintenance. Biggest estimated additions quarter-over-quarter are Libya with 418,000, United Kingdom with 111,000, and Brazil with 109,000 barrels per day.
- BofA Merrill Lynch global investment strategist raised energy and gold commodities to overweight in its tactical asset allocation model for the first quarter of 2012. In their view, energy is well supported by easy monetary policy and the risk of a spike due to geopolitical events. Their model continues to overweight gold due to high risk of a sovereign default in Europe and low/negative real interest rates around the globe.
- A potential short-term rise in pricing for Colombian coal may force European buyers to seek other sources. Heavy rains have led to a two week delay in coal transport from the mine site to the ports for Colombia’s two largest producers – Drummond & Prodeco. The rains have also resulted in reduced coal production at the mines for the two companies.
- Deutsche Bank highlighted that India’s gold imports, the largest consumer, is expected to drop by 48 percent in the first quarter as a decline in the currency boosts prices and high interest rates cool investment demand, according to the Bombay Bullion Association.
- Zhu Jimin, head of Shougang Group, one of China’s biggest steelmakers, addressed members at CISA’s annual meeting, saying that prospects for the steel sector remained gloomy, with the entire sector facing falling profits in 2012. “Enterprises are facing increasing operating risks, under pressure from a variety of factors such as rising costs, falling demand and difficult and expensive financing,” he said. Zhu said a series of policies introduced last year to control the real estate sector had reduced demand for steel, and if the policies were not adjusted the situation could worsen in 2012. Slowing growth in domestic manufacturing, railway, shipbuilding and auto sectors could also take its toll, he added.
- Resource Daily reported that Nigerian unions are calling for indefinite strike action on January 9 to shut down both the up and down stream oil sector. The strike is in reaction to the recent government decision to remove fuel subsidies which has seen gasoline prices double. In 2010 Nigerian production accounted for 13 percent of Shell volumes and 12 percent for Total, 10 percent for Eni and 2 percent for Statoil.
Tags: Alcoa Inc, Aluminum Producer, Asian Buyers, Benchmark Price, Board Basis, Coal Production, Congo Drc, Crude Oil Futures, Democratic Republic Of The Congo, Energy Value, Financial Times, Global Surplus, Gross Energy, Kilo Calories, Largest Exporter, Lightweight Metal, Market Radar, Natural Resources Corporation, Raw Coal, Republic Of The Congo
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Tuesday, January 3rd, 2012
This post is a guest contribution by Cees Bruggemans, chief economist of First National Bank.
Financial Times columnist Wolfgang Munchau was most original this week to compare the current European crisis with its distant forebear, the 30-year war 1618-1648 (see “Grim lessons from the 30-years war”).
That conflict had also started small but ended up devastating Central Europe as North vs South and Catholic vs Protestant parts collided (killing 20%-40% of the population in German lands and with the Peace of Westphalia establishing the principle of not interfering in the internal affairs of sovereign states).
I don’t want to improve here on Munchau’s originality, in the manner that distant conflict arose, evolved and fragmented Europe, setting it up for 300 years of conflict, and the comparisons with today’s drift of events (if minus the wholesale slaughter).
But especially when focusing on Germany, and the demands it is making today on weaker EU peripherals, there is some seriously unfinished business in Europe that could do with some more highlighting.
The austerity and discipline being imposed on peripheral stragglers today is often implied to be ‘typically’ German, even harking back to the Teutonic stereotypes running around in German forests 2000 years ago and already giving the invading Romans a hard time.
Yet much of this modern ‘steely’ culture may have been forged in the great furnaces of the 20th century and not just Weimar either.
What may be playing out today may be the unfinished business of 17th century Europe as per Munchau, but it is under the direction of 20th century serial experiences shaping the German nation.
And so we ultimately re-encounter the echo of the Guns of August 1914, as WW1 turned into a bloody stalemate, to be lost by Germany, pushed by the victorious Allies into inhuman reparations, its burdens unnecessarily impoverishing (and giving John Maynard Keynes his big break in showing up these idiocies in “The Economic Consequences of the Peace”), giving rise to the unwise macro policies of Weimar and its hyperinflation, obliterating the German middle class, imposing hardship and seemingly forever deep suspicion of borrowing and out-of-control central banks printing money, finally topped off by the Great Financial Crash of 1929 and its depression aftermath.
That 20-year period (1914-1933) was merely the first modern crucible, the combination of horrific war and financial and economic devastation.
This experience set Germany up for the second, even more horrifically devastating 20-year crucible (1933-1953) during which preparation for war provided initial economic recovery and new prosperity, only to lose it completely in total war and its prostrated aftermath.
This set Germany up for the third time. With some liberty this can be said to be a 50-year stretch (1953-2003).
It took unbelievably hard work and discipline (and Marshal Aid and the US defence umbrella) to start anew and achieve a miraculous recovery from total war, at least in the West.
By the early 1970s, however, after 25-years of outperformance, West Germany like other parts of Europe was promising its citizens an ever more generous welfare state even as the drive behind its growing prosperity was starting to falter, a function of demographic shifts, increased state burdens, reduced risk-taking and investment, which the energy crises of the 1970s, its inflation revival and currency disruptions, made worse.
As the 1970s were left behind, Germany (like other parts of the world) did not fully recover the elan of its post-WW2 growth recovery, partly perhaps because such rebuilding phase tends to have growth opportunities that don’t repeat in more prosperous tranquil times during which supply-sides become less responsive.
So the 1980s were an indifferent decade, leaving Germany and Europe to struggle with the fallout of the 1960s’ party ending and the dagger thrusts of the 1970s.
Only to be confronted at the end of the 1980s by the biggest opportunity of the century, as Communism faltered and fell, East Germany could be reabsorbed while Eastern and Central Europe could be neutralised and safeguarded for the future.
But it came at a price. The immediate cost in the East was to expensively subsidise East Germany’s reabsorption and provide Russia and her former satellites with assistance as they sought to adjust to victorious market capitalism and Democracy.
The German costs included huge annual fiscal transfers, overheated public spending, and the Bundesbank raising interest rates over the backs of all of Europe, causing growth performances to suffer in the 1990s.
Simultaneously, the Western Continental allies imposed their price for agreeing to German re-unification
France wanted the creation of a Monetary Union anchoring Germany. Spain and other peripherals demanded huge development aid infusions for infrastructure projects.
Whereas Germany spend 20 years (1990-2010) applying internal discipline and attempting reform, made easier with the availability of cheap sourcing in Eastern Europe, to regain its trade competitiveness from overvalued currency and labour through unpopular internal adjustments while benefiting from external demand for its superior export goods, the rest of Europe focused on enjoying the benefits flowing from globalisation (cheap consumer imports).
In addition, the past ten years offered EU peripherals big development transfers from the richer parts fuelling economic booms and low German-like interest rates fuelling financial booms (with the resulting import booms also favouring Germanic Europe).
The defining moment of the modern European era came in late 2009, with the dust long settled on the demise of Communism and German re-unification, and the Anglo-Saxon financial crisis only recently overcome, leaving unbelievable detritus in its wake.
The Great Recession set in motion by the Anglo-Saxon financial crisis had disturbed European debt dynamics, sufficiently so that it started to show up in stages how many of the peripheral partners had massively misused their participation in the Monetary Union.
Like Queen Victoria in her day, Germany was less than amused, pained by the belated realisation what the neighbours had been up to in their big prosperity drives, variously in banking (Ireland), property (Spain), general welfare spending (Greece), often while completely losing all growth dynamic for decades through restrictive supply-side practices (Portugal, Italy) and some or all these features also recognisable in the so-called ‘soft core’ partners (Belgium, France, but not limited thereto).
This time it wasn’t the devastating aftermath of total war, or of social welfare overindulgence, energy and inflation shocks or geopolitical neighbours going under and needing assistance.
This time, though Germany itself had made mistakes (mainly in its banking) and required some sacrifice of its own social welfare largesse in order to get its national finances back in order, the main mistakes had been made elsewhere in Europe, as much in spending and debt priorities as in not safeguarding the institutional underpinnings of the Monetary Union, Euro and ECB or structurally safeguarding their growth dynamics.
It was with the discipline forged in two world wars, one generation devastated by hyperinflation and Depression, and another generation deeply burdened by social overreach, energy shocks and the bailing out of failing geopolitical neighbours too big to ignore, that the most recent indulgences of peripheral Europe were put under the microscope.
Given the past 100 years of German experiences it mustn’t come as such a major surprise that the first inclination wasn’t to bail out anyone or to meekly accept the end of the Euro, fragmenting Europe back into its constituent parts.
The benefits of hanging together were simply too great, the costs of breaking up financially too unattractive, while it shouldn’t be beyond anyone to taste and learn from experiences that Germany had gone through serially and still allowed her to thrive in the end (if not without external assistance from American aid, European cooperation or Chinese globalisation).
So the first inclination was not to bail (even if markets hoped, expected and required this, it being in their interest to see their exposed investments fully safeguarded) or to run away (for to outsiders the impossibility of making the Monetary Union work was obvious now), but instead to rather double up the pressure and to ensure everyone honoured their original commitments, and do for a change what the Germans had to do for a century over and over and over again.
And all this with only some limited sympathy (solidarity) for the smaller countries clearly totally in over their heads into non-sustainable situations (Greece, Ireland, Portugal), but doing this piecemeal as it took time discovering they really WERE completely gone.
Such reasoning may lead to outcomes different from the obvious.
If the EU peripherals really don’t want to leave the Monetary Union and Euro, fearing the consequences for themselves and later generations, but want to stay partnered with the stronger European nations, they will need to accept discipline and structural reform on a time scale usually only encountered after a hyperinflation or major war devastation.
Not impossible, but certainly hard, especially where internal rigidity is deeply engrained and the Democratic dispensation prefers easy as compared to hard solutions.
The last word has obviously not been spoken, with a decade stretching ahead of us, in which Europe will have to confront deep questions about itself and the solutions on offer.
In the meantime, German Finance Minister Wolfgang Schaueble opinioned this week that there will not be a market crisis collapse in 2012 as the situation remains ‘controllable’, putting the focus not on markets but squarely on the structural needs of Europe.
It suggests more creative tension and brinkmanship as Europe is forced to face up to its many realities, of the past generation, the past 100 years, indeed the past 400 years. This could take at least a decade to fully resolve, this being the German position all along.
But then they talk from deep experience.
Source: Cees Bruggemans, First National Bank, December 31, 2011.
Tags: 30 Year War, August 1914, Austerity, Central Europe, Chief Economist, Financial Times, Financial Times Columnist, First National Bank, Forebear, German Lands, German Nation, Grim Lessons, Guns Of August, John Maynard Keynes, Peace Of Westphalia, Sovereign States, Stragglers, Victorious Allies, Wholesale Slaughter, Wolfgang Munchau
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