Dear All,
Michael Pettis': Syriza and the French indemnity of 1871-73 (really about Greece) is a must read.
An extremely long and somewhat difficult text but Michael Pettis is an important thinker and have great knowledge of balance sheets and economics…. A MUST READ – if not pre-NON FARM, then certainly printed for the weekend.
I have chosen a few "things" from the article – but the analogy of the French Indemnity and overall concept of that "the ultimate deal" is clear, but the path uncertain…..is appealing and well argued.
Adding my own flavor to this – having spent considerable time with many clients and hedge funds – my view is best described by a piece done by GaveKAL yesterday called: "Greeks gaming themselves out" written by Anatole Kaletsky:
"The dominance of bureaucracy over democracy is one core principle on which the EU institutions will never compromise"
Elegant, true and the very definition of pretend-and-extend. The "system" is kept in place due to political capital invested and the deficiency of the players in Michael Pettis words : " I worry about the terrifyingly low level of sophistication among policymakers and the economists who advise them when it comes to understanding balance sheet dynamics and debt restructuring"
Simply the present crop of bureaucrats and policy makers is educated, formed in time where IMF, World Bank, ECB, and central banks mattered – their one trick pony strategy of imposing austerity blindly got them "booted" from Asia since Asian crisis, and now from Greece…
We are in my view at the end of the "rainbow" – policy makers have made themselves obsolete. Central bankers are now all reduced to cutting rates and "exporting their problems to other" through currency devaluations. This is, hopefully, the end of central bankers and bureaucrats as economic Generals – a line I touched on my piece post SNB dramatic action: Endgame for central bankers
My conclusion:
GREXIT is the only way to maintain pretend-and-extend for policy makers. They can't allow non-compliance as it will mean wider "loss sharing". Let me stress a GREXIT is not what I want, but my for now analysis of the most likely outcome.
Michael Pettis argues well and much better than I could for the opposite compromise, but I don't, personally, think we REALLY want a deal. What we want is a new mandate for change – a final goodbye to a world where buying time and investing in paper money is incentivized through QE and regulation and at the expense of education, productivity and people.
We had eight years of doing nothing, maybe it's time to do something? Yes that 'something means taking loss', new beginnings, but DO NOT underestimate economies ability to rebound if set free – again Michael Pettis shows this by Frances unique ability. My model base for this year remains:
Low in growth, inflation expectations between Q2 and Q3 – a sharp increase in velocity of money, marginal growth and inflation to occur in Q4 (a perfect 9-12 month lag from 50% drop in energy) – so 2015 does become a year of change for me politically and economically.
Strategy wise I worry. I have been doing this since pretty much the DKK peg started (1982) and right now intraday volatility is exploding, fixed income and equity products trades with same 206d actual volatility (12%-ish both) and market never been more illiquid. We are correlating to one – both in the market and geo-politics. Binary – black or white only.
Complacency prevails: I have just today had five people, before lunch, tell me there are no alternatives to equity due to negative interest rates! Probably! This old dog would rather buy something which is cheap, out-of-style like commodities (DBA & DBC)
Don't forget a market with negative yield MUST by definition have an expected return on all asset going forward which will collapse (one asset is competing with another only to the marginal return is higher…..). I.e: Low bond yield, means less return in other assets to.
Buying Gold now – adding more to DBA and DBA is my first major change to my long Fixed Income in place since Q3-2013. I will reduce bonds over next two quarters, but still see 10Y US below 1% and German Bunds below 1%.
Safe travels,
Steen
Even if the question of who is to "blame", Greece or Germany, were an important one, the answer would not change the debt dynamics. It would take the equivalent of Ceausescu's brutal austerity policies in Romania, which were imposed during the 1980s in order for the country fully to repay its external debt, to resolve the Greek debt burden without a write-down. Given that Ceausescu's policies led directly to the 1989 revolution, which culminated in both Ceausescu and his wife being executed by firing squad, the reluctance in Athens to imitate Romania in the 1980s is probably not surprising.
While everyone probably agrees that Greece simply cannot proceed without debt forgiveness, less widely agreed, but no less obvious in my opinion, is that there are a number of other European countries that also need debt forgiveness if they are to grow
In summary, I think there are several points that those of us who want "Europe" to survive should be making.
1. The euro crisis is a crisis of Europe, not of European countries. It is not a conflict between Germany and Spain (and I use these two countries to represent every European country on one side or the other of the boom) about who should be deemed irresponsible, and so should absorb the enormous costs of nearly a decade of mismanagement. There was plenty of irresponsible behavior in every country, and it is absurd to think that if German and Spanish banks were pouring nearly unlimited amounts of money into countries at extremely low or even negative real interest rates, especially once these initial inflows had set off stock market and real estate booms, that there was any chance that these countries would not respond in the way every country in history, including Germany in the 1870s and in the 1920s, had responded under similar conditions.
2. The "losers" in this system have been German and Spanish workers, until now, and German and Spanish middle class savers and taxpayers in the future as European banks are directly or indirectly bailed out. The winners have been banks, owners of assets, and business owners, mainly in Germany, whose profits were much higher during the last decade than they could possibly have been otherwise
3. In fact, the current European crisis is boringly similar to nearly every currency and sovereign debt crisis in modern history, in that it pits the interests of workers and small producers against the interests of bankers. The former want higher wages and rapid economic growth. The latter want to protect the value of the currency and the sanctity of debt.
4. I am not smart enough to say with any confidence that one side or the other is right. There have been cases in history in which the bankers were probably right, and cases in which the workers were probably right. I can say, however, that the historical precedents suggest two very obvious things. First, as long as Spain suffers from its current debt burden, it does not matter how intelligently and forcefully it implements economic reforms. It will not be able to grow out of its debt burden and must choose between two paths. One path involves many, many more years of economic hell, as ordinary households are slowly forced to absorb the costs of debt — sometimes explicitly but usually implicitly in the form of financial repression, unemployment, and debt monetization. The other path is a swift resolution of the debt as it is restructured and partially forgiven in a disruptive but short process, after which growth will return and almost certainly with vigor
5. Second, it is the responsibility of the leading centrist parties to recognize the options explicitly. If they do not, extremist parties either of the right or the left will take control of the debate, and convert what is a conflict between different economic sectors into a nationalist conflict or a class conflict. If the former win, it will spell the end of the grand European experiment.
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
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