How close for Europe?
Important viewing for the start of the week. Here’s the link if you’d like to view it at its source: http://www.cbc.ca/video/swf/UberPlayer.swf?state=sharevideo&clipId=2239470660&width=480&height=322
Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 27 May 2012.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Tony
:
The muddle-through solution.
“Invert, always invert.”
Germany wants Greece to stay in the Euro so that German companies can continue to export using a depressed currency, which is good for the German economy. If Greece and some of the other southern European countries leave the Euro, then the Mark rises and the German economy is battered.
I disagree with the thesis put forward by Niall Ferguson, ie, Berlin does not know what is going on. Germany knows exactly what is going on. It must continue to string Greece, Spain, Italy and possibly France along for as long as possible, not killing them off, and not reviving them. As long as the cost of doing so is less than the benefit of a reduced German currency.
Think of the benefits to the Australian economy if a wily politician in Australia could join currencies with a neighbour, such that the result is a lower Aussie currency? (Think NZ) Even if the cost was some economic support to the neighbour. Most of the problems facing the Australian economy would be solved overnight. (Except for those pesky New Zealanders living off our dole – See how the European mind works?)
There is no love lost between the countries in Europe. They do not wish to help each other. They wish to help themselves. And in this case, Germany has the gold and will continue to slowly roast the PIIGS for as long as possible.
Greg
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Following is an extract, subtitled EORU HOPIUM, from a piece by John Hussman (an American hedge fund manager and economics professor) which I found very interesting and pertinent to the above video. (http://www.hussmanfunds.com/wmc/wmc120528.htm)
Euro Hopium
“Two main hopes have kept investors relatively complacent about the growing risks in Europe: the hope for Eurobonds, and the hope for large-scale ECB purchases of distressed sovereign debt (essentially money-printing).
With respect to Eurobonds, investors should understand that what is really being proposed is a system where all European countries share the collective credit risk of European member countries, allowing each country to issue debt on that collective credit standing, but leaving the more fiscally responsible ones – Germany and a handful of other European states – actually obligated to make good on the debt.
This is like 9 broke guys walking up to Warren Buffett and proposing that they all get together so each of them can issue “Warrenbonds.” About 90% of the group would agree on the wisdom of that idea, and Warren would be criticized as a “holdout” to the success of the plan. You’d have 9 guys issuing press releases on their “general agreement” about the concept, and in his weaker moments, Buffett might even offer to “study” the proposal. But Buffett would never agree unless he could impose spending austerity and nearly complete authority over the budgets of those 9 guys. None of them would be willing to give up that much sovereignty, so the idea would never get off the ground. Without major steps toward fiscal union involving a substantial loss of national sovereignty, the same is true for Eurobonds.
Over the weekend, Jean Claude Trichet, the former ECB head, proposed a system to save the Euro, whereby European politicians could declare a sovereign country bankrupt and take over its fiscal policy. He also proposed a system whereby the Eurozone could produce its own domestic energy by placing a giant hamster on a wheel the size of the Eiffel Tower.
Moving to the European Central Bank, large scale ECB purchases of sovereign debt would simply be the money-printing version of Eurobond issuance. When the ECB purchases the bonds of a given country, and creates Euros for them, it has essentially printed money until the point in time that the bond is paid off. If that day never comes, as is the concern with distressed European debt, then the ECB has essentially printed permanent Euros in order to finance the spending of the country whose bonds it purchased. In order to guard against this sort of backdoor fiscal policy, the ECB only buys bonds after ensuring that it has a senior position to other bondholders. So if the ECB was to purchase distressed European debt on a grand scale, the result would be that the remaining bonds would be subordinated, making the prospective losses on those bonds even higher than they were previously.
Ultimately, what investors really want is for the debt of various countries to be wiped away by the ECB simply printing money to retire that debt, or by having Germany and stronger Euro-area members to make endless transfers to peripheral European countries. The whole system rides on this willingness to transfer fiscal resources, or to allow money printing (with no revenue to stronger members from that money printing) in order to finance heavily indebted members. The reason the recent elections in Greece and France matter is that they send a signal from the public to European governments: the people are unwilling to make any more “austerity bargains” that put the public behind bank and government bondholders. So Germany is now being asked to continue its transfers without any end in sight.
We can’t rule out the chance that Europe will cobble together enough temporary liquidity for Greece and troubled banks to kick the can down the road another time or two, but these kicks will become increasingly weak and short-lived in the context of a new recession. Even in the event of various liquidity injections, there is virtually no chance of addressing the solvency of Europe – the ability of each government (much less the banking system) to sustainably pay their debts – within the constraints of the Euro. As long as the Euro exists as a single currency, individual countries can’t inflate away the real value of their debt, or restore their trade competitiveness through exchange rate depreciation against other countries.
Under these strains, I expect that the Euro will fracture well beyond a Greek exit. Ultimately, the result might be a “strong Euro” that reflects the union of Europe’s most fiscally responsible countries, or we might instead see a “weak Euro” that follows the departure of Germany from the currency union and leaves peripheral members free to inflate. So it’s not clear which direction the value of any surviving Euro may take until it is clear which member countries will remain. In any event, however, what we are unlikely to see is a single Euro that combines fiscally responsible and fiscally irresponsible countries, and requires endless one-way transfers of sovereign public resources in order to hold the system together.
We will undoubtedly have moments of promising news that will relieve economic and Euro-area concerns for brief periods of time. Part of the reason that the markets have been fairly complacent despite deterioration on these fronts is exactly the hope and expectation of investors for these transitory but unpredictable moments of relief. If one steps back from the trees to observe the forest, the reality of the situation is that Europe is already largely in recession, the global economy is slipping quickly toward the same outcome, and in my view, the U.S. is also entering a recession that will ultimately be dated as beginning in May or June of 2012 (i.e. now). The economic headwinds already in place are likely to make any meaningful budget progress virtually impossible in the Eurozone, and without meaningful budget progress, the likelihood of continued bailouts to peripheral European states is slim. So while short-lived bouts of hopeful enthusiasm are likely, the reality of the situation is much more challenging. “
Roger Montgomery
:
Excellent Greg. Thanks for sharing that.
Christophe
:
Great video Roger, thanks for sharing!
Roger Montgomery
:
anytime.
Gabe
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Hi Roger and Others
Don’t know if you agree however my analysis of the financial world is if it is not fixed shortly for good this time,what we now have will be the norm for the next decade.Our world problems are the result of the GFC and the fact we did not fix it but only masked the situation.
The reality is the debt has to be erased not disguised and sold off
to others only to appear in later years as a toxic investment.
This will result in a lowering of living standards for a while however it will bring back confidence – which is the missing ingredient.
Roger Montgomery
:
Indeed!
Greg Mc
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Agree, Gabe. There has, until now, been a continuing deferral of the day of reckoning but it can’t go on indefinitely. The medicine will have to be taken sooner or later, in one way or another.
I actually suspect that things will muddle along for a bit longer than many might expect, but the situation will break eventually.
Craig
:
question – how many times can something be too big to fail, before it becomes too big to save?
James Staples
:
What problem???
The United Countries of Europe (UCE).
Isn’t it amusing (if it wasn’t so serious) that politics thinks it can beat markets. From the earliest days of the euro when many of these sovereign countries “cooked the books” to gain entry into the euro and/or had deadlines extended by years to gain entry into the euro (mainly around just meeting budget deficits limits – sounds familar?) they now find themselves unable to agree on basic government fiscal functions.
The “infrastructure” exists (i.e. buildings – European Parliment) but not the sovereign (political) will and certainly not the “wisdom”. Interesting brinkmanship going on with each sovereign self-interest holding a global fullhouse. Pity they all aren’t holding the same full house.
Best of luck Europe.
All I know is derivatives crises occur because those charged with its management don’t understand what they are managing. And this derivatives play is one of the worlds biggest.