Thoughts from the Frontline
A Random Walk Through the Minefield
May 28, 2011
Would You Like to Read Over My Shoulder?
Dysfunctional, Thy Name Is Europe
What Happens if the Greeks Default?
Trigger Points and Evasive Action
A Random Walk Through the Minefield
Gaming the GDP Numbers
Tuscany (And I Get the Irony)
“All political thinking for years past has been vitiated in the same way. People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.”
– George Orwell
“ Hindsight is not only clearer than perception-in-the-moment but also unfair to those who actually lived through the moment.”
– Edwin S. Shneidman, Autopsy Of A Suicidal Mind
Brinkmanship is defined as the practice of pushing dangerous events to the verge of disaster in order to achieve the most advantageous outcome. It occurs in international politics, foreign policy, labor relations, and (in contemporary settings) military strategy involving the threatened use of nuclear weapons.
This maneuver of pushing a situation with the opponent to the brink succeeds by forcing the opponent to back down and make concessions. This might be achieved through diplomatic maneuvers by creating the impression that one is willing to use extreme methods rather than concede. During the Cold War, the threat of nuclear force was often used as such an escalating measure. Adolf Hitler also utilized brinkmanship conspicuously during his rise to power. (More on ignoring events and Hitler later on.)
In the last 48 hours, so much news has come out of Europe that has me frankly shaking my head. It is a strange game of brinksmanship they are playing, and it is one we should be paying attention to (as if the brinkmanship played by US politicians over the debt ceiling is not enough). This week we look at what seems to be European leaders taking random walks through the minefield at the very heart of the European Experiment. As Paul Simon wrote, “A man sees what he wants to see and disregards the rest.” But first…
Would You Like to Read Over My Shoulder?
As you know, I read scores (if not hundreds) of reports and analyses each week to put together my letters. Wouldn’t you like it if I could filter for you what is important? The few things that you should read? What would it be worth to you to have someone with my years of experience and breadth of resources available to you as your own personal reader/filter?
I can be just that. I’ve now launched a new service called Over My Shoulder to bring you the very best 5-10 pieces I read each week.
I’ll call your attention to some of the most fascinating analysts out there, people with non-intuitive perspectives on some of the most pressing issues facing us as individual investors. Concerned about inflation/deflation? Wondering about the future for US markets and sovereign debt? Europe? It’s all here.
If you need cogent analysis and clear reasoning, this is the service for you. And if you want to see the data, charts, and graphics that back it all up, you’ll get them. Would that be worth just $39 every three months? What is just one piece worth to you that helps you make that critical decision?
My job is to find you the best of the best, making sure your radar is pointed at the critical issues and weeding out all the noise. If your time matters as much as your investments, click here to learn more: http://www.johnmauldin.com/overmyshoulder/recent/
And let me hasten to note, this weekly letter will not change. It will still be free, coming to you each weekend. And now on to this week’s letter.
Dysfunctional, Thy Name Is Europe
This week one member of the European Central Bank after another repeated the warning that if Greece defaults or restructures its debt, then Greek debt would not be eligible for use as collateral at the ECB, nor would Greek bank debt. They are continually warning of “contagion risks” and the end of the euro as we know it, and all in stentorian tones that would make any doomsday prophet of Armageddon jealous.
But this ignores...
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Comments
Carl Swenlin
May 30, 2011, 9:51 a.m.
I am 70 and I have often wondered why the Jews did not get out of 1930s Germany while the getting was good, so it was interesting to see the list of incremental events that could have spurred them to action. Missing from that list was even the slightest hint that there was a Holocaust in the future. No one at the time could have conceived that such a thing could happen to them, certainly not while there was still time to escape. Of those Jews who did escape Germany, most went to other places in Europe, which was ultimately a failed sanctuary.
Today it is hard to imagine what it will be like when the global financial system collapses. We should be taking action to protect our assets, but the problem is that we don’t know the rules by which we will be playing in the future.
jim mcwhorter
May 29, 2011, 9:53 a.m.
Thank you as always for a thoughtful and cogent discussion of the economic issues facing the eurpean community. However, although you amy have obliquely alluded to the potential for a resolution via political expediency; I feel that you did not adequately give weight to that methodology for taking action to the detriment of the many by the few. My reasoning goes thusly:
Given that this is an EMERGENCY the various politicos will indeed take action in spite of any protestations to the contrary by the populace as a whole. Their rationale will assuredly be something along the lines of “We MUST take action in this EMERGENCY to support our fellow coomonwealth members via additional taxes and fees paid into the ECB, IMF, etc…” Once the first emergency is averted via added taxes and fees on income or assets it will be a slippery slope indeed as the same logic is employed by these Keynsian Kowboys to the healthcare and pension woes. The logical outcome from this endgame scenario is the extension of economic woes for years. This brings another point to mind regarding more socioeconomic issues the european community and NATO allies are faced with but I will merely allude to them for now.
Have a great time in Tuscany with your family.
george outlaw
May 29, 2011, 1:05 a.m.
Dear John,
Well this might sound like a Dear John letter because it actually is.
I couldn’t agree more that you can’t see the future clearly anymore than the Jews could or did. Hayek has a very incomplete economic theory which despite this is widely adhered to in Europe and not at all in America. I do agree that the Euro will fall from it’s record highs now—-doesn’t require much reading or knowledge to come to that conclusion.
However, I think your failure is in your belief system. Most assets personal and corporate are either paid for or well secured. Germany, and the Nordic countries are by far the most secure and profitable countries in the world. They have the assets to pay for Greece, Spain and Portugal or in effect take ownership of their assets at fire sale/bankruptcy prices. What is the downside in that? Your graph indicates that the EU has marketed increased it real asset base as well as other more secure forms such as bonds, etc. Basically, the Europeans homes/businesses are paid for, they individually have money in the bank, secure pensions(relatively), they don’t have even their toys financed. Each year they become more and more energy efficient, Germany will reach energy efficiency (hence little Euro drain and increased net income by 2025 approx. The net income effect for ending oil dependence would offset the PIGS with a profit left over. Population growth is stable or falling, and they meet their national debts via real sales to the world for trade goods.
America on the other hand is a basket case, held up only by fantasy. We have an approximate 13% of the economy which is considered internationally competitive and profitable. The largest export is exportable only because of crony capitalism which subsidizes it(Agriculture) to the extent that it remains profitable. Our GDP is over 60% derived from “consumption”. Imagine a country with 13% profitable industries, spending 100% of the GDP. Everything almost is financed, like a stack of cards. The government is for sale to the highest bidder, and as a result the “management” is unable to manage in a coherent and timely manner. No one would invest in a company like that. Luckily the corporations/wealthier have almost 100% ownership of the profitable assets including the government and the burden/costs are largely paid by those who have little say in the process. So there are very profitable investment opportunities in the US.
Europe on the other hand, well you have to take it by country. There are loads and loads of money in all the PIGS you mentioned, it is just not taxed, very similar to America. If they clean up the tax collection system, and increase governmental revenues as they should in the US then there is really no fiscal calamity. However, the herd…you’ve heard of them follow and print stuff like your article.
So enjoy your vacation, eat and enjoy life as the Italians do and look out for a nice piece of property for yourself and hopefully your kids will have the opportunity to become European citizens one day.
And I could go on…but you really need to stay overseas for awhile, learn about some other cultures, learn the language…....before you make such broad statements. But as our last great alcoholic(dry) ex President said…you must have misunderestimated me. Harvard also, but then all is for sale in America, NO?
George