February 2012
It's one thing
to say that peripheral eurozone countries are better off leaving the euro, but
how, exactly? And how severe can we expect the consequences to be, not only for
those nations but also for the entire eurozone – and for the rest of us,
worldwide? To minimize fallout from the event(s), it would be helpful to have a
solid foundation, based on an historical understanding of similar events, on
which we could build a reasonable set of expectations.
In the following
piece, Jonathan Tepper, my Endgame
coauthor, gives us the cornerstone of just such a foundation. With his London
firm, Variant Perception, he has prepared a 53-page report with the very
confident title "A Primer on the Euro Breakup: Default, Exit and Devaluation as
the Optimal Solution."
He
reminds us that "during the past century sixty-nine countries have exited
currency areas with little downward economic volatility." He makes the case
that "The mechanics of currency breakups are complicated but feasible, and
historical examples provide a roadmap for exit."
The
real problem in Europe, he says, is that "EU peripheral countries face severe,
unsustainable imbalances in real effective exchange rates and external debt
levels that are higher than in most previous emerging market crises."
The
way through? "Orderly defaults and debt rescheduling coupled with devaluations
are inevitable and even desirable. Exiting from the euro and devaluation would
accelerate insolvencies, but would provide a powerful policy tool via flexible
exchange rates. The European periphery could then grow again quickly with
deleveraged balance sheets and more competitive exchange rates, much like many
emerging markets after recent defaults and devaluations (Asia 1997, Russia
1998, and Argentina 2002)."
We'll
need this sort of robust thinking and a willingness to meet the challenge
head-on if we're going to get through not just this eurozone crisis but the
Endgame in which the whole world finds itself, in the final throes of the Debt
Supercycle.
You
can see the entire report on the Variant Perception blog – http://blog.variantperception.com/2012/02/16/a-primer-on-the-euro-breakup/
– or download
it as a PDF.
Your
confident that we will master the Endgame analyst,
Companies issue state of the enterprise
addresses, and presidents issue state of the union addresses ... but you've got
to be pretty confident to address the state of the world. Luckily for us,
Stratfor founder and CEO George Friedman is just that confident – and
it's well-deserved.
George is the expert in geopolitics, and his
company is the best source out there for geopolitical analysis. Thus, his
recent article, "The State of the World: A Framework," is well worth
a thorough read. It identifies three distinct phenomena the world is facing: the
European financial crisis, the Chinese export crisis, and Iran's rise to power
in the Middle East.
One of his most interesting points, and one
that I'm inclined to agree with, is that the most powerful country in the world
– the United States – is currently unprepared to deal with this new
reality. Something to keep in mind as we enter election season ...
Some of you may know that Stratfor was hacked several weeks ago. While they rebuild some infrastructure, they've got an open-house website – you can access the content that's usually only available to subscribers. You may want to take advantage of this opportunity by visiting www.stratfor.com before they lock up the house again. I particularly recommend their 2012 Annual Forecast.
Your wondering whether I'll have Greek, Chinese,
or Iranian food tonight analyst,
This week we have a shorter Outside
the Box, from my friend David Galland at Casey Research, with an interesting
insight into why gold can be considered as a poor investment by some rather
influential investors (like Warren Buffett) while others may see it as the core
of a diversified portfolio. As usual when I use someone's material for an OTB,
I include a link at the end, if you want to look deeper. The rather large team
at Casey Research specializes in gold, natural resources, and energy-related
investments, for those with such an investing bent.
As
a quick note, the feedback on this weekend's letter on taxes has been
substantial, and a great deal of it is quite good and worth thinking about.
Many bring up real problems with the position I took in my letter, and I may
surprise you by agreeing with some of them. My intention right now (barring
something happening between now and Friday night) is to take some of the better
statements and questions, and answer them. I am not married to any specific
plan. I just want to solve the problem and am open to anything that is
politically feasible and makes sense, as long as we solve the basic problem of
the deficit. I think it will make for a very interesting letter. I do read your
feedback, by the way. So if you wanted to respond and wondered if I might
actually read it, the answer is yes I do, and this week will answer as many as
I can.
And
to answer a question I get a lot, I buy a little physical gold every month. I
don't even look at the price. The check is written the same day each month, for
the same amount. I take delivery. I hope the price of gold goes down so I can
get more gold per dollar. I also hope it ends up being worthless, as that will mean
everything else has worked out just fine. But my gold is there just in case my
crazy gold bug friends are right and we can't actually trust the government to
find a reasonable solution to our dilemma. And maybe because deep down I
really don't trust the (insert your favorite expletive). Just a little
insurance, you understand.
So,
until we connect this weekend, have a great week!
Your I
am not a gold bug analyst,
No one does it like Kate Welling – we're
talking financial-world interviews here, "interrogatory
journalism," as Kate would put it – and her interview of Dr. Lacy Hunt,
which you're about to read, is in my opinion one of the best she's ever done,
and the best I've seen with Lacy.
Kate's interviews, which she
publishes in welling@weeden,
normally get seen only by the institutional investors and other market pros who
are her clients; but she has kindly allowed me to share this one, in which Lacy
tackles the same fundamental challenge I've been writing about these past few
years: How do we deal with the economic crisis we've brought upon ourselves
through the buildup of too much debt? How do we get out of the hole we've been
digging, when the tried-but-not-so-true Keynesian (and Bernankean) methods just
get us in deeper? How do we work through the end game of the Debt Supercycle,
when there are seemingly no good or easy choices left, and find our way forward into
an era of renewed growth and hope?
Lacy doesn't give us The Answer, but
what he does give us that is really helpful is a deep historical understanding
of economic forces and the key players who have tried to manage them, guys like
Irving Fisher, who completely missed the call of the Great Depression, but
learned a thing or two from it. Bottom line: "... if Fisher is
correct, and if we try to solve our current problems by getting deeper in debt,
then what Fisher is saying is the additional indebtedness doesn't make us stronger,
doesn't increase our options. It makes us weaker, reduces our options."
My answer to everything tonight, as my brain,
which is still in Cape Town, tries to catch up with my body in Dallas: take in a Mavs game!
Your giving microeconomic forces their due
analyst,
Today we dive
into Part 2 of Woody Brock’s notes from his new book, American Gridlock (www.amazon.com/gridlock). He looks at what we
can do in the future to prevent another crisis like we had in 2008, why we need
to change, how we bargain with China (will be very controversial, in China at
least!), what capitalism really is, and then he addresses the thorny issue of what
it means to distribute wealth fairly. What can be said to those concerned with the
top 1% of the population owning a grossly disproportionate share of the
nation’s wealth?
You can learn more about Woody and his
economic services at www.SEDinc.com,
as well as see some of his previous essays. You can also follow him on Twitter
and Facebook (Twitter: @HwoodyBrock; Facebook: American Gridlock [http://tinyurl.com/7ch7vld]) .
(Note: Woody is attempting a social media strategy to help deliver his message,
and I am just curious as to how many people will follow him on Twitter.)
I had a long
dinner with Woody last week and was on a panel with him the next evening. He is
one of the more fascinating minds and interesting people I have met in my
travels, and he tells the best historical stories (where else can you learn
about who went down on the Titanic and why, and the foundations that were set
up in their names that changed the US?).
I am off to
South Africa tomorrow night and back Saturday, spending three of the next four
nights in airplanes, experiencing the glamour side of travel. Not sure when or
where I will write the letter for this week, but it will get done. And thanks
to those of you who sent kind words and thoughts regarding my daughter Melissa,
who I mentioned in last week’s letter. You are very kind, and it is
appreciated. Have a great week!
Your getting 60 hours
to read and write offline analyst,
