by Brandywine Global Investment Management,
“It does seem to be true that the Germans, more
readily than other peoples, can withdraw themselves from the exigencies and
contingencies of life into a region of Innerlichkeit.” -John Dewey, Columbia
University Professor of Philosophy
The issue of Germany and its approach to ameliorating
the over leveraged balance sheets of its southern neighbors will dictate the direction
of sovereign spreads in 2012. The direction of
sovereign spreads will also determine the direction of risk premium spreads in
the leveraged finance markets— both bonds and loans. Defaults in the leveraged
finance market will and should be an after thought to the systemic risk factors
inherent in sovereign and next-of-kin bank credit spreads. Therefore,
forecasting default rates should take a back seat to a better understanding of
German Kultur and thought that will shape the euro-zone sovereign finance
structure in 2012 and beyond.
[ this is why we are so loathsome to take any notice
of the rear-view mirror defaults as well as forecast default expectations as
liquidity is much more critical than any macro or micro data]
John Dewey assessed German culture and thought in a
1915 book titled German Philosophy and Politics. His essential point was that “the chief mark of distinctively German
culture is its self-conscious idealism with unsurpassed technical efficiency and
organization.”
While these words were published nearly 100 years ago, they still ring true. In fact, they are very
relevant to better understanding the German psyche and their approach to
restructuring the debt of their most troubled southern neighbors, Greece
and Portugal.
[short-term pain but medium-term gain on devaluations]
The most recent European Union summit highlighted that
we are left with some of the same issues that confronted the great empires
prior to World War I—the battle between “English liberalism with its
emphasis on individual freedom and self-determination and Prussian socialism
with its emphasis on order and authority.”
Events in 2012 will establish the path we will pursue.
With this uncertain backdrop, investors should assess credit risk premiums with
caution, but remain opportunistic to any changes in the macro background.
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