A Small Printed Note Saying "Wait!"

The Mothers of Intervention

by Mark J. Grant

To me, the world is running down a quite slippery slope in its attempt to avoid calamity. The political machines in Europe and the United States and to a real but lesser extent in China have passed the hat to their central banks because either they cannot or will not face up to the severity of their problems. Some have called it lack of leadership which may well be true and I have categorized it past that where there is a decided lack of agreement about how to settle important issues so that the three central banks are all that stand between farce and tragedy. The investment community, so long used to the invincibility of the Fed in particular, recognize the dire straits but continue to rally in equities or compress in bonds based upon their almost dogmatic faith  that each central bank can cure the problems by adding liquidity in ever increasing amounts to deal with the solvency issues that won’t go away. I would say that this “faith based initiative” is misplaced based first upon the caveat that the nations in question all have liability for their central banks, that one day, someday, the size of the national liabilities for their central bank will get counted and recognized and finally that the printing of money whether recognized or unrecognized eventually has consequences.

I have often heard it asked, and by some of the largest professional money managers in the world, why the markets are behaving in their current fashion. We get bad economic news, poor earnings, fiscal crisis in Greece, Spain, Ireland, Portugal, Cyprus and perhaps in Italy and still the markets rise. The reason for all of this is “intervention” which has resulted not just in liquidity but in the notion that the central banks will do anything/everything to cure the problems so that worse is better, white is black and rational judgment is transformed into lunacy. It is liquidity and faith that are driving the boat and derelict accounting that is providing the fuel.

The problems in the United States are clear enough. We find two distinct visions of the world. Forget the parties; we have one contender who is presenting a socialist viewpoint of the world which is actually quite similar to what is taking place in Europe. Then we have a candidate that is espousing a more traditional American value where people stand on their own two feet and make their way based upon their initiative. When I grew up in the 1950’s we applauded and respected the achiever and the successful. Today Mr. Obama bashes Wall Street and wants those who have attained some success to hand over their money to those that have languished. This is far past the “safety net” that has always been in place in the United States and his vision is the cousin to France, Italy and other nations mired in Socialism where the population is dollar cost averaged by the taxes and political system that is in place. While I would personally contend that the traditional American values have merit I would also agree with the proposition that the people in the United States are faced with a very real choice between Socialism and Capitalism that will be decided in the coming weeks. This is not, in my opinion, the traditional five degrees to the left or right choice but a fundamental difference in values.

In Europe the problems are also of a fundamental nature. It is not just North versus South or the nations with money as opposed to the nations without it but a demand by those nations in trouble to have access to the capital and the savings of the nations that are economically solid. The definition of “More Europe” in Germany is decidedly different than the definition in Spain and the fight for a European definition is at the center of the rancor in Europe which has left the ECB as the only real functioning institution in Europe past the drivel that flows out of Brussels like so much manure to sod the farms outside of Antwerp.

The problem is exemplified by both Spain and Greece. Bank stress tests that were a joke, economic projections that had all of the reality of a Grimm’s Fairy Tale, and economies that are diving off the cliff. Spain reports out this morning that the bad loans at their banks jumped to a record 10.5% which is coming off of a baseline of 0.72% in December 2006. The worst case scenario forecast of Oliver Wyman has taken on all of the reality of the economic projections of each country provided by the IMF which must have been constructed by some folks in the land of Winkin, Blinkin’ & Nod. The fantasy continues; inaccurate data, fanciful projections, grand arm waving assurances by the European politicians and then months or quarters out real numbers which lay the scheme out naked and finally the fantastical belief that the central bank will wave its magic wand and make everything all good again. This is the stuff of Mommy kissing the boo-boo and everything will be just fine but the scrape is now a gash and I am afraid that the machinations of Mommy Central Bank cannot cure the problems much longer because surgery is required.

Many countries in Europe have reached the point where they are saying “No.” We see it this morning in pronouncements from Sweden and Finland. Euro-zone nations “need to do some things now that we maybe can’t be a part of,” was the common statement. Austria and the Netherlands have lined up stating no more of their citizen’s money for other countries.  German Chancellor Angela Merkel on Thursday called for more integration within the European
Union by giving EU's top economic official the veto power on national budgets of member states.

This, I assure you, will not fly in the Parliaments of many European nations and “More Europe” not only lacks a common European definition but it lacks agreement from one nation to the next. We are just not reaching some sort of crunch time but we are reaching a point and perhaps the point where the European Muddle ends and the division begins.

“On the delivery plate of the Nutri-Matic Drink Synthesizer was a small tray, on which sat three bone china cups and saucers, a bone china jug of milk, a silver teapot full of the best tea Arthur had ever tasted and a small printed note saying "Wait.”

                   -Douglas Adams, The Restaurant at the End of the Universe