If you aren’t the lead dog the scenery never changes

Fiction has to make sense

By Mark Grant

I stated, quite some time ago, that the recession in Europe would proceed to the United States. It was just a matter of time before the austerity demanded on the Continent began to have its affects in America. We are in earnings season and the numbers have not been pretty. China is in a slow-down, you may append what terminology that you like, but the reality of it is staring you in the face. Exports by all of Asia to Europe are not only in decline but the waterfall is a steep cascade as denoted by China whose exports to Italy are off almost thirty-seven percent. France had to inject $9 billion into Peugeot today as VW reported out profits that declined nineteen percent. I project that by the first quarter of next year that America will also be in a recession as the spillover from Europe darkens our shores.

“There are some people who live in a dream world, and there are some who face reality; and then there are those who turn one into the other.”        -Douglas Everett

The equity markets went up, bonds compressed, as the never ending printing presses rolled on in Europe, in China, in Britain and in America. Printing trumped the European recession until the spigots were either turned off or became ineffective. What else is that you can promise the markets after “limitless” and “uncapped” play out? The world’s financial markets have lived off of the largesse of the world’s central banks while the financial projections of each nation in Europe and the IMF churned out numbers, relied upon by many, that were absolute fantasies as proven by the subsequent quarters when real numbers appeared to the gasps of those in the various marketplaces that had expected something else entirely.
 With short rates at just above Zero, with everything promised now except the kitchen sink and with the economies in a major part of Europe falling into the abyss where is it that you think we are going besides down? I would argue that the central banks did what they could, delayed the inevitable but that it was always a question of when and not if before earnings turned grim and the markets reversed.

“The difference between fiction and reality? Fiction has to make sense.”        -Tom Clancy

It is nice to think that the world is mollified by the ECB and the decline in yields of the troubled countries in Europe but that is only part of the story and a relatively small piece at that.The debt keeps growing in Spain, Portugal, Greece, Italy so that the drop in funding costs is more than cancelled out by the amount of debt that must be serviced. Europe has yet to confront further loans to Greece, Spain, Portugal and Cyprus because they cannot agree on how to proceed so the whole lot languishes in Elysian Fields as the effects of the poppies must have overcome the necessity of doing anything. It is a Xanax induced environment as Greece runs out of money and as Spain faces regional debt issue, bank debt issues and the possibility of several parts of Spain that wish to disassociate from the country.

Well, I can tell you with certainty that you can only do nothing for so long because eventually the lack of capital forces your hand and it is usually just at a time when everyone is surprised that your elbows are on the table and that you have demonstrated such poor table manners. I suggest taking a long and hard look at what you own now, what equities have outperformed, what bonds have compressed beyond your expectations and taking some money off the table now before the markets take your profits off the table for you. “Preservation of Capital” remains in force and I humbly suggest that you preserve some now before it is no longer your choice!

“Reality is merely an illusion; though a very persistent one.”

                                                                                      -Albert Einstein