The Eurozone: A Family Snapshot

Given what is going on in the eurozone at the moment, I thought it would be nice to have a snapshot picture of it, circa 2010.

 Data: Eurostat (2010)

Ninety percent of the Eurozone's GDP is produced by just seven countries

Before you reach Greece, number 8 on the list with a mere 2.5%, you are already up to 89.99% of total GDP.  That is to say, the "black sheep of the family" is a relative spiffle and its fiscal troubles should have been dealt with firmly and - most importantly - FAST.  It didn't happen, so the debt crisis has been allowed to fester and spread, threatening to become a serious systemic issue for the entire European Union.  A huge mistake for Europe's leaders, particularly Frau Merkel and Monsieur Sarkozi who should have known better.  Much better.  

After the collapse of the USSR and America's Bush II, it seems that it is now Europe's time to go through its very own Era of Total Ineptness.

History is a harsh mistress whose cycles shall not be disturbed, indeed...

Sudden Debt Redux: Where Are We Now?

Sudden Debt was started five years ago warning of excess in debt, asset bubbles and the end of the "Permagrowth" model.  Today, some of the most egregious excesses have been reversed or at least arrested after wrenching and painful adjustments to the real economy.

Here are some relevant charts (all apply to the United States).

• Total debt as a percentage of GDP is still extremely high, but at least it has stopped growing.

 

• The debt service ratio has come down significantly, mostly through rock-bottom interest rates engineered by the Fed.

• The personal saving rate is rising, even if only slowly.

• Residential real estate, the biggest bubble of them all and Mr. Greenspan's biggest mistake, has burst spectacularly.

The charts above tell me, at least, that the Permagrowth model of the US (and global) economy is finished and must be replaced with something entirely new.  I simply cannot imagine that we will just roll over and once again start pumping the same old bubbles of consumption, debt and real estate as remedies for "low growth".  History teaches us that it can't be done: once a bubble is burst it stays burst for a long, long time and any attempts to re-inflate it ends in wasted time and resources  (Just look at Japan..).

What we need, instead, is a paradigm shift.  My choice is to focus on raising earned income and savings,  investing the surplus in renewable energy and resource management, basic R&D and technical education.

Gold vs. Debt and GDP

Continuing a bit from the last post's subject, here's another comparison between gold and US debt: The value of the entire amount of gold in existence in the world vs.  total debt of the USA (a proxy for global debt), and global GDP.

According to the World Gold Council there were a cumulative 169,100 tonnes of gold mined by the end of 2010, all of it still in existence since gold practically does not degrade, react, corrode, etc.   At the recent high price of $1,800/troy oz. its total market value was $9.8 trillion, or 16% of global GDP.

Using data from the Federal Reserve (US debt) and the US Geological Survey (annual global gold production) I come up with the following chart.

The value of gold is essentially a psychological phenomenon, since it has very few tangible uses. At 15% of global GDP, up from 5% just six years ago, it seems to me like it is discounting a lot of panic (the euro will fall apart, the West will inflate away all of its debt, the US will devolve into a second-rate power, etc. etc.).

They Are Scared Witless..

In this post's title "they" are speculators/investors (are there any true investors left in this world, I wonder?) and "witless" means exactly that: they have taken leave of their wits (assuming they had any to begin with, of course).

Proof? The following charts, showing:

(a) The price of gold soaring to new highs, apparently discounting a heavy bout of inflation in the future and,

(b) The yield on 10-year US Treasury bonds crashing to near new lows, apparently discounting future deflation.

Gold Flying High

10-Year Yields Collapsing

It stands to reason that this situation is untenable and can only occur when speculators are very, very scared, running about like chickens with their heads cut off.  I am a long-term investor myself, a natural-born contrarian bent on spotting exactly such nonsensical divergences.

Markets always provide tremendous opportunities to level-headed contrarians at two nexus points: bubble bullishness and panic.  Characteristic to both is the absence of common sense, observable and easily calculated by simple arithmetic (ratios are as far as you have to go).

For example, the ratio of gold price to 10-year yields stands now at 776 (it went as high a 850 a couple of days ago).  Just three years ago it was at 210...

The witless in search of "safe" havens, indeed...

As The World Burns

Well, now it's official:  The Debt Crisis is global.  But what lies at the heart of it? What are the economic fundamentals which have created it?

In a word, "China".  Oh, I don't mean that China as a nation is at fault, that it is to be blamed for the profligacy of Western consumers and their politicians' astonishing inability to lead, predict or - at least - to react properly.  No, I use "China" as a label for our present borrow-spend-inflate assets economic paradigm

In the last couple of decades we in the West have moved a huge portion of our manufacturing to China and become junkies of debt-financed ultra-cheap goods.  Said finance provided by China, of course.  It doesn't take a PhD in economics to spot the imbalance, of course.  As I have said many times before, the Debt Crisis is not the disease but a symptom, albeit a lethal one.

What is the proper remedy?  Nothing less than a global shift in the economic paradigm: we urgently need to move away from global consumerism to local "investism" (to coin a word).  Invest in what? you ask.  Green energy, mass transport, environmental amelioration, recycling, responsible resource management - and these are just a few items that have the very real potential to create a boom in local manufacturing and skilled jobs for a very long time, measured in decades.

Think of it this way: what is more important for our own present and our kids' future?  A third (and fourth and fifth) pair of cheap sneakers, or a new solar power plant?  Another V8 4x4 monster, or a new electric railway?  A fossil-fuel economy that resembles a roller-coaster nightmare, or an increasingly feasible electric utopia?

It's time to wake up from the bad dream and get to work building our very own Utopia.

PS For my European friends: Do you seriously think you can have a common monetary policy (the euro) without a common fiscal policy? Do you, really?

L'Affaire Strauss-Kahn

Il n'y a aucune coincidence dans la (haute) finance (pronounce in French for maximum rhyming effect).

Well, well, well... the prosecution is furiously back-pedalling on its charges against Mr. Strauss-Kahn.  It seems the chambermaid is not exactly the unspoilt lily of veracity she claimed to be.  As the Reuters article in the link puts it: "Case against Strauss-Kahn near collapse".

Being in the field for over a quarter century I have learned, often the hard way, that weird coincidences simply do not exist in finance.  If it seems too good (or too bad) to be true, it is safe to bet that it's not true.  

So, let's make no mistake here: there were way too many and powerful interested parties that wanted Mr. Strauss-Kahn out of the way.  Who?  In Latin, we ask: qui bono? (who stands to benefit?).

I'm not going to bother with the obvious French presidential race political stuff.  Instead, I think it was NOT a coincidence that the European debt crisis got much worse right after Mr. Strauss-Kahn, a confirmed euro-booster, got arrested and paraded publicly in manacles.

I'll go back to watching summer sunsets, now.  But I think the summer is about to get much, much hotter from here on.

A Blast From The Past

I have been re-reading Gustave LeBon's The Crowd, the 1895 classic on the psychology of herd ("crowd") behavior.  The French social psychologist was the first to scientifically and methodically study crowd behavior outside the criminal classes.

Here are a few bon mots:

• Crowds amass mediocrity, not intelligence.
• Compared to individual persons, crowds are always intellectually deficient.
• Crowds cannot help but exhibit excessive credulity.
• When in a crowd, an individual's faculties of observation and critical ability vanish.
• Events witnessed by the largest number of people must be questioned most of all.

 I am sad to say that Hitler, Mussolini and Bernays (Freud's nephew) were fans of this book, putting it to ungodly and unhealthy use (Bernays convinced women to smoke).  Ah... propaganda, thy name is Herd.

And what do financial markets have to do with crowd behavior?  Well, actually, the proper question is: when do financial markets not have anything to do with crowd behavior?

The Land of "Miracles"

Greece... land of Pythagoras, Plato, Pericles - and more platitudes than you can shake a stick at. 

Nevertheless, here's one more from a Greek bank professional: Greece is the land of miracles.  (I'm certain he didn't quite mean it as a compliment).

To wit, ANYTHING can happen there. Here's a handy comparison from recent history.  

• First, a current chart of the 5-year CDS (credit default swap) on Greek government bonds (click to enlarge).

 Greek CDS

•  Second, a chart of what happened in the Greek stockmarket some 10 years ago.

Greek Share Prices 1997-1999

Get my point, via chart comparison?  The place is basically looney-tunes and CANNOT be analyzed or predicted in any rational, by-the-numbers method.  For clues, best dust off the psychotherapy manuals and be prepared for excess, negative AND positive.

• Third, here's how the share bubble burst after the year 2000. The "miracle" of 1999 turned into dust shortly thereafter.

Now, given the excess of emotional swings apparent above, I wonder what may happen to Greek CDS prices in the not-so-distant future?

You Call This Global Leadership?

The US government is about to be shut down in the next 24 hours over the federal budget impasse.  Here are the only numbers you need:

Federal spending is approx. $3.7 trillion, the deficit this year alone is projected at $1.4 trillion - and the politicians are squabbling over spending cuts amounting to $33-40 billion;  that's  1% of spending and 2.9% of the deficit.  You gotta be joking, right?  

Obviously they are not, so I must conclude that their heads are so deep into the sand that they are in danger of being swallowed whole into their self-made political sand-trap.  If they call this leadership on a global scale then I suggest we call in the Greeks...

You Call This Global Leadership?

It's Greek To Me

The amount of hot air emanating from Washington DC has increased exponentially as politicians are arguing about the size of next year's budget deficit, but no matter what they decide it will be, in a word, monstrous.

To illustrate just how bad things are in the good ol' USA fiscally-wise, here's a helpful comparison:

Not fair to compare the US to Greece, you say?  Correct, because the figure for Greece is for the general government, i.e. it includes all local and municipal budgets, whereas for the US it involves the federal government only.

So, yes, it's Greek to me...