Monday, June 4, 2012


I have been reading many views from an endless number of commentators on the potential roll on effects of a Euro break-up; a new language has sprung up around the Euro crisis, such as the now widely used Grexit, and even less pleasant sounding Spexit (which does not seem to have caught on). What to make of all these scenarios that are being trotted out?

My answer makes this a relatively (and unusually) short post; the answer is that nobody really has any idea at all, and if they say they do, then they are genuinely geniuses, have an outstanding set of tarot cards, or they are just plain guessing. The reason why I argue this is very straightforward. As I argued in my last post, we are entering a special set of circumstances. In particular, the drivers of the world economy long ago ceased to be about market fundamentals, and is instead dominated by state action; whether fiscal or monetary policy. This is largely the result of what I termed as extreme policy making setting up a dynamic in which the extreme policy enacted in economy x, sends ripples out into the markets, leading to a further extreme policy response from country y, which in turn washes back onto economy x, which reacts with further extreme policy.....and so it continues with all of the major economies now acting with increasingly extreme policy to a point where markets are now 'nationalised'.

There are therefore some very basic reasons why it is not possible to predict the roll on effects of a Grexit, or any other exit, from the Eurozone. The only certainty is that, as and when these events take place, the economic policymakers will not stand back, but will again intervene in an even more dramatic fashion, in an attempt to 'save' the world economy. Here I am assuming that the coming Euro-calamity will actually take place in the coming month/s. Quite suprisingly, I am in rare agreement with Paul Krugman that there is currently no plausible avenue out of the current path to crisis in Europe. However, I put a small caveat that there just might be a new action from policymakers, and not just those in Europe, and these might still hold back the tide a little longer.

Like many commentators, I am tempted to hazard a guess at possible outcomes, but keep on trying to grab hold of any scenario which is driven by clear principles, theory or the market. However, as I argued in my last post, any theory or generalisation from past events has been torn up along with the economic textbooks.

Instead of finding any clear scenario, I simply finding myself contemplating what will be done as a large ditch attempt to turn back the tide, and how this will set up even more unpredictable outcomes. One obvious answer will be that the printing presses will roll, and not just in Europe. We might even see concerted and coordinated central bank responses, including the Euro area, Japan, China, the US and the UK. In all events, the central banks will continue to at least try to stand behind the banks, perhaps producing something like an LTRO on steroids.

Perhaps the most interesing question will be the timing of action. At what point will policymakers act; before Grexit, during Grexit, or once the consequences of Grexit are apparent. Also, although Grexit is often seen as the forthcoming trigger for crisis, it may be that the trigger will emerge in one of the larger Euro economies, with Spain, Italy, Portugal, Ireland, and even France, all looking fragile. There is a real risk of events overtaking the current 'magic' date of the Greek elections.

Regardless of the 'trigger', if my guess is right, and that there will be a coordinated response, there will likely be a positive spike upwards, as relief grips the market. Commodities and stocks will likely briefly soar in so-called safe haven markets. As with previous state interventions, eventually the markets will fall back down, or even crash. Alternatively, if policy is uncoordinated, then there is likely to be a series of small market rallies, which will extinguish themselves as quickly as they started. This might encourage yet further extreme policy responses. Running to gold is another possibility, as gold in some respects is entirely irrational and that very irrationality is also gold's strength. It just feels safe when all else feels unsafe*.

Nevertheless, this is all speculation, and the only certainty in the policy response is that there absolutely will be a policy response, and it will almost certainly be extreme. As such, the ripples of the actions of each of the policymakers will ripple out and interact in the global economy, and will likely further swamp any market signals that might remain. It is for this reason that I emphasise that my commentary is nothing more than speculation; I am guessing.

As such, we are now in the uncomfortable position that, come what may, the world economy now no longer sits in the hands of markets, firms, banks and individual actions of economic actors. Instead, we now wait upon the action of states to determine the next steps in this economic crisis. The track record of states at managing the crisis is not encouraging. They have tugged and heaved on both fiscal and monetary policy levers, and still the situation in the world economy swings back towards negative outcomes. With each swing back to negative from each policy response, the stakes are being raised ever further. Again, in my last post, I discussed how the LTRO has compounded the problems in Spain, albeit giving both the Spanish banks and state a very, very brief reprieve.

My final guess is to suggest that, at the very least, the economic ride of the coming months will be a turbulent one. In this, I think I am in agreement with everyone. For the rest, and my own comments, treat is all with a big pinch of salt.

* I do not believe that gold is some kind of 'special' form of 'money', but its history as money is what I believe gives it the feeling of safety. 

Note: For my next post, I will try to get away from the Euro crisis and instead take a more analytical look at China or the US going forwards. The European crisis is not the only issue of interest. However, for all my good intention, I keep being distracted by Europe and, for obvious reasons, may be pulled back to Europe. If I do return to the European situation, rather than a very general post such as this one, I will try to focus on some of the detail of the situation (country/market/institution etc.).


  1. What has "value" today? Food/energy? We are not at that point I think...

    I think of:
    1) health care access (due to aging population too), also a doctor in the family...
    2) access to affordable education
    3) for a nation: guarantee of political and social stability. That will be a real asset...

  2. Hi,

    I'm quite pleased to be able to post on this great blog. Just a couple of words to say that your position is indeed very near to the one of many gold-bugs.

    What may make a difference between you and a gold-bug is that gold-bugs are generally converted to sound money because they need to.

    Gold-bugs are generally in ages near pension time with significant amount of their precious little money stored in monetary instruments.

    This is obviously a serious constrain that has you think and read. Possibly Mises or Hayek in the first place.

    Most of the gold-bugs would be glad not to be. And are for most recent converts (2006 in my case) who felt that they no reasonable alternative. They would, for most of them, prefer, money in the bank, should money in the bank be both safe and interest-bearing.

    What you say is irrational about gold is indeed very rational. Gold is all about rarity and nothing else.

    The fact that this rare metal has strictly no use outside that its precious is what makes it an obvious element in any reasonable monetary construction.

    By the way, I recommend you pay attention to the last writing of late Jacques Rueff - The monetary sin of the West - possibly you already did. And most specifically the concluding chapter concerning the development of the international monetary system.

    On top of being a sound thinker on monetary theory, Jacques Rueff was also right "on the money".

    Jacques Rueff has been instrumental on monetary history over more than 40 years, exclusively on behalf of his country - as a "grand commis de l'├ętat". Not as a Goldman Sachs temporary transplant.

    He was no gold-bug. But we strongly believe that you cannot trust neither politicians, or a people, to deliver a monetary system without some sort of external physical constraint such as gold.

    I alas expect Jacques Rueff to be proven correct.

  3. The allure of physical gold is that it carries zero counter party risk.

    Did anyone see this slide show by Raoul Pal:

  4. Thank you for yet another incisive article. I love your conclusion to which I fully concur - somethings going to happen, but [we] can only guess at what.

    Here's my prediction.

    There is a variable that must not be discounted - it's election year in the US. With the economy wobbling and share prices on the wane, wouldn't it be great for Mr Obama for a nice "recovery" (however temporary) just as the voters are off to the booths. This will be when the co-ordinated QE and LTRO will be unleashed.

    The only(!) spanner in the words is Greece (Spain can bide its time for the moment).

    However, I think that the Greeks (especially the sizable army of public sector workforce) do not want - at any cost - to leave the euro. This is spooking them and my opinion is there will be a (suprizingly) confortable ND/PASOK majority. Of course, the trioka will give the country "concessions" to the conditions to help sooth the (sizable) minority. Sure, they'll be a few riots on the streets by the understandably angry Greek youth nursing 50% unemployment, but Greece will bumble along for now.

    Cue temporary "relief" and rise in the stock markets, boosted, when necessary, by the aforementioned QE/LTRO. This will be a dead-cat bounce, but will keep things rolling along until the election.

    And then, in this rock/hard place saga, it all starts again (around about Christmas I reckon).

    Meantime, I'm seriously eyeing up bank shares (Barclays). They are 173p as I write and I expect a cheerful 230p at the peak of this engineered revival, ready to sell hopefully just in time.

    Not, lamentably, how the markets should work, but these days, you've just got to roll with it to make a buck!


  5. I reckon the Greeks will be given a 6 month stay of execution after their elections, in the way of a debt repayment holiday, on the basis that the new government must be given a chance to sort things out. Some short term loans may be made available by some 'Euro fund' to bridge the gap so short term bills can be paid. So that takes us to January 2013 .... after that it will be clear the Greeks will still never repay their debts and then the Grexit may happen.

    Of course this allows everyone connected to Greece another 6 months to manage their exposure downwards in whatever way they choose.

    Spain, Portugal etc will just bumble on until it becomes clear what is happening to Greece.

    So my money is on next year before the Euro enters its final phase.

  6. To: Anonymous June 5, 2012 3:37 PM

    Barclay's shares are trading at 203p today as a result of this new fangled scheme to pump cash into the banks.

    Well done - you are half way there!

    1. To Jonny,
      Thank you, I bought at 177p, and am certainly going to stay put. No complacency though, however the BoE intervention was a useful nudge for sure :)

      On Monday, I expect another boost (5%) when PASOK/ND are voted in.

      I am grateful to this excellent blog as I am heavily influenced by the dose of reality it gives when I make investment decisions. Although, like this blog, I dont always call it right!



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