As
the financial world breathed a collective sigh of relief as the Greek
Parliament voted to impose further austerity measures on the people of Greece,
I wondered aloud to no one in particular how many times we'd have to see this
movie before people finally realize that this crisis is a permanent one.
There are many analogies that we could use to illustrate what has gone on,
but probably the best is a trauma patient coming into the hospital with a
severed carotid artery. Instead of performing surgery and repairing the
wound, doctors throw the unlucky fellow on a gurney with a piece of gauze
taped over the incision. Every so often they check back in, throw another
piece of gauze on it and walk out, never fixing the problem. That is
precisely what is going on with regards to the Eurozone mess. And America's
too. Lots of tape and gauze with precious little in the way of real solutions
has been the norm for quite some time now and there is no reason to think
that this will change unless it is out of dire necessity.
In
my opinion, there are (at least) three overriding macro themes that are
driving this crisis, and will continue to do so. Like most other recent
economic and financial dislocations, it will go until it doesn't. Looking at
the macro drivers below, it is easy to see why this is the case: old habits
die hard and most importantly, this crisis, along with most others, is
insanely profitable for a select few.
The Psycho-Moral Problem
When
you really tear away at all the media glitz and veneer applied to the global
debt mess, you can find several underlying causes. The first is greed. The
second, and this one has been a rather recent development, is laziness. I
often wonder if America would be able to undergo another industrial
revolution similar to the first one in today's world. I seriously doubt it.
We seem to be good at building shopping malls and restaurants, then borrowing
money to patronize these establishments. In the aggregate though, we really
haven't built much in the way of productive capacity in a generation, let
alone manned and operated it. Do we even remember how? What is really coming
to the forefront is that we are by no means alone in this suspiciously insane
endeavor; the people of Europe have been doing a mighty fine job of living
beyond their means as well. Europe has had its own 'great society' upheaval
similar to America's turn down the wrong path in the 1960's.
This drive to create a social
utopia, or in economic terms, a post-scarcity world, has created exactly that
which it was supposed to avoid – long-term scarcity. Why did these
attempts occur? Gross misunderstandings of economics? Many think so, but when
you read the articles, papers, and other correspondence written by many of
the players in these movements it becomes rather clear that they were
interested more in power accumulation than anything else. And two continents
got wrapped up into it to the point where we have no idea how to live without
it. Here in the US, over half of the population receives some type of
transfer payment from the government. For the purposes of this article, I am
not making the distinction between people who paid into programs like social
security and Medicare and those who didn't. The point is governments have
become little more than a very expensive conduit between the 'working' class
and those who are collecting from them. And, it has been this way so long
that people cannot fathom a world that is any different. When they are
confronted with drastic change, well, you saw what happened in Athens –
and is still going on despite the fact that the media has moved on to more
pressing and important matters such as Nancy Grace's newfound popularity.
The
bottom line is that the Eurozone and America both need a massive attitude
adjustment. 2008 didn't even put a dent in the entitlement mentality in
either locale. Imagine what it will take to change our way of thinking.
Rating Agency Competitive Downgrades
The
final two bullet points likely fall under the broad category of financial and
economic cannibalism. For years now, I've marveled both publicly and
privately about the willingness of the major credit rating agencies to
maintain the sterling debt rating of the USGovt
despite a growing fiscal morass that is now only first being truly
recognized. Let's make the assumption that the people who run these agencies
are not illiterate and actually know what is going on. Unfortunately, this
logic has proven to be spot on as is evidenced by the constant beatings
applied to Eurozone countries by the majors (S&P / Moody's).
This
strategy of competitive downgrades serves to exacerbate the debt issue at its
core, pretty much guaranteeing that none of these countries will ever clear
their debts. Of course that is the whole point. The current action dovetails
rather well with John Perkins' assertions in "Confessions of an Economic
Hitman." Keep in mind also that while all
these downgrades on PIIGS sovereign debt have taken place, the USGovt has received only 'stern' warnings regarding its
own fiscal black hole. Clearly Moody's and S&P are in the business of protecting
the status quo. We saw the depths of rating agency fraud beginning in the
early part of 2008 when highly rated mortgage tranches suddenly came up lame.
We will see this again, this time in USGovt
Treasury bonds. The status quo will be protected, even if a company or two
takes a dive in the process. Think Lehman
Brothers.
Outrage
from the Eurozone has intensified, particularly with yesterday's severe
downgrading of Portugal's debt by Moody's. The cut came as a newly elected
government had just pushed through an ambitious austerity program. In the
past year, Portugal has been cut from Aa2 (two steps below the rating of the USGovt) to Ba2, which is below investment grade and
otherwise known as 'junk'. This has all transpired despite the fact that
Portugal has at least been trying
to get its house in order. Meanwhile, Washington does zilch and
maintains a top rating? These strategic hits on countries that are totally at
the whim of the IMF and/or regional central banks reek of foul play. Calls
for 'more responsible behavior' by Eurozone officials should be replaced with
investigations into the ratings agencies themselves, given their duplicitous
actions (and lack of action in some cases) regarding credit ratings.
It
is also probably a reasonable assumption that both major ratings agencies and
the raft of second-tier firms knew going in what was going to happen
regarding the Eurozone. Much of the fallout follows the tenets of common
sense. The endless bailouts are no different than our own broken system.
Whether or not these bailouts are covered by the media is of no consequence.
They've been going on for years and will continue to go on. The point is,
shouldn't the ratings have gone down sooner? There will be those that will
argue that cutting ratings in 2008 or sooner would have precipitated the
crisis in and of itself. This is probably precisely why the balloon hasn't
gone up yet on America's bond ratings. However, it would appear that the
ratings have been cut strategically to allow financial entities to game the
system, hence my earlier comments regarding financial and economic
cannibalism.
Similar
to the yield curve, there is a ratings curve in the Eurozone, which creates a
multitude of opportunities for trading profits. This goes back to the
cardinal rule of large firm investing a la Jim Cramer: when there is no
volatility, create some. And if you put a few countries into IMF receivership
along the way, well that is just a cost of doing business, right?
Hedge Fund Bets
This
probably qualifies as a corollary to my earlier point about parties gaming the system, but I think we need to expound on this
just a little bit. My entire point here is that once again, the biggies are
playing with fire. And they will get burned. Not maybe. Obviously there are
no guarantees in life, but I'd say this one ranks up there with the sun coming
up. It is going to happen. This is a continuing testimony to the greed
involved in our society and financial system and precisely why I lobbied hard
and spoke out against any bailouts in 2008. These people needed to go
bankrupt. Instead they were allowed to compromise the financial system and
with it, the economy. With the wounds barely healed, if they've healed at
all, these same folks are right back at it again.
True
to form, George Soros has had plenty to say about the Eurozone mess.
Remember, he is the same fellow that said 'I'm having a good crisis' in 2009
while people were losing homes, jobs, and retirement savings. He added that
it was the culmination of his life's work. Oddly enough, the Daily Mail,
which originally posted the story, has since pulled the
offensive comments. He said recently,
"We are on the verge of an economic collapse which starts, let's
say, in Greece, but it could easily spread," billionaire investor George
Soros said during a panel discussion in Vienna on June 26. "The
financial system remains extremely vulnerable."
The
fact that the self-appointed master of the currency raid has pointed out the
fragility of the financial system foreshadows directly to the near certainty
that there will in fact be another crisis. Again to my earlier point, it is
insanely profitable for a select few. Hedge funds are firmly betting on the
extension of the Greek tragedy to the rest of the Eurozone, and some are even
betting on the metastasis of the problem across the Atlantic as well.
The
major point to understand here is that there is no way to even quantify the
risks associated with getting in on the sovereign debt mess. If you had 192
or so standalone countries, each with its own central bank like we used to
have, it would be difficult enough just because of the propensity of banks
and other financial actors to invest across borders. The idea of the regional
currency and central bank was to curtail the risk inherent to the system, but
instead, it has done the exact opposite because now there are so many actors gaming the system simultaneously. The idea of having a
bunch of Dick Fulds operating on the razor's edge
with the global financial system on the line is a scary proposition. Sooner
or later, someone is going to make a mistake and that is going to be it.
Once
again, it will come down to the derivatives taking the paper empire to the
woodshed. It isn't even so much the millstone of the hundreds of billions in
Eurozone debt that is spread all over the globe. There are bets on that debt,
default swaps, options, and a full array of side bets on the debt itself,
then bets on the side bets themselves and so on out to the 4th or 5th degree
in many cases. The derivative issue was never even really addressed. It was
the 800-pound elephant in 2008 and it is still standing there. Why? Because
it is insanely profitable for a select few. Which comes back to my original
point: we have a true moral crisis at the root of our economic and financial
woes. None of the symptoms can be fixed until we get at the real causes and
human nature is a tough nut to crack. See why
I'm such a pessimist?
Andrew W. Sutton, MBA
Chief Market Strategist
Sutton &
Associates, LLC
Interested in what is going on in the markets and
the economy? Read Andy Sutton's weekly market and economic commentary 'My Two
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