European Musical Chairs

By Todd Harrison  NOV 14, 2011 9:40 AM

The song remains the same.

 


“And the men who spurred us on sit in judgment of our wrongs; they decide and the shotgun sings the song.” 
--The WHO

We fire up this Monday pup to find fresh faces in Europe. Given the political shifts in Italy and Greece—which join Ireland, Portugal, the Netherlands, Belgium, Hungary, Finland, Slovakia, Latvia, Bulgaria and Poland in shaking up the corner office since the sovereign sequel of the debt crisis erupted—it's a brand new world, or in the words of German Chancellor Angela Merkel, the fertile seeds of a "new Europe." Merkel, speaking in Leipzig today, called for an overhaul of the European Union to facilitate closer political ties and tighter budget rules. "The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union," according to Bloomberg.

You can't blame her for being ambitious; she knows what's at stake if this effort fails. What I haven't heard much about, however, is what happens if they succeed. Yes, we know that means austerity measures and tax hikes on the wealthy and more likely than not, debt destruction or at the very least broad reorganization, little if any of which is pro-growth.

While giving my keynote at Minyans in the Mountains III in 2006, I offered the following fare,

"In 2000, I forged a reputation by foreseeing the train wreck on the horizon. In 2003, I earned a reputation by overstaying my welcome in the bear camp. I failed to recognize the power of a coordinated agenda and underestimated the influence of fiscal and monetary policy."
 
That was eight years and four or five bubbles ago, and we continue to navigate what is in my estimation one of the most historic junctures in world history. 

I've said it before and I'll say it again: We'll tell our grandchildren about these decades, much the way our grandparents passed lessons down from The Great Depression. This isn't about dollars and drachmas anymore; it's about war and peace, social civilities, and the economic construct that will define future generations.

Yes, I've been bearish for some time—2000 through 2010 was the single worst decade in the history of the financial markets—although I've shifted a bit through a big-picture lens. While I believe it will get worse before it gets better—and those are the steps that matter most right now—I continue to foresee generational opportunities in the back half of this decade, a stance shared by Paul Tudor Jones, and I’m positioning accordingly.

So, how do we get from here to there?  Two words: Time and Price

We can dance, prance, sing, posture, jawbone, inflate, re-flate, deflate, strong-arm accounting rules, sweep toxic debt under the rug, run misdirection plays regarding public psychology, or engage in other political trickery to distract the attention of the disenchanted global marketplace, but at the end of the day, when the dust finally settles, all we're really talking about is time and price.

Let's look at simple yet relevant topic that is at the root of current issue overseas -- the European banking sector. Including the effects of hedges, European banks had a net exposure of roughly $120 billion to Greek government borrowing and private debt at the end of June, according to the Bank of International Settlements as sourced through the New York Times. Additionally, the banks have $643 billion in exposure to Spain and $837 billion to Italy; that’s big money, even in today’s day and age.

This isn't "news" per se; these figures are outdated and well-known. However, as we learned entering September 2008, credit signs surrounded us and offered a clear warning to anyone willing to listen. 

While the stock market reaction to the sovereign situation is muted—the summer swoon began to discount the risk, as we said at the lows—we must remain acutely aware that this situation is extremely fluid and risk management must trump reward-chasing even if we believe that Santa will sneak down the chimney and deliver QE3 in time for the holidays.

Random Thoughts
R.P.

Twitter: @todd_harrison



No positions in stocks mentioned.