The European Elephant in the Room

By Peter Atwater  MAY 30, 2012 2:00 PM

With most blindly measuring just their own part of the elephant, few see the more troubling whole.



Countries don’t fail; they come apart.

As I talk to policymakers, economists, investors, and capital markets participants, I am amazed at how few grasp this distinction.  In fact, as I listen to them discuss what is happening in Greece or Spain, I sometimes wonder if I am witnessing a real-time version of the old joke about the four blind men and the elephant.  One is focused on the tail, another the ears, a third the trunk, and the fourth the legs.  Given their own area of focus -- politics, economics, the equity or fixed income markets, or the financial services industry -- none see the elephant in the room.

Thanks to my work in socionomics, what I see are the broad-reaching concurrent consequences of a severe downturn in mood.  In the political world, I see it in the enormous dispersion of votes in the recent Greek elections, as voters sought safety anywhere they could find it from the extreme far left to the extreme far right. 

Greeks weren’t unified in their opposition to bailouts or austerity, they were (and remain) unified in fear.  Consensus, particularly cohesive centrist consensus, is now unachievable due to the low level of Greek confidence.  Market participants and economists need to appreciate that.

And the rest of Europe, I am afraid, is not far behind Greece.  Whether one looks at the political environment in Spain or at the growing divisions among the troika and national leaders across Europe, divisiveness is rising rapidly.  And the lower the DAX (^GDAXI), IBEX (^IBEX), and other major European indices fall, the more pronounced those divisions will become. 

People forget that generosity is a function of the confidence of the donor, not the need of the recipient.  As mood drops, self-interest rises.

Still, my economist friends want to measure everything in Europe in terms of GDP growth or inflation.  What they fail to see is that both of those measures (as well as most other economic measures) measure the consequences of changes in mood, not the causes.  They’re walking behind the elephant with shovels and buckets, weighing what happened. 

Thanks to socionomics, I can easily say today that all of the economies of Europe are weakening significantly, and unemployment in Spain and Greece, particularly, is going to get even more worrisomely high. 

Markets measure confidence; falling market indices today suggest lower employment levels tomorrow.   Unconfident business leaders don’t hire. Public policymakers should be anticipating this situation and working on plans to respond to it.  Instead, most are merely reacting to events as they unfold -- they are too busy reading what the economists wrote.

Even worse, many of my investor and capital markets friends still talk about Grexit as if it were a clinical Lehman Brothers-type moment for Europe.  To them, it is an “event”. 

They don’t see the long term implications that are likely to arise from the profound deterioration in mood that will accompany Grexit.  Violence and terrorism are certain to occur, and Europe will clearly see cross-country controls on the mobility of labor, goods, and services -- and even data.  Those are natural accompaniments to social mood bottoms, which is when countries (like financial institutions and corporations) fail.  At the bottom, hope is lost.

I offer these thoughts today not to alarm but to spark a broader conversation on what is transpiring in Europe.  To encourage those who are blindly measuring just their own part of the elephant to take off their blindfolds and to see the more troubling whole.

As I offered above, markets measure mood -- but not just the mood of investors and capital markets participants. In the case of countries, markets measure the mood of voters, politicians, depositors, business owners, children, and adults.  Major indices are our political, social, economic, and even cultural barometer.  They reflect our level of confidence in all that we do.

From my perspective, time is of the essence.  The pronounced drop in the southern European indices are signaling much more than a possible banking crisis in Spain or even Grexit.  The indices are warning that these countries are at risk of coming apart, politically, socially, and economically.

To believe that the consequences of what now happens in Europe can be measured in days or weeks or even months, as many I know now still do, woefully misreads what is afoot.  At the current level of social mood, what is unfolding will have implications measured in decades.  This is a generational transition.

Countries don’t fail; they come apart.

Others wiser than me need to start thinking about what that means for Europe and hopefully consider what they can now do about it.
Position in SH and JPM

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.