Another Fuse Is Lit

With this article Minyanville is proud to welcome Fil Zucchi as its newest contributor. Fil is the founder and manager of Zebra Investment Advisors and Zebra Fund. We look forward to hearing more from Fil and we are confident our readers will come to value his unique insights.

Hello everyone. It is a real joy to have been allowed in the City of Critters as a contributor, and I want to thank Toddo, Prof. Reynolds and all the other professors for the privilege and opportunity. A quick word on the “2 cents” I hope to toss into the critters’ fray. I do not have a particular area of focus, although due to my family background, real estate is where I have the most hands-on exposure and depth of resources. Being “an Eyetalian”, I regularly scan local news sources for anything that may be happening in the Old Country / Europe that might affect us here, and if I see anything interesting the ‘Ville will be the first to know. I also do a lot of technical work on my own, as well as fundamental research in “under the radar” sub-sectors and companies. Finally, as many other professors, I too am a bit of a macro junky.

My market leanings are, and have been for longer than I care to admit, squarely in Boo’s corner, though I have abandoned my evil twin “Chicken Little” at the ‘Ville’s gates after Boo told me he wants to keep his current misery all to himself. With that in mind, on to the real stuff.

The Euro induced trade problems and the general malaise affecting the EU economies have been well documented. But another major internal squabble is brewing: it centers on the growing conflicts among the fiscal policies of the various EU members. The newer, mostly eastern European members are slashing taxes left and right and sucking life and capital out of Germany and France welfare economies. Italy now has joined the fray, with Berlusconi putting his government on the line on the tax cutting issue. In turn, the noise for stretching the Maastricht deficit bands (the Maastricht accord laid out the boundaries of domestic budget deficits each country may run) is growing louder. Why may this matter to the U.S.?

• The developing list of EU members, and their inherent incompatibilities, is starting to drive home the insanity of having first invented a currency, and then attempted to build a massive network of economies around it.

• As the chasm between welfare economies and free market economies grows wider, there is mounting political and grass-root pressure to protect the respective social and economic structures and, sadly enough, there is rising “intolerance” toward workers flocking to the more thriving countries, and toward non-workers flocking to the more “socialist” countries. This in turn further complicates the workings of the broader EU economy.
  
  
  
• These issues compound the recent problems arising from the “strong” Euro and will, in my opinion, force the EU to join Japan and the United States in an all out race to devalue their respective currencies.
  

While these conditions are not today’s worries, prior to leaving Chicken Little behind he did dutifully remind me that over-stimulative policies, followed by protectionism and competitive devaluations served as the primary triggers (together with money tightening) for the 1929-1932 problems.

As suggested by several contributors, the many never-seen before imbalances threatening our markets will persist until a catalyst blows up the house of cards.  And while the gathering threats of the twin deficits, of not so latent inflation pressures, the Fannie (FNM:NYSE) problems, etc., etc. are front and center on investors' minds, the hidden dangers might be the most insidious: I think it is worthwhile to keep the unfolding of a not-so-united Europe on the radar.