Either the globe goes through yet another round of “extend and pretend” that won’t work, or we let some boats sink. A year after those boats and their captains sink, the world will be a much better place. If the decision is made to keep the sinking ships afloat, we will pay for it with another decade of deflation.

 

By Bruce Kasting

 

Three months ago I made fun of an ABC News report about the stock market. The occasion back then was the rise in the Dow Jones above 13,000. ABC has a panel of thirteen “experts.” All thirteen were in agreement; this time the move in stocks was the real deal. All thirteen experts were convinced that stocks had no where to go but up for the rest of the year. Of course they were all wrong.

These are the faces of ABC’s experts. If you watch TV, you may recognize them. I don’t think these folks are experts. They are shills. If they did not see problems looming a few months ago, they are either blind, or they were just lying.

 

These very same experts (and most of the politicians in Europe) are selling a few other stories. I think they are as wrong today as they were back in February.

The big lie today is about Greece. Almost every story I read on this topic is the same. If Greece is forced to leave the Euro very very bad things will happen, including:

1) Serious hardship will befall the Greek economy. Unemployment will rise, the economy will fall.

2) Contagion will spread from Greece. Countries such as Spain and Italy will come under attack. Their ability to float new bonds will be impaired. The cost of debt will hinder their ability to grow; unemployment will rise.

3) If Greece goes into the toilet, there will be capital outflows from Southern Europe to Germany. These capital flows will undermine the banks and capital markets of countries in the EU.

4) If the Euro Zone is unstable, then the global stock markets will fall. As equity markets tank, the global economy will go back into recession (or worse). Therefore there is no option but to save Greece.

This is complete horse shit.

1)  Greece has been in a recession for five years. There is not one chance in a hundred that it is going to get out of recession anytime in the next five years if it stays in the Euro. The kindest thing that the leaders in Europe could do would be to kick Greece out. Greece should never have been in the Euro in the first place. Mistakes were made. Mistakes are always expensive, but the worst mistake is not recognizing that a mistake was made.

2)  Contagion? What is going on today if not contagion? Every country in Europe is already infected. The disease has now spread around the globe.

3)  Capital flight will happen if Greece goes turtle? Over the past two months reported capital outflows from the PIIGS exceeds $200 billion. (I think it is much higher than that.) German and Swiss bond yields have gone negative the past few weeks. There are border guards surrounding Switzerland these days to keep hot money out.

4)  The US stock market has lost a cool $1 trillion since the May 6 Greek election ($357 billion on Friday alone). Global stock markets have fallen another $1T in the same period. The book losses on other asset classes is enormous. If you add up the losses in the past three weeks, it easily exceeds $3T (5% of total world GDP).

The best thing the politicians could do for the voters they represent is to just let Greece go. Yes there would be costs, but the costs of pretending that there is a viable option to keep Greece in the Euro will be ten times the cost. If all of Greece’s debt were wiped out, the cost would be $250 billion. By my calculation, the world has already paid a price 12 times higher than that in just the past three weeks. If the game with Greece continues, the cost will be $10 trillion and a global depression. The pundits and pols are saying that the worst case is a Grexit. I say the worst case is another effort to keep Greece in.

The blow up in Europe (and damn near every corner of the globe) the past month has led most observers to conclude that another round of Federal Reserve intervention is a just few weeks away. The pundits believe that Ben Bernanke will rise up and push some monetary buttons and all will be well again.

 

 

How can supposedly bright people believe that another four month – Fed induced sugar high can do any good at this point? This is as stupid as the forecast that stocks were going to keep rising a few months ago. The Fed is powerless to change things; the markets have already done more than the Fed could ever do.

What might the Fed do next according to the seers? Promise to keep rates low for a long period of time? Ridiculous. We have been living with ZIRP for four years. It hasn’t worked. It’s not going to work.

The Fed could extend Operation Twist, but that would not do anything either. The ten-year is at 1.45%. Who in their right mind would think that pushing the T-bond to 1.2% would make a difference? Only a fool.

Some are pushing for another round of pure QE. The Fed would buy up another $600 billion of Treasury bonds and mortgage paper. It would print the money to pay for the purchases. That thinking is insane. If the Fed were to announce a big QE program, the markets might rally for a week, but when reality sinks in, and the downside of further monetary expansion is realized, the markets would resume their slide.

Don’t believe in the pundits out there that make it on TV every day. They are either shills for their employers, blind and stupid or just flat out lying. Don’t believe in the politicians or central bankers who are pushing the case for more monetary gas. Those folks are so pregnant with their past mistakes, they can’t possibly change direction. Rather than admit their mistakes, they will double up and make the same bad choices again.

There is only one option left for policy makers. Get real. Greece has to go, Spain too. Printing money will not work, that has to stop. Yes, that direction is painful. It will cost the Germans a bundle to make things right, but that is cost it must bear. After all, Germany did create this mess, and Germany benefited from it for a dozen years. The rest of the world will suffer as well. But what is the alternative?

The ship is sinking. The captains are embarrassed that they have put the ship on a reef. They don’t want to admit to past sins so they refuse to put the lifeboats in the water for fear that the passengers will lose confidence. What those captains are actually doing is insuring that all the folks on board will drown. I would like to see a few of those captains go down with the ship, but it is unnecessary that all the passengers (seven billion) drown too.

We are on the edge of a very hard landing. I don’t think it can be avoided any longer. The next two weeks are critical. Either the globe goes through yet another round of “extend and pretend” that won’t work, or we let some boats sink. A year after those boats and their captains sink, the world will be a much better place. If the decision is made to keep the sinking ships afloat, we will pay for it with another decade of deflation.

 

 

Bruce Krasting

Westchester, NY, United States

I worked on Wall Street for twenty five years. This blog is my take on the financial issues of the day. I was an FX trader during the early days of the ‘snake’ and the EMS. Derivatives on currencies were new then. I was part of that. That was with Citi. Later I worked for Drexel and got to understand a bit about balance sheet structure and corporate bonds from Mike Milken. I was involved with a Macro hedge fund later. That worked out all right, but it is not an easy road. There was one tough week and I thought, “Maybe I should do something else for a year or two.” That was fifteen years ago. I love the markets. How they weave together. For twenty five years I woke up thinking, “What am I going to do today to make some money in the market”. I don’t do that any longer. But I miss it. View my complete profile

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