Yavol!
Hans and Jacque have had a great run, so has their buddy Yao.
Hans and Jacque were loaning Pietro and Edmur money now for the last 15 years to buy German and French goods--and looking past the fact that their Greek and Portuguese customers were up to their eyes in debt as were the rest of their countrymen.
Yao had been loaning to his customer John in the same fashion over the same time frame. John and his pals in the US now owe the Chinese over $1 trln.
Now the games have begun. The Germans are faced with being asked to potentially commit their citizens to fork out up to 8% of their GDP to further fund this smart guy fiasco. Sarkozy has threatened to pull France out of the EURO….
I hope I am very wrong--but I was doing a little digging over lunch.
In 1930 Hoover signed into law the Smoot-Hawley tariff, a protectionist measure which although well-meaning (to protect US Industries against unfair foreign trade) actually served to fractured the world economy and convert the 1929 stock market crash into a debacle as world trade froze up. This freezing up happened in not dissimilar ways when the commercial paper market stopped a couple of years ago and global corporations, (for a significant period of time), stopped lending to each other as the banks stopped extending credit. Nationalism is also on the rise. US v China, Europeans v Europeans.
In fiscal year 1932, the US government rang up its largest peacetime deficit which approached a staggering 60% of all federal expenditures. BUSHAMA have done their best to follow suit here. Europe is now running deficits all around. 16 countries all agreed to keep their deficits under 3.5% of GDP in the Maastricht Treaty and 16 countries are now above those limits some at 15% of GDP.
In 1932 nobody advised tax cuts under those circumstances. In 1931-1932 Hoover proposed -- and a Democratic-controlled Congress enacted -- a massive tax increase in a desperate effort to balance the federal budget. It was the largest peacetime tax hike in US history. Much of Europe is about to be forced to do this and that is with high joblessness already; ie. 20% unemployment in Spain. Governments everywhere are soaking up capital in the name of urgency and emergency. Large government remained a huge constraint on capital formation until WWII. Deficits, health care spending, bail outs all similar thinking this time around. “We have to do something” rules the thinking at the top.
In his 1933 inaugural address FDR demonized the nation's "money changers"-- this is very similar to the current witch hunt going on for all those having anything to do with “Wall Street.” The money guys get deals done. They create transaction liquidity and keep the markets open for business. There is a very clear mandate to “get those guys” by the current Administration.
What options did President Hoover and the Congress have? They were facing the melt down of the federal government and the potential collapse of the gold standard. I think I have written before, I do not think they were doing anything other than what they thought was best in 1932. Global trade is going to slow and is likely doing so now. All things financed in EUROs are being scrutinized. Rates on European sovereign debt are rising as portfolio managers move out of EURo denominated bonds. I am very concerned that policies are going to be enacted “for our own good” that will keep creative financial minds and capital formation on the sidelines collecting interest and dodging taxes for as far as the eye can see.
We are all wired to feel greed when we should feel fear. Greed turns into justification- which turns into hope-- which turns into disaster-- which turns into fear--- and then you buy. Use stops to take your feelings out of it.
I am really shocked at how little the $1 trln in pledges did for the markets and that 11,000 is becoming a distant memory. DON’T do the “cancel when close” order on your stops. Let them provide discipline against your hope. If your investment is good, your stops will not be hit. If not they will get culled from the herd as they should.
Good luck,
Leon
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