The Canary in the Coal Mine Part II

In our last blog installment we asked, given the present unsettled state of the world the real issue for clear-thinking people is: “What comes next after these “Occupiers” fade into the sunset?”

Well, here in Toronto the OWS has been dispersed, the “Library Yurt” in St. James’ Park has been dismantled and its “defenders” bundled off; and who better to provide some insight into that question than The Right Honourable Tony Blair, the former Prime Minister of Great Britain from 1997 to 2007 and since then the Official Envoy to the Middle East for the Quartet? 

Recovery Partners attended a dinner last week where Mr Blair was the keynote speaker. A key message that he delivered was that the world is shifting very fast, and it is more interdependent and interconnected than ever before. Following that theme, he said that today’s politicians must quickly get used to the fact that they have to make “Big Decisions” and they must the right ones and make them quickly or risk losing control of the situation the West confronts today. This message ran through his entire address.

As for the situation in Europe Mr. Blair strongly advised that leaders there must recognize that the Eurozone is shifting from the “Politics of the Grand Design” to the “Politics of the Grand Plan”. It is the Grand Plan that has eluded decision-makers there. Unfortunately for Europe, however, Mr. Blair emphasized that, in this regard, the Eurozone and its leaders cannot afford to rely on a strategy that makes incremental changes that lead to incremental gains. This requires that the current Eurozone leadership realize that the crisis there is not a situation to be “managed: Today’s leaders have to take Big Decisions at an Existential and Fundamental level (which in itself is an act that risks or provokes a collapse of the system unless the right decisions and plans are implemented). The key realization here is that the single currency crisis has exposed a need for reform, it has not created that need.

Mr. Blair went on to say that the true operative timeframe now for the Euro rescue must be measured in weeks not months if the Eurozone is to be saved. This means that everyone in Brussels and in the Euorzone countries needs to get behind the Euro. In the longer term decisions need to be taken about a European Fiscal Union and Fiscal Reform. There are clear flaws in the Monetary Union Project, but for now a crisis management solution must be implemented quickly.

Everything is preferable to a breakup as the consequences are serious for both creditors and debtors therefore people on all sides of the negotiating table should be motivated to find a decision. Based on the foregoing there is simply is no “middle course” according to Mr Blair.

Similarly, the US Economy requires dramatic decisions that the Leadership there has avoided. Mr. Blair enumerated several “huge challenges” facing the US including debt levels, deficits, needed reform of the tax code, and an urgent need to rebalance the economy in favour of a more equitable division of National Income. He was unequivocal in saying that needed decisions have been deferred and have been piling up for years and these imperatives can now no longer be ignored.

As noted above Mr. Blair has spent a good deal of time since leaving office preoccupied with events and developments on the Middle East. His main message here, following from above, was that the Arab Spring, the Israeli Palestinian conflict, and Islam’s relationship to the West are all not only interconnected, they are key agenda items.

While it has become obvious that a variety of  regime shifts have going on in the Middle East, it is less obvious to note that most lack stability. In many countries modernization has outstripped to ability of the economy and population to keep up. Here, the main difference between Eastern Europe and the Fall of the Berlin Wall and what is going on in the Middle East today, is that with the Fall of Communism there was: (1) Unity among the Eastern Bloc population on what they wanted to get rid of; and, (2) unity among those peoples on their desire to adopt a Western Way of life, its aspirations and values.

Mr. Blair explained that in this regard, today in the Arab world there is no cohesion around what the population would like to structure in place of deposed regimes and dictators. Therefore it would be a huge mistake for the West to assume that people there just want to move towards a stable democracy. The simple model of modernization conveniently ignores the deep influences or tribalism and religion in many of these countries.

Therefore it is not obvious what the outcome in many of these countries will actually be. That means that unless we take strong positive action to get people into the right frame of mind that there will be problems with the transition.

Many of the regimes outside the West are quite strong and resistant to “Arab Spring” type events. They afford a measure of political stability. The folks who are a serious threat to these regimes or the status quo in those countries are usually either co-opted or neutralized

To underscore this point Mr. Blair said that many prominent people in these countries are extremely nervous about making ANY move, let alone the RIGHT move….and that this is happening throughout the region. Therefore he emphasized that we in the West we have to stay engaged with these populations. Specifically he stated that we have to assist with change, help these societies cope with modernization and at the same time, challenge them. The West needs to demonstrate that democracy is not only about a constitution and right to vote, it is also about: (1) an attitude to life, (2) freedom of expression, (3) freedom of religion, (4) freedom to work and transact in open, transparent and fairly-regulated markets, and (5) the requirement to live with tolerance and diversity.

The World no longer revolves solely around the US and Europe regarding strategies and political imperatives based around territorial interests. In fact the West must understand that the main message it must represent going forward is a Way of Life: Freedom, Democracy, Justice, and Tolerance being but some of the watchwords. Through leadership and vision we should impress upon the emerging and newly middle income economies to come to the conclusion that they would do far better to emulate the West rather than if they did something else.

Mr Blair’s remarks were warmly received and appreciated. Clearly in command of the subject matter and charismatic, he could probably have gone on for several hours. From our persepctive his address was as much an observation on the current state of affairs as it a warning to all of us that unless a more constructive approach to our problems is pursued by politicians both in Europe, North America and elsehwhere, that the consequences could be extremely undesireable.

This week financial markets in Europe remained on a knife edge and the US political class again showed that it continues to behave in a manner that is completely unresponsive to market discipline. The indicatiors on the threat board continue to flash yellow and red.

I am reminded of a luncheon I attended in Tokyo shortly after the fall of the Berlin Wall, when the then Russian Foreign Minister, Andrey Kozyrev, was asked by a member of the press how things would turn out in Russia. His response was that “No one is in full control, any one of hundred outcomes are possible and most of them are ones that people really won’t like.” As events have shown since then, it appears that the world and Russia herself has largely lucked out.

We may not be so fortunate this time.

Posted in Crisis, EU, Economy, Middle East, OWS, USA | No Comments »

The Canary in the Coal Mine – Part I

“Now if I tell you that you suffer from delusions; You pay your analyst to reach the same conclusions; You live your life like a canary in a coalmine; You get so dizzy even walking in a straight line”

Sting and The Police

Monday’s news of the failure of the debt ceiling negotiations in the US ahould not have come as a surprise to anyone who has followed this issue. Disheartening, sad, and ultimately dangerous to our economic well-being and Global Stability, yes, but unexpected, no. Recovery Partners was interviewed on that very topic yesterday and the full interview is avialable here in part 1 and part 2 or you can watch an abridged version on our site.

On Monday  Zerohedge posted a note on Austria, entitled “35 Seconds Of TV Air Time Explaining Why Austria’s AAA Rating Is Doomed“. Most of the discussion focused on the massive Central and Eastern European credit exposure. According to them, massive bank credit losses and a sovereign downgrade is a sure bet as well as the fact that contagion has spread to several Central and Eastern European economies.

Elsewhere on the Continent, the Sovereign obligations of Eurozone countries were getting smoked as spreads against German bonds blew out across the board.  Looking ahead at the heavy borrowing calendars for many of these countries the picture does not look good.

In related news, European stock markets dropped Tuesday after an expensive bond auction for Spain and as data showed that the U.S. economy grew at a slower pace in the third quarter than initially estimated.

Also today, IMF Managing Director Christine Lagarde said in an e-mailed statement to accompany a press release annoucing the creation of a new IMF fast-track liquidity facility. “This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.”  It is no surprise as these announcements came as Europe’s crisis threatens to spread to Spain and France. The real “non-announcement” here is that this is happening because the Euro-people have yet to implement the Bailout plans agreed to weeks ago in part because the EFSF has become non-functional and incapable of producing needed funding for cash-starved Euro-governments. This despite the recent publicly announced intentions to ramp up the EFSF to between EUR 1 and 2 Trn. How ironic it is that just over a year ago on the establishment of the EFSF, that Olli Rehn, EU commissioner, boasted that the EFSF would “never need to be used”. Now it is obvious that, apart from some half-completed bailouts, it has proven to be of extremely limited effectiveness and can no longer function.

And earlier this morning it was reported by the FT that the Chinese Banking Regulator (the CBRC) announced that the Chinese Property slump exceeded the test limits of the Chinese bank stress tests. In April, the CBRC told banks to test their loan books against a 50 per cent fall in prices, and also a 30 per cent fall in transaction volumes. In October, however, property transactions fell 39 per cent year on year in China’s 15 biggest cities, according to government data. The weaknesses in the Chinese scenarios echo earlier problems with stress testing in the EU, where regulators underestimated the potential impact of a sovereign debt crisis.

Joining the party, the Fed announced new stress tests for the top 19 US banks to take place between now and January and having the results announced by March 2012. There are six large banks that are going to attract particular focus according to the Fed press release and accompanying statements.

Watch this space.

Early Warning Systems and all That

During my time in New Zealand I remember seeing lorry loads and trainloads of sheep, cattle and pigs being packed off  to the slaughter houses and knacker’s yards. Over the time I was in that beautiful country, I observed the behaviours of these animals as the transport vehicles rumbled past and this left me with the indelible impression that these creatures somehow knew that something ominous was afoot….even though they could not read, write or understand a sentence of English, much less the road map.

 This brings to mind the OWS movement which appears to have swept the globe as a phenomemenon that defies definition. The OWS movement seems a jumble of contradictions: it professes respect for the enviroment but its activities have destroyed parkland and befouled inner cities with garbage and human waste; it professes respect and fellowship for citizens of the countries in which it staging its protests, yet it’s activities have significantly interfered with the commercial interests of small businesses and their employees, threatened passersby with violence and has otherwise commanded the attention of our law enforcement authorities to the deriment of others who might actually have benefited more from their attention at a particular time; and yet all along it professes to be able to “see the future” and is therfore justified in attempting to change that “fate” for everyone’s benefit. Moreover, in conversation, not one of the OWS protesters has been able to articulate a coherent vision, objective or group mission that all OWS protesters can agree with.

 The ultimate irony of the OWS “movement” however lies not in the paucity of substance, it lies in the fact that what little substance its demands and prescriptions contain, all seem to feature demands for exactly the wrong thing. This is quite simply that  the common thread among OWS protesters is that they are screaming for : more Government, more state control, more handouts, and generally speaking, for the Government or some other central authority to “solve” their problems. This is precisely the wrong prescription delivered at a time when the reality is that the cause of many of our challenges today is that the modern Welfare State has run out of rope, our political structures have not responded well to recent challenges and, combined with the demographic picture, that there is simply is no more “wealth” to be “spread around”. The choices Western society confronts today all revolve having to make do with less. That is the Bottom Line that the OWS is ignorant of at a fundamental level.

This “movement” in its present state will therefore likely fade away shortly and none too soon. Although the OWS folks sense that “something is wrong” in the world, they, like the animals on the way to the slaughterhouse, cannot articulate what it is they sense and fear, and, because of that and other inherent limitations, they are in no way equipped to devise strategies or action plans to avoid whatever fate awaits them, nor by the same token, to be able profess that they can render such advice to anyone else.

Given the present unsettled state of the world the real issue for clear-thinking people is: “What comes next after these “occupiers” fade into the sunset?”

For more on that, please dial in to Part II of our Canaries Blog series in 24 hours.

Posted in Bond Market, Canada, Crisis, Crminal Activity, EU, Fed Policy, IMF, OWS, Sovereign Debt, USA | No Comments »