Author : John E. Charalambakis
Date : February 9, 2014
By Thursday last week we felt that given the markets drop by 5% this year, it was time to put some money to work by investing into companies with strong fundamentals and which seemed to be at a good entry point. We still believe that this will turn out to be a decent year for equities. However, we have not abandoned the view that unless we experience significant reforms in global debt, derivatives, collateralization, and fiat money issues, the world economy may be facing within two-three years an unavoidable void that will be the mother of credit resets for decades to come.
The case of how the Fed’s QE actions have affected emerging economies is well documented, (see e.g. our January 18th commentary). However, we disagree with the view that the recent emerging markets tremors were due to Fed’s tapering. As we have argued before, the Fed’s tapering will actually increase the money supply, since it is accompanied by reverse repos which increase the collateral base and thus become the basis of credit extension. The Fed is removing unutilized reserves and allows more collateral in the hands of credit makers. The reason that emerging markets are faltering is because of Chinese tremors (however, we do not expect a hard Chinese landing before the end of 2015) and most importantly because they have lost golden opportunities to fortress themselves and move forward to the stage of creating a sustainable middle class that produces, consumes, and is taxed.
By the second decade of the 15th century, Europe was experiencing the age of “new monarchs”. Kings were trying to dominate their lands. Their tactics followed this norm: raise revenue through taxes, use the funds to raise an army, employ that army to suppress the wealthy nobles. In France Charles VII inherited the problems of his mad father. The English occupied even his capital (Paris), forcing him to leave in the provincial town of Bourges. Charles VII even allowed Joan of Arc to be burned at the stake, despite what she had done for him. Finally, he came to himself. At the climax of the crisis he pulled the noblemen together, was able to raise revenues, built an army, defeated the English (ending the hundred years war) and got his country back. Louis XI succeeded his father to the throne and by using the same tactics he expanded France’s territory.
While Charles VII and Louis XI won control of France, England was falling apart because of the internal disputes among the “mighty nobles”. Near the end of these civil wars Richard, duke of Gloucester, seized the throne but defeated by Henry Tudor whom the English legislature made king. Henry made finances his special project. He used cost controls methods that cut waste and through land acquisitions and taxes he established a very sound basis for his kingdom.
In Spain the story was a bit different, simply because a country named “Spain” did not exist. Three small kingdoms filled the Iberian Peninsula: Portugal on the west, Castile in the center, and Aragon on the east (a small Moorish, Muslim kingdom also existed in the south). In 1469 Isabella was about to inherit Castile. Before doing so, she married her cousin Ferdinand who was about to inherit Aragon. Therefore, they united their kingdoms to produce what is known as Spain. This of course was the easy part. Following the unification of their kingdoms they collected taxes, chose loyal governors, and smashed their internal opponents (including the Muslims and the Jews) robbing them of most of what they owned, i.e. they followed the norm as explained above.
The path set by the age of “new monarchs” would stigmatize Europe until 1945. If it were not for NATO (and not because of the dysfunctional EU) European nations would still be fighting! The unavoidable void has another European dimension called banking capital holes. Possibly they will cover them up again this year – when the time for the stress tests comes – using band-aids and avoid the collapse, however the incoherent policies of the EU that advance the interests of a couple of countries face a major outcry and challenge on May 25th (EU Parliamentary elections day).
And as we are on the subject of wars and voids, what could we say about the kinds of USIs (Ukraine, Syria, Iran)? Ukraine and Syria are in turmoil. Syria is in the midst of a civil war – which may spell into Lebanon – and Ukraine may get there unless prudent minds prevail. To some extent of course, both of these countries – as well as Iran – are geopolitical and asset plays. If the ongoing negotiations with Iran do not produce a peaceful deal by year’s end, then the deus ex machina a.k.a. war may make its appearance.
Monetary manipulations come with an expiration date. As Chrysippus (the philosopher who is credited with the lasting influence of the Stoic school) taught us there is always a natural impetus operated in human affairs. Nature, striving for virtue, made the natural impetus. Efforts to deviate from that natural impetus betray confusion and lead people astray.
Let’s hope that the trajectory planned is a trajectory that would resemble a natural impetus made up of stuff that does not resemble the unrelenting echoes of the old European monarchs.