Two birds one stone

The Economist magazine this week suggested turning Greece into a giant refugee processing center funded by the entire EU. Brilliant!

What Will Tomorrow Bring: Austri-zona

As Arizona is to the US immigration issue, Austria is for western Europe. The same radical nationalism and anti-immigration politics will blaze through Austrian politics. Some of the same tactics will be tried. Very similar cultural impacts will be felt in terms of dilution of the "Austria-ness" of the place. However, the religious differences will create a vastly more complicated and, at least initially, untenable situation. Mideastern immigrants who are relatively parochial will have a tough choice to make, similar to that faced by countless migrations around the globe in the past, and recently in Europe (north Africans in Paris circa 1980's or Turks in Germany circa 1995). "Do we prefer to live separate from the local culture in order to preserve all our traditions, religions, and mores? Or do we integrate?"

20 years from now, the answer will be "neither" - as both sides will have met somewhere in the middle or some sort of clash will have occurred.

By then, the debate will be about what to do about the fact that ethnic non-Austrians, on average:

• earn less than Austrians
• are incarcerated at a greater rate
• attend university at a lower rate
• and feel they have less opportunity

And, despite likely changes to Schengen to limit mobility, this will not just be an Austrian problem.

Stupid is as Stupid Does

Switzerland has spent over a century building a safe, predictable, stable currency. Sadly, as one of the last bastions of sovereign stability, the nation is now feeling the unintended consequences of their scotch ways. It is teetering on the verge of recession because their currency is too expensive. As a consequence, Europeans are cancelling trips to the Swiss Alps because everything is too expensive there. Swiss are driving across the (0pen) border to buy TVs and food in Italy where their francs go much further.

Thus, the central bank intervened in currency markets today to knock down the franc. Tonight, the franc is trading above where it started the day.

Ditto Japan.

Consequently, the Swiss and Japanese central banks' wallets are a few billion dollars lighter tonight ... and currency traders' wallets are a few billion dollars heavier.

When will central banks learn??

Follow Up: Talk Amongst Yourselves: Governmental .... Effectiveness??

(specifically ... the part about the likely impact of financial industry regulatory reform)

In a recent blog post, I said:

Financial Institutions will once again be lobotomized. Divided into two classes:
- Utilities (aka retail banking)
- Casinos (aka everything else)

Utilities" are done for as a for-profit enterprise. Just like Amtrak and Con Ed, they will require permanent and heavy subsidy verging on nationalization to survive the tonnage of regulations which will be piled on.

"Casinos" will have to escape to the Bahamas, Monaco, or Indian reservations. I would not be surprised to see these firms further subdivided into firms that are allowed to play with other peoples' money ("brokerages") and those playing with their own money ("proprietary dealers").

Well ... the pudding of proof is starting to pour in ... even without the fancy new regulations:

1. Anglo Irish Bank will be split into a "good bank"which will retain only deposits, and an "asset recovery bank" which will run down its loans over time. Leave it to the Irish to invent a casino that always loses. BTW - Seeking Alpha (blog) doesn't think this is the end of the story.
   
2. Everyone's favorite financial institution, Goldman, has now announced that they're following my advice (at least in the US) by voluntarily winding down slash selling their proprietary equity trading operation called the "principle strategies group." No casinos here, Mr. Regulator, we're just a buncha blue-collar broker-types ... keep mooooving.

Ridiculous is as Ridiculous does

The US government and media obsess over a lotta ridiculous stuff ... unfortunately to the preclusion of solving some of our major issues. Whether or not this is intentional (as I supposed recently) doesn't matter. The consequence is the same: the nation gets distracted and divided with trivialities and victim-less issues while the major issues continue to grow ... and to quietly bleed us all dry.

Happily (?) we're in good company. The news recently has carried a bevy of similar symptoms from across the globe. Here are some ridiculous things that ridiculous people are wasting our time on:

Turkey has banned the AK party which is currently running the government. This makes it illegal for their current PM (Gul) to be PM. Great idea, dumbasses! What better way to show that a Muslim country can be stable and progressive and modern than to disregard the will of the majority in a military quasi-coup on the fear-mongering premise that Gul is imposing Sharia law. Evidence? He wants women to have the freedom (not the requirement, mind you) to wear headscarfs at university. I'm sure the EU is ecstatic that they let you in now. I guarantee this has single-handedly cost the entire country several percentage points of GDP over the next few years.
Meanwhile, the Kurd question looms, ignored, as a true threat to Turkish sovereignty.

South Koreans have spent half their summer protesting and rioting over the government's decision to allow imports of US beef. The sharpest of these tacks has suggested the PM should be fired and the government recalled in a no-confidence vote. That would be a great way to spend taxpayer dollars. Dude - if you're bored, there are better hobbies than getting water-cannoned or arrested. All of this because they're afraid of the sliver-thin chance of importing mad cow ... and the rhetoric that Korean ranchers (oh, yes - they even wear cowboy hats!) would lose money.
Meanwhile, North Korea shows it's just a misfit teenager who needs a little love and attention to keep it from going Columbine on the World's ass. Oh, and the billionaire patriarch of Samsung Lee Kun Hee is finally convicted for his 60 years of tax evasion and market manipulation ... but nobody's rioting over the destruction of the rule of law ... the fact that the Korean judicial branch dragged their feet for decades until he was old enough for them to justify handing down a suspended sentence ... Nobody wants to say anything about the 60 years of too-cozy relations between the government and chaebols (national champion conglomerates) which allows this kind of bad behavior.

Italy has contributed to the decline of the rule of law by passing a law which gives the senior-most politicians (particularly PM Berlusconi) immunity from prosecution. Great. This guy's been raping (financially and um ... otherwise) the country for 25 years with no concern for the law. Even the famously "make love not war" Italians took a break from cigs, espressos, and whistling at girls to mount massive protests.
Meanwhile the Italian economy is toppling into recession. If it makes you feel any better, guys, the rest of Europe is right behind you ... although you're the country Nouriel Roubini singled out at Davos "unfortunately, the lack of serious economic reforms in Italy implies that there is a growing risk that Italy may end up like Argentina" and fall out of the EMU. Ouch. Oh, and maybe you guys should get off the Vespas and into bed ... the Italian fertility rate is half what it was in your grandparents' day.

And the whopper: Russia and China showed they were willing to go bat for moral rectitude by refusing to allow even the weakest of penalties against Mugabe and his pack of animals in the UN security council.
Meanwhile ... the international organization which is supposed to save us all from ourselves proves once again how useless it is. The world seems satisfied to do nothing in the face of the most heinous treatment of the world's most down-trodden.

Don't think this behavior is confined to these countries. It's in everyone's backyard.

East is the new West (not what you think!)

... or "If Sarkoszy was my man, then Merkel is my gal! ... And Tusk is my bro for life!"


During the recent French presidential election, I took time to back Nicolas Sarkozy. What a neat guy: pro-capitalism, particularly pro-business (vs. the typical french reliance on government) and willing to stick his neck out like the pro-American cowboy-wannabe that he is. Finally, a president of France who embodies the word suave!

Then there's Angela Merkel quietly but bravely trodding the same trail that Nick-o is on. Pro-american (or at least less anti- than most continental politicians); pro-business and willing to fight some hard fights vs. the traditionally german paralyzing social-protectionism. I have to apologize to her for neglecting to give her an equal shout-out.



While I'm in the mood to genuflect, I should also give a belated nod to Donald Tusk, Polish PM. This guys is strong-like-bear enough to get elected even (sarcastic gasp!) with straight talk and a pro-growth, low-tax, pro-privatization, pro-decentralization (or even lessened state intervention), increased civil liberties platform.



Sarkozy's parents fled communist dictatorship in Hungary in 1944. Merkel, herself, grew up in the oppression of East Germany. Tusk braved the secret police for decades as a member of the (at the time illegal) Solidarity party, personally fighting for the freedoms he now can protect.

Lesson for today: It's no coincidence to me that those who have seen the evils which accompany collectivism are some of the most staunch supporters of the individual's right to act without government intervention. At least somebody understands. East is the new West. Once bit, twice shy.

Follow-up #3: You've heard of the Illuminati, right?

For one of my first blog entries I chose to assert that the mythological illuminati were real. I argued that it was not a group of overstuffed old European men swilling cognac as Hollywood would have it. Rather, it was a global group of investment houses which owned a surprising share of world assets. These were the New Illuminati who had replaced the original European aristocracy variety. It appears it's time to update that blog. We have a third generation on our hands.

At the time, I took the long-term view that the European variety was a relic, clawing for relevance in a more transparent modern world. From the days of monarchs and peasants controlling the known world, we've undertaken a 5-century march toward power decentralization. This has swept in a 4-century economic miracle of wealth democratization, compounded in a virtuous cycle by technological progress. I still hold that long-term view; tides that big don't just flip a U, but they also don't flow smoothly. They progress just like a wave on the beach: crashing forward and then receding back ... only to crash forward a teeny bit further the next time around. By analyzing the fluid dynamics of countless micro-forces partially reinforcing and partially countermanding each other, we can try to predict where the water will be at any future moment. Even with a supercomputer, our predictions are seldom accurate ... but even a whelk knows the water's rising.

I would suggest that we are entering a period of several such forces which will, on net, create a pause in the long march.

#1 - Sovereign Wealth Funds. The populists fear-monger with xenophobia, since many of these funds are not trusted allies of The West. To that, I say: grow up. The world is, indeed, too flat for that. Truly open markets are color-blind, and as such I'm all for letting SWFs join the party without a bunch of government intervention. The liquidity they provide will be a net benefit on the world economy.

At the same time, however, we must keep our eyes open to the unique risks SWFs present. These funds are notable first for their relative enormity. Sometime when you're bored, draw up a bar-chart of the assets under management for the largest mutual funds, hedge funds and retirement funds. Then add SWFs to the chart. I hope you're not afraid of heights because they will tower over the rest, and they're growing fast. These funds are notable second for the fact that as government entities, their motivation is at risk of being hijacked for political power, especially in less-than-democracies. SWFs might engage in economic warfare even if that means the fund loses some money. The same would never be done by a privately-owned, profit-motivated fund.

Put differently, SWFs amount to an concentration of economic power in the hands of a tiny group of governmental aristocrats. To wield influence in this context, one need not appeal to the masses democratically; just get a half dozen of new illuminati to collude and you can have a transfer of power the size of the 1970's oil shocks. True, market forces will eventually countermand these disruptions, but an adept strategist could ride the crest of the wave and then permanently lock in their gains at the high-water mark.

#2 - The Sage of Omaha. For a short stint in history, certain Americans have risen to a level of wealth that bought them influence similar to that of the illuminati. Unfortunately, all Yanks are ADD-afflicted cowboys. Generation after generation of Americans produce self-made men with no respect for precedent, lineage, continuity, or legacy. Canegie, Rockefeller, Getty, Hughes, Wilson, Gates, and many others have sat at the table, but few have stayed long. None of these men has been invited to participate in the control structures the illuminati use to protect and control European enterprise.

That's why it will be highly interesting to see if it will be any different this week as the Warren Buffett pays house calls on as many illuminati as he can find. Berkshire Hathaway's pitch is logical; they have one of the longest track records of investment success around. More importantly, he believes in the rare long-term value investing strategy (as do the SWFs BTW). This allows those thousand-year-old Euro dynasties to sleep at night knowing they won't wake up next to a wrinkly, hideous old cur like Icann, Ickes, or "Chainsaw" Al Dunlop ready to test out Schumpeter's creative destruction on their family empire.

Buffet has to convince the families of the hopeless future ahead for the stagnating Euro economy. He then has to sell the notion that the only way for their dynasties to survive the next 100 years is to introduce a teensy bit of his American youth and exuberance. They will fear that one cannot dip only the toe in the pool. They may be right. Buffet's number one goal, after all, is not to preserve European gentry. It is to continue market-beating returns on investment year after year after year. Loading up the Berkshire portfolio with a couple billion dollars of stagnant Euro businesses will not help in that regard unless change is on the horizon. The key question is How. Does Warren think he can break into this world of old money and introduce American business and finance models? Perhaps even unwind some of those share cross-holdings? Does he think he has enough political weight (and buddies with the same) to lean on national and EU governments to loosen the legislative straightjackets? Either would unlock tremendous value, but neither seems to me likely in the short-to-medium term.

I can only speculate that his objective is threefold:

• Ensuring that, in the very long-term, he is well-positioned to take care of the European liberalization
  
  
• Buying his way into the enormous and under-utilized pools of capital held by those families
  
  
• Picking up some large shareholders in BH who share his stable, long-term view. He might even give them a few board seats to protect himself from the chance of an Icann or Ickes invasion.

Euro Vibe

Gosh darn that Rick Steves. He's just so jolly and fop-ish and humbly bumbling and lucky to trollop around the Continent for a living. He makes me jealous every weekend when I flip on PBS and find him in České Budějovice sampling Pilsners with the bearded, weathered locals or donning lederhosen to mountaineer with some sehr gesundliche Swiss retirees in Zermatt.

I wish I was on the Continent. with a fast car and a cappuccino, but alas I've put my Spanish summer vacation plans on hold. Since I no longer work for a European firm, I don't even have a business excuse to go pay ten bucks for a Coke and a newspaper at De Gaulle.

I can't even justify buying a good Châteauneuf-du-Pape, although the silver lining of that one is that I've found some nice Argentinian Malbecs and California Central Coast Syrahs.

The dollar will come back, and then I'll go. Europe always lags the US and everything is always in slow motion there. Let's say we have a sorry 2009 but in 2010 the US grows by 4% for a year and then settles back to 1% for 3. Europe will show up in 2011 with 3% growth and stay there through 2012, after which they'll have a protracted 10 years of no growth in response.

Euro / Dollar Rates

News every day this week was that the Euro is at an all-time high against the dollar. Primarily, I chalk this short-term move up to the simple and obvious interest rate differential, since the Fed cut Fed Funds and Discount rates on Tuesday. Asia followed suit Wednesday. London has announced increased liquidity availability Thursday. That leaves the ECB as the sucker-bank willing to pay the highest rates.

But the Euro's been bumping its head on records for months now. Part of the blame, of course, falls to the US. Instability, volitility, inflation fears (more on that later), recession fears, budget fears, and the overall US move away from Rubin's "strong Dollar" policy has put them on their heels, but I would think that they could have softened by now if they desired to do so. Question, then, is why they're pursuing the strong Euro.

• Is the ECB trying to avoid inflation in the high-growth zones in Scandinavia and Ireland?
• On a related note, does it have to do more with the steep yield curve and implication of higher future inflation?
• Are they so focused on becoming a reserve currency that they prefer interest rate stability to economic competitiveness and consequent GDP growth?
• Are they simply proving again that they are slow and inept? Just now buying into the "strong currency" concept which appears to have benefitted the US through the 90's?

Unfortunately for Europe (and Canada and others BTW) there is a heavy cost to the "strong" theory.

The full answer .... I leave to you!

Follow Up: Sarkoszy

Sarkoszy is my man. Lets only hope he can stick to his guns and past philosophies on free markets once P-M (which he will certainly win). Beyrou is another carreer politician Chirac.

Talk amongst yourselves ...

To what extent is Kosovo, run by un/EU a model for future supra-nationalist governance?

FOLLOW UP: Woe-is-Europe

Europe continues to be subpar. More than ever since the US stopped funding the continent (Marshall followed by Cold War support) young Europeans are unsure of attaining even their parents’ levels of affluence. It is unclear whether this slow bleeding over decades has taken its toll on the “family money” of the continent, but most likely so. Only through prescience or a complete flight from European investments could they have preserved. Too much, far too much bureaucracy. Far far far too much focus on sensationalism, on news-tainment or the one I like better recently irri-tainment (media so in-your-face and horridly insipid that you can’t stop watching it) especially of the European scandal-tainment variety so well perfected by the Italians to avoid looking at their real problems of impotence, lack of innovation, inability to compete with anglo business models. Meanwhile the Vikings continue to perk in spite of their oppressive socialist staightjacket. One must ask ones self: just how damn productive, innovative, and rich could they have been (or could they become) were this mantle lifted? After all, the apparent source of all the global flows of productivity is in the vicinity of the north pole. People appear to get less productive the further they are from that groundswell. Yet the US is not more than a decade from the European curse. Given an increased (even just maintained) focus on lack of personal responsibility, on socialistic regulation, we’ll be right behind them in the donkey-train leading down to economic stagnation.

Woe-is-Europe

One of the most unsung sad stories of this world is the age gap in Europe. As their population pyramid inverts (more kodgers than kids), there is a job vaccuum at the top of the food chain. Even though their overall economy is stagnant on the continent, the few good jobs left are held onto with a death grip by older and older people. Most Euro kids coming out of school have no job to turn to. Instead they focus on internship after internship, advanced training after advanced training, apprenticeship after apprenticeship. All the while living at home, broke, and depressed. Forever postponing the launch of the "real life" they hope to lead when they "grow up."

At the end of the day, you end up 100 tragically overqualified twentysomethings competing for every job that comes up ... only to get aced out by a much less educated establishment player in his 40's.

Similar things happen in politics. Euro youth is entirely disenfranchised in that arena.

Meanwhile, the US youth has long won the culture wars. Euros have two choices: buy into American culture or be a global dork.

What's left for these people? Radicalism? Adventurism? Socialism? Someday, these guys are gonna start changing things on that continent.