Click here to read this article in pdf format: December 9 2012

Today, I want to summarize what we covered over the year. During 2012, I sought to address both theory and market developments. Under an Austrian approach, I discussed many macroeconomic topics: the effect of zero interest rates, the myth of decoupling (between the US and the Euro zone), collateralized monetary systems (as imposed by the European Central Bank), the technical (but not realistic) possibility of a smooth exit from the Euro zone, the destruction of the capital markets by financial repression, the link between the futures, repo and gold markets and consumer prices (I don’t like the word “consumer prices”, but it is better than speaking of a “price level”), insider trading, circular reasoning in mainstream economics, high-frequency trading, what can precipitate the end game to this crisis, the technicalities of a transition to a gold standard, the conditions for a successful implementation of the gold standard, and the flawed logic behind the Chicago plan, as proposed by Benes & Kumhof.

Let’s now briefly follow up on each of the market themes I covered in 2012:

1.-There has been no decoupling: The Euro zone is coupled to the US dollar zone

At the end of 2011, when the collapse of the banking system in the Euro zone (courtesy of M. Trichet) was dragging the rest of the world, the Swiss National Bank established a peg on the Franc to the Euro and the Federal Reserve extended and cheapened its currency swaps with the European Central Bank. These two measures –indirectly- coupled the fate of the assets in the balance sheets of the Euro zone banks to the balance sheets of the central banks of Switzerland and the US.

As in any other Ponzi scheme, when the weakest link breaks, the chain breaks. The risk of such a break-up, applied to economics, is known as systemic risk or “correlation going to 1”. As the weakest link (i.e. the Euro zone) was coupled to the chain of the Fed, global systemic risk (or correlation) dropped. Apparently, those managing a correlation trade in IG9 (i.e. investment grade credit index series 9) for a well-known global bank did not understand this. But it would be misguided to conclude that the concept has now been understood, because there are too many analysts and fund managers who still interpret this coupling as a success at eliminating or decreasing tail risk. No such thing could be farther from the truth. What they call tail risk, namely the break-up of the Euro zone is not a “tail” risk. It is the logical consequence of the institutional structure of the European Monetary Union, which lacks fiscal union and a common balance sheet. I am not in favour of such, but in its absence, to think that the break-up is a tail risk is to hide one’s head in the sand. And to think that because corporations and banks in the Euro zone now have access to cheap US dollar funding, the recession will not bring defaults, will be a very costly mistake. Those potential defaults are not a tail risk either: If you tax a nation to death, destroy its capital markets, nourish its unemployment, condemn it to an expensive currency and give its corporations liquidity at stupidly low costs you can only expect one outcome: Defaults. The fact that they shall be addressed with even more US dollars coming from the Fed in no way justifies complacency.

In January of 2012, I laid out an analytic framework to visualize the dynamics between these two currency zones. I reproduce the figure below without comment, as it is self explanatory:

 

In February, I anticipated that the European Central Bank was eventually going to need to floor the value of sovereign debt. It took about seven more painful months to see this take place, with the announcement of the Open Monetary Transactions. With this in mind, I suggested not to chase the stock rally and warned that shorting the euro would be a painful trade.

2.- Manipulation in the gold market

From my years at the Universidad de Buenos Aires, I always remember professors J. M. Fanelli and Daniel Heymann, because they used to and still think that policy makers (in Argentina) had no choice but to “manage” the price of the US dollar (vs. the peso) to fight inflation. The value of the US dollar, in pesos, was a signal that shaped inflation expectations, according to them. In the same fashion, I am convinced that those at the helm of the G7 central banks believe that to shape inflation expectations and avoid the burst of the bond bubble, they need to manage the price of gold. And that is exactly what they have been doing (via swaps, leases from their deposits at below market rates), since Standard & Poor’s downgraded the sovereign risk rating of the US. They are wrong of course and in time, it will prove to have been an expensive decision. The proof? Movements like the $100/oz drop upon the announcement of the second Long-term Refinancing Operation at the end of February. Nobody who lives marked to market would ever dump so much gold in seconds in a market, let alone do so sustainably and predictably, as it often happens, between 10am and 11am ET. I am convinced that had it not been for this manipulation, gold would have had a stellar performance this year. But how serious can I sound debating a counter-factual statement?

3.-Liquidity will not fund capital expenditures but share buybacks, dividends

In March, we were perhaps the first to suggest that the US dollar liquidity enabled by the Fed via swaps was going to be used to buy back shares and distribute dividends, rather than finance capital expenditures (I say “perhaps” because a few days later David Rosenberg expressed the same view). This is a typical outcome of financial repression. Nations under financial repression generate bankrupt companies owned by wealthy owners. Time will tell but so far, numerous articles have been suggesting that this trend is taking place (Eric Beinstein, from JP Morgan, shows evidence to the contrary, in his latest Credit Markets Outlook report). Because of this, I proposed that as a trading theme, one should buy the product, rather than the producers, which is a winning trade in inflationary environments. Therefore, the suggestion was to buy gold, rather than gold miners.

4.-To defend their currency, the Euro zone destroyed its capital markets

(At this stage, I think no comments are needed on this point, which I made in March.)

5.- Sovereign debt owned by other sovereigns is a concern

In March too, I noticed that the situation in 2012 resembles that of 1931, as Greece and increasingly other peripheral EU countries owe to other governments, the IMF and the European Central Bank. Private investors have been wiped out and just like in 1931 (when France, for political reasons, allowed the KreditAnstalt to go bankrupt), when the next bailout is due, political conditions will be demanded that no private and rational investor would demand.

6.-Canada’s story will be different

In April, I proposed that the Canadian context was different and that rather than expect contagion from the banking system to the government, in Canada, we should expect contagion from the government to the banking system. I still expect this deterioration to be triggered by an exogenous development (i.e. outside Canada) and the reaction of the Canadian dollar to the revised unemployment rate on December 7^th may be telling us that this view has merit.

7.- September marked a tectonic shift

I will not elaborate on the points below. I wrote extensively about them in September (see here, here and here), but I need to mention them because they are very relevant for the next year. These points, I must clarify, are my best case scenario, because the necessary condition for their validity is that Spain and any other peripheral country in need of a bailout asks for one and receives the support of the European Central Bank (ECB) in exchange :

-The market will arbitrage the rates of core Europe and its periphery, converging into a single Euro zone target yield (with higher German rates).

-We will no longer be able to talk about “the” risk-free rate of interest, when we refer to the US sovereign yield. Inflation expectations will pick up

-The Canadian dollar should not rise significantly above the US dollar (i.e. above $1.04 per 1 CAD).

-The ECB backstop (i.e. purchase of sovereign debt) generates capital gains for the banks of the Euro zone and transforms risky sovereign debt into a carry product (i.e. an asset whose price is mostly driven by the interest it pays, rather than its risk of default, because this risk has been removed by the central bank)

This implies that in the future, sterilization at low rates or the suggested negative deposit rates at the European Central Bank, under Open Monetary Transactions, will not be feasible. Banks will demand high rates in exchange, if they are to sell the debt to the central bank.

Epilogue

In my next letter, and likely the last one of the year, I will address the topic of why we have not yet seen high or hyper inflation and what is necessary, in general, to see this phenomenon take place. The letter will go dedicated to Peter Schiff. In it, I will seek to show that unlike Keynesian economists believe, not only are high nominal interest rates compatible with high inflation, but in fact they are a necessary condition for high inflation to exist and morph into hyperinflation. This is a paradox to mainstream economics…and, coming from Argentina, I love paradoxes.

A final observation, on method

As my approach is within the Austrian school, you may have noticed that I use praxeology. ( “a theorem of a praxeological science provides information that has been derived by sheer reasoning; it is the product of pure logic without the assistance of any empirical observation”, I. Kirzner). Hence, you find almost no statistics in my articles. My aversion to them is due to my view that the national accounting system used to date is simply a barbaric relic of mercantilist doctrine. But that’s a story for another time… I walk through problems using simple axioms and test their logic with identities (i.e. balance sheets). Mainstream economists, on the other hand, use equations. Hence, they need to “torture” their stats to prove their propositions, because they are inductive. I use deduction.

 

 

Martin Sibileau

Click here to read this article in pdf format: September 16 2012

Last week, after the German Bundesverfassungsgericht decided not deactivate the debt monetization program announced by Mr. Draghi a week earlier, the Italian government sold EUR4BN in 4.75% 2014 notes at an average yield of 2.75%. This compares with 4.65% obtained at a sale of the securities on July 13th.

With the European Central Bank backstopping short-term EU sovereign debt (as long as the issuer submits to a fiscal adjustment program), we should see two trends taking place:

The first one, mentioned in our last letter, is that the market should arbitrage between the rates of core Europe and its periphery, converging into a single Euro zone target yield. The Italian auction mentioned above, together with continuous weakness in Germany’s sovereign debt, the movement of capital out of the US dollar to the Euro zone (lifting the Euro to $1.31) and the rally in EU banks, would seem to indicate that this convergence is slowly materializing. The critical piece here, the one that will really nail this coffin, is the return of deposits transferred to the core of the Euro zone, back to the periphery that originated them. This is what’s behind the ongoing negotiations towards a banking union. Ironically, if the banking union was successful, making deposits return to banks of the periphery, it would make it easier for the Germans to leave the Euro zone, because the current imbalances of the Target 2 system would disappear, radically lowering the cost of the exit!

The second trend, the one we missed last week, consists in that –perhaps- we will no longer be able to talk about “the” risk-free rate of interest, when we refer to the US sovereign yield. If the first trend proves true, there would be no reason to believe that the short-term US sovereign yield should keep as low as it is vs. the equivalent EU sovereign yield. For all practical purposes, in the segment of up-to-3 years, the European Central Bank would set the value of the world’s risk-free rate! The big assumption here is of course, that the first trend, above, holds true. Only then, the arbitrage between the US sovereign yield and the EU sovereign yield could be triggered.

What would the levels be, for the up-to-3 year yields? As we know, the European Central Bank will not pre-commit to a yield target. Of course, they don’t want to be challenged, because there is only so much they can sterilize before they start suffering a net interest loss, as we explained last week. But from a dynamic perspective, what counts is not the level, but the driver: In the long run, as the sterilization fails (also explained in our last letter and first proposed back on May 13th, 2010), the short-term “risk-free” rate of interest would be driven by the consolidated fiscal deficit of the Euro zone.

 Having said this, the remaining question is what determines the value of the long-term risk-free rate of interest. The Fed, in our view, although not announced last Thursday, will eventually continue to purchase long-term US sovereign debt. Effectively in the beginning, the Fed would set the value of the risk-free yield curve, past the three-year point. When things get out of control and inflation expectations for the US dollar take the lead (in a few years), the fiscal deficit of the US should determine the dynamics of the long-end of the curve….Does that make sense? No! (At least not, if you are not Keynesian) Because if “things get out of control”, we must say good bye to long-term interest rates altogether. That market will evaporate, and the US will only be able to sell short-term debt. At that point, if the Euro zone still exists as we know it, the battle for the ownership of the risk free rate will have been won by the European Central Bank, by definition. Why? Because by definition, if the Euro zone still exists, it is because they succeeded in stabilizing their fiscal problems. Otherwise, the shortening of the term horizon for the US sovereign yield should continue contracting, until hyperinflation completely wipes it out.

Additional thoughts

With these thoughts in mind, one cannot but wonder at the idiocy blindness of those who sustain that both the European and the US central banks removed “tail risks” in the last days, with their new measures. To start, the whole idea that a tail risk exists is simply a fallacy of Keynesian economics. It assumes there is a universe of possible outcomes and, as if humans acted driven by animal spirits, randomly, each one of them has a likelihood of occurring. In all honesty….what else can occur if a central bank prints money to generate a bubble? Why would the bursting of the bubble be called a tail risk, rather than the logical outcome? Why, if that was tried in 2001 in the US, resulting in the crisis of 2008…why would it be any different now, when there is an explicit announcement to print billions per month? Why?

 The splitting of the risk-free interest rates, in short and long terms, and the “moving” of the short-term to the Euro zone somehow sadly reminds us of the division of the Roman Empire, between West and East, when the capital moved to Constantinople. Is this ominous?

Finally, as inflation expectations, post the ECB/Fed announcements pick up, the rally in credit (i.e. IG18 credit default swaps index reaching 83bps) is telling us that banks outside the Euro zone or the USD zone -banks which did not benefit so much from a “portfolio” effect-, will have a hard time remaining profitable, unless they take additional risks, or they get themselves the same subsidy that the ECB and the Fed give to their zombie banks. This suggests to us that the Canadian dollar should not rise significantly above the US dollar.

Martin Sibileau

Click here to read this article in pdf format: July 9 2012

Markets had a quiet week, with a holiday in Canada and another in the United States. We will therefore be brief today.

In our last letter, we presented how we think, the end of this crisis will be brought about: With the collapse of the futures markets. It is important that these markets really break because they are the ones used to manipulate commodity prices (not just gold) and as long as commodity prices can be controlled, the flight from fiat money to real assets will not be triggered and the global depression will stay with us. We know that, “they” know that and that’s why when that critical moment approaches, the repression to avoid it will be phenomenal, of a kind nobody in the developed world has ever witnessed. We leave it here…

Last week, the central bank of Argentina declared that at least 5% percent, we understand, of deposits held by local banks “must” be lent to businesses. Everyone laughed at this ridiculous measure. Everyone knows that it is useless and that the government of that country can do nothing to prevent their eventual fall. Last week too, the central bank of the European Union declared that it will pay nothing, (zero percent rate) on deposits from Euro zone banks. Yet nobody laughed at this measure and still… it is nothing else but a twisted version of what the Argentines did. It is as ridiculous and it will be met with the same answer: Less lending and more recession.

As we wrote months ago, in order to save their currency, the Euro zone destroyed its banks. And with this last measure, it will have ended its money market. For all practical purposes, the European Central bank made sure that its liabilities, the Euro, will never be able to reach a global reserve status. The damage these irresponsible central bankers are doing is immense because until now, Euro banks were not lending to each other for a genuine reason: Very high counterpart risk within a currency zone that is falling apart. They were taking heavy capital losses on the sovereign debt holdings they had been coerced to invest their funds in but, at least, they were able to earn 25bps on immobilized monies. Now, they won’t even have this “risk-free” income, a situation that actually enhances counterpart risk, as solvency is further crushed.

At the same time, if the banks cannot afford to have funds immobilized, they will discourage the growth of deposits in the Euro zone, precisely when they are most needed. The way markets welcomed this measure shows we are not alone with this view.

On another note, last week too, Robert Diamond, ex-CEO of Barclays was called a criminal during a testimony before the British Parliament. The reason? His former employer was accused of manipulating the London inter-bank offered rate (LIBOR). We can only ask this: Why are bankers called criminal when interacting in the market to get a price for their product, while central banks, who actually “set” the rates….are not? Who is the criminal? After all, would any other business not try to move a price to its benefit? If it is successful, it’s because the demand for that product is there. The point is: They were not, which is why Libor, after all, has become an irrelevant rate. Was that criminal? Did bankers really ever force other banks or businesses to borrow by way of bank debt, rather than bonds or raising equity? Yet, central banks do actually impose rates on the market, regardless of demand. Who is the criminal? Who is it?, we ask…

Lastly, in our letter of June 25^th, we argued that it was now conceivable to see Germany leave the Euro zone first. We think that the latest actions, both by the central bank and the Euro Summit, make this outcome increasingly likely.

Martin Sibileau

Click here to read this article in pdf format: June 11 2012

As we write, the news is out that Spanish banks will get bailed out in the order of EUR100BN (also reported EUR125BN). We have repeatedly said that bailing out banks whose capital vanishes because they hold junk government debt is an exercise in circular reasoning (see our letter: “The EU must not recapitalize banks”, from October 17tth, 2011). This also applies to those bailouts where the pockets are bigger, as in the case of the Euro zone members. Eventually, without deficit monetization, this will affect the credit quality and spreads of Bunds (i.e. sovereign debt of Germany).

Over the past week, we have been introspective. Recognizing that we have been pessimistic (perhaps since we began writing), we tried to look for policy solutions that would prove us wrong. Let’s see…

Today, even Warren Buffet acknowledges that the problem of the Euro zone is institutional, that fiscal integration is required for the zone to survive. We were, however, maybe one of the first to have openly said that the problem of the Euro zone was institutional, back on February  8^th and 10^th 2010 (yes, more than two years ago!) and that all these bailouts and liquidity manipulations would lead nowhere. We were contrarians back then and wrote in answer to a publication by the Bank of America’s Credit team: “US Fixed Income Situation”, Fixed Income Strategy, February 5th, 2010. In this note, the writers suggested that the crisis was of a short-term nature, driven by liquidity issues, with a longer term solvency problem.

Now, our view is mainstream. Now, with everyone siding with the institutional perspective on the Euro zone, we wonder if it is really impossible for a peripheral country to carry a smooth exit from the Euro zone. Until now, we thought it was and because of that position, we had a consistent view of the problem, whereby the US would step in via currency swaps and end up picking the tab. However, we think we may be wrong here and this is why we just wrote above, that we have been very introspective.

It may be possible that a peripheral country be able to exit the Euro zone smoothly. It may be. We are not saying that it is likely or not, or that it will or will not. But only, that it is possible, technically speaking. And we will use today’s letter to examine this possibility.

When we think about the survival of a currency or related bank runs that precipitate a currency crisis, we are being biased and narrow minded. We view the collapse of that currency as an asset to store value. But in doing so, we neglect the other function money has, which is to serve as a medium of indirect exchange, a medium to transact. Societies can actually live under bi-monetarism, whereby one currency is used to store value and the other, the imposed legal tender, is used to transact. There are multiple living examples of this in the world, and we are particularly familiar with those in Latin America.

The processes in demonetization actually start with this sort of bi-monetarism. The peso, inArgentina, was at one time used to store value and to transact. With the sovereign problems and increasing confiscation via inflationary tax, the peso was dropped as a store of value but continued to be used to transact. The US dollar replaced the peso as store of value. But later, as inflation became more acute, the peso completely disappeared and Argentina was forced to establish a currency board, where the central bank would only issue pesos if they were almost 100% backed by US dollar reserves. And then again, the peso began to be used to transact, while US dollars retained their role as a store of value. As the macroeconomic situation improved in the early ‘90s, US dollar stocks were not exchanged for pesos, but pesos flows (i.e. new savings) were not converted to US dollars.

With this in mind, it is therefore conceivable, that without affecting the status quo under the existing Target 2 structure (i.e. Trans-European Automated Real-time Gross Settlement Express Transfer System), a country like Greece start issuing their own currency with their banks accepting deposits both in Euros, supported by the European Central Bank, and in drachmas. The drachmas would not have to be imposed upon the private sector to transact, but the government could decide to pay all its future debt issuances and operating expenses (including wages) in drachmas, and demand that taxes be paid in drachmas too (A government can also simply default on the euro debt and re-denominate it at an arbitrary exchange rate).

To avoid falling into hyperinflation, the drachma would have to initially be backed by assets that would necessarily have to come from privatizations. In the case of Greece, this is difficult, as most if not all of sovereign assets have been encumbered. But we trust there is always the possibility to create a special purpose trust owning fiscal land, reserves or infrastructure royalties to begin. In other cases, unencumbered gold reserves could be used for that purpose.

It is important here to remember that the price of those drachmas, relative to other currencies, will not depend on the quality of the assets behind, but on the demand, relative to its supply. If the demand is not imposed (if bi-monetarism without capital controls is allowed) and the supply of drachmas will only increase gradually, as wages are paid and redenominated debt is serviced, we could see this currency survive, if the committed austerity programs continue in place. This would represent a scheduled depreciation of the currency, until the fiscal deficits are solved. If they are not, the whole experiment would succumb, just like it did in Argentina, in February of 1981, under the so called “Tablita” (tabla = ledger, and in this case, containing gradual peso depreciations).

The key here is that, after the still ongoing bank runs in Greece, with its citizens having all their savings stocks in Euros, they will afford to keep monetary flows in drachmas (i.e. the cost of having to transact in drachmas will be offset by the fact that their savings are in Euros). This policy would boost the purchasing power of their savings, vis-à-vis, the public services provided by the government, now supplied in drachmas. This policy too, would represent a devaluation of the cost of public workers, for those who managed to convert their savings into euros. And we believe that is the case for the majority of Greeks.

For Germany, this scenario would also be a win-win situation, because the Euros they now subsidize under Target 2 would eventually and gradually be recycled back into the remaining core Euro zone, as the peripheral country imports goods from the Euro zone. In fact, this alternative could well represent a virtuous spiraling process, with the Euro appreciating, Euro sovereign interest rates falling (both in Euros and in drachmas), and stocks (particularly financials) increasing. If that was the case….what would happen to gold ceteris paribus? We think it would plunge, and only be relevant in US dollar, Yen and Yuan terms, as the US and Japanese fiscal cliffs come to the forefront, while China’s situation continues to deteriorate.

In summary, the absolutely necessary conditions for a smooth exit from the Euro zone are:

1)  No capital controls and freedom to convert to Euros in any amounts of local currency, at a market rate

2)  Acceptance of bi-monetary deposits at banks: Euros and local currency

3) The European Central Bank will address liquidity on the Euro portion of deposits/assets, the local central bank will be the lender of last resort for the local currency portion (Otherwise, the experiment is set to fail, like the currency board failed in 2001 in Argentina, because US dollar deposits were not “insured”. The alternative, if the ECB does not cooperate, is to impose a 100% reserve requirement on the Euro portion of deposits)

4) No legally enforced indexation of Euro denominated contracts (let the market sort it out)

5) No definition (silence) by the government, on the future of the Euro denominated sovereign debt (eventually, a non-hostile renegotiation can be done, within the European Union, leading to the fiscal integration that everyone is now seeking)

6) The local government will pay expenses and demand payment of taxes in local currency.

7) Some sort of stock, hard asset back-up of newly issued local currency (gold, privatized assets)

And finally, the most difficult one (the one Argentina failed to comply with in 1980):

8  A credible plan to reduce fiscal deficits, now denominated in local currency.

If only one of these conditions were not met, an exit from the Euro would end in chaos.

Martin Sibileau

Click here to read this article in pdf format: June 4 2012

The loyal reader knows by now that we have been, perhaps since the start of our publication, expecting a dynamic like the one seen last Friday, namely, lower stock prices and a higher gold price. The last time we insisted on such a forecast was on April 9^th, under the title “We’re getting closer”. But no, we are not like the oracle of Delphos, supplying pagans with loose predictions. We have been very precise in laying out what the drivers for the upcoming collapse are. At the beginning, in 2009, we were alone (read, for instance, our letter from May 19^th, 2009) . Today, we are only one of many to side with this view.

We want to throw a word of caution. Last Friday also, Treasuries ended higher (i.e. yields lower), which means that the status quo, although challenged, is still the status quo. There are now many, including Peter Schiff or George Soros, who assume that from now on and incarnated by the reversal in gold, we start a new phase. This phase would lead us to a crash, followed by unseen amounts of money printing and ending in hyperinflation.

This is a simplistic, 10,000 ft above ground perspective, we think. Undoubtedly, and as per our last two letters, liquidity seems not to be an issue and the intervention of central banks will do little to prevent what we think will be a crash. This crash will be nothing else than the repudiation of the uncertainty provoked by and the misleading nature of zero interest rates, as well as of the increasing financial repression. But exactly for this reason, the status quo will not leave without a fight that will involve more capital controls, price controls, unilateral currency devaluations and a diversity of other interventions.

On this basis, we think it will be wise to be cautious taking a trading view. We will not only have to protect our savings, our assets “nominally”, but physically as well. Coming from Argentina, we have the dubious benefit of knowing a thing or two about this, but it may not be all that handy. After all, the developed world has its own methods and (going by the experience in the manipulation of the price of gold) one of them is the manipulation of prices via the futures markets.

In the futures market, prices can be affected on an unfunded basis, that is…without actually having to own an asset or all the cash to own it. As long as futures markets exist and regulators impose a risk weight on the assets that serve as collateral, the defenders of the status quo will have a tool to inflict pain on those who want to seek refuge in real assets. Therefore, it is valid to ask what could bring the collapse of the futures markets. High inflation would be one of the factors, but in our view, it is a longer term one. A simple answer to the question is this: Futures markets will collapse when an asset that was supposed to be delivered, cannot be delivered in the quantities and at the time it was going to be delivered. Most likely, due to the failure of a big counterparty, followed by that of the corresponding clearinghouse. This event, if it takes place and we think there is an increasing likelihood that it will, will really boost the flight from nominal to real capital.

Why do we think there might be an increasing likelihood of it happening? Because it would be the unintended consequence of the same manipulative actions governments are taking to affect spot prices. As these manipulations increase, their unintended consequence is more likely to occur, just like it did happen to the derivatives position of a well-known, global bank.

With these words of caution, we can only add that the future weeks, months, will be horribly volatile and that one will have to sit tight, and on the margin, move nominal capital to real capital at each opportunity. Policy makers believe they are still in control, but they are not. And by the time they find out, it will be too late for us to take any protective measures. The European periphery, for all practical purposes, is already out of the Euro zone. The US, for all practical purposes, is insolvent. The creditor countries of the world, for all practical purposes, are heading towards deception, as they find out that their mercantilist view of reserves management has destroyed wealth and misallocated capital. The Middle East, for all practical purposes, is heading towards complete anarchy and the commodity countries likeCanadaorAustralia, have left their fate in the hands of hope, unable to steer a course on their own, at the mercy of global capital flows…and hope is seldom a good strategy.

Martin Sibileau