The Frog in the Pot

Interesting times, these – You’d think that with all the contradictions served up by the media on a daily basis, a feeling of panic would ensue. Not the kind of panic of a certainty, but the kind arising from the unknown. Instead I feel a vague disquiet. The kind that comes from being able to envision a logical outcome, and that feeling, that hope that we haven’t come to far to turn it around.

The last time I was overcome by this – is it cognitive dissonance? – was in 2000, with most of my liquid net worth invested in my employer, Sun Microsystems. Sun had enjoyed a meteoric rise to 100-times-earnings, when some idiot analyst called for a doubling of the stock within the year. Hardware/tech companies rarely exceed a PE of 18, so this call was, shall we say, alarming. Like calling the top. The very next day Sun started it’s inexorable decline, from ~$100 to ~$2, barely touching the sides on it’s way down.

I was paralysed; I watched in a rather detached fashion as my net worth crumbled, but I did not panic. Very much like the frog in pot, and we know how it ended, with Sun, and the frog. Oh, if only I could explain why I did not act on what I knew was the logical, mathematical outcome.

Today? Greece. A nuclear Iran. Our failing economy.

Greece – Prime Minister Tsipras has managed to turn the tables on the EU and Greece’s three creditors. What may have been a manageable situation five years ago, has left the Europeans at the abyss, according to Alex Jurshevski, Managing Partner at Recovery Partners. Sadly his detailed commentary makes the most sense and is the most damning indictment of the IMF and the creditors. The point he makes is that as the weaker countries, undermined by the exposure to Greece, drop out of the guarantee structure, the guarantee migrates to the remaining, stronger members, leaving a possible €500B bailout on the German economy, worth more than 50% of their GDP.

He sees a likely run on capital in Spain, Italy and others, much as Greece experienced coming up to this point, with people stuffing mattresses; capital controls will follow – as in Greece – leaving people without cash for their day-to-day subsistence. Disorder follows, in a region having already suffered through 6 years of recession.

And how would this be fixed? The IMF? “They’ve made a hash of every restructuring they’ve been involved with … they’re Ivory Tower people … they’ve plied these people with 175% debt [to GDP]” exceeding their 70 to 80% mandate. Grexit? That would trigger guarantees, and Eurozone members going to the bond market to cover those guarantees. A glut of bonds, reduced bond prices, an increase in yield at a time when the global economy is so sensitive to yield. It just doesn’t seem like there is a pain-free way clear of this.

Iran – Well, where to start with this mess? It seems like the very same mentality that accepted Greeks at their word and accepted them into the Eurozone, is at work here. Desperate for some kind of foreign policy success, the American administration is prepared to chart a path for a non-nuclear Iran to a point down the road where to will have the legal wherewithal to weaponise. Iran has managed to renegotiate every red line that Obama’s team laid down: unfettered inspections? yeah, no. And of course it was silly of us to expect them comply. Accounting for past activity in order to establish a baseline for future activity? It was desirable 2 years ago. Today? Let’s not fixate on the past; besides we’re certain of what they were doing anyway. Riiiight. Of course, sanction relief predicated on compliance becomes immediate sanction relief when the red lines are renegotiated into non-existence.

10 years from now, Iran will be a nuclear power; tomorrow, with sanctions removed, they will flow their oil into a glutted market. Yay! 10 years to boiling point.

Our failing economy – another example of the frog: I am struck almost daily by news that nobody seems to connect. A president that cites a rising stock market as evidence of a successful economy, while wages are stagnant, labour participation rates are falling and major corporations are laying off. You cannot have markets continue to exceed GDP growth for any extended period of time, and revenue figures bear that out. Growth in earnings are being generated through efficiencies and buy backs. Efficiencies is a word that describes the laying off of people for technology, or cheaper labour in Mexico. Wage stagnation bears that out.

In Canada, in a near-zero interest environment, we are told that employers are holding
cash for a rainy day. In Canada, at, or near, parity with the US dollar, did employers use line_graphthat buying power, coupled with free money to upgrade machinery and inventory, you know, for a rainy day?Apparently not. Well, that rainy day is here.

Citing “Unemployment” figures is another red herring. It reflects the number of people collecting benefits; once they stop collecting those benefits, they are not counted. “Unemployment is down!” They fall to the – rarely cited –  “Labour Participation” figure. I make up one of the more than one-third of North Americans that is not part of the labour force. Consider the possible impact of having more than one-third of possible wage earners not participating in the economy.

Like Greece, I have debtors coming to me. Unlike Greece, I will meet my obligation, but the buck stops there. My expenditures are focused on non-taxable items: groceries, accommodations. Net revenue to my government – $0.00. Income tax, likewise.

The way I connect the dots, the numbers bear all this out. Other than Apple – literally – there is virtually no top line (revenue) growth in manufacturing and consumer products, and what there is, is driven by pricing power. Witness Altria or Philip Morris: consistent – albeit weak – revenue growth in the face of declining smokers. There is little of the consumer left and, frankly I’m tapped out.

“Hey now, don’t that make you feel a whole lot better?”

— The B52’s – Dance This Mess Around


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