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Germany has closed it's border with Austria tonight to refugees. Poland and Slovakia remain open but we'll see how long that lasts. Clearly, there are limits to the Bavarian 'Wilkommen in der Hanglange.'

Perhaps Mrs Merkel and her Cabinet were surprised at the lack of European wide enthusiasm for her largesse and their appalling lack of team spirit in sharing the immense burden that Germany has shouldered. 

Perhaps though, her security service spoke to our security service and suddenly it's come as rather a surprise to discover that all of the tide of migrants are not quite what the media have portrayed them to be.

Quelle surpise! You mean Twitter, and the BBC sending Fiona Bruce from the Antiques Roadshow to Beruit for two days to interview one bloke who was photographed by an agency photographer selling biro's on the roadside with his daughter asleep in his arms haven't been telling us the whole picture? 

Expect a media about face within 24 hours, 'What were the Germans thinking of, putting us all at risk like that?'

Then again, Mrs Merkel might just have talked to some of the refugee agencies with decades of experience and learned that their policy is to keep the migrants within the region and close to home for when stability eventually returns to their various homelands. 

No one has greater capacity for organisation and logistics than the Germans. It is never though, Mrs Merkel, the first million people you have to worry about.

(As a quick aside, no family in the known universe is more disciplined about cross border mobile phone use than are the Crumble Kids, their dad being utterly paranoid about unforeseen big phone bills. Which company then, are all these refugees with? I want to sign up with them. If they have mobile signals in war zones in the Middle East and I can't get one in Compton in West Sussex they must be bloody good, and obviously as cheap as chips).

If there is a sudden rush of perspective and proportionality across Europe, does that mean that all the kids leaving for University this week and next will be able to return home at Christmas and find their rooms haven't been donated by their well meaning Mum's to a refugee family from Gaza?

 

Europe

Back after a parents trip to Auschwitz-Birkenau. It does make you think about many things…. Europe amongst them.

A visit to any of the camps is always going to be emotionally challenging. It does though, give pause for moments of reflection on many things, the current state of Europe and “could it happen again?” amongst them. Of course genocide has indeed continued to be inflicted on people across the world since 1945 and there seems to be no end, or sense, to the steady stream of racial, religious and ethnic murder and cruelty in the world. Growing divisions in Europe will not take us back to the 1930’s but the shadow of the Second World War is never far away and traditional cross border suspicions are again bubbling under the surface and are not helping; not one little bit.

Angela Merkel took office ten years ago in 2005 when Europe was enjoying the pinnacle of its success. German integration was complete, the Russians were picking themselves up off the floor, Europe was united with a queue of new entrants to the EU project and the global economy was blazing. The world though has very much changed. Europe is in crisis with many members blaming Germany for their problems. Few countries now want to join the EU and the EU doesn’t want any new members. Ukraine is plunging deeper into the abyss and fear of Russia is growing. US politicians are discussing arming the Ukrainians and storing arms for US troops in the Baltic States.

The combination of economic and political stress has led to an increase in nationalism. Those flames are being fanned by the actions of extremist Islamic terrorists. Germany then, finds itself in the unwanted and uncomfortable position of being forced to take a leading economic and political role. The good thing about that is there is no other country more unlikely to change a political problem into a military one. The bad thing is that institutionally, Germany is not experienced or adept in the handling of cross border crisis.

Reluctantly, probably the most important politician in the world today but with no easy options.

Playing in the Russians backyard and encouraging demonstrations was never going to have an elegant end. As is often the way with liberal minded democracies when shots were fired the Germans backed off and instead of supporting the Ukrainians they joined in with sanctions. Germany will not ever get involved in military action in the East but is now being forced because of its earlier political engagement to seek compromise and to cool the situation down, much to the chagrin of a number of US politicians.

Merkel’s US visit was designed to persuade the US to soften its approach to Ukraine but a deep rooted suspicion of the Russians and their intentions does not easily change in Washington and Putin meanwhile, has his own constituency to serve which will not easily accept Russia backing down without significant concessions.

Equally, the Greek situation is creating unease in Berlin. The Germans have massively benefited from free and open markets with more than 50% of GDP going to export. Growing nationalism and protection may come to threaten Germany’s dominant export position, especially if the Euro is threatened by a Greek default and expulsion with others following. Germany has been forced to adopt a tough public stance with Greece yet the new Greek government was elected specifically with a mandate to challenge Germany.

From a German perspective, they’ve been doing all the right things, including lowering their leverage ration from 80% to 76% of GDP in the last four years. The rest of Europe though has its foot on the floor and is accelerating toward the fiscal cliff edge. Of Greece’s $350bn debt, a mighty $210bn is owed to the Eurozone bailout mechanism. Germany’s share of that is some $57bn. The problem is not the burden which may be placed on German taxpayers, it’s the share which other countries have signed up to and their ability to pay. Italy for example has a debt to GDP ratio of 132.6% and so is borrowing to pay interest. But Italy’s share of the Greek liability is $37bn while France is on the hook for $42bn. France is well down the road of becoming a financial basket case with the state taking 60% of GDP and with a debt to GDP ratio of 92%, (Maastrict supposedly limited debt to GDP at 60%). The problem with these stats is that a Greek exit will be met with a storm of protests from voters when they figure out what the bill means for them and there is little doubt the political map of Europe will undergo further rapid change.

None of this is good for markets. Increasing numbers of strategists are going underweight US equities and overweight European equities. These people don’t learn quickly. In fact, they probably don’t learn at all or are so glued to their valuation models they just don’t see the storm clouds rolling in. True and transparent price discovery of debt instruments in Europe is currently non-existent. That will happen when a central bank quadruples its balance sheet over ten years as the ECB has done. This of course was a necessary requirement to save European banks which had become insanely leveraged into the 2010-12 peripheral debt crisis, (DBK @ 56x for example with $1.9tr of assets and only $36bn of tangible equity).

As I wrote at the time, the unwillingness to force speculative investors to take losses and to underwrite them would simply store problems for the future. The future has arrived but paying the piper is now going to have a political cost and not just an economic one. Of the two alternatives, allowing Greece to go and watching the whole experiment unwind at great cost to the German taxpayer, or appeasing Greece, and subsequently other countries, at great cost to the German taxpayer neither is particularly palatable. The problem with both is that Germany probably ends up stronger and that is as unwelcome in Berlin as it is outside. Germany will probably allow Greece to go, if only because the domestic political cost will be lower than allowing them to stay.

It will however, set in train a sequence of events that none of us can know the outcome of. According to a new McKinsey study, global debt has grown by $57tr since the crisis. Government debt has grown by $25tr and only in the UK, US, Ireland and Spain has domestic, (but not government), debt deleveraged. China meanwhile went postal and increased leverage by 4x and now has a debt to GDP ratio at a stomach churning 282%. Zero interest rates will not hold the wall forever and disruption from FX markets resulting from political breaks are one likely route to what we refer to as real “price discovery.”  You could though, just call it an almighty crash, harsh bear market and economic depression and it’s that last word, depression, that haunts historians and anyone else who has had a reflective thought at any one of the camps.

Enough is Enough NSA

Perhaps the spying game has gone quite far enough

Well, we can jest and joke,can't we? The manufactured outrage from Europe on inter government surveillance is anyway really somewhat disingenuous. That's exactly what covert agencies do. It's why they were set up and any suggestion that Europeans do not indulge in the same practices is just contemptible, especially as most of the European countries in question work with US agencies on targets of mutual interest so it's absolutely no surprise to them what American capabilities are.  

However, embarrassment is being caused domestically for the governments concerned and as Stratfor highlights, the Snowden documents are being released in a clever and orchestrated way designed to create maximum impact and disruption between the US and it's allies. 

More surprisingly is given that anyone who has been near them know that the US establishment is utterly anal about security, (well, a visit to JFK immigration will teach you not to go there too often), how in the blazes did a three month contractor get so deep into some of the intelligence cells within the NSA? One might be forgiven for thinking it's just one big disinformation operation. Stranger things have happened.

Frederick Forsyth's open letter to the German Chancellor

 

I'm a bit late with this but it's good to have it on the blog, both for those who may have missed it and as a matter of record.

Frederick Forsyth, author of some thundering good reads and Express colunmist, has penned an open letter to the German Chancellor, Angela Merkel. Couldn't have put it better myself; this should be a mandatory read for Cleggites and their ilk.

"Dear Madame Chancellor, 

PERMIT me to begin this letter with a brief description of my knowledge of, and affection for, your country.

I first came to Germany as a boy student aged 13 in 1952, two years before you were born. After three extended vacations with German families who spoke no English I found at the age of 16 and to my pleasure that I could pass for German among Germans.

In my 20s I was posted as a foreign correspondent to East Germany in 1963, when you would have been a schoolgirl just north of East Berlin where I lived.

I know Germany, Frau Merkel, from the alleys of Hamburg to the spires of Dresden, from the Rhine to the Oder, from the bleak Baltic coast to the snows of the Bavarian Alps. I say this only to show you that I am neither ignoramus nor enemy.

I also had occasion in those years to visit the many thousands of my countrymen who held the line of the Elbe against 50,000 Soviet main battle tanks and thus kept Germany free to recover, modernise and prosper at no defence cost to herself.

And from inside the Cold War I saw our decades of effort to defeat the Soviet empire and set your East Germany free.

I was therefore disappointed last Friday to see you take the part of a small and vindictive Frenchman in what can only be seen as a targeted attack on the land of my fathers.

We both know that every country has at least one aspect of its society or economy that is so crucial, so vital that it simply cannot be conceded.

For Germany it is surely your automotive sector, your car industry.

Any foreign-sourced measure to target German cars and render them unsaleable would have to be opposed to vetopoint by a German chancellor.

For France it is the agricultural sector. For more than 50 years members of the EU have been taxed under the terms of the Common Agricultural Policy in order to subsidise France’s agriculture. Indeed, the CAP has been the cornerstone of every EU budget since the first day.

Attack it and France fights back.

For us the crucial corner of our economy is the financial services industry. Although parts of it exist all over the country it is concentrated in that part of London known even internationally as “the City”.

It is not just a few greedy bankers; we both have those but the City is far more. It is indeed a vast banking agglomeration of more banks than anywhere else in the world.

But that is the tip of the iceberg. Also in the City is the world’s greatest concentration of insurance companies.

Add to that the brokers; traders in stocks and shares worldwide, second only, and then maybe not, to Wall Street. But it is not just stocks.

The City is also home to the “exchanges” of gold and precious metals, diamonds, base metals, commodities, futures, derivatives, coffee, cocoa… the list goes on and on.

And it does not yet touch upon shipping, aviation, fuels, energy, textiles… enough. Suffice to say the City is the biggest and busiest marketplace in the world.

It makes the Paris Bourse look like a parish council set against the United Nations and even dwarfs your Frankfurt many times.

That, surely, is the point of what happened in Brussels. The French wish to wreck it and you seem to have agreed. Its contribution to the British economy is not simply useful nor even merely valuable.

It is absolutely crucial. The financial services industry contributes 10 per cent of our Gross Domestic Product and 17.5 per cent of our taxation revenue.

A direct and targeted attack on the City is an attack on my country. But that, although devised in Paris, is what you have chosen to support.

You seem to have decided that Britain is once again Germany’s enemy, a situation that has not existed since 1945.

I deeply regret this but the choice was yours and entirely yours. The Transaction Tax or Tobin Tax you reserve the right to impose would not even generate money for Brussels.

It would simply lead to massive emigration from London to other havens. Long ago it was necessary to live in a city to trade in it.

In the days when deals can flash across the world in a nanosecond all a major brokerage needs is a suite of rooms, computers, telephones and the talent of the young people barking offers and agreements down the phone.

Such a suite of rooms could be in Berne, Thun, Zurich or even Singapore. Under your Tobin Tax tens of thousands would leave London.

This would not help Brussels, it would simply help destroy the British economy.

Your conference did not even save the euro. Permit me a few home truths about it. The euro is a Franco-German construct.

It was a German chancellor (Kohl) who ordered a German banker (Karl Otto Pohl) to get together with a French civil servant (Delors) on the orders of a French president (Mitterrand) and create a common currency.

Which they did. IT was a flawed construct. Like a ship with a twisted hull it might float in calm water but if it ever hit a force eight it would probably founder.

Even then it might have worked for it was launched with a manual of rules, the Growth And Stability Pact. If the terms of that book of rules had been complied with the Good Ship Euro might have survived.

But compliance was entrusted to the European Central Bank which catastrophically failed to insist on that compliance.

Rules governing the growing of cucumbers are more zealously enforced. This was a European Bank in a German city under a French president and it failed in its primary, even its sole, duty.

This had everything to do with France and Germany and nothing whatever to do with Britain.

Yet in Brussels last week the EU pack seemed intent only on venting its spleen on the country that wisely refused to abolish its pound.

You did not even address yourselves to saving the euro but only to seeking a way to ensure it might work in some future time.

But the euro will not be saved. It is crumbling now. And since you have now turned against my country, from this side of the Channel, Madame Chancellor, one can only say of the euro: YOU MADE IT, YOU MEND IT."

Euro Exit; An Elegant Solution

 

 

Markets have been preoccupied all week with how the trauma in European debt markets will be resolved. Will Germany capitulate from their hard line stance and allow the ECB to print, or will France capitulate and be drawn in to stronger German led political union? Meanwhile, the Southern European members are being squeezed hard as global investors derisk their exposure throughout the Euro zone with a commensurate deterioration in trust and confidence. There is at this point, little clarity about the outcome. 

One enquiring mind has popped up with an elegant solution. Mark Tinker at Framlington Asset Management, and occasional contributor, takes the lead, 

 

 

“My tone is somewhat light hearted, but the intent is very serious. 

An obvious analogy is China and the US. We know that China, as a manufacturing nation, has pegged its currency to the US, an economic zone running a large current account deficit and has benefited to the extent that there are regular calls to have it named as a "currency manipulator". The resulting capital account surplus of China was then recycled through the debt markets of the US as Germany's has been through the convergence trade in the Euro zone. Is not Germany then guilty of exactly the same thing as China? If we agree that it is so, then should we not expect Germany to float the DM in the same way as China will float the RMB? 

Germany should with immediate effect re-denominate all assets into a new DM, which would almost certainly appreciate rapidly against the "Old" euro, probably by around 25%. It could then do as the Swiss have done and make it quite clear that it will target a new informal peg of around 120 (hence my flip comment about pegging itself to the Swiss Franc). This would then enable a lot of the capital currently hiding in bunds to flow back into the eurozone and relieve the liquidity crisis there, for

that is the real issue in Italy and Spain, a fear of a Euro break up meaning a 25% haircut in all assets. 

The German population would love to have the DM and the Bundesbank back and while the Eurozone would have slightly higher yields than now, so long as the ECB makes it clear that ultimately it will print to guarantee repayment of principal - as every other sovereign nation can - there is no reason why their bonds should trade worse than, say the UK. 

The euro survives, just with Germany now in the same position as the UK and Sweden, in Europe but not the Euro. The only losers are German Banks with assets now denominated in a depreciated currency, but as we know, the solvency issues of Greece, Portugal and Ireland are more than accounted for in Banks balance sheets already. This was never a solvency crisis, it has been a liquidity crisis triggered by fears of a currency crisis. Remove Germany and all your problems are solved. If they won't leave, then the other 26 should vote them out.” 

One can only hope that this cracking originality in approach also catapults Mr Tinker to the front of the pack for consideration in the Wolfson Economic Prize which will be awarded “to the person who is able to articulate how best to manage the orderly exit of one of more member states from the European Monetary Union.” With a prize of £250,000 we can simply be certain that his will not be the only entry!