Doom Loops: The European Enigma

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taylor@pinecapitalpartners.com

PINE CAPITAL ©

So, what do you think would happen in this hypothetical example if this loan was taken? A Great Migration would happen of course

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who in the hell would want to live in Nevada (if being in

Nevada alone wasn’t bad enough

- kidding)? The recession in Nevada would be so bad that investors would start l ooking at t he banks in N ew York and T exas to see t heir exposure and to make matt ers worse, the unempl oyed Nevadans would be saturating th e Californian labor mark ets.

As I am sure you’re aware, this situa

tion is only semi-hypothetical

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this is the exact scenario that played out for Greece in 2012 ahead of the Euro-zone crisis. The point of this example is to illustrate two important ideas: (i) the current framework of the Euro-zone is not viable long-term; and (ii) to make the framework viable in the long-

term is politically impossible (that’s not a subjective

observation

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ask anyone with a pulse and a social media account, they’ll agree).

The crux of this argument is this: Most of the countries that are currently hurting in the Euro-zone have been hurting since they joined the system at the beginning of the millennium

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that’s not a coincidence (and no, I’m not talking about Y2K); Europeans are older, there’s a lot of financial assets there ($11T in lif

e insurance, $3T in pensions)

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that are receiving zero -yield, this is how populism manifest; The most indebted sovereigns in the world incent the most important and underfunded investment funds in the world to

invest in the world’s riskiest and lowest

-yielding assets. Banks, insurance firms, pensions

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they have to put capital reserves up for any risky asset they purchase (which already has a low-yield), however, they can borrow for free and buy higher-yielding sovereign debt and are not forced to put up reserves. The regulators of

course, recognize sovereign debt as “riskless” despite being the exact opposite less than

four years ago. (What happens when

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risk-free

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becomes risk-y?

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I know, bad joke) The doom loop (sovereign supports bank, bank supports sovereign) makes the EU inherently fragile

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political reformation

is virtually impossible because it’s zero

-sum game regarding common-

currency and interest rates; it’s like me borrowing money to give to

people so they can buy my widgets

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the alchemy of finance can keep the illusion going for a long time, but we eventually sober up. Sometimes, the medicine is worse than the disease

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in the case of Europe, the medicine is poison. The regulatory agencies will cause the very same problems the seek to avoid; they are so worried about preventing a small problem today, that t

hey’ve completely missed

the big problem tomorrow. When the buffers deteriorate, so will the confidence. Despite the obscene level of economic hypochondria here in the States

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a recession isn’t

going to happen tomorrow. Are we artificially pulling some future purchases from tomorrow to today? Yes. Is this going to put us back on the gold standard and finally give us the Big Short 2 that oh so many self-proclaimed economic contrarians have insistently called for? Hell no. Fittingly, illusory superiority is not confined to gold bugs and academics. The financial tail is now wagging the real economy dog, and this story begins and ends with the only thing matters

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