Charles Gave is the French economist whose research firm GaveKal is fairly well known,and read in some hedge fund circles. In his latest note, John Mauldin reports on a dinner he attended with several investors and experts, of which Gave was one. At the
dinner, he predicted the Euro’s imminent demise.
Will the Euro Survive?
We had dinner on Monday night at the
home of Hervig von Hove of Notz-Stucki Bank, where I was speaking the next
morning. There were 16 of us at the table, and these people represented a great
deal of money as managers and investors. All very well-informed. We sat outside
in perfect weather in the Swiss countryside. Charles Gave sat across from me at
the middle of the table, and we talked and debated as the rest asked questions
and offered opinions for 3-4 hours. The wine was flowing, and it was a most
interesting evening. Now, with that set-up…I was asked if I still thought the
euro was going to parity with the dollar, and I said I did, although I was not
sure what the euro would look like in three years, or who would be in it. There
was some pushback from people who thought the dollar would be the weaker
currency. So I asked for a show of hands as to how many people thought the euro
would be higher in one year’s time. There were 6 hands raised, but one
gentleman said he was actually abstaining. So I asked how many thought the euro
would fall, and we got 12 hands. Yes, that is 19 votes for 16 people. Clearly
there were at least three economists in the group who voted both ways!
Then someone asked Charles about the issue. Now, for those who have never had the extreme pleasure of time with Charles, he is a powerful, white-haired French patrician, and one of the better economists I know. Quite a brilliant thinker and not afraid to express his mind forcefully with a voice that sounds like God talking, with about the same assurance (note to self: never again follow Charles on a speaking stage).
“The question is entirely irrelevant” – punctuating the air for added emphasis. “The euro will not exist in a year. The whole thing was dysfunctional from the beginning.”I suggested that was a tad bearish.“Not
at all. I think it is extremely bullish. The demise of the euro and the return
of national currencies will allow for proper allocation of investments and
resources. It is the best thing that could happen for the markets.”I could not get him to commit to exactly how that process of dissolution would look. “I didn’t create the euro so it is not my responsibility to solve the problem for them.”But I cannot help but think that any exit by anyone from the euro will be disorderly, giving rise to Bernanke’s
“significant effects.” Many European banks are simply not solvent if there are
major sovereign defaults. The US banks have sold some $90 billion in credit
default swaps on Greek, Irish, and Portuguese debt to European banks. That is
supposedly balanced with other purchases of CDS, but my sources say that much
of that insurance is from German Landesbanks. Yes, the same ones I mentioned
above that are basically insolvent. We are joined at the hip to Europe. A
European recession would certainly be felt here. And a credit event could cause
the same problem as in 2008, as banks start to refuse to lend to each other
again. Ugh. The potential for a real crisis is far too high for comfort. It would mean another recession for sure, with the US already close to stall speed and global growth slowing. I hate to sound alarmist, but I am worried. Absent a problem in Europe, the US should be fine, if slow. And maybe European leaders can stall the crisis off longer, buying
time for banks to move their debt to the ECB and raise capital. We have to
really keep our eyes on this.At some point, Europe needs to realize that the problem with Greece, Portugal, et al. is not illiquidity, but that they are insolvent and have few prospects for economic growth anywhere close to what is needed to solve their problems.
Europe would be better off just taking the money they are giving to Greece and using it to recapitalize their banks. Let Greece go. Give it up. Let them enter a 12-step program or whatever it is that insolvent nations do. That is harsh, but it is also the truth.
But there are very sad things going on. It is not just banks that are losers here. Pharmaceutical companies are starting to refuse to deliver to Greek hospitals, as they are up to two years behind on their payments. It turns out that Greece owes some €6 billion to
private businesses like hospitals and simply cannot pay. Those costs are rising,
and much of it is to hospitals for medical care supported by the government.
They are issuing bonds (shades of California) for the debt in some cases, which
sell for a discount of 50%, if they can be sold. And we thought finding €12
billion was a hard thing. This is not just a Greek problem, it is a concern in many countries that are having financial difficulties.
- Euro Crisis a Death by A Thousand Day Trades (thepressnet.com)
- Greece Threatens to Leave Euro Area (thepressnet.com)
- Greece Struck Down by General Strike (thepressnet.com)
- The Contagion Risk of Europe (ritholtz.com)
- French banks agree to defer Greek loans Decision taken to roll over holdings of maturing bonds as EU policymakers mull ways to share burden of rescue package. (afroaddis.wordpress.com)
- 71% of Germans say euro has no future; German government plans for Greek default (birdflu666.wordpress.com)
- A Very British Greek Tragedy (politicsontoast.com)
- If Greece should have its own currency, why not U.S. states? (blogs.law.harvard.edu)