Germany Tip-Toes Toward a Euro Exit

Germany Tip-Toes Toward a Euro Exit

Dan Amoss The stock market will not remain in its current tranquil state. Investors will soon be roused from their blissful trance. This trance traces its origins back to the mass self-delusion that central banks can revitalize multi-trillion-dollar economies, simply by prodding investors into stocks and other “risk assets.” Investing is not that simple. The comparison between bond yields and stock yields — two completely different investments — has become absurd. Bonds are contracts involving a fixed stream of cash flows and a predetermined maturity date. Stocks are claims on highly uncertain streams of future free cash flows that often stretch out for decades. Many risks can enter the picture and alter the trajectory of free cash flow — and investors’ expectations of them. Risks tend to appear out of the blue and smack investors out of their blissful trance — a trance created by central banks that have shifted far too much attention on the returns of stocks versus bonds… Here is just one negative catalyst growing closer as the weeks and months pass: Germany could exit from the euro and return to the deutsche mark. While a German exit would offer long-awaited clarity about the future of Europe, it would also spark a mad scramble to adjust to a new reality. A German exit would trash the euro’s value against the currency that’s steadily becoming the reserve of choice: gold. Only weak economies with bankrupt governments would be left standing behind the euro. The European Central Bank (ECB) would be free to monetize as much Italian and Spanish debt as it wished (i.e., print euros to buy the government bonds of Italy and Spain). The economists calling for a weaker currency to restore prosperity to the PIIGS countries would get to see their prescription play out in a real-world laboratory. Results would show that currency debasement does not create stronger, more competitive economies. Countries left in the euro would see collapsing living standards: import prices would rise and capital investment would fall amid a chaotic currency regime. ECB president Mario Draghi famously deemed the euro “irreversible”; he would do whatever is necessary to preserve it. But what Draghi sees as necessary will eventually be seen as intolerable in creditor countries like Germany. Once Draghi starts monetizing Spanish debt, Germany and other wealthy countries will view the euro’s costs as greater than its benefits. The German central bank — the Bundesbank — still exists. The Bundesbank could convert its liabilities from euros to deutsche marks at a predetermined exchange rate and take a one-time write- down on assets related to claims on PIIGS central banks. It would certainly be costly, but the alternative is worse: perpetually financing eurozone states unwilling to restructure public benefit programs unaffordable for their economies. Having seen the example of Greece, the Spanish public suspects that austerity will only make things worse. Spain will come to believe that its salvation lies in the printing press — in the ability to inflate away its heavy debt burden. After promising markets that the ECB would buy Spanish debt, Mario Draghi now has no choice but to fire up the euro printing press. Most other debt holders will flee the chaos unfolding in Spain. They’ll refuse to hold Spanish bonds at yields too low to compensate for default risk. The ECB, once it establishes a fake, above-market price for Spanish bonds, will ultimately find itself the only holder of those bonds. This is what happens when central planners impose prices far from what private investors consider fair value (in this case, pushing Spanish debt yields to below 4%, versus a much higher market-based yield). Once the German taxpayers see that the ECB will become the majority holder of Spanish debt, they will insist that German politicians plan an exit from the euro.

Iceland Proves Ireland and US Did `Wrong Things’ Sacrificing Taxpayers

By Yalman Onaran

February 02, 2011 “Bloomberg” January 31, 2011 – - On his second day as head of Iceland’s third-largest bank, Arni Tomasson faced a crisis: The firm he had been asked by regulators to run was out of cash.
It was Oct. 8, 2008, at the height of the global financial meltdown, and Iceland’s bank assets in the U.K. had been frozen, Bloomberg Markets magazine reports in its March issue. Customers flocked to branches of Tomasson’s Glitnir Banki hf to withdraw money, even though the government had guaranteed their deposits. By the end of the day, the vaults were empty, says Tomasson, recalling the drama two years later.

The only way Glitnir and other lenders could avoid a panic the next morning was to get more cash, which they were having trouble doing. A container of crisp kronur sat on the tarmac at Reykjavik’s airport awaiting payment, Tomasson says. The British company that printed the bills, De La Rue Plc, was demanding sterling, and the central bank couldn’t access its U.K. account.

“Everybody was panicked — depositors, creditors, banks around the world,” Tomasson says. “The effort by all of us at the time was to make sure life could go on as normal.”

Tomasson, 55, got the cash he needed that night after the central bank managed to open an emergency line of credit with a European lender. Now, he’s sitting in an office in Reykjavik, handling about $24 billion of claims by creditors as life in Iceland’s capital returns to normal.

Unlike other nations, including the U.S. and Ireland, which injected billions of dollars of capital into their financial institutions to keep them afloat, Iceland placed its biggest lenders in receivership. It chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion, 11 times gross domestic product.

Krona Devaluation

The crisis almost sank the country. The krona lost 58 percent of its value by the end of November 2008, inflation spiked to 19 percent in January 2009 and GDP contracted by 7 percent that year. Prime Minister Geir H. Haarde resigned after nationwide protests. With the economy projected to grow 3 percent this year, Iceland’s decision to let the banks fail is looking smart — and may prove to be a model for others.

“Iceland did the right thing by making sure its payment systems continued to function while creditors, not the taxpayers, shouldered the losses of banks,” says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. “Ireland’s done all the wrong things, on the other hand. That’s probably the worst model.”

Ireland guaranteed all the liabilities of its banks when they ran into trouble and has been injecting capital — 37 billion euros ($50 billion) so far — to prop them up. That brought the country to the brink of ruin, forcing it to accept a rescue package from the European Union in December.

New Banks

Ireland’s banks had more than 10 times the assets of Iceland’s lenders, making their collapse more dangerous for the European financial system. Ireland also couldn’t devalue its currency because it is part of the euro zone. Still, countries with larger banking systems can follow Iceland’s example, says Adriaan van der Knaap, a managing director at UBS AG.

“It wouldn’t upset the financial system,” says Van der Knaap, who has advised Iceland’s bank resolution committees. “Even Irish banks aren’t too big to fail.”

Under an emergency act of Iceland’s parliament on Oct. 6, 2008, the assets and liabilities of the three biggest banks — Kaupthing Bank hf, Landsbanki Islands hf and Glitnir — were divided based on whether they were originated at home or abroad. The act created three new banks that were given the deposits and loans made to Icelandic companies and consumers. Resolution committees were set up to manage and liquidate what the old banks were left with: the overseas borrowing and lending that fueled a sevenfold increase in assets from 2000 to 2008.

Saving the Future

Arni Pall Arnason, 44, Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future.

“If we’d guaranteed all the banks’ liabilities, we’d be in the same situation as Ireland,” says Arnason, whose Social Democratic Alliance was a junior coalition partner in the Haarde government.

By guaranteeing bank liabilities, Ireland faces a public debt burden as high as 12 times the country’s GDP. Iceland’s is about 85 percent.

“Our future isn’t as bleak because our public debt isn’t as high,” says Hoskuldur Olafsson, chief executive officer of Arion Banki hf, the new bank formed to take over Kaupthing’s domestic assets.

‘Disappeared Overnight’

Today, Iceland is recovering. The three new banks had combined profit of $309 million in the first nine months of 2010. GDP grew for the first time in two years in the third quarter, by 1.2 percent, inflation is down to 1.8 percent and the cost of insuring government debt has tumbled 80 percent. Stores in Reykjavik were filled with Christmas shoppers in early December, and bank branches were crowded with customers.

Half a mile from where Tomasson runs Glitnir’s resolution committee, the bank’s former headquarters glitters against Reykjavik’s dark winter skies. The building, one of the largest in Iceland, is lit in red neon with the logo of the company that emerged from its wreckage: Islandsbanki hf.

“We had built trust over 100 years, but it disappeared overnight,” says CEO Birna Einarsdottir, 49, who was executive vice president of commercial banking when Glitnir collapsed. Einarsdottir, who spent five years working for Edinburgh-based Royal Bank of Scotland Group Plc, says, “It will take more than two years to regain that trust.”

Banking Boom

Iceland’s banking boom began in 2001, after the U.S. Federal Reserve began cutting interest rates, pumping cheap money into the global economy. The next year, Iceland sold its majority stakes in Landsbanki and a predecessor of Kaupthing. The new owners, along with those of Glitnir, which was already in private hands, expanded lending at home and overseas.

Kaupthing’s income surged 100-fold from 2000 to 2006, reaching 100 billion kronur ($850 million). Banking’s share of national output almost doubled to 9 percent, while that of fishing, the traditional backbone of Iceland’s economy, halved to 4 percent. More homes were built from 2004 to 2008 than in the entire previous decade, fueled by a government decision in 2003 to lower down payments on mortgages to 10 percent from 30 percent. The 367 Range Rovers sold in Iceland in 2007 exceeded the number in Denmark and Sweden, which combined have almost 50 times Iceland’s population of 318,000.

Tchenguiz Loans

The banks were particularly aggressive in the U.K., where loans were made to developers of the NoHo Square complex in the Fitzrovia section of London and to All Saints, a retail chain. Many of the borrowers had insufficient or low-quality collateral, according to investigations launched by the Icelandic government since the crisis.

“Our banks found their own subprime borrowers,” says Magnus Arni Skulason, founder of Reykjavik Economics ehf, a financial consulting firm.

Loans were also made to companies in which bank executives and owners had stakes or which were controlled by their friends, according to dozens of lawsuits initiated by regulators and resolution committees. Kaupthing lent 1.5 trillion kronur to such related parties, often without collateral, Prime Minister Johanna Sigurdardottir said in 2009. In 2008, lending to U.K. entrepreneur Robert Tchenguiz, chairman of R20 Ltd., and related parties accounted for more than 25 percent of Kaupthing’s equity, according to a 2010 report by a parliament-appointed special investigative commission.

Tchenguiz, 50, Kaupthing’s biggest retail borrower, was also a board member in Exista hf, one of the bank’s owners. His spokesman said Tchenguiz wasn’t available to comment.

Red Flags

“It’s hard to see where the lines between bad decisions and violating the law were crossed,” says Gunnar Andersen, director general of Iceland’s Financial Supervisory Authority.

Andersen says that before his arrival in April 2009, the agency was understaffed and failed to see the red flags being raised as the banks grew through risky lending. So did auditors and credit-rating firms, he says. Moody’s Investors Service gave the Icelandic banks its fourth-highest rating of Aa3 in 2007, even though the central bank had long since lost its ability to be lender of last resort if those firms ran short of cash, Andersen says. Abbas Qasim, a spokesman for Moody’s in New York, declined to comment.

David Oddsson, who became chairman of the central bank in 2005 after a 14-year stint as prime minister, says he relayed his concerns about surging growth of the industry to government leaders.

‘Party Was On’

The three banks had become the largest companies in Iceland, creating thousands of well-paid positions and controlling the top trade associations, says Oddsson, who oversaw the privatization of Iceland’s state-owned lenders as prime minister. Their headquarters were the largest buildings in Reykjavik, dwarfing the parliament.

“Nobody wanted to listen when the party was on,” says Oddsson, 63, now editor of Morgunbladid, one of the largest dailies in the country, with a circulation of about 50,000.

It was Oddsson’s decision not to build up the central bank’s foreign currency reserves from 2005 to 2008 that made a bailout impossible.

“They were collecting debt in such a fast pace, it would be stupid for us to build a mountain they could lean on if they failed,” Oddsson says. “The creditors that were lending to the banks recklessly had to face the losses.”

After the three lenders were seized by regulators, the government negotiated with the creditors, almost all of them outside the country, including mutual funds and hedge funds in the U.S. and the U.K. and European banks and pension funds.

Glitnir Creditors

Kaupthing’s creditors agreed to take an 87 percent stake in Arion, and Glitnir’s creditors now own 95 percent of Islandsbanki. Glitnir’s biggest creditor as of June was Dublin- based Burlington Loan Management Ltd., followed by Royal Bank of Scotland and DekaBank Deutsche Girozentrale, the fund manager for Germany’s state-owned savings banks.

Glitnir’s 8,500 creditors and Kaupthing’s 28,000 expect to get about 30 cents on the dollar for their claims, based on secondary-market prices of the banks’ debt and asset valuations by the resolution committees. About half of Kaupthing’s creditors are German depositors who had Internet accounts, have gotten their principal back and are seeking interest payments.

Landsbanki’s creditors opted for a promissory note from successor NBI hf instead of a stake in the new bank. Landsbanki had collected about $5 billion of overseas deposits through branches in the U.K. and the Netherlands. Iceland didn’t guarantee those deposits at the time it seized the bank, as it did for domestic customers, leading to a dispute with the British and Dutch governments.

Icesave Depositors

In December, Iceland agreed to compensate the U.K. and the Netherlands in full for their payments to Icesave depositors, as the Landsbanki accounts were known. Payment, including interest of about 3 percent, will be made over 35 years.

The U.K. and Dutch governments are claiming priority over other creditors so they can recoup funds from Landsbanki to cover the payments, based on a hierarchy created by the 2008 emergency act. If they succeed, other creditors would get nothing from the sale of Landsbanki’s assets. The priority of depositors is being challenged by creditors in court.

“The German banks and pension funds that loaned to Landsbanki in the early 2000s argue that their investments were made well before the law was changed,” says Heidar Asberg Atlason, a partner at Logos Legal Services in Reykjavik, which represents about 100 creditors of the 3 lenders.

Suspended by Cables

Claims against the three banks add up to $107 billion, and it may take years to resolve them in court, even after the resolution committees finish their work.

At Kaupthing’s offices, housed on the seventh floor of a building with floor-to-ceiling windows overlooking the Atlantic Ocean, a half dozen asset managers huddle over computer monitors watching market prices for stocks and bonds the bank owns. They and their counterparts at Landsbanki and Glitnir are in no hurry to sell.

“Some things, like our subsidiary in Norway, we sold really fast because we had good offers,” says Tomasson, the Glitnir resolution committee chairman. “Others we resisted selling immediately because we wouldn’t get a good price. Creditors are telling us not to hurry, not to do fire sales.”

At Arion headquarters, visible from Kaupthing’s resolution office, CEO Olafsson sits in a meeting room that’s suspended by steel cables and surrounded by see-through glass floors, talking about the challenges facing the new bank. Those include restructuring thousands of consumer loans, mortgages and debts of small Icelandic companies.

‘Just Can’t Pay’

While the bank got the loans from Kaupthing at steep discounts — in some cases for nothing, if no recovery was expected — it has to work with borrowers to make sure they can pay back, Olafsson says.

“Asset values and income in Iceland have gone down a lot, so people just can’t pay,” he says.

Iceland’s government, now led by the Social Democratic Alliance, has pushed laws through parliament that would require the new banks to write off $1.4 billion in consumer debt.

“There have been lots of interventions, which creates uncertainty,” Islandsbanki’s Einarsdottir says. “But hopefully those are all behind us, and we can complete all the restructuring by the end of 2011.”

Creditors have an interest in seeing Einarsdottir and Olafsson succeed. They stand to recover more if the new banks can be sold for a good price to strategic investors or in a public offering. Glitnir aims to do so in three years; Kaupthing is shooting for five.

Rebuilding Confidence

While the shattered trust of the public may take years to rebuild, there aren’t any alternatives for Icelanders, who have kept their deposits at the new banks.

“I lost all the confidence in the banks, but where else can we go?” says Jon Birgir Valsson, a customer at an Islandsbanki branch in downtown Reykjavik who was paying some bills for the government agency that employs him. “Life continues. We need to bank, and these are the banks we have.”

Rebuilding the confidence of international investors may take longer. Iceland’s banks won’t be able to access international markets until political and financial uncertainties are removed, say creditors and their representatives, who asked not to be identified.

Those include the agreement reached with the U.K. and the Netherlands, which has to be approved by President Olafur R. Grimsson. The politically independent head of state has said he’ll decide by February whether to put the issue to a referendum again. Voters rejected a previous arrangement last year that forced a higher interest rate on Iceland.

‘Grow Cautiously’

Einarsdottir agrees that settlement of these issues and completion of debt restructuring is required before the government and the banks can access international capital markets again.

“In the beginning, banks and other financial institutions in Europe were telling us, ‘Never again will we lend to you,’” Einarsdottir says. “Then it was 10 years, then 5. Now they say they might soon be ready to lend again.”

This time her bank won’t use foreign funds to go on a lending binge, she says.

“We will only focus on areas where we can bring on the nation’s expertise, such as fishing and geothermal energy,” says Einarsdottir. “We will grow cautiously.”

Fishing, Banking

Economy Minister Arnason wants more for Iceland than fishing and geothermal energy. He acknowledges that the nation got into banking without the right infrastructure or the know- how to do it well. Still, he doesn’t think Icelanders have to go back to fishing now that they’ve proven themselves inept at finance.

His government needs to find work for the 2,000 highly educated finance-sector employees who lost their jobs, he says. Otherwise, they’ll migrate, and a shrinking population is the biggest scourge for this small, isolated island nation.

“The choice isn’t between fishing and banking,” Arnason says. “The choice is building a healthy, diversified economy.”

Arnason will have a better chance of keeping his countrymen home if Iceland can resume growth as predicted. It would also help prove his predecessors were right to let the country’s banks fail: Ireland, which rescued its financial institutions, is on the way to shrinking for a fourth consecutive year.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

The Sun Sets on the West

By Chris Mayer

What will the global economy look like in 2050?…and should we care about that now, forty years before the fact? Dr. Marc Faber, the 63- year-old Swiss editor of the well-regarded Gloom Boom & Doom Report, recently addressed both questions.

China ought to be the world’s largest economy by then, Faber predicts. The economies of the U.S. and India, should be neck and neck for the No. 2 spot – about 60% of the size of China’s. A distant fourth, at maybe a quarter of the size of the U.S. economy, will be Brazil, followed closely by Mexico, Russia, Indonesia and Japan.

That’s a very different world than the one we live in now, where the U.S. is No. 1 by a large margin and the European countries, such as Germany and the U.K., still figure prominently. What interests us most, though, is not so much the destination of 2050, but the path of growth to get there.

There are as many ways to show this growth trend as there are golf balls in the water at No. 15 at my local golf course. But Faber cites the trend in motor vehicle sales to illustrate the trend.

You can see that the “emerging 16? – the largest of the emerging markets, which includes China and India – caught up and passed the U.S., the European Union and Japan in 2008 as the world’s largest auto markets. What’s interesting here is that even in this recession that gap has widened.

There are all kinds of ideas that spin out of just that one observation. Cars don’t operate in a vacuum. They require an entire operating system to run, as software does. You need roads, for instance, and you need gasoline stations and gasoline. You need a lot of oil.

Just think about oil for a minute. The U.S. eats up about 25 barrels of oil per capita per year. Even countries such as South Korea and Japan consume around 15-20 barrels of oil per capita per year. China and India are tiny compared with that. China is at 1.5 barrels of oil per capita annually. And India barely registers.

So one can only imagine that as these economies grow and take up more of a share of the global economy, their oil consumption will rise exponentially. As far as investing goes, it boils down to investing in what these economies need, but don’t have.

In other words, we ought to ask the question, “For which commodities will demand not collapse?” Faber presents a chart that provides a partial answer. The chart presents China’s proven reserves of each commodity as a percentage of the world’s total reserves.

 

This chart does not include the agricultural commodities like soybeans and potash that China has in very short supply, but the chart does include many other important (and investible) commodities like copper, natural gas, uranium, bauxite (important in making aluminum), chromium (a steel additive) and manganese (important for making stainless steels). As investors, the left-hand side of the vertical line on the chart is where you want to be.

The commodities bull market, Faber ventured, is still on, though he cautioned that the road will be bumpy.

Even in commodity bull markets, 50% corrections are common.

“Hard asset booms are fueled as much by pessimism about economic prospects as by optimism about a continuously high appreciation of the commodity in question,” Faber explains. “In this sense, commodity booms are characterized by greed based on fear.”

On the question of the dollar, Faber was emphatic that we would see it lose value against the real world of things. Faber predicted that sooner or later we would have major inflation thanks to government stimulus and money printing. Therefore, Faber is long gold and silver.

He also thinks Japanese equities are depressed and points out that many Asian equities are near 20-year lows, except China’s. He also likes financial services in emerging economies and infrastructure stocks. On this latter idea, Faber said, “There are bottlenecks everywhere,” and noted a potential problem of delays or cancellations. He likes farmland, too.

As for what to avoid, Faber says turn your nose up at real estate and government bonds. There are also potential oversupply problems in tourism, with too many hotels, resorts and the like. Faber cautioned against these industries…and there are certainly too many government bonds as well.

We’ll see how it plays out, but I’m with Faber. The world is changing dramatically. And it’s the emerging markets that will provide the light at the end of the tunnel.

How the Irish Can Save Civilization (Again)

In three weeks’ time, Ireland will, for a moment, hold the fate of Europe in its hands. Through a quirk of Irish constitutional procedure, on Oct. 2 the Republic of Ireland will be the only European Union nation to hold a referendum on a treaty to revamp how the EU, home to half a billion people, does business. The Lisbon Treaty, therefore, will stand or fall on the votes of perhaps one and a half million Irishmen and women.

From the perspective of Brussels, this is grossly unfair—a miscarriage of democracy masquerading as democracy. The Irish have stymied the denizens of Brussels’ European Quarter before, most recently the first time they voted against the Lisbon Treaty last year.

Back then, the establishment in Brussels blamed one man above all for the defeat. His name is Declan Ganley. He was one of the driving forces behind the No campaign the last time around, and he’s back to do it again. Your correspondent recently sat down with him to find out what he’s fighting for in trying to see to it that Ireland once again votes No to Lisbon—and in the process, he hopes, forces the EU to choose a different path.

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Ismael Roldan

I put it to Mr. Ganley, an impeccably dressed, balding Irishman of 42, that from Brussels, this whole referendum looks profoundly unjust. Why should 1.5 million Irish voters get the opportunity to hold back the progress of 500 million citizens of Europe?

“I would look at it a very different way,” he shoots back. “It’s profoundly undemocratic to walk all over democracy. . . The Irish people had a vote on the Lisbon Treaty. They voted no. A higher percentage of the electorate voted no than voted for Barack Obama in the United States of America. No one’s suggesting he should run for re-election next month. But—hey, presto!—15 months later we’re being told to vote again on exactly the same treaty.” He taps the table for emphasis: “Not one comma has changed in the document.”

But the insult to democracy is more egregious, in his view, than simply asking the Irish to vote twice—that was already done to Ireland with the Nice Treaty in 2002. In this case, it is not just the Irish whose democratic prerogatives are being trampled, but the French and the Dutch, among others, as well.

In 2005, France and the Netherlands each rejected the proposed EU Constitution in referendums. Lisbon, Mr. Ganley contends, “is the same treaty.” What is the evidence for that? “Well, first of all, the people who drafted the European Constitution say it is. Like [former French President Valéry] Giscard d’Estaing. He called it the same document in a different envelope. And having chaired the presidium that drafted the Constitution, he would know.” There’s more. “He also said in respect of the Lisbon Treaty that public opinion would be led to adopt, without knowing it, policies that we would never dare to present to them directly. All of the earlier proposals for the new Constitution will be in the new text, the Lisbon Treaty, but will be hidden or disguised in some way. That’s what he said. And he’s absolutely right. There is no law that could be made under the European Constitution that cannot be made under the Lisbon Treaty. None.”

So in trying to ram the Lisbon Treaty through, the EU is also undoing the democratic choice of the French and Dutch electorates. “Millions of people in France, a majority, voted No to this European Constitution. In the Netherlands, millions of people did exactly the same thing. When the Irish were asked the same question, they voted no also. Those three times that it was presented to an electorate, the people voted no.” Far from thwarting the will of those hundreds of millions of fellow Europeans, then, the way Mr. Ganley sees it, Ireland has a duty to them to uphold the results of those earlier votes. Approving the treaty would be a betrayal of those in France and the Netherlands—not to mention the millions of others who were never offered a vote on the Constitution or Lisbon.

Mr. Ganley speaks in a low, measured tone, even when, as he occasionally does, he slips into rhetorical bomb-throwing mode. “Why,” he asks, “when the French voted no, the Dutch voted no and the Irish voted no, are we still being force-fed the same formula? You don’t have to scratch your head and wonder about democracy in some intellectualized, distant way and wonder, is there some obscure threat to it.” He adds, without raising his voice, “This is manifest contempt for democracy. It is a democracy-hating act. . . . This is so bold a power grab as to be almost literally unbelievable.”

The nature of the power grab that Mr. Ganley refers to deserves some elaboration. What, exactly, is wrong with the Lisbon Treaty itself? “The treaty is a product and indeed enshrines a set of principles and a way of governing the European Union that clearly shows no will or intent for democracy,” Mr. Ganley says. “You will hear it discussed quietly across the dinner tables in certain sections of Brussels and elsewhere that we’re entering into this post-democratic era, that democracy is not the perfect mechanism or tool with which to deal with the challenges of global this-that-or-the-other. This idea of entering into some form of post-democracy is dangerous. It’s ill-advised. It’s naïve.”

The Lisbon Treaty, like the EU Constitution would have, puts this idea of post-democracy into practice in a number of concrete ways. The most striking is Article 48, universally known by its French nickname, the passerelle clause. It says that “with just intergovernmental agreement, with no need of going back to the citizens anywhere, they can make any change to this constitutional document, adding any new powers, without having to revisit an electorate anywhere,” Mr. Ganley explains. “Do you think they want to revisit an electorate anywhere? Of course they don’t.” If the Irish vote yes, in other words, Oct. 2 would mark the last time that Brussels would ever have to bother giving voters a say on what the EU does and how it does it. Ireland would have, in effect, voted away the last vestige of European direct democracy not just for itself, but for the entire continent.

The passerelle clause is not the only evidence in the treaty of a post-democratic mindset. “The other thing it does,” Mr. Ganley says, “is it creates its own president—the president of the European Council, commonly referred to as the president of the European Union.” This EU president, Mr. Ganley notes, “will represent the European Union on the global stage. This will be one of the two people that Henry Kissiner would call, in answer to his famous question, when I want to speak to Europe, who do I call? He’s now going to have a telephone number, a voice that speaks for Europe, because that voice will have half a billion citizens, legally.”

The other person who would speak for Europe is the “grandly named” High Representative for Foreign and Security Affairs, the EU’s foreign minister, in effect. Mr. Ganley is, as he puts it, “cool with that.” But there is this: “Presumably they’re going to be speaking for me, right, because I’m a citizen,” he says. “But I don’t get to vote for or against these people. So, who mandates them, if not me, as a citizen, or you? Oh, so somebody who is how many places removed from me selects from within one of their own. They never have to debate with a competitor. I’m never given a choice of, do you want Tom, Joe or Anne. I’m presented with my president. Do I walk backward out of the room now?” Just as a yes vote in Ireland would mean that future expansions of the powers of the EU would never have to be put to a popular vote, it would also mean that Europeans would never get the opportunity to elect its highest officials.

It’s easy to see why Mr. Ganley has made himself unpopular in Brussels. And yet, he avows, “I am a committed European. I am not a euroskeptic, not in any way, shape or form. I believe that Europe’s future as united is the only sensible way forward.” It’s just that he fears that Europe, as it is presently constituted, is setting itself up for a fall. “I’m very sure about one thing,” he says. “Which is, if it is not built on a solid foundation of democracy and accountability and transparency in governance, then it will fail. And it’s too valuable a project, and it has cost too much in terms of blood and treasure, to create an environment where this could happen.”

The whole political dynamic in the European Union, he argues, is outmoded. To talk of only euroskeptics and europhiles actually serves the interests of the mandarins in Brussels because it doesn’t allow for the existence of a loyal opposition or constructive dissent. But a loyal opposition is precisely what Mr. Ganley hopes to create. “What I’ve been saying since the beginning of the last Lisbon campaign, it blows fuses in Brussels,” he says. “They just can’t process it. The system crashes. They have to reboot every time because I don’t fit into the euroskeptic box.” Their mentality, he says, is “friend-enemy. Uh, no.” And he points to himself: “Friend—a real friend, because I’m telling you the truth. I’m telling you, you’ve got a problem and we’ve got to fix it.”

He adds, referring to the European establishment in Brussels: “I’ve got news for them. This little European citizen, along with millions of others in France, the Netherlands and Ireland, have now said something to them. And they can either carry on the way that they’re going, and fail, or they can listen to the people, engage them, and bring them along with them.”

Instead of a dense, almost unreadable treaty that shuffles the deck chairs of the Berlaymont building in Brussels, the Commission’s headquarters, Mr. Ganley would like to see a readable, 25-page document that provides for the direct election of an EU president, greater transparency in decision-making and a bigger voice for the people of Europe. “We have to ask more of people,” he says. But equally, “we have to trust people. They talk about the democratic deficit. The deficit of trust is a yawning gap right now in Europe. And the biggest loss of trust has been between those that govern and the people, not the other way around. What was it Bertolt Brecht said? ‘That the people have lost the confidence of their government?’ This is the identical mentality.”

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Still, for all this talk about democracy and higher principles, the people of Ireland have their own parochial concerns to consider as well. There’s been a lot of talk about how a No vote could hurt the Irish economy in some way. And a number of big multinationals in Ireland have called on the Irish to ratify the treaty and let it go forward. Is Mr. Ganley putting his country at risk by calling for a No vote?

He emphatically denies it. “The only people at risk in the Lisbon Treaty are these elites in Brussels,” he scoffs. “Somebody said last time that Ireland would be the laughing stock of Europe if we voted no. Well, we voted no, and actually these elites in Brussels became the laughing stock of the people of Europe. That’s what I saw in the weeks that came afterwards.” He goes on: “The only people we risk annoying are a bunch of unelected bureaucrats and what I call this tyranny of mediocrity that we have across Europe.” What’s more, he says, “the Irish have never been afraid throughout history of asking the tough questions and standing up for freedom and what was right against much, much bigger opponents. In fact, we seem to revel in it.”

It was easier to revel, however, when Ireland was still enjoying a boom of historic proportions. Will the Irish decide, this time around, that it is safer to keep their heads down, and go along with the program? In Mr. Ganley’s view, this would be totally self-defeating. If Ireland votes Yes, he says, “We’re getting nothing in return except to be patted on the head by some mandarins and told we’re good Europeans. Would we be acting as good Europeans if we said yes to this?” He thinks not. “If this question was asked of the people of Europe, whether they wanted this constitution, we know almost for sure that en masse they would vote no.” And yet, “We’re almost literally being held hostage, with a gun pointed to our head, and being told, if you don’t sign this thing, unspecified bad things will happen. But what they’re asking us to do is to sell out the rest of the people of Europe.”

And the whole European project—which he supports—”has to be about ‘We, the people,’” Mr. Ganley says. “It’s not top-down, it’s got to be bottom-up. And the European Union right now is top-down. It does not have the support of the mass of its people. It does not have their engagement. They don’t even know what’s going on. And it literally conducts its business behind closed doors, and that has to stop and it has to stop now.” If Mr. Ganley has anything to say about it, it will stop in three weeks, in a little country called Ireland on the Atlantic periphery of Europe.

Mr. Carney, the editorial page editor of The Wall Street Journal Europe, is the co-author of “Freedom, Inc.,” due out in October.

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European Union, Euro, Dollar, Labor Reporting Nonsense, and More

Chuck Butler’s thoughts for the day…

This morning, the euro got a boost when, in a draft statement from  European Union leaders, it was reported that they believe they are seeing the first signs of a “sustainable economic recovery”, and that there will be little to no need for further stimulus of the economy… Now… Normally this would have sent the euro on a trip to the moon, soaring ever higher… But, these days, everyone has to take a statement like that, and temper it a bit with a dose of reality… These guys don’t really know if the economy is going to have a “sustainable economic recovery”… Every country is in uncharted waters with their economy right now, and it remains a possibility that the economy could rebound a bit, and then take a double dip…

That’s what I see happening in the U.S. later this year… Double dipping, which is taboo when dipping chips into salsa or the myriad of different dips… But is a possibility with an economy so deep in a recession / depression, that with all the stimulus, it does show signs of recovery, only to fall back… Because, it was never on terra firma…

Speaking of the economy here in the U.S… Yesterday, we saw the Weekly Initial Jobless Claims remain above 600K for the week, but… The Continuing Claims dropped drastically… And this is where I draw the line between make believe and reality… First of all, no one in the media had covered the Continuing Claims data while it was going up, up and away in its beautiful balloon… But, show a drop, and these knuckleheads were all over it like a cheap suit! OK… So the number dropped… Well… I don’t see that as a “sign that the job meltdown is over”, like many in the media said… When Chris Gaffney told me that the number had dropped, I told him…

That means one of two things… 1. That people are going back to work… Or 2. that unemployed people saw their unemployment benefits expire, which means, and I’ve explained this many times before, so it shouldn’t be a surprise, but it means that they are DROPPED from the list of unemployed! Now… What mental genius came up with that one? Any way… I would put my money on what’s behind door number 2! Wouldn’t you at this point?

When the Bureau of Labor Statistics (BLS) can report a strong jobs number without all the adjustments, then I’ll jump on the job creation bandwagon…

OK… It looks as though the story I told you about the other day, as a potential hoax, but wondered why the media wasn’t covering it, regarding the $130 Billion in bearer bonds confiscated from two Japanese men at the Swiss, Italian border, turns out to be a non-event after all… The bonds, which at first were reported to be “real”, are now being called fakes / counterfeit… So… So much for the secret war financing under the cover a dark knight stuff, eh?

OK… Enough of that… Let’s see what the Fed has up its sleeve these days… The Fed is looking for ways to communicate to the markets that they will NOT be raising interest rates until, at the earliest, 2nd half 2010! Now… They also want everyone to know that they will be quick to remove the stimulus from the markets… One, doesn’t add up to the other one here, folks… And just as the Fed has always been… Cagey… They’re just not being truthful to us…

You see, they don’t want the markets jumping ahead, and moving yields higher on bonds, which would basically shut down the nascent mortgage business recovery… But, they are very quick to say that they will remove the stimulus… I wonder how many people out there really, truly, in their heart of hearts, believe the Fed will 1. know how to remove their stimulus without damaging the economy, and 2. will do it at the right time?

You won’t see me signing up on the roster of those that believe in those two things! Just look at their track record! If you want some insight to the bumbling, tumbling, fumbling that has gone on at the Fed over the years, you should check out a book by William Fleckenstein, “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve… You can get it on Amazon… It will open your eyes wide open to all the things I talk about regarding Big Al’s incompetence and the Fed’s bungling…

EU Execs – The European Commission is After Your Compensation

Link to article:  http://www.cfo.com/article.cfm/13735719

Investment Suggestion – Agriculture

The Best Investment Opportunity of 2009
By Chris Mayer, editor of Mayer’s Special Situations

“Investing in agriculture today will be like investing in the oil sector in 2001-2002,” writes Mark McLornan in the May issue of Marc Faber’s Gloom Boom & Doom Report. McLornan runs a fund that invests in farmland. Some of his on-the-ground observations confirm many of the things I’ve been telling my readers for the past several years.

As for likening agriculture today to oil in 2001-2002, an investor’s pulse quickens. We all know the great run oil stocks had as the price of oil sprinted from under $30 to a peak of $143 per barrel. Investors made hundreds-of-percent gains – even thousands-of-percent gains. What most investors forget is that oil prices halved from 2000 to the bottom in 2001, just before the great run-up. The same sort of setup seems to be happening today in the agriculture sector. Most ag commodities fell more than 50% after hitting their June 2008 highs.

This is the pause that refreshes.

The biggest reason to get excited about agriculture is the fact that supplies are at multi-decade lows. In fact, as McLornan points out, “agriculture is one of the very few sectors globally that currently face supply shortages.”

The “stocks-to-use ratio” provides a helpful context. This ratio measures how much supply is on hand versus how much we use. High ratios imply a fully supplied market. Low ratios hint at possible shortages. You have to go back to the 1970s to find ratios in wheat and corn as low as they are today.

The kicker to all this is that last year, the world’s farmers produced a record wheat crop and the stocks-to-use ratio barely budged. There is no way we are going to top that harvest this year with all the drought hitting different parts of the world.

The International Grains Council (IGC) predicts a fall in total wheat output in 2009-10. The IGC predicts global wheat output of 650 million tons, down by 5% from the previous year. The largest declines are seen in the European Union, the U.S., China, Russia, and Ukraine. “Although conditions in the Northern Hemisphere are generally favorable,” the IGC says, “production is likely to fall sharply.”

McLornan says that global yields for wheat hit a plateau in the 1980s and “gene modification technology has been unable to improve what natural selection has achieved over the past centuries.” So we already have tight supplies. And they look to get tighter.

The financial crisis also threatens to reduce supplies. Farmers who cannot gain access to credit cannot put seeds in the ground. Thus, the twin forces of drought and financial crisis seem likely to exert a growing influence over the grain markets – depressing supplies and therefore, boosting prices.

We’ve seen this movie before…

In 1933, in the pit of the Great Depression, writer Sherwood Anderson took to America’s back roads to see how the country was making out. He wandered into coal towns and mill towns, farms and factories.

His account, published in 1935 as Puzzled America, gives us a peek at Depression-era days. As the title lets on, most Americans seemed not to know quite what to make of the Great Depression. “Puzzled” seems just the right word.

It was puzzling because a man was prosperous and then suddenly was not any longer. A common story in farm country during the Great Depression began something like this: There was a prosperous farmer with lots of land who grew wheat. He then went into debt to buy more land and plant more wheat. The price of wheat suddenly fell like a shot quail. And the farm went under. Just like that, our man was broke.

If the financial crisis didn’t take the farm, Mother Nature did. “It was a farm until he plowed it,” Anderson quotes one man as saying of his uncle’s place. Then the drought came. The dry soil swirled around like snow in a blizzard. The farm simply “blew away.”

The hot winds tore the bark right off the trees and burned crops to ash. Fences lay buried under dust drifts. Dust storms blackened the sky. Topsoil of thousands of acres blew away. Anderson describes a little church in North Dakota:

The boards of the church cracking and curling under the dry heat, the paint on the boards frying in the hot winds… and the dust of the fields sifting in through the cracks. Dust in the mouths of the people as they prayed for rain.

Commodity prices took a big tumble after the crash of 1929. That’s what bankrupted the once-prosperous farmers. Then you had fewer farmers farming. Then you also had drought. Supply fell and prices soon rallied hard off their bottoms. By 1937, most food commodities – corn, wheat, sugar – were as high, or higher, than their ’29 highs.

Today, we also have the dual threat of drought and financial crisis. Farmers across the southern plains report poor crop conditions, thanks to dry weather. We also have drought in many places in the world that usually grow a lot of food.

One example: China’s Ministry of Agriculture said that a third of its crop faces drought issues. The country’s stocks-to-use ratio will fall below 30% for the first time since 1971. As AgCapita, an investment fund specializing in farmland, notes in a recent letter, China will be a net importer of 12 million metric tons of wheat. By way of comparison, Canada’s entire annual wheat exports average around 15 million metric tons.

We also have cutbacks in supply, as farmers have a harder time getting financing to buy seed, fertilizer and machinery. As The Wall Street Journal reported recently:

Across the nation, farmers are making plans to cut their production of corn, wheat, rice, peanuts, beef, pork, poultry and milk… Also, some farmers plan to grow just one crop on land that normally produces two each year, and to let some land lie fallow throughout the year.

Production of meat in every category will fall for the first time since 1973. Meanwhile, consumption of grains keeps rising. Globally, wheat demand should rise 6% this year. No surprise that retail food prices rose nearly 6% last year. I think they could rise as much this year.

Ultimately, we’ll have to grow more food…somehow. So a forward- looking investor will want to invest in the ideas that help that process along. Fertilizers are one such idea. Like a prizefighter with a tough chin, fertilizer demand doesn’t stay down for long. The reasons are simple. Lower fertilizer use means lower crop yields. Lower crop yields tend to raise prices for food. These higher prices then provide an incentive to plant more, so fertilizer demand comes back.

I’m a fan of PotashCorp (POT:nyse), which benefits from these trends. It also owns more potash, a key fertilizer, than anybody else. As Barron’s recently noted: “Longer-term investors can take comfort in the knowledge that many crop-planting, potash-guzzling countries – like China, India, Brazil – all have growing economies.” And they have growing populations as well.

There are other ways to invest too. You can buy other ag-related businesses. You can also invest in the actual food commodities. I expect good moves on this stuff in the back half of the year after the fall harvest disappoints.

What about demand?

I think we’re getting close to the moment when the world’s meager supplies of grains become front-page news. We have another few months before the reality of a lousy fall harvest sets in. Agriculture investments should do very well from that point – for everything from fertilizer stocks to agricultural equipment makers to the grains themselves.

As always, I recommend buying assets like these before the crowd sees it on the 6:00 news.