I was walking through the Traboules, hidden passageways in the old quarter of Lyon, France, some of them dating back to the 4thcentury. The word “traboules” is a corruption of the Latin “trans-ambulare” (to pass through) allowing the inhabitants more direct access to the fresh water from the river Soane.
That evening the great city was under an intense heat wave and, as I was finding my way through buildings, courtyards and up and down staircases, the air just stood still but the cool, massive ancient walls provided some relief. Every traboule is different – each has a unique pastel color, a particular curve or spiral staircase, vaulted ceilings or Renaissance arches.
Lyon is an amazing town and it has changed a lot over the years.
“When I came here long time ago,” said the Dutch guide lady, “the city was grey and dirty. It is beautiful and green now.”
Lyon area, like most of the French metropolitan territories is rich. Phenomenally productive farmland, very inhabitable climate zone. Great rivers for industry and internal transport and a population far younger and aging more slowly than the European norm.
Remarkably, the French economy has always been held mostly in house, in stark contrast to Germany. The French know full well that should the Americans walk away from the Bretton Woods agreement, the global security that enables the European Union – which is at heart a union of exporters dependent upon global access – life will change. That obviously upsets president Macron, but it doesn’t overly hurt France.
And the Americans are walking away from providing global security. Consider this tweet by president Trump of June 24th:
“China gets 91% of its oil from the Straight, Japan 62%. So why are we protecting the shipping lines for another countries (many years) for zero compensation. All of these countries should be protecting their own ships...”
This new approach will dramatically re-shape the economies and political systems of global exporters, and what does the US need to do to trigger it? Not a damn thing.
But France is different - in a world without the Americans running things, it is by far in the best position to chart an independent course in the new order that is coming. It has easy access to the North Sea, Atlantic Ocean and Mediterranean Sea, giving France – and France alone – fingers in every pot that matters to Europe.
The French designed the EU for strategic reasons and so never lashed their economy to Europe. They also have the longest and most active history of engaging in military interventions. French forces are capable, experienced, professional, never rusting on the shelves. One of the great things about having a strong national system with no international dependencies or exposures is that you can choose your battles rather than having them chosen for you.
Strong as the French cities are, Paris is stronger than all of them combined, giving the country centralization and unity. Again, in a stark contrast to Germany.
France is a country to watch, for all the good reasons.
The next day I was riding my motorcycle back from Lyon to Geneva through the Massif Central. The views were great, the heat brutal but I didn’t feel it as I was moving high speed.
It occurred to me as I was leaning down in curves, that it is the creative part of my life that I enjoy the most – the book and the essays, of which there are a lot here, something like seventy. The chance of a major break through is unknown, but I take the risk.
I was always a risk taker; it is impossible to change it now. And I don’t even want to.
The great actor Gary Cooper has this inscription on his gravestone: “he was lucky and he knew it.”
Voyons ce qui se passé. We’ll see what’s next.
I was riding north on the A5 towards Heidelberg, pushing it hard on the (mostly) no speed limit German highway. My only concern was that my luggage for the weekend would come loose and fly off as I was approaching speeds illegal anywhere else in the world and the wind force was brutal. Eventually I hit the speed limiter and had to slow down. No, not in the bike, but I lifted my head from behind the little screen and was not able to put it back down.
I live for the rush, adapting to the unknown.
Later, it started raining, so I stopped under an overpass to put my rain gear on.
I could get the sniff from the fields on both sides of the highway.
As I was waiting for the rain to let up I was thinking how Europe is a special please peopled with cultures as different as night and day. And there are no secrets in Europe, everyone’s noses are perennially in everyone else’s business.
Germany cannot hide how good they are, and that makes them a target. Its mere existence is interpreted by everyone as an existential threat.
The solution? Attack first, and they did it twice in the last century.
It needs to be understood that the European Union is able to exist because the United States keeps the European countries safe from both outside powers and one another. With Germany in the same currency zone as moribund economies, the price of the Euro is weaker than a purely German currency would have been. The exports exploded.
The problem with EU is that you have a single currency, but you don’t have a single economy.
Germany, for one, has this mercantilist view of the world that dates back to the eighteenth century. Lets make stuff, sell it to the rest of the world and bring the money back home. Germany never focused on developing the domestic market. The result is that even the EU statistics show the per capita worth of an Italian household on a net basis is higher than a German. The Germans are focused on international trade, which is nonsense, because it’s the domestic consumption that makes all the difference.
What’s more, remove the American security overwatch and the whole European thing comes crashing down. Then the Germans either need to massively deindustrialize so that their economy matches their current military power, or they need to massively re-arm so that their military can sustain their current economic power. Take a guess which way they will go.
And inaction is not an option, and the reason for it is the fact that as big as Germany is, the Germans will never enjoy a quantitative advantage over their collective competitors. They are located in the middle of North European Plane, with no mountains in the east and the west to provide natural protection.
Germany is a quirky place and I actually like it. 60% of their firms are not listed and kept private, which means that they can’t raise money in the stock market to operate - they need to go to a bank for a loan. Subsequently any swings in business environment have a magnified effect on their banking system. Now, you have a bank with the country’s name in it (Deutsche) on life support for the longest time and its stock price is in single digits. It sells at about 6 Euro a share as I write it, used to be about 120 just ten years ago. Sad story, this.
Going back to my weekend trip, the WIFI was working only in the reception area (in a four-star place) and they displayed a sign that telefax services are available around the clock. I was making my way to dinner when I saw it and I thought – did they just defrost you?
In 1997 two distinguished scholars, Myron Scholes and Robert Merton, shared the Nobel Prize in Economics for their work on methods to valuate financial instruments called derivatives. Subsequently they teamed up with a veteran Wall Street banker named John Meriwetherin a company called Long Term Capital Management.
The fund blew up spectacularly in 1998 almost taking the Western financial system down with it. Which is hilarious, or it would be if not for all the money lost and damage to the economy. It took a consortium of 14 major banks led under the gun by Federal Reserve to restore liquidity in the markets.
Perhaps the problem with university professors is that they live in their heads, with little interest and understanding how the life works in the trenches.
If they did, they would realize that common sense is the most misleading tool one can use to forecast events.
I wouldn’t call it hubris, just a disconnect from reality.
What is hubris, however, is the practice of governments to manipulate interest rates (price of money in time) in an attempt to combat the old and true business cycle by making funding artificially cheap. I’ll be kind and say that the results are mixed.
And the counter argument to this logic is really simple:
Low interest rates force people to savemore, not spendmore. If the rate of return is low, one needs to save more for retirement, for the house, for children’s education. This fact flies in the face of European Central Bank’s QE policy.
Obviously they have a different goal in mind – keep the debt of member states artificially cheap, so they don’t blow up like the LTCM.
The Greek 10 year bond now pays 2.7% a year. How disconnected from reality is that? Add a zero to that number for a sanity check. Greece is not even a real country – it was always a proxy for somebody else.
So, for this sweet arrangement to work somebody has to suffer because the economy is zero sum game, so here it is.
The pension funds need 7 – 8% return to meet their obligations. Where are the investment grade instruments that pay that? Out of necessity they’re chasing risky debt (like Turkish bonds, which add currency risk as their lira is in a free fall).
Note that in a global economy every investment needs to filtered through currency risk.
I am of the opinion that the system will reset itself at some point, it could be in a few months or in a few years, but it will, and it could be the biggest trade of our lives.
Take the United States, the strongest economy in the world. They’re claiming almost full employment and at the same time forecasting trillion dollars budget deficits as far as the eye can see. This doesn’t make any sense any way you look at it.
So how can the reset look like? There are a few elements that are clear already.
First, the value of all sovereign debt out there and the value of all currencies is purely based on people’s confidence in governments. There is nothing else backing it up since Nixon took the dollar off the gold standard in 1971.
This confidence is still running pretty high, as indicated by the price of gold, which is trading sideways for the last few years. Gold is not a hedge against inflation, is a hedge against governments loosing control over their economies.
When the stats go up, watch down below.
Granted, gold is not what it used to be – with all these metal detectors at the airports and elsewhere it is hard to move, almost like a real estate. Which may explain the ultra high prices paid for paintings – it’s way easier to cut them out from the frame, roll them up and move to wherever you want to be next.
That’s playing it safe, not being confident about knowing how things will work out.
Second thing is, the bondholders will eventually take a haircut. Notice that in a liquidation mode, any listed firm has tangible assets that will give some money back. Government bonds are backed by nothing.
It looks to me that the big money is getting ready for something. Don’t underestimate them.
I was riding from the village of Barcaggio on the northern cap of Corsica through the high mountains to Calvi, a city on the west coast of the island.
The narrow and winding road wasn’t like anything I experienced before, great views and all that, but steep and difficult. I passed the sign “Calvi 70 km” when the brakes on my BMW started to give a squeaking sound and I realized that they were overheating, as I had the bike fully serviced before the trip.
Still, I was pushing it, adrenaline pumping through my veins to the point I misjudged a turn and a white RV appeared right in front of me and I had two choices: hit it or drop the bike. I did the latter and as I was lying on the road with my right leg stuck under the motorcycle I was wondering if someone will hit me from behind.
The late Sergio Marchionne once said: “in life, if you push hard, you crash sometimes.” Guess that day it was my turn.
A group of Italian riders stopped behind me and one of them helped me to get the bike off the ground. It was scratched, but still good to ride.
“You okay?” he looked at me from behind the sunglasses.
“Yeah, just need a minute.”
He gave me a thumb up, climbed on his Multistrada and roared away.
And that left me wonder of what had just happened. My mountain riding skills are likely subpar – I am a cruiser guy, but the situation got me thinking about the perception abilities of my brain. In a fast paced settings one thing to understand is that when your eyes move, you’re blind for a split second, you brain fills up the void a little later. You can’t see your eyes move in the mirror, can you? The brain instead takes what it knows from before and after and stiches it together.
In tennis, with a really fast serve, the brain comprehends the location of the ball about 7m behind from where it already is. Of course you more or less know where it’s going to be, the brain makes predictions knowing its limitations. That is how tennis works and that’s why you can’t catch a fly in mid air (which moves about eight times slower than the tennis ball) because the linear predictions aren’t working. The fly moves randomly.
What’s more, when you see a scene you see everything together – the color the motion and the shape. But in the brain all these features are pulled apart and processed in different areas. They’re also processed at different speeds – color is processed more quickly than motion, which is processed more quickly than form.
When you open your eyes and look to the world there is one thing that you’re not seeing – and that is what’s happening now.
I kept going to Calvi, marveling the village signs shot up with high caliber weapons and French names painted over in back leaving just the Corsican dialect below.
It’s a special place – rough, beautiful and pristine.
On the Friday evening in Ajaccio after I checked in the hotel and parked my motorcycle, I went to the port for a dinner. It was a Fisherman Night, all seafood, all the time plus a good band playing on the stage. I was enjoying the local wine until my guarding angel told me its time to go. She saved me the day before, so I listened.