League of Nations Mark 2.0

The League of Nations is very well when the sparrows shout, but no good at all when eagles fall out. – Benito Mussolini, Italian Dictator

The first League of Nations was set up after the First World War with the aim of ensuring world peace through collective security and the settling of international disputes through negotiation and arbitration. At its peak it had 58 members but it utterly failed in its task, was unable to do more than hold conferences and refused to impose sanctions which didn’t suit its senior member states. Ultimately it was unable to prevent the Second World War.

The European Union is still growing in size, but is also incapable of take any binding decisions. The needs and interests of its member states are too diverse; what suits Germany and its beliefs, whether economic, financial or diplomatic, all too often does not suit members of the southern bloc. No decisions are taken, no economic growth can occur, no direction can be decided upon or followed.
Europe, when judged by Europe-wide economic and social statistics, shows a poor picture. In fact the northern bloc is not doing badly, for that the southern bloc is doing far worse than even the most pessimistic reports suggest. Unemployment in Spain and Greece is catastrophic and getting worse, the Italian economy is a mess.

What does all this prove?

Probably nothing. But there is a long held habit of becoming infatuated with short term data and over-reacting to it as if it were marking the onset of the next phase in a double, triple, or quadruple dip. If any panic measures are ever decided upon, they are generally meaningless.
European governments, now infamous for their absolute inability to take any decisions worth talking about, are calling for greater regulation of the capital markets, forgetting all the while that these markets are already highly regulated. The politicians, mainly so that they can play to their own galleries, are demanding that banks and financial institutions should be even more regulated than they are now.

The reality is that the shadow financial sector is almost completely unregulated. To be clear, this sector includes investment banks, hedge funds, money market funds and Structured Investment Vehicles, which borrow money in large size from the international money markets in order to invest it in longer term securities which may suddenly become anything other than secure. It was the problems these vehicles faced in 2008 and the losses the banking sector faced from their loans to them that largely caused the economic disaster of 2008.
In Europe, we do not need Special Investment Vehicles to cause us nightmares; these come all by themselves through political lethargy, inaction and incompetence.

Dr. John Hulsman, a former CIA adviser, suggests there are four factors which are leading to what he calls a ‘terminal decline’ in European fortunes.

1. Donor fatigue on the part of the German public. The German Chancellor Angela Merkel, with an eye firmly on the general election in September is not being open regarding the choices facing the country. Either Germany, which already owns a huge proportion of debt issued by the poorer countries, continues to pay for the deficits of other countries without limit and accept a higher level of inflation or it should end the European project.
2. Italian political fatigue. The present coalition government of left and right is facing ever declining national economic strength. It reflects the belief on the part of the Italian public that all established politicians are part of the same self-serving elite and yet rule by grey technocrats who have little personality has little or no public support.
3. The United Kingdom has European Union fatigue. David Cameron the prime minister has little support from his own party when it comes to Europe and equally little support in Europe when it comes to renegotiating Britain’s place in the EU. The British public has lost faith in the incompetence of the European politicians and the British opposition are, if anything, even more opposed to European membership than the government
4. France has reality fatigue. President Hollande is now utterly unpopular because his election promises misled a public that desperately wanted to be misled and the French political elite fear the slightest hint of structural reform. Nothing will change in France because there is still a widespread belief that austerity and indeed any form of economics are subjects for other people and not for the French. The French people do not want to hear the truth and their politicians are too afraid to tell them.
It is certain that investing in the bonds issued by European governments is potentially disastrous. There are investors who believe that the small additional margin they receive on investments in Spanish or Italian Debt is worth having. Greek debt is already completely owned by the ECB. In reality, these yields are being held artificially low and should in reality be very much higher. Given a change of policy when the northern bloc is no longer willing to subsidize the olive oil states and the ECB can no longer rely on German political and financial support, the prices on debt not already owned by the ECB will collapse.

Against that there are still excellent export driven companies in Europe and elsewhere which make the stock markets very attractive indeed.
I cannot emphasize strongly enough that high quality equities selected by experienced fund managers with a track record of success over several years are the new safe haven for careful investors.