Before I hit the send button this week, let’s look at a few charts that can help us judge the current scope of the problem. These are from the very astute Bill Hester of the Hussman Funds. He wrote a very solid piece entitled “Five Global Risks to Monitor,” athttp://hussmanfunds.com/rsi/fiveglobalrisks2012.htm. It is very good, if sobering, reading.
This first chart shows how much bank debt is maturing in Europe over time. You have to add in how much new debt must be sold, as they will need to raise capital to balance the sovereign debt losses. Do you have a spare €1.5 trillion? Yes, some of that is rollover debt, but banks are trying to reduce their exposure to each other and may not want to roll over that debt, unless they can turn around and get capital from the European Central Bank to buy it, which is a back door to debt monetization.
The next chart shows how much debt must be rolled over by governments in the coming year. Notice how much Italy must raise in the first three months!
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And one last chart from Hester. This is the rise in the cost of new debt as older, cheaper debt comes due. My simple example is not at all extreme.
Next week we will look further into Europe. As a preview, I do think this is the year they will be forced to the very hard decisions. We will examine what a fiscal union would look like and how likely it is to happen, and what the prospects are for a break-up of the eurozone, and compare several scenarios for what Europe may look like in five years.
I am finishing this letter on a Saturday night in Hong Kong, after spending the day speaking at a conference sponsored by the Hong Kong Economic Journal, which will celebrate its 40thbirthday next year. It is the #1 Chinese language economics paper, and I am honored that they would translate my letters each week into Chinese and take a full page of their paper to publish them. They note that I write their longest column by far!
Last summer I met with the research editor of the Journal, Lewis Chong, over pizza in the little village of Trequanda in Tuscany, Italy, where we struck up a friendship and decided to work together. It now looks like a very good decision, at least on my part. They have actually made quite an effort to promote our new relationship, and I was surprised to see fairly large pictures of me in their paper and as I stepped out of baggage claim at the airport. Go figure. And when you get out of a taxi on a random street in Hong Kong and someone comes up and asks if you are John, then the world has changed.
Last night Louis Gave took me on a tour in his old-style Hong Kong junk, a rather large boat that is made to tour the islands. He took me on a harbor cruise at sunset, and as the sun melted into the sea we left the harbor and began to motor south down the island. Of course, the downtown and across the harbor is wall-to-wall skyscrapers. But as we went further, as we rounded the corner of each bay, we were met by even more skyscraper apartment buildings. And more and more. I had no idea of the scope of the building they have done in the last 20 years. Truly amazing. Almost as amazing are the prices people pay for the apartments and office rents. It makes New York look cheap. The city and its people seemingly never sleep. And the optimism about China is quite contagious. At points it is close to giddy. But when you look around you can understand that optimism.
I must confess I am not a good sailor. And our boat in the harbor rolled and heaved quite a lot, at least for this Texas boy. I was quite happy when we got to smoother waters as we left the harbor on the way to the yacht club.
Tomorrow morning I leave for Singapore, meanwhile continuing work on an overdue manuscript as I travel. I will meet up with my old friend Tony Sagami, who is coming down from Bangkok to spend a few days with me, and as readers and new friends show me their town. I get to drop by and see Jim Rogers at his home after a gig at CNBC Singapore Wednesday morning (guest hosting their Squawk Box). I am really looking forward to my first time in Singapore.
I am not certain of the schedule for next week’s letter, as I am on very long flights back home at the times I normally write. But I will write, regardless.
It really is time to hit the send button. Have a great week!