David Santschi Talks Euro's Lies And Delusions

Includes: ERO, EU, FXE, GLD, TIP, TLT
by: TrimTabs

TrimTabs President & CEO Charles Biderman sat down with Executive Vice President David Santschi to talk about some of the major problems facing Europe and the euro, and how delusional thinking led to them.

Charles Biderman: What worries you the most about the Eurozone debt crisis?

David Santschi: What worries me the most is the prevalence of lying and delusion in Europe. And by lying, I mean people being confronted with the problem and then not being honest about it. And by delusion I mean people being confronted with a problem and not understanding the problem or not understanding how big the problem is. So we have both lying and delusion on a grand scale in Europe. When you have a fiat money system, where money is backed by nothing but confidence, nothing tangible, and you have people running the system either lying or delusional, the chances of a systemic failure become very, very high. By the way, I don't mean to pick on the European themselves. We in America are delusional as well. It's just the problems in Europe are a lot more acute and the problems are further advanced there.

CB: But why can't the European Central Bank do just like the Fed, and print money and make Europe's problems go away like ours have?

DS: I would argue that our problems really haven't gone away. They've just been pushed aside or kicked down the road. The problem in Europe is really a problem of solvency, it's not a problem of liquidity. If money printing could solve the problem, we wouldn't be worried about Spain or Portugal or any of these countries right now, right? The ECB could just print $2 trillion, $5 trillion, $10 trillion and just be done with it. But, the problem with printing money is, lending printed money to people who are bankrupt or insolvent doesn't make them solvent. It just doesn't work that way. And there are two big difficulties with what the ECB could do. The first thing it could do is just lend money to banks outright, as it did in the LTRO 1 and LTRO 2. The problem with that is there's a dearth of high quality collateral in Europe now. Banks have already pledged their high quality collateral and they don't have much high quality collateral left.

Now, the ECB could of course loosen its collateral requirements, but then the impact on the euro might not be too pleasant. Another thing the ECB could do is print money and buy bonds of Spain, Portugal and Italy outright on the open market as it's been doing. The problem with that is, if the ECB keeps buying more bonds, the bond holders are going to get weary. As you recall, the ECB subordinated the bond holders in Greece to itself. So if the ECB really starts printing money and buying Italian, Spanish and Portuguese bonds on a grand scale, the private investors are just going to go away, and then you have a real problem.

CB: So what does Europe need to do to solve it? Are its problems solvable?

DS: Well, they're solvable. But unfortunately, there aren't any easy solutions to a debt problem. If there were, then everyone in the entire world would be rich, right? We could go out and borrow tons of money, use the easy solution and move on with our lives. People need to stop expecting simple solutions, because there aren't any simple or easy solutions. What needs to happen is the losses need to be recognized honestly, and the investors - banks, bond holders, who ever - need to take the losses on that bad debt, and it's going to be very painful, no question about it. But if Europe continues to bail out investors and continues to bail out banks, the entire financial system is going to implode. It's going to fail. The only people here who should be bailed out are the depositors. Because the depositors, they didn't want to speculate in the markets. Bailing out depositors is OK, but bailing out bond holders? Four or five years into this, why on earth are we bailing out bond holders and banks so no one loses money on their crappy debt. It's crazy.

CB: Final question, how can we make money, or at least not lose money, based upon what you see happening in Europe?

DS: Well, I think the key is just what you said, not losing money. The key here is to preserve capital and not lose money. First of all, if you've had any money at all in European banks - or banks that use the euro in particular I mean - I would get that money out right now. I wouldn't touch any financial investments related to Europe or the euro. I would hold the U.S. dollar cash, I would hold U.S. Treasuries, particularly inflation protected securities. And I would also hold some gold too as a long-term insurance policy, but not as a short-term trade. Obviously, in the short-term, for different selling and liquidity pressures, I think, could put pressure on gold. But I really think everyone needs to own some gold just as kind of insurance.