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Dancing Around The Fire Of Hell

The following are excerpts from Byron Wien's commentary for the Blackstone Group. While many may not agree with the opinion/view, it is important to see all sides of an issue before coming to a conclusion.

The full commentary can be found here.

He started out by saying he had done some preparation for our visit. "I think the title of your essay should be 'Dancing around the Fire of Hell.' For years I've been telling you that the accumulation of debt was going to be the ending of the developed world and for years you have been telling me my views are too extreme. The problem is you are an optimist and I am a realist. You go around with a smile on your face thinking that there are serious problems facing us, but that everything will turn out favorably because the policy makers will do what they have to do to avoid disaster, and so far you have been right. The developed economies and their stock markets have plodded along and investors haven't made or lost much money in spite of the challenges. At a certain point, however, the temporary measures that the policy makers put in place to avoid financial catastrophe prove insufficient and that's where we are now. I'm not saying that it will happen tomorrow but events are falling into place that will take the smile off your face.

"The problem is that most investors think incrementally. They don't step back and look at the whole landscape, which includes how we got here and where we might end up. In democracies the people always want the government to do more for them, but they don't want to pay higher taxes. Politicians get elected by promising benefits, not by raising the revenues necessary to avoid increasing debt. In a developed economy real growth should equal the population increase plus productivity. For Europe and the United States that's about 2%, but people there want their economies to grow more than that so the government provides the stimulus to create faster growth and takes on the debt necessary to do it. Everything is fine as long as the cost of ten-year debt doesn't exceed the nominal growth rate, but when it does the cost of servicing the debt becomes an unsustainable burden, and that's where Spain and Italy are. The United States isn't quite there yet.

"The next step will be for every central bank in the world to keep printing money. Ultimately this will bring on a higher level of inflation, but I think the world is ready to accept that. World leaders will agree that growth should be their objective and inflation will be the price they will have to pay for it. This may result in some instability among currencies. Before this happens there will have to be more suffering. Spain and Greece will default. There won't be outright financial disaster because by the time the defaults take place the banks will have sold most of the troubled sovereign debt on their balance sheets to the European Central Bank. France's deficit will get worse as Hollande implements some of the programs he talked about in his campaign. Human beings and governments have an unlimited imagination and they will use it to delay the day of reckoning. In the longer term the crisis may turn out to be a good thing because the pain of what we are about to go through will prevent it from ever happening again.

Yes, the article is pessimistic. Yes, it paints an ugly picture for investors. It sounds gold buggish, but really is not. It shows an understanding for the problems we are facing and the inability to solve them without leading to other, equally serious problems. Cause and effect.

Hope you enjoy it, Mike

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.