On November 11, 1918, in the French town of Compiegne, the Allies and Germany negotiated cessation of hostilities on the Western Front effective at 11:00 a.m. Paris Time. At the eleventh hour on the eleventh day of the eleventh month, the War to End All Wars was over. Armistice Day, celebrated throughout the western world, was a time to remember those who made the ultimate sacrifice in fighting against the Central Powers of Europe to defend our freedom. After World War II, the United States changed the name of the holiday to Veterans Day and expanded its purpose to celebrate not only those who fought the Kaiser, but also all American veterans who have fought to maintain our freedom.
It is somewhat ironic that we celebrate this Veterans Day, 11.11.11, just a few days after the German Chancellor has made a call for a “New Europe” and the world is once again threatened by European excesses. This time there has been no cannon fire, no battalions have marched, and no tanks are in the streets of Paris, but the lack of fireworks does not change the overall script. Sure, there are differences — Germany likes to change dance partners from time to time. In World War I it was the Central powers of Austria-Hungry and the Ottoman Empire, while in World War II they preferred the Axis powers of Italy and Japan. Today it is France and the Euro Zone, strange as that may seem. The goal is, however, the same: to control the whole of Europe in the name of centralized governmental power. If successful Germany yet may get the European dominance they seem to have wanted since the day their barbarian ancestors destroyed what was left of the Roman Empire and cast the world into Medieval darkness. If they fail, Europe will once again be trying to piece itself together in the aftermath of another ill-fated attempt to bring the continent under central control.
This saga, while gripping, is wreaking havoc with the financial markets. We foresee one of two outcomes: Germany could get its way, with a much stronger Eurozone that would not only determine a country’s currency but also would have great control over fiscal policy; or the Eurozone, and possibly the entire EU, will collapse. Either scenario could work in the long term, and it is not our place to judge which is best, but getting to either point is going to be politically painful, and that political pain will continue to spill over into the markets. We will see up days, even short rallies, but it is hard to see how our markets go up with an economy the size and importance of all of Europe in such a political mess.
The collapse of Greece has been distracting markets for more than a year. Greece is much like the sub-prime mortgage market — alone neither was big enough to really cause pain, but they were not alone. The mess in sub-prime was actually in the whole mortgage market, just as the mess in Greece is in all of Europe. Sub-prime and Greece were simply where the problem was at its worst and therefore were the first dominos to fall. Italy is now the concern. Italy has the world’s third-largest bond market, behind the U.S. and Japan. This makes Italy too big to be bailed out and a real threat to the global economy.
The mortgage mess was really just a symptom of larger issues, and this debt crisis in Europe is just the same. In our case it was the must-have-it-now, free-spending culture that caused people to buy houses they could not afford, financiers to sell mortgages that should not have been sold, and elected officials and regulators to push for more home ownership. In Europe the issue is the entitlement culture that sees work as a distraction from life instead of a meaningful part of who one is as a person. Europeans have been far too comfortable with the regulatory nanny state and the unsustainable social contract that goes with it. Sacrificing freedom for a false sense of security may feel better than being subjected to a tyrant, but in the end neither is sustainable. People are meant to be free.
This brings us back to the purpose of this day. As we honor those who have fought to keep us free, let us not forget that freedom is worth fighting for, and that freedom is what has made this country great. Regardless of whether one chooses to use freedom to work on Wall Street or occupy it, or to go to tea parties or ridicule them, one owes that freedom to the men and women who have served this country in its Armed Forces.
Today the entire Iron Capital family solutes all veterans of the U.S. Armed Forces and thanks you for protecting our freedom. May God bless you, your families and the United States of America.
Chuck Osborne, CFA