by Dr.John E. Charalambakis
The past two weeks have been quite historical. Let’s review some facts and ponder about the direction of the markets in the foreseeable future.
- Euroskeptics won major battles in several countries demonstrating the failure of a leadership that has created a sclerotic and over-regulated disunion which has no vision and direction, let alone a plan to uplift the people from a dangerous hole they have pushed them into.
- Mario Draghi on the other hand, started unveiling some unorthodox measures in order to buy time and kick the dysfunctional can a.k.a. Euro down the road.
- Meanwhile employment levels in the US reached pre-recession levels and the equity markets kept their chorus of joy, while bond markets’ landscape exhibited signs of revitalization with the yields lower than they were six weeks ago, despite the continuous tapering by the Fed.
- In China, banks saw their bad-debt ratio rising by 21% to record highs, indicating further economic slowdown amidst the decline of the shadow banking system (which will make it more difficult to refinance existing loans).
- Finally, Russia in an effort to escape from its isolation made one more time efforts to sway China via energy and currency reserves deals. We consider these efforts nothing but signs of insecurity.
In 1794, William Wordsworth penned down his disillusionment with the French Revolution and the Reign of Terror that followed it:
To her fair works did Nature link
The human soul that through me ran;
And much it grieved my heart to think
What Man has made of Man.
In Spain the painter Goya expressed the same feelings, in Germany Beethoven felt crushed, and in America Thomas Jefferson could not hide his disappointment. The love affair with revolution was replaced by the love affair for Romanticism. Faith in the rights of man yielded to a newly founded faith in Nature. Nature became the guardian, and the soul of moral guidance to what ultimately thought to lead to illumination. The outer observation of Enlightenment became the inner contemplation where truth was lost in “beauty”. Man’s senses were transformed by Romantics into sources of divine truth.
It is not surprising then that Rousseau “felt one with Nature” when inspired to draft his attack against wealth creation. Romantics throughout the centuries have a tendency to escape reality by failing to engage reason and what Locke described as the basis of knowledge i.e. constantly comparing our ideas with the experiences and judgment of historical facts.
As Montesquieu taught us, we cannot understand ourselves apart from others and the knowledge that comes from interaction in a commercial society that seeks to create capital and wealth. It is when you allow people to go off on their own, to become isolated over their own thoughts that they can create something out of nothing (the solitary hermit, the monk in his cell) that they start confusing fantasy with reality and end up getting is all in trouble.
Rousseau’s followers the Romantics succeeded in reversing the formula taught by Enlightenment. Crushing the competitive spirit of wealth and capital formation was thought to be normal given the promises of fiat system of social contracts encompassing submission to the General Will.
Unfortunately, we have not escaped the fantasies of the Romantics. They still rule through fiat money and via monetary manipulations. For some time (which could still be another two-three years) those could work, and thus we will not hesitate from taking advantage of those opportunities whether it is in the equities or bond markets. However, while we hope for some real reform in global monetary architecture we also seek opportunities in turn-around companies that truly add value and create wealth through commerce and trade.