The euro’s fatal flaw was always people. The fact that most eurozone countries are at least nominally democratic and keep having elections means that the more complicated and draconian the process of merging them into one entity ruled by unelected bureaucrats in Brussels becomes, the harder it is to elect people at the national level who want to keep going. 

Greece is an obvious example, and will provide some thrills and chills as its debt negotiations lurch to the inevitable extend-and-pretend resolution. But much bigger things are brewing as the euro’s issues bite other constituencies in other ways. 

In Italy, for instance, the new government recognizes that the country’s only chance of functioning under a stable currency is to make serious reforms in pretty much every corner of the economy, especially its almost child-like labor laws. Here’s a brief overview of those laws from the National Center For Policy Analysis:

• Cassa Integrazione Guadagni is a scheme that allows Italian businesses who need to shave their workforce to put a worker on “standby” rather than fire him outright. The government will pay the worker a large portion of his lost salary until he is rehired. Such a program keeps workers from moving to new jobs while businesses struggle to compete.

• Firing a worker in Italy for poor performance is incredibly difficult, and employers have to convince a judge that there is no alternative option available to the employer short of firing the worker. These hearings can take months, and litigation is not cheap.

• According to the World Economic Forum, Italy ranked 141st out of 144 countries in terms of its hiring and firing practices.

• Italian unions are stubborn, and businesses — in order to avoid having to negotiate with them — stay small. Of all the countries in the European Union, Italy has the largest number of small businesses because companies are concerned about what growth would mean in terms of union negotiations.

But of course the Italians don’t like the idea of a free market in work, so they’re taking some personal days to make the point. See Hundreds of thousands rally in Rome in protest over ‘anti-job’ reforms.

Governments, meanwhile, don’t like having to deal with dissent, so in Spain and elsewhere they’re trying to make it harder to organize — which simply creates a new issue for demonstrators to protest. See Spaniards take to streets to protest ‘draconian’ new security laws. 

For Germans the situation is a little different because they until recently have benefited from being able to sell things to the big-borrowing eurozone periphery. But now the debt thus created is looking like it will have to be covered by German taxpayers, and they’re starting to regret their past decisions. See Angela Merkel’s conservatives suffer worst election result since WWII.

So here’s a modest prediction. After a bit more brinksmanship, Greece gets an extension and disappears from the headlines for a while. Then the focus shifts to the eurozone’s real threats, which are the bigger countries where anti-euro forces on both left and right are gaining popularity. With Podemos (Spain, radical left) and National Front (France, radical right) now leading in opinion polls, sitting politicians will start doing all kinds of crazy things to keep their jobs. Negative interest rates will spread, debt monetization will expand, and the euro will get even weaker. 

Then Greece will resurface, having failed to transform itself into a fully-functioning capitalist economy, and the whole thing will start again. But from an even more precarious place.

“Imagine some national (and probably global) volcanic eruption, initially flowing along channels of distress that were created during the Unraveling era and further widened by the catalyst. Trying to foresee where the eruption will go once it bursts free of the channels is like trying to predict the exact fault line of an earthquake. All you know in advance is something about the molten ingredients of the climax, which could include the following:

• Economic distress, with public debt in default, entitlement trust funds in bankruptcy, mounting poverty and unemployment, trade wars, collapsing financial markets, and hyperinflation (or deflation)
• Social distress, with violence fueled by class, race, nativism, or religion and abetted by armed gangs, underground militias, and mercenaries hired by walled communities
• Political distress, with institutional collapse, open tax revolts, one-party hegemony, major constitutional change, secessionism, authoritarianism, and altered national borders
• Military distress, with war against terrorists or foreign regimes equipped with weapons of mass destruction”

The Fourth Turning – Strauss & Howe – 1997

When you read pertinent passages from Strauss & Howe’s prophetic assessment of history from a generational perspective, eighteen years after its publication and seven years into the Crisis they forecasted with uncanny accuracy, you find yourself shaking your head and appreciating their visionary generational appraisal of antiquity. Those who scorn The Fourth Turning either haven’t read it, are ignorant of the cyclical nature of history, blindly believe in never ending human progress, or their salary is dependent upon not acknowledging the truth. A year consists of four seasons – Spring, Summer, Fall, and Winter. A long human life of 80 years consists of four phases – childhood, young adulthood, mid-life, and old age. Human beings tend to associate themselves with the cohort born within the roughly 20 year period that makes up one phase of life.

Members of a generation share an age location in history, tend to share some common beliefs and behaviors, including basic attitudes about risk taking, culture and values, civic engagement, family life, and tend to have a sense of common perceived membership in that generation. The generational attitudes, moods, leaders, and events that occur during recurring 80 year cycles drive the pathway of history. Strauss & Howe have been able to document the Turnings of Anglo-American history back to 1435. Like the seasons in a year, there have been cyclical turnings every twenty years or so for centuries. They can be described as High (Spring), Awakening (Summer), Unraveling (Fall), Crisis (Winter). Each turning is a reflection of generational interactions, moods, and attitudes. We are now seven years into a Crisis that will likely not climax until the late 2020’s.

The beginning of the new year has seen the usual avalanche of 2015 forecasts from mainstream media pundits, Wall Street gurus, Ivy League economists, journalists and bloggers. Most are paid to produce forecasts which promote their employer’s agenda; convince readers to buy their investment products, newsletters, or service; propagandize the government storyline; or validate their Ivy League academic theories. Those in the employ of the Deep State always produce forecasts of economic growth, positive developments, and never ending progress. They’ve never seen a recession coming, the stock market declining, or war looming. None of these people saw the 2008 Financial Crisis coming. They all believe 2015 will be a great year. They are narrow minded linear thinkers who are willfully ignorant of history or purposefully peddling propaganda for a paycheck.

Making annual forecasts in the midst of a 20 year Fourth Turning Crisis is rather pointless. Predicting improvement or progress in the midst of a Crisis is nothing but a futile exercise in mental masturbation. Fourth Turnings, like a protracted, brutal, frigid, gloomy, stormy winter of discontent, may have an occasional let up in intensity, but will rapidly revert back to turbulence, danger, and volatility. When I wrote Fourth Turning Accelerating in June of last year, I made the case that core elements of this Crisis – debt, civic decay, and global disorder – were combining to provide an impetus to the next dire phase of this relentless blizzard of pain, suffering, chaos and war.

“Reflect on what happens when a terrible winter blizzard strikes. You hear the weather warning but probably fail to act on it. The sky darkens. Then the storm hits with full fury, and the air is a howling whiteness. One by one, your links to the machine age break down. Electricity flickers out, cutting off the TV. Batteries fade, cutting off the radio. Phones go dead. Roads become impossible, and cars get stuck. Food supplies dwindle. Day to day vestiges of modern civilization – bank machines, mutual funds, mass retailers, computers, satellites, airplanes, governments – all recede into irrelevance.

Picture yourself and your loved ones in the midst of a howling blizzard that lasts several years. Think about what you would need, who could help you, and why your fate might matter to anybody other than yourself. That is how to plan for a saecular winter. Don’t think you can escape the Fourth Turning. History warns that a Crisis will reshape the basic social and economic environment that you now take for granted.” – Strauss & Howe – The Fourth Turning

Putting forecasting into perspective during Fourth Turnings is easy when you have a grasp on history. Imagine there were pundits pontificating on CNBC or CNN in 1936, the seventh year of the Great Depression Crisis or 1780, the seventh year of the American Revolution Crisis. Most historians refer to the Great Depression as the period from the Great Crash of 1929 until our entry into World War II in 1941. Annual forecasts of improvement would be meaningless to people living through this brutal period in our history.

If Jim Cramer was assessing the period from 1934 through 1936 on his daily radio show, he would have been gushing about GDP growth of 10.8%, 8.9% and 12.9%. He would have been effusive about the 300% surge in the Dow Jones Index from the 1933 low to the 1936 high. CNN would be doing special reports about the tremendous success of New Deal programs, as Federal spending and handouts accounted for the entire surge in GDP. But, in reality the average American continued to struggle to survive, as unemployment ranged between 17% and 22% during this time and only the rich owned stocks. Another 10 years of hardship, war, and death on a grand scale awaited them. Perspective and context are essential when attempting to assess periods in history. You get no context from the entertainers passing for journalists in today’s world.

The beginning of 1780 saw Washington and his troops surviving the harshest winter of the 18th Century in Morristown, NJ as the 5th year of war still left the outcome highly in doubt. CNN would have blamed the polar vortex for the temporary lull in patriot fortunes. Defeats in battles against the British in South Carolina and the uncovering of Benedict Arnold’s plot to surrender West Point to the British would have been spun as minor setbacks. Cornwallis’ surrender at Yorktown was almost two years away. The Articles of Confederation hadn’t yet been signed and the U.S. Constitution wouldn’t be signed until 1787. The Crisis wouldn’t end for another fourteen years, in 1794.

Fourth Turnings have their own rhythm and pace. The reactions to events and mood changes of generational cohorts interact to provide the dynamic that drives Fourth Turnings. The specific events are not foreseeable but human weaknesses, faults, flaws, failings, strengths, intellect, and emotions are consistent across the ages. Human nature does not change, therefore it is predictable. Those who wish for this Fourth Turning to accelerate and get to the climax sooner may want to rethink their desire. The Civil War Crisis was accelerated because all parties were intransigent and unwilling to compromise or pause. The result was 700,000 Americans killed in four years, representing 5% of the entire male population. This Fourth Turning could be accelerated with the push of a button and millions killed in an instant. I don’t think anyone wants that kind of climax. We are entering a banquet of consequences where our choices will make a difference.

“A Fourth Turning harnesses the seasons of life to bring about a renewal in the seasons of time. In so doing, it provides passage through the great discontinuities of history and closes the full circle of the saeculum. The Fourth Turning is when the Spirit of America reappears, rousing courage and fortitude from the people. History is seasonal, but its outcomes are not foreordained. Much will depend on how tall we stand in the trials to come.” – Strauss & Howe – The Fourth Turning

The Shadow of Crisis

“Don’t think you can escape the Fourth Turning the way you might today distance yourself from news, national politics, or even taxes you don’t feel like paying. History warns that a Crisis will reshape the basic social and economic environment that you now take for granted. The Fourth Turning necessitates the death and rebirth of the social order. It is the ultimate rite of passage for an entire people, requiring a luminal state of sheer chaos whose nature and duration no one can predict in advance.” – Strauss & Howe – The Fourth Turning

Just as you can’t turn the clock back to the glorious warm days of Summer or the delightfully pleasant cool days of Fall, the dark, foreboding, bitter days of Winter will bring forth raging blizzards, dangerous sub-zero temperatures, and vicious gale force winds. And there is no way to avoid, sidestep, or escape the trials and tribulations which will sweep away the existing social order and replace it with something better or possibly far worse. There are no guarantees this Crisis will resolve itself in a positive manner. The spark that catalyzed the Crisis mood in 2008 was the global financial implosion caused by Wall Street bankers committing the greatest control fraud in world history, corrupt captured politicians’ spineless failure to address the nation’s spending and debt problems, and the Federal Reserve creating a housing and stock bubble through their loose monetary policies and complete failure to regulate the Too Big To Trust Wall Street banks.

The inability of the linear thinking ruling class to acknowledge the seriousness of our current circumstances and the implications of the era of depression and violence the country is about to experience can be witnessed on a daily basis by listening to mainstream media talking heads or politicians of all stripes who bloviate about economic improvement and progress just ahead. Could there be a better example of myopia, delusion and willful ignorance than the theme and opening line of Obama’s State of the Union speech:

“THE SHADOW OF CRISIS HAS PASSED”

Do Obama and his advisors actually believe this Crisis is over? Or is he purposely misleading the American people about the seriousness of our circumstances because he has been instructed to do so by the men who really pull the levers of this country – Wall Street bankers, shadowy billionaires, and the military industrial complex. If the Crisis has passed, why has the 30 year bond yield fallen to an all-time low? Why does the Fed maintain an emergency stance by continuing to keep interest rates at 0% if the economy is really growing at over 4%, unemployment has really fallen from 10% to 5.7%, corporate profits are at all-time highs, and the stock market has risen by 200% to record highs?

In Part Two of this article I’ll prove the shadow of crisis has not passed, and the core elements of Crisis – debt, civic decay, and global disorder – get worse by the hour.

As the world continues to digest breaking news out of Greece, today the Godfather of newsletter writers, 90-year old Richard Russell, covers everything from World War II, to God, gold, peace of mind and what to do in a hurricane……continue reading HERE

The US on the brink of being unable to borrow or create money.

“No other central bank in the world (except Canada, curiously) would be able to post such a pitiful number and still pretend to be credible.”

“Bottom line, the Fed is not going to be in a position to write blank checks to the US government indefinitely without becoming insolvent and causing an epic currency crisis.” 

“where else can Uncle Sam go? Who else will buy his debt? Simple. You.”

Simon Black lays out the terrifying scenario in this essay below – Money Talks Editor

Another step down the long, slow road to (retirement fund) IRA nationalization

Let’s take a brief walk into financial reality for a moment.

At the time of this writing, the United States government’s official debt is nearly $18.1 trillion. 

Now, let’s look at who the biggest owners of that debt are:

1) Taxpayers of the United States.

If you’ve held a job in the Land of the Free, 15.3% of your salary has gone to fund Social Security and Medicare.

Each of these programs holds massive trust funds that are supposed to pay out beneficiaries, both present and future.

Conveniently, the trust funds are required by law to buy US government debt.

And given that every single US taxpayer is an ultimate beneficiary of these trust funds, that ranks the people of the United States as among the biggest holders of US debt.

How sustainable is this? Not very.

The 2014 trustee reports for both Medicare and Social Security indicate that nearly ALL of the trust funds are sliding towards insolvency.

This isn’t some wild conjecture. The people in government who manage these trust funds are flat out telling us that they’re about to go bankrupt.

Let that sink in for a bit… then ask yourself: how long can two insolvent programs continue to be among the largest owners of US government debt?

2) The Federal Reserve

Now that we know Social Security and Medicare cannot continue to buy Treasuries indefinitely, we turn our attention to the Fed, which as of today, holds over $2.4 trillion in US government debt.

The Fed is essentially the lender of first resort to the US government and has singlehandedly managed to mop up the vast majority of government debt over the last several years.

Problem is, the Fed has to print money to do this. And the Fed has created so much money over the last few years that it’s now borderline insolvent.

The Fed’s capital now stands at just 1.27% of its total assets. To be clear, this is a razor thin margin of safety.

No other central bank in the world (except Canada, curiously) would be able to post such a pitiful number and still pretend to be credible.

But make no mistake, there is a level of monetary expansion that’s too far. And the Fed is already getting close to this danger zone.

Bottom line, the Fed is not going to be in a position to write blank checks to the US government indefinitely without becoming insolvent and causing an epic currency crisis.

And when that happens, where else can Uncle Sam go? Who else will buy his debt?

Simple. You.

More specifically, your retirement account.

According to Internal Revenue Service estimates, there’s close to $5 trillion in individual retirement accounts in the Land of the Free.

This is money that taxpayers prudently set aside for retirement, hopefully cognizant that Social Security isn’t going to be there for them.

Devoid of any other easy lender, $5 trillion is far too irresistible for such a heavily indebted government to ignore.

I’ve long warned that the government could easily nationalize a portion of all IRAs.

It would be so simple for them to do– just a single executive order and a couple of phone calls.

They’ll probably wait for some market crash, and then sell it to Americans like this:

“For your own protection, we will henceforth require banks to invest your retirement savings in the safety and the security of US government bonds.”

These bonds, of course, are so safe that they fail to pay an interest rate that even keeps up with inflation, effectively guaranteeing that you’re going to lose money.

It started happening last year.

In his 2014 State of the Union address, President Obama announced his MyRA program.

MyRA is basically an IRA that invests directly in… you guessed it… government bonds.

He pitched it as an easy for Americans to save for retirement “with no risk of losing what you put in”.

Step two came when both the President and Treasury Secretary embarked on a blitzkrieg-style marketing campaign to pump the program, pledging that they would aggressively push businesses to sign up their employees.

Now comes step three.

Find out more in today’s podcast where we talk about the obvious, looming threats to your retirement security, and the structures you can build to do something about it.

http://www.sovereignman.com/podcast/031-another-step-down-the-long-slow-road-to-ira-nationalization-audio-16042/

If you have an IRA, you need to know this.

I’ve also put together a free report about safeguarding your IRA; it’s a scaled down version of a premium report that I sent to our Sovereign Man: Confidential members recently, but it contains a lot of valuable information.

You can download it here:

https://s3.amazonaws.com/sm-cdn/blackpapers/IRA+Report-free.pdf

Durables Miss In Big Way

The slow growth/low inflation story gained additional traction Tuesday when durable goods orders came in well below expectations. From The Wall Street Journal:

U.S. businesses broadly cut capital spending in the final months of 2014, raising red flags about the economy’s ability to sustain momentum amid troubles around the globe. Orders for durable goods — products like cars and kitchen appliances designed to last at least three years — fell 3.4% in December from a month earlier, the Commerce Department said Tuesday. Orders have fallen four of the past five months.

Bonds Win In Two Of Three Scenarios

From an investment perspective, there are three major scenarios likely facing investors. Scenario one is an ongoing period of slow growth and low inflation, which can be favorable for both stocks and bonds. Scenario two, slower growth, has gained some momentum with the recent trends in earnings and economic data. Scenario three involves a stronger economy and a shift toward higher inflation. You can see a larger and economically-broader version of the flow diagram below via this link.

The least likely outcome in the short run appears to be scenario three (stronger economy). Given the stock market has not broken down in a meaningful way yet, it seems reasonable to assign the highest probability to scenario one, which is more of the same (slow growth and low inflation). The broader market’s failure to make a new high over the last seven months tells us scenario two (slower growth/recession) is creeping higher on the probability ladder. The video below puts some additional fundamental and historical context around the three scenarios.

Strong Dollar Hits Earnings

The fundamental backdrop includes increasing fear of deflation, which has helped increase demand for the world’s reserve currency, the U.S. dollar (UUP). A strong dollar has some negative consequences for U.S. corporations. From Bloomberg:

The dollar’s surge is reducing earnings at American companies from Procter & Gamble Co. (PG) to Pfizer Inc. (PFE) and DuPont Co. that make a large portion of their revenue abroad. P&G, the world’s biggest consumer-products maker, today reported profit that missed analysts’ estimates in the quarter ended Dec. 31 after what Chief Executive Officer A.G. Lafley called “unprecedented” foreign-exchange rate fluctuations reduced sales by 5 percentage points. DuPont and drugmakers Pfizer and Bristol-Myers Squibb Co. (BMY) all posted annual forecasts that trailed predictions, in part because of the dollar.

Investment Implications – The Weight Of The Evidence

In two of the three scenarios described above, bonds can perform well. Consequently, we have been slowly been ratcheting up our fixed income (TLT) exposure in recent weeks. Until the broad stock market breaks down, we can afford to remain patient with our equity-based ETFs (SPY).

Wednesday brings the latest from our friends on the Federal Reserve’s Open Market Committee. If we are willing to pay attention with a flexible and open mind, the market will guide us in the coming days and weeks.