Byron Wien: I Spoke To The Smartest Man In Europe, And What He Had To Say Was Terrifying
Blackstone’s Byron Wien is up with a new blog post, wherein he relays a conversation he had with someone he only refers to as The Smartest Man In Europe.
Wien doesn’t say who The Smartest Man In Europe is, but describes him as basically an incredibly brilliant, wordly, rich businessman.
Many of you remember The Smartest Man from earlier essays; I have been writing about him annually for more than a decade. He has been a friend for thirty years, and during that period he has shown an almost uncanny ability to see major events affecting the financial markets before other observers. Among these were the fall of Japan as an economic power in the 1980s, the economic changes in China and their significance the early 1990s, and the serious consequences of excessive borrowing in the developed world in the last decade.Continued below.
His DNA endowed him with a certain amount of business acumen. His ancestors operated canteens along the Silk Road, selling food, weather protection and supplies to travelers to India and China. He apprenticed in finance in New York, but returned to Europe to take advantage of opportunities created during the post-war recovery there. Along the way he has acquired the ABC’s of European wealth – an airplane, a Bentley and a house on a Cap in the French Riviera. The depth and breadth of his art collection is impressive, but material things are not what gives him a high. He gets his thrills from identifying a problem, thinking it through and being right in determining how it gets resolved. In his ninth decade, he is an inspiration to me.
So what does TSMIE see now?
Basically that massive amounts of debt will bring the decline of Western Civilization, but that in the meantime, before that happens, policy makers would pull every trick they could in order to stave off a catastrophic event.
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.
After getting to the point where fiscal stimulus no long works, the world’s central banks will go into overdrive (as is already happening)
“Before we experience widespread defaults the authorities will pull out every trick in the book to prevent catastrophe. That’s because there is a general belief that the European Union was a good idea. In order to compete against the United States and Asia, the European countries had to hang together. It was as much a geopolitical decision as an economic one. There needs to be more cooperation among the European leaders. The first step is to create a coordinated banking system to prevent a run on the banks. Deposit insurance won’t do the job. It’s too much to expect the various governments to agree to a political union at this time, but there could be a banking union to prevent the European banking system from collapsing.
“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.
He concludes:
“So what am I doing with my money? It is hard to hide in stocks. Even Danone is reporting disappointing earnings; people are so worried they aren’t even buying yogurt. The French auto companies are in trouble. I think gold is going much higher. I am buying energy stocks because I want to own something real. Preserving capital is my focus now, not making money, but I like IBM and Apple. Also some Swiss multi-nationals. If Obama wins in November the market will go down. A Romney victory will create a rally, but once he gets into office he will find there is not much he can do to make things better.”
I left The Smartest Man’s office somewhat dazed. My optimism was clearly diminished by what he had to say, but I still believe that somehow disaster has a way of usually not happening. It seems clear that world leaders are going to do everything possible to avert a financial catastrophe and I think they have the resources to accomplish that goal. It does seem, however, that the developed world has to resign itself to a prolonged period of slow growth.
For what it’s worth, the story doesn’t sound that different from a lot of the Austrian fairy tales about printing and hyperinflation, but still, it’s a well-written read.