Jul 10/15 – The coming battle between young and old

2015-07-10 10am EDT  |  #demographics #Europe #Greece #Lehman

One of my twitter guys posted a great chart yesterday. It compared the GDP of the US versus Greece since 2005. In the tweet, he reminded readers how much the 2008 credit crisis hurt the average American. Economists labelled that slowdown the worst disaster since the Great Depression. Yet when you compare the US 2008 crisis to the current Greek depression, it registers as barely a blip.

Is there any wonder why the Greek people are fed up? Regardless of who is to blame, the pain they have suffered is immense.

I don’t know how this week-end will play out. My gut warns me that Tsipras is going to fold. I don’t think former Greek finance minister Yanis Varoufakis was willing to compromise, and that is why he was pushed out. I wish that Tsipras had the guts to just leave the EU, but it is difficult to drive through that sort of bold reform. I don’t know if the Greek people are ready to take that leap.

There are too many older Greeks who were promised cushy pensions who want the system to continue ‘as is.’

Everyone talks about the great divide between the rich and poor. We hear about the outrageous wealth of the 0.01%’ers all the time. Yet the real battle in the coming years will not be between the rich and poor, but rather between the young and old. Yes, there is no doubt the rich have abused the system to make themselves even richer. But even if you tax them with a 1970’s style English 98% top marginal rate, the entitlement promises made to the vast sea of regular citizens will overwhelm any extra money raised by sticking it to the rich. There is simply no way society will be able to honour all the promises made to the baby boomer generation.

The combination of lower birth rates, overly optimistic growth assumptions and the universal human condition to put off until tomorrow what you should do today, has created a perfect storm of an entire generation that has no money put aside for their retirement. They are counting on the current working generation to either borrow more to fund the gap, or for the current workers to earn less. This will not happen. They young will wake up to this injustice. This skew in the willingness to vote no in the recent Greek election is something we will see more of in the future. As this burden becomes greater, the strife between the generations will only increase.

This is one of the reasons I am confident we will eventually see inflation. The temptation to ‘print’ our way out of this shortfall will be irresistible to politicians. Yes, I know that some of the ‘promises’ to the older generation are indexed to inflation, and printing will not reduce those obligations. But on the whole, the older generation’s wealth will be inflated away. The younger generation has a whole lifetime of earnings ahead of them. I am aware of the worry wages will not increase with inflation, but I am hopeful we will see increases in the minimum wage and other measures to increase worker earnings as a proportion of the economy. On the whole, inflation will hurt the older generation much more than the younger one.

I know that right now market pundits are more worried about deflation than inflation. I seem like a strange lunatic warning about the coming inflation. Yet when I look at the math, I don’t see any other way out. More and more young people will vote for radical changes, much like the young Greeks. This battle between the young and old will only intensify in the years to come. When you think about the possible solutions, ask yourself how many currencies have collapsed because of deflation, and how many have been inflated away to zero…

The infamous Lehman week-end

There is lots of hope (hype) about the possibility of a Greek deal this week-end. As I write this, markets are pricing in an increased chance the Greek Prime Minister will agree to the European demands.

I don’t know how to handicap this possibility. I am going to flatten many of my positions as I view the risks over the week-end to be through the roof.

Although I am not predicting this outcome, this situation reminds me of the infamous Lehman week-end. I remember telling my buddy that there was no way they would let the such a big important broker go under. I think I was trading the Lehman prefs from the long side on a punt. I figured the common equity would probably be diluted in some equity raise, but that the debt and the prefs would be saved. Well, I sure figured wrong…

We now know the government officials simply backed off and let the shit hit the fan. The prefs and all the bonds were zeroed over night. There is a decent chance a Greek deal will be reached this week-end, but it is by no means a sure thing. This time I will watch from the sidelines…

Thanks for reading and have a great wk-end,

Kevin Muir

the MacroTourist