Steen Jakobsen, chief economist for Saxo Bank in Denmark, has some very interesting thoughts to share on the sovereign debt crisis in Europe. His six major points are:

  1. More austerity cannot possibly work.
  2. Voters have lost the faith and willingness needed to repair the current EU and Eurozone construct
  3. Credit and debt cycle is busted. Irving Fisher’s Debt-Deflation Model is in progress.
  4. The end-game is near for Europe. Prepare for a meeting of the cardinals
  5. Nicolas Sarkozy is falling apart and likely to lose to Marine Le Pen in the first round of French elections
  6. The “Hope Trade” in equities is in Extreme Overvaluation. Be nimble and cash-rich now to be able to take advantage of deep discounts coming up later.

Faith in Eurozone Dissipating Fast

Please consider More apathy, less austerity – faith in Eurozone dissipating fast written below as a complete guest post in entirety.

From Steen …

In my travels to Madrid I made the following observations:

Sarkozy was in Madrid last night and when questioned on French downgrade he said three times to three different journalist: ‘I don’t understand the question, you need to clarify it’. The journalists here are amazed at how arrogant he was/is but more importantly it seems Sarkozy is ‘falling apart’. He knows he is likely to lose to Marine Le Pen – and he needs to do something desperate and he will. I am in Paris later today and will report more.
On Spain – there is the same apathy I observed in Milan this time last year – people appear to have already given up on 2012 – but…


  • More austerity is not possible – a worker is lucky to make 1000 eur a month! How do you cut 20 percent of that?

  • Taxes have just gone up – more than 1 million people live for less than EUR 400 a month!!!!

  • Plus I continue to hear of people being laid-off from major banks. Apparently one such major bank initiated big cuts on Friday (yet to be reported?) firing high salary employees like private bankers.

The end game is just one of two:

  1. The debt trap leads to collapsing growth, rising fiscal imbalances and stock market tanks 25/30 percent leading to a call for a ‘meeting of the cardinals’ – which ends up addressing the real issue: who pays the bill and how do we create an internal devaluation of the poor Eurozone countries combined with a move to true solidarity and fiscal transfer. (Germany pays!)

  3. More of the same – the German fiscal compact makes the rich in the north more rich and the poor in the south even more poor. The current account trends continue and the world comes to an ‘Atlas Shrugged’ moment where there is only the public sector left. Social riots become the norm, Greece leaves the EU, Portugal follows, and things get out of control leading to the EU breaking up.

Voters have lost the faith and willingness needed to repair the current EU and Eurozone construct. The only thing left is to possibly take the loss, either by democratising the loss – a part nationalisation of banks like the Swedish bank model – or through a Schumpeter model of destruction of capital.

The world simply will not see enough growth in 2012 to service the massive debt despite a 1 percent effective financing rate. This economic gravity will prevail despite the big hopes for the European Central Bank’s Long-term Refinancing Operation and QE3 in the US (via US dollar unlimited swaps lines).

Yes we have LTRO and yes we will see more LTRO ahead but the private sector is contracting more than banks and governments are able to sustain. This is becoming a classic Irving Fischer theory; excessive debt leads to deflation and ultimately new beginnings.

I have never been more confident than now that this game is just months or a few quarters away from breaking down. Prepare for that meeting of Cardinals!

The credit and debt cycle is busted. Keep watching the ‘new capital of 2012’ being deployed into ‘hope trades’ but also note that my favourite cyclical model is now in extreme overvaluation territory!

Finally, the dislocation of capital and credit creates huge opportunities in the credit space and in stocks. Be nimble, be cash rich not because you have to be afraid of the future but because the resetting of prices will create deep discounts which could create double digit returns for a decade when this forecasted fire ends sometime in 2012.

Safe travels,

Major Agreement

I am in essential agreement with all of Steen’s points having said the same things on many occasions. I only have a couple small differences.

The chart of the S&P; does not say much to me. Indeed one can look at various points where indiactors were at extremes and the market kept rising anyway.

However, his main point “be nimble and cash-rich now to be able to take advantage of deep discounts coming up later” is 100% spot-on.

In regards to Marine Le Pen, I do not know if she is “likely” to defeat Sarkozy in the first round, but certainly EuroSkeptics are on the rise and it is a very reasonable possibility.

Regardless, polls show Hollande would beat either Le Pen or Sarkozy, so Sarkozy’s days are indeed “likely” numbered.

For an analysis of Le Pen, please see

  1. September 16 2011: Eurozone Breakup Logistics (Never Believe Anything Until It’s Officially Denied)

  3. December 12 2011: Will Sarkozy Survive the First Round in French Elections? Regardless, Sarkozy’s Replacement Will Be Worse; Socialist challenger François Hollande Would Renegotiate EU Deal; Bickering Before Ink is Dry

  5. January 15 2012: “Let the Euro Die” Candidate Trails Sarkozy by Slight 2 Percentage Points; Will Sarkozy Survive the First Round Vote? Eurozone About to Become Unglued

March Polls

Le Pen 24%
Strauss-Kahn 23%
Sarkozy’s 20%

Strauss-Kahn was forced out over sexual allegations in late Spring.

December Polls

Round 1

François Hollande 31.5%
Nicolas Sarkozy 26%
Marine Le Pen 13.5%
Francois Bayrou 13%

Round 2

François Hollande 57%
Nicolas Sarkozy 43%

January Polls

François Hollande 27%
Nicolas Sarkozy 23.5%
Marine Le Pen 21.5%

Round 2

François Hollande 57%
Nicolas Sarkozy 43%

Certainly Le Pen has gained much on Sarkozy in just the last month. As Steen commented, the “arrogant Sarkozy is falling apart” and will not win round 2 even if he survives round 1 one on April 22, 2012.

 Mike “Mish” Shedlock
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