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May 9, 2023·edited May 9, 2023

From what I know (and I am far from expert) and have read, Lacalle's facts are correct and his argument makes perfect sense.

In Europe everything in the credit system is so integrated with sovereign debt and the EU. For example here in the U.S. we (still) have multiple pathways for credit that are not directly impacted by our federal "sovereign" debt (although they are certainly impacted by the FED-set funds rate and dollar liquidity), including corporate bonds, municipal bonds, private equity, BDCs, regional banks, community banks, etc. To my knowledge Europe has had on the other hand until very recently just commercial banks and national banks and the EU (for example the European Investment Bank) as vehicles of credit. All of these are highly invested in and dependent on sovereign debt. This is a huge downfall of the EU economic system - and for that matter socialism and globalism in general. Any failure cascades top down rather than bottom up - so it cannot be isolated or contained.

In other words, our system is not nearly as sclerotic or vulnerable to systemic catastrophic failure. I think this is why Luongo for example has often stated that our financial system may collapse but Europe will collapse first. Nevertheless we remain very susceptible financially to European sovereign debt failures and credit crunches because of the amount of money from here invested over there and the amount from there ("offshore dollars") invested here. We won't escape their problems even with SOFR fully in place.

Any corrections/additions to my thinking are very welcome + thanks, Mark.

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When I worked in the industry 10 years ago, European banks were nowhere near as strong as US banks.

One problem the Europeans have is there are only a handful of banks per country. The government may even hold a significant stake in the bank - known as the golden share. It's hard for a government to make its banks charge off problem loans when the government is a major shareholder.

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Bubbles popping?

Many multi families were bought at negative cash flows, assuming you could increase rents. And commercial loans are usually 5 years.

“Just saw the first 'distressed seller' LP opportunity come across my inbox from a client of mine and great operator in PHX, buying a multifamily property

35% discount of what it was bought for in 2021”

https://twitter.com/YonahWeiss/status/1655181858592661504?cxt=HHwWgICxgbDIsfgtAAAA

Another bubble is Airbnb’s. People paid higher prices assuming higher income due to short term rentals.

https://twitter.com/texasrunnerDFW/status/1655232586921447426?cxt=HHwWhMDUwZPRyPgtAAAA

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Great article, thx for breaking down such complicated matters into bite-sized pieces.

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I'll keep all that in mind. In fairness in Luongo, he has always maintained that the Powell v. Davos thesis has two prongs: 1. To gain control over US monetary policy, and 2. to enforce some fiscal discipline on the federal government. The two go hand in hand. He has consistently maintained that there can be no fiscal discipline without control over monetary policy.

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Removed (Banned)May 9, 2023·edited May 9, 2023
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"Lagarde keeps propping it up."

And Yellen, too. He's been on that as well. Thanks.

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Removed (Banned)May 9, 2023
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You're welcome!

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