Thursday, July 28, 2011

Hide in Canada?

Given the anxiety over a US credit downgrade from AAA, Matt Yglesias wrote that since the US issues roughly 60% of AAA-sovereign rated paper, there aren't that many places to hide if you are looking for AAA paper:

There’s not nearly enough German or French or British AAA-rated debt out there to play the kind of global role that U.S. Treasuries currently play. The world’s second largest economy, China, doesn’t have liquid capital markets, and the third largest economy, Japan, has already lost its AAA-rating.

That got me to thinking. If you are worried about the Europe (i.e. France, Germany and the UK), the other obvious alternative are the Canadas. Take a look at the spread between the 10 year Canadas and the 10 year Treasuries. While Canadas have rallied somewhat against Treasuries, the spread is by no means at an extreme level.

 Now look at the Canadian Dollar, shown below. The loonie remains in a technical uptrend against the greenback and recently staged a bullish breakout and pullback pattern.

Could Canada* be a place to hide?

* Warning: The Canadian bond market is far less liquid than the Treasury market. The Canadian economy is about one-tenth the size of the US so you should scale your liquidity expectations accordingly.

Wednesday, July 27, 2011

Analyzing the debt ceiling impasse

The markets have been fairly sanguine about the debt ceiling debate, largely because there is an underlying assumption that some sort of deal will get done before the deadline. Then I got to thinking - the markets are highly top-down, macro-economic focused about this debate, what if the proper framework for analysis is micro, not macro, economics?

Game Theory as analytical framework
For a micro-economic point of view, I turn to Game Theory as a way of forecasting behavior. The classic problem in Game Theory is the Prisoner's Dilemma, described by Wikipedia in the following way:
Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated the prisoners, visit each of them to offer the same deal. If one testifies for the prosecution against the other (defects) and the other remains silent (cooperates), the defector goes free and the silent accomplice receives the full one-year sentence. If both remain silent, both prisoners are sentenced to only one month in jail for a minor charge. If each betrays the other, each receives a three-month sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?
If we cast the Republicans and the Democrats as the two prisoners in the problem and the incentive is winning the next election, then we can see the debt ceiling issue in a different light [emphasis added]:
If we assume that each player cares only about minimizing his or her own time in jail, then the prisoner's dilemma forms a non-zero-sum game in which two players may each either cooperate with or defect from (betray) the other player. In this game, as in most game theory, the only concern of each individual player (prisoner) is maximizing his or her own payoff, without any concern for the other player's payoff. The unique equilibrium for this game is a Pareto-suboptimal solution, that is, rational choice leads the two players to both play defect, even though each player's individual reward would be greater if they both played cooperatively.

In the classic form of this game, cooperating is strictly dominated by defecting, so that the only possible equilibrium for the game is for all players to defect. No matter what the other player does, one player will always gain a greater payoff by playing defect. Since in any situation playing defect is more beneficial than cooperating, all rational players will play defect, all things being equal.
In other words, when faced with a choice between the common good and personal gain, the optimal decision is to defect for personal gain, or allow the deadline to pass with no deal in order to gain political advantage in the next election.

Playing the brinksmanship game
That's what happens when you play the game of brinksmanship. Left leaning blog DailyKos described brinksmanship during the Cold War era in the following way:
That word was conjured by President Dwight Eisenhower's secretary of state, John Foster Dulles, to describe the Soviet Union's approach to international policy during the Cold War of the 1950s. Brinkmanship was most evidently realized in a pair of international crises -- the Soviet blockade of West Berlin resulting in the US-led Berlin airlift campaign to resupply the city in 1948 and 1949, and the 1962 Cuban Missile Crisis, where US and Soviet military forces nearly came to blows over the USSR's emplacement of nuclear missiles on that island nation.

Brinkmanship tactics, by the Dulles understanding, involve threats that are continuously escalated -- sometimes just by one side, sometimes by all sides. The threats need to be credible if the aggressor is to have any chance of actually obtaining capitulation. The best defense against brinkmanship is to respond with similar escalating threats. It is a flawed and risky defense in that there is always the chance one side or another will not back down, forcing a final confrontation. Often, however, one side (the USSR, in both the above mentioned incidents) did back down and disaster was averted.
Of course, DailyKos blames the Republicans for the impasse, but I am not here to lay blame but to analyze the situation. What are the chances that someone blinks because of the apocalyptic nature of the decision of both sides to "defect" in this game of Prisoner's Dilemma?
Consider the Republican position as an example. Conservative commentator David Frum describes the Republicans as backing themselves into a corner, which will likely cause them to "defect" in the game of Prisoner's Dilemma:
[The] Republicans put the gun on the table. They raised the menace of deliberate default in a way it has not been raised before.

Then, having issued the threat, they discovered that their own core supporters would not allow the gun to be holstered again.

They issued demands they knew could not be met, for budget cuts much bigger than Republicans ever enacted when they had the power to enact them. They cocked the weapon. And now here we are: the demands are unmet and Republicans find themselves facing a horrible choice between yielding on their exorbitant demands or pushing the United States into financial upheaval.
Be careful about what you wish for
On the other hand, Greg Mankiw is right in that people can and will respond to incentives. If you structure the incentive as gaining power in the next election, then a financial apocalypse looms. On the other hand, if you think about the incentives what you can do in the event that you win the next election, then the game changes. Here is Frum writing about the possibility of payback, a.k.a. Be careful about what you wish for because you might get it:
Consider this scenario: President Palin (or Romney or Perry or Pawlenty or whoever) is sworn in with great jubilation among movement conservatives in January 2013. Voter distaste with Democrats also led to the crushing defeat for Democratic Congressional incumbents, leaving Republicans with hefty majorities in the House and Senate. In a paroxysm of celebration, Republicans pass the Ryan budget, slashing taxes and putting major reforms in Medicare years down the road. However, the growth promised by advocates of this budget does not materialize, and (as the budget estimates) the federal government runs huge deficits for the first two years of the new president’s term. Frustrated with a series of broken economic promises, voters turn Republicans out in massive numbers in the 2014 midterms. Though Republicans cling to a narrow majority in the Senate, they are wiped out in the House, and an exultant Nancy Pelosi reclaims the title of Speaker.

In passing the Ryan budget, Congress also upped the debt ceiling by a trillion or so, but perpetual deficits mean that the ceiling is coming awfully close, and federal spending is due to break it in early August 2015. So now, in May, the president must go on bended knee to Speaker Pelosi, who demands tax increases as the price for her caucus supporting an increase in the debt ceiling.
In this example, how the Republican Party thinks about incentives (winning the election, or what happens to the prize should they win) will incentivize them quite differently as to how they play this game.

Monday, July 25, 2011

A nervous bull

As I write this, global equity markets are down in reaction to the lack of a debt ceiling agreement out of Washington. Despite this event, I remain a nervous bull since my Asset Inflation-Deflation Timer Model issued its buy risk signal last week to jump into commodity producers, emerging market equities and TIPs. The market conditions now are similar to the last time the Timer Model issued its buy risk, or inflation signal, last September just after Bernanke's Jackson Hole QE2 speech.

First of all, the driver of the Timer Model, namely commodity prices, are starting to trend up:

Most importantly, economically sensitive commodities such as copper show a similar pattern of break out from a technical downtrend and starting to rise:

Measures of risk appetite, such as the relative performance of Consumer Discretionary to Consumer Staple stocks, are also showing a similar pattern of turning up:

The relative performance of cyclical stocks is one of the weaker links in the pattern. Last time, cyclicals were in a relative downtrend but they were in a constructive pattern of a triangle formation showing higher lows. Today, cyclical stocks are in a relative downtrend and they are approaching a key relative support zone. A breakdown below relative support would be a negative divergence.

Key risks
To be sure, there are important macro and event risks that overhang the market. As I pointed out before, the banking sector has broken down below an key relative support level and remains in a relative downtrend. Past instances of important violations of relative support is an indicator of high systemic risk in the financial system, i.e. the Russia Crisis of 1998 and Subprime Crisis of 2007.

I interpret these conditions as a tactically bullish. Risk appetite is rising and it's time to jump on that momentum. The last time this happened, it sparked a significant intermediate term rally in the market.

While I am highly concerned about the level of systemic risk in the financial system, these concerns were also present last September as well, when the BKX was also in a relative downtrend. Given these conditions, my inner trader tells me to give the bull trade the benefit of the doubt, but maintain tight stops in order to limit my downside risk. In other words, I am a nervous bull.

Friday, July 22, 2011

Thermopylae or Crete?

Is the Greek rescue package another metaphorical Battle of Thermopylae? Recall that a small Greek rearguard, which was hopeless outnumbered, held off the Persian army for a few days. They lost the battle but won the war. Or is this just the opening shot in the Battle of Crete in 1941, where German paratroopers annhilated the Allied defenders in an air assault on Crete? To quote Wikipedia's account:
After one day of fighting, the Germans had suffered very heavy casualties and none of their objectives had been achieved. The next day, through miscommunication and the failure of Allied commanders to grasp the situation, Maleme airfield in western Crete fell to the Germans, enabling them to fly in reinforcements and overwhelm the defenders. The battle lasted about 10 days.

Joseph Cotterill of FT Alphaville also pointed out an IMF analysis regarding Argentina's debt swap back in June 2001, i.e. voluntary debt swaps don't work:
Voluntary debt swaps (and debt buybacks) done during a crisis can be likened to the case of an individual who, unable to service mortgage undertaken when interest rates were low, decides to refinance it at a much higher interest rate in exchange for temporary relief...

Key indicators
Here is what I am watching. One of the key paragraphs of the deal reads [emphasis added]:
All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Public deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest. In this context, we welcome the budgetary package recently presented by the Italian government which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in 2014. We also welcome the ambitious reforms undertaken by Spain in the fiscal, financial and structural area. As a follow up to the results of bank stress tests, Member States will provide backstops to banks as appropriate.
In other words, the EU is saying, "Portugal and Ireland are out of luck. Don't expect anything from us."

Does the market believe that? Can the Greek contagion be arrested?

Consider the yield of the 2-year Portuguese paper shown below. While rates have ticked down, they are still substantially above the levels in late June, before this latest round of anxiety broke. Can the yields at least come down to those levels?

The same could be said of the 2-year Irish note:

...and Spanish paper:

I think that the all-clear can be sounded when yields for peripheral Europe retreat and stabilize. Until then, the risk premium on the Greek contagion remains a concern.

Thursday, July 21, 2011

The perils of technology

File this under the perils of technology: Here is a link to the funniest autocorrections on iPhones. (Warning: NSFW).

I haven't laughed this hard in years.

It does illustrate, however, the limits of automated (read: quantitative) systems.

Wednesday, July 20, 2011

How to solve the US budget crisis

Here is one way of easing the budget deficit that is relatively painless (but it will never get done because the proposal runs up against too many entrenched interests). Paul Kedrosky posted this chart of the efficiency of US healthcare spending against other major industrialized countries.

What if US health care expenditures fell because it became more efficient. It's not exactly rocket science and no one has to re-invent the wheel - other major industrialized countries have done it before. Wouldn't that solve a lot of the fiscal problems that the US faces?

P.S. See my personal take here of the differences between the Canadian and US health care system here.

Tuesday, July 19, 2011

Timer Model: Buy inflation hedges & risk

After spending several weeks in neutral in a market that lacked directional conviction, the Asset Inflation Deflation Timer Model has moved from a "neutral" to an "inflation" reading. This condition signals that the model portfolio should orient itself to the risk trade, namely inflation hedge vehicles, such as shares of commodity producers, emerging market equities and TIPs.

The Timer Model depends on commodity prices as a leading indicator of global growth and inflationary expectations. The chart below of commodities as measured by the CRB Index, shows that commodities have been rallying in the face a recent bout of equity weakness, which is constructive for the "buy risk" trade.

The chart below of commodity prices compared to equity prices shows the relative uptrend in a more dramatic fashion:

Buffett talking bullishly about the economy
As another bullish sign, Warren Buffett has been talking bullishly about US economy and employment and Bloomberg reported that Berkshire Hathaway recently bought $4b of stocks for its portfolio [emphasis added]:
We have gone through, I don’t know how many recessions, perhaps 15 in the history of this country.
But, our system over-shoots periodically. And in this particular case we had a huge bubble. So the fact that there’s a correction after that should not be unexpected. But our system always comes back and it will this time. And it already is...
We will come back big-time on employment when residential construction comes back. And we way over-produced in houses. I mean we were forming a million or 1.2 million households and we were building close to two million residential units.”

Big surprise, we ended up with too many houses. We’re not going to blow them up. We’re not going to have kids start getting married at 12 or something. There’s a natural correction. The only way a correction takes place is to have households formation exceed new construction by a significant amount for a significant period of time.

We’ve had it for quite a while. And when you see these figures of five or 600,000, that means we’re sopping up housing inventory and I don’t know exactly when that hits equilibrium, but it isn’t five years from now I know that. And I think it actually could be reasonably soon.

A commodity-equity disconnect?
On Monday, stocks tanked while gold rallied past $1,600, likely on concerns about systemic financial risk in the US and Europe. In my discussions I was asked if there is a possibility of a disconnect between gold (and commodity prices) and equities (and the "risk" trade).

I would answer that question in a number of ways. First of all, while gold and other precious metals can be regarded as an alternate currency to the fiat currencies, the move in commodity prices has been broadly based. Consider, for example, Dr. Copper:

...or the agricultural commodities, as measured by the ETF DBA:

John Murphy of also recently pointed out that equities and commodities remain closely correlated, though they haven't always been correlated in the past:

In short, the fact that commodity prices are rising in the face of all this bad news can only be interpreted constructively for the global growth outlook.

Risks to the trade
The initiation of a new position by the Timer Model is always fraught with risk. I am closely watching the behavior of Banks against the market. The relative underperformance of the Banking Sector is a source of concern. As the chart below shows, the sector has broken down below a major relative support level and remains in a relative downtrend. While the sample size is low, past occurences have signaled major market dislocation, namely the Russia Crisis (1998) and the Subprime Crisis (2007), which didn't result in a market meltdown until a year later in 2008.

Any investor who buys "risk" at this point, as the Timer Model is doing, has be concerned about the tail risk of a European sovereign crisis or the possibility of a US default. Neverthless, commodity prices have been able to signal past financial meltdown episodes, i.e. the Lehman and Russia Crisis. Still, I expect to enter into this trade with tight stops as a way of defining my risk tolerance.

Addendum:  Further to my post, Erik Swarts of Market Anthropology confirms the Timer Model signal. He analyzed the silver-gold ratio and concluded that risk appetite is on the rise and "equity markets are substantially undervalued".

Monday, July 18, 2011

Pair trading update

Sorry the posting have been light as I was Down Under with the family. Here is a vacation picture of visiting black swans in New Zealand:

Upon my return, I reviewed some of the pairs trades that I suggested in the past. It appears to be time to consider an exit from those two pairs. First of all, I had suggested that Canadian equities were a cheap way to get Aussie exposure, largely because the two economies are so similar. This pair has moved back into neutral territory and it's time to think about taking it off. There may be some more short-term upside in the pair as the Australian market is underperforming over anxiety over the government's carbon tax proposal.

As well, I had suggested that it was time to buy Research in Motion and short Nokia. Given that there are some profits in that pair and the risks inherent in that trade, it may be time to take some money off the table.

A new trade to consider
As I wandered the streets of Sydney, I came upon this sign (note the institution, but the rates are similar across all banks):

Notwithstanding that this is a commentary on the difference between the accommodative policy of the Federal Reserve and the more inflation aware RBA, the difference in yield is suggestive of a AUD vs. CAD carry trade. Given that the nature of the economies are similar, this would be an interesting fundamental currency pair to consider.

However, this may not be the time. The chart below of the AUDCAD rate shows that the currency pair has broken a key technical support:

However, this would be an interesting carry trade to consider in the future given the dynamics of the two economies.

Monday, July 11, 2011

What the bulls need to do

Sorry the postings have been light because I have been traveling. Looking at the markets, it appears that we have seen the relief rally, which I talked about on June 22. My favorite overbought/oversold indicator shows that the market has strongly rebounded from an oversold condition and these rallies typically last 1-3 weeks.

US equities saw a setback on Friday because of the ugly jobs picture. As a ray of hope for the bulls, Warren Buffett was talking bullishly about the employment situation and Berkshire was reported to have added $4b of equities to its portfolio.

However, Buffett has always said that he is not good at market timing. Near term, I continued to be concerned. Here are the things that I want to see the bulls achieve in the next few weeks before a bullish impulse can be confirmed.

First of all, the banks continue to act badly relative to the market. I would like to see the Banks show some sustained strength compared to the general market. The continued underperformance of the banking sector is an indication that the markets are still concerned about systemic risk in the financial system.

Second, I would like to see some signs that the Greek contagion has been arrested in Europe. In the wake of Italian bond yields blowing out Friday, an emergency meeting has been called on for Monday to deal with the Italian situation.

Lastly, equities need to decisively rally through resistance, as represented by the May highs.

Until those conditions occur, I interpret the current conditions as a range bound market.

Tuesday, July 5, 2011

When balance funds failed

In meetings with clients and prospects, I have been asked by several people about the rationale for building the Asset Inflation-Deflation Timer Model. The simple answer is, "I built it because balanced fund diversification failed so miserably in 2008."

Consider this chart showing a 60% stock (SPY) and 40% bond (AGG) mix, rebalanced daily. The theory behind Modern Portfolio Theory is that such a diversified portfolio is supposed to give you growth but protect you on the downside should something go wrong. Simply put, diversifying between stocks and bonds mean that when one thing goes up, the other either stays the same or goes down, and vice versa. That way, you get a much steadier rate of return than by holding one asset class.

Now look what happened during market meltdown in 2008. Diversification didn't help that much because both stocks and bonds fell at the same time. The 60/40 balanced fund portfolio gained a total of 5.8% on an annualized basis from September 2003 to the present and suffered a maximum drawdown of 35% over that period.

The 35% drawdown was particularly surprising given the "diversified" nature of the portfolio. At the same time, I constructed a hypothetical portfolio of what a balanced might have and should have looked like in that market of the Great Bear. I assumed that for the 12-months ending March 2009, the portfolio steadily lost 10% over that time. The rest of the time, it had the same returns as the standard 60/40 benchmark. The modified portfolio returned 7.9% over the same period and saw a maximum drawdown of 15%, which is more in line with the expectations of a diversified balanced fund.

Risk is becoming one-dimensional
The failure of diversification is attributable to the increasingly single dimensional nature of risk. On a daily basis, we see either the "risk on" or "risk off" trade dominating the ticker. When investors buy risk in the "risk on" trade, stocks, commodities, the euro and high-yield bonds generally rise together. In a "risk off" environment, the US Dollar and bond prices rally.

When the prices of different asset classes move together, what was diversifying is diversifying no longer. Foreign stocks and bonds, particularly if they have any form of credit risk aren't diversifying to each other anymore. Neither are commodities, nor emerging markets.

Asset prices either just go up, or go down. We saw a similar investment environment back in the late 1960's and 1970's, when the stock market moved in a broadly sideways pattern with but up and down moves. We also saw a similar pattern in the Japanese stock market in the last two decades.

The Timer Model is a active asset allocation strategy that uses intermediate term trend following techniques to take advantage of those moves up and down, which parallel the patterns of the "risk on" and "risk off" trades of today.

That's why I believe it's the right tool for the current market environment.

Friday, July 1, 2011

The European Experiment in context

As Canadians celebrate Canada Day on July 1 and my American friends celebrate Independence Day on the 4th this weekend, I thought it would be useful to reflect upon Greece and the EU by putting the European Experiment in context.

STRATFOR wrote a great essay called The Divided States of Europe that gives some context to the problems in Greece. I have found them useful at times for analysis, but more importantly, their viewpoints often reflect an Inside the Beltway view of the world that offers a window on how the Washington elites think about geopolitics. The Divided States of Europeis is republished with permission of STRATFOR and they state that Greece's financial problem is a problem of economic integration without political integration [emphasis added]:
It is important to understand that the crisis is not fundamentally about Greece or even about the indebtedness of the entire currency bloc. After all, Greece represents only 2.5 percent of the eurozone’s gross domestic product (GDP), and the bloc’s fiscal numbers are not that bad when looked at in the aggregate. Its overall deficit and debt figures are in a better shape than those of the United States — the U.S. budget deficit stood at 10.6 percent of GDP in 2010, compared to 6.4 percent for the European Union — yet the focus continues to be on Europe.

That is because the real crisis is the more fundamental question of how the European continent is to be ruled in the 21st century. Europe has emerged from its subservience during the Cold War, when it was the geopolitical chessboard for the Soviet Union and the United States. It won its independence by default as the superpowers retreated: Russia withdrawing to its Soviet sphere of influence and the United States switching its focus to the Middle East after 9/11. Since the 1990s, Europe has dabbled with institutional reform but has left the fundamental question of political integration off the table, even as it integrated economically. This is ultimately the source of the current sovereign debt crisis, the lack of political oversight over economic integration gone wrong.
The last time Europe at the height of political and economic integration was in 1942 under Hitler's Nazi Germany - and look at how that experiment turned out. STRATFOR went back in history and found a parallel of economic integration without political integration, namely the United States after her War of Independence:
The best analogy for the contemporary European Union is found not in European history but in American history. This is the period between the successful Revolutionary War in 1783 and the ratification of the U.S. Constitution in 1788. Within that five-year period, the United States was governed by a set of laws drawn up in the Articles of the Confederation. The country had no executive, no government, no real army and no foreign policy. States retained their own armies and many had minor coastal navies. They conducted foreign and trade policy independent of the wishes of the Continental Congress, a supranational body that had less power than even the European Parliament of today (this despite Article VI of the Articles of Confederation, which stipulated that states would not be able to conduct independent foreign policy without the consent of Congress). Congress was supposed to raise funds from the states to fund such things as a Continental Army, pay benefits to the veterans of the Revolutionary War and pay back loans that European powers gave Americans during the war against the British. States, however, refused to give Congress money, and there was nothing anybody could do about it. Congress was forced to print money, causing the Confederation’s currency to become worthless.

The problem eventually became Greek-like:
Nothing brought this reality home more than a rebellion in Western Massachusetts led by Daniel Shays in 1787. Shays’ Rebellion was, at its heart, an economic crisis. Burdened by European lenders calling for repayment of America’s war debt, the states’ economies collapsed and with them the livelihoods of many rural farmers, many of whom were veterans of the Revolutionary War who had been promised benefits. Austerity measures — often in the form of land confiscation — were imposed on the rural poor to pay off the European creditors. Shays’ Rebellion was put down without the help of the Continental Congress essentially by a local Massachusetts militia acting without any real federal oversight. The rebellion was defeated, but America’s impotence was apparent for all to see, both foreign and domestic.

The Why of the European Union
STRATFOR went on to discuss the centrifugal forces tearing Europe apart [emphasis added]:
The current political and security architectures of Europe — the EU and NATO — were encouraged by the United States in order to unify the Continent so that it could present a somewhat united front against the Soviet Union. They did not grow organically out of the Continent. This is a problem because Moscow is no longer a threat for all European countries, Germany and France see Russia as a business partner and European states are facing their first true challenge to Continental governance, with fragmentation and suspicion returning in full force. Closer unification and the creation of some sort of United States of Europe seems like the obvious solution to the problems posed by the eurozone sovereign debt crisis — although the eurozone’s problems are many and not easily solved just by integration, and Europe’s geography and history favor fragmentation.

That is where I depart from STRATFOR's analysis, where their inside the Beltway analysis is a little too trite and simple. It does not appear that STRATFOR understands the centripetal forces holding Europe together.

After the Second World War, Western Europe surveyed the wreckage and collectively decided "never again". In the 200 years preceding that war, Europe had been wracked by conflict (WW II, WW I, Franco-Prussian War, Napoleonic Wars) and the main source of conflict was between France and Germany, or the Germanic states before their unification. When Western Europe said "never again", they devised a solution that bound the French and the Germans so tightly that the devastation of war on the European Continent would be stifled, hopefully forever. That solution was the EC, which became the EEC and now the EU.

Politically, they have largely succeeded. Today, if Angela Merkel mobilized the Bundeswehr and told the troops, "We are going to war against the French", the men would all laugh and go home. Compare that result to the cost of the Battle of Verdun of 300K dead and another 500K+ wounded and you will start to understand why the EU was formed.

Europe's challenge today
The European experiment began with economic integration - a Common Market. Political integration was much harder and would have to wait. The adoption of the euro as a common currency was just another step in that path, but it turned out to be a serious mis-step.

Today, we are facing the European equivalent of a Shays Rebellion. The problem of the lack of political integration has surfaced with a vengeance. It will be up to Europeans to resolve this for themselves.

To say that the euro is at an end as a common currency is overly simplistic analysis. In many ways, the EU was paid by blood - just remember the price paid at StalingradVerdun and Napoleon's retreat from Moscow, just as some examples.

Don't count the European Experiment as over just yet.