Report from Leen’s Lodge

Report from Leen’s Lodge
David R. Kotok
June 24, 2012




Fishermen plying the pristine waters of Maine tend to focus on bass and salmon, while they consider pickerel to be “trash fish.” Pickerel have a mouthful of sharp teeth, linger in shallow water, and quickly charge bait or a lure. The fisherman often misses the hook, as the pickerel has crunched and then spit out the artificial lure, leaving the fisherman to sit silently contemplating what just occurred. Pickerel is a ruthless, prehistoric fish.

As you get older and are afforded the opportunity to visit Leen’s Lodge, healthier dietary choices begin to supersede the usual fried campfire fare. And so, grilled chicken and salad grace the menu, along with a couple traditional items. However, what about the pickerel?

My guide, Ray Socabasin, scaled the pickerel, slit the back and the ribs after it had been cleaned, and then placed it on a metal plate. Adding a little light olive oil, some onions, peppers, and seasoning, he then covered it with aluminum foil and placed it on the fire. A few minutes later we had a baked pickerel.

The pickerel meat is sweet and very flavorful; you might almost call it a delicate, fish-type spare rib. The little bones in the pickerel melt from the heat; and so this otherwise difficult and bony fish becomes a succulent, marvelous delicacy. You take it off the campfire and behold a feast. Thus, a visit to Leen’s Lodge, near Grand Lake Stream, Maine, offers a little solace in an otherwise turmoil-filled world of struggling financial markets and cut-throat politics.

Nevertheless, let’s glance at credit spreads. We have updated and posted them on our website: There you will see credit spreads and yields on benchmark 10-year bonds of the “good guys” and the “bad guys” in Europe and most of the other important places in the world.

We want to call your attention to an added chart that shows the yields on Swiss government debt. Notice the Swiss shorter-term, 2- to 5-year debt is now trading at a negative yield. That is correct; people are paying interest to loan their money to the government of Switzerland. In the front end of the yield curve, Switzerland is financing itself at a profit. The 10-year Swiss franc-denominated government bond has become the benchmark bond of the euro zone.

Imagine a construction in which the benchmark bond of a currency zone of seventeen countries is denominated in a different currency. That is what is happening in Europe. Why? The Swiss have pegged their franc to the euro at a ratio of 1.2 to 1. The Swiss Central Bank will buy unlimited amounts of euros that are presented to it in order to maintain that price. The balance sheet of the Swiss Central Bank is growing continuously, as the influx of euros swells into the Swiss monetary system.

Thus, we now have a de facto euro zone benchmark bond denominated in Swiss francs, maintained by the Swiss government and the Swiss Central Bank, and at a yield of almost 100 basis points below the traditional German benchmark bond.

Markets seek this safety because it has become an established “one-way” trade. Markets are betting that the euro zone will be dismembered, losing or expelling one or two of its members. The various scenarios have widely different outcomes, but the events are being considered. Markets are also betting that diminution in the German ability to maintain and finance the rest of the euro zone’s debt structure will eventually cause German credit to weaken.

The strengthening of German credit is not in the cards, nor is the strengthening of European credits. The euro zone continues to spiral downwards. The economies of the various countries are shrinking. Debt ratios are rising, and the curious notions of European politicians are not much changed. They think that by piling debt load on debt load upon debt loads, they can solve their problem of insufficient bank capital and very low or no growth.

Markets say, “Okay, if and when the Swiss franc peg to the euro comes apart, the Swiss franc will soar in value. Meanwhile, I can park my money in one of the safest, strongest credits of sovereign debt in the world.” Switzerland is viewed as one of the preeminent, AAA-rated, safe, sound, and stable financial economies.

Here at Leen’s Lodge, we have discussions of the significance of the credit spreads. What do they mean for banking systems and for banking enterprises? Chris Whalen, an expert on the banking sector, is dissecting the credit spreads and how they are impacting the profitability of banks in the US and abroad. Jim Lucier from Capital Alpha talks about Washington-based policy makers and essentially suggests that nothing happens for the rest of this year, other than the interminable debating of our political season. Others in attendance here are investors and consultants from various locations around the country. They are concerned about low yields and are watching the destruction of savers’ income. They wonder how long this apparent madness in financial markets and pricing will continue.

The plate comes off the fire and the pickerel are delicious, succulent – and vanish quickly as hungry fishermen switch from fried fish to baked fish. We take this as a metaphor for a change of policy. Policy change is very helpful to the diets of fisher folk at Leen’s Lodge.

Can European policy makers switch from fried fish to pickerel? Can Americans do the same? Have we had enough of the financial diabetes and cardiac treatments that follow the ingestion of massive sequential compounding debt structures?

We will find out soon enough. Leen’s Lodge is a great place to contemplate some very important subjects, in addition to finding cooperative fish in pristine waters, in beautiful surroundings. You can call (800) 99-LEENS or visit for more information.

David R. Kotok, Chairman and Chief Investment Officer

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