I’ve been suffering some serious writer’s block lately. Just can’t seem to come up with the right words to express the current condition we find our condition to be in.
Now usually in the movies, when the main character is a writer suffering from the blank page syndrome, something dramatic happens. Either he goes off to the woods to find inspiration and instead finds a gang of crazy zombies trying to break into his house and kill him. Or, typically after a bottle of bourbon, he makes a deal with the devil – inspiration for his soul. Or even worse (that is if you’re the movie watcher looking for a good action flick on a Saturday night) he finds the “love interest,” and the whole thing just turns into another weepy chick flick.
But as luck would have it, I didn’t need to recluse myself to the woods, or make a deal with the devil. Instead I had the good old European Community to snap me out of my doldrums. You see this past weekend, the G-8 world leaders met, and emerged with what had to be, one of the single most bizarre statements ever made in political/economic history. Since this incident received minimal coverage, let me set the stage and explain.
So picture the G-8 leaders (the leaders of 8 of the largest 12 world economies – they still won’t let the non-white guys in, or Russia which are basically white guys that don’t count), sitting around a table agonizing over unemployment across the EU, lack of economic growth, trillions in deficits, the Greeks are dumpster diving for food, the Spanish are turning back the clock 200 years as young men are flocking to be sheep herders – one of the few jobs available in their new “austerity” economy. Then in the midst of gloom, up pops Eddie Haskell aka French President Hollande, and he says. “Hey Beav, let’s just change our policies to “growth” and our economies will grow again!” The Beaver, played by ECB Chief Mario Drahgi, replies, “That’s a great idea Eddie, why didn’t we do that before!” Then in unison, the rest of the G-8 leaders have their V-8 moment, slap their foreheads with the palm of their hands and, in unison, exclaim, “Yes, we’ll just grow our economies!” They proudly emerge from the conference and announce to the press that they will implement a balanced approach to austerity by adding in growth measures for their economies. The world applauds, and global stock markets rally…for a day.
The immediate reaction to this “Eddie Haskell” moment, was relief. (For both of you readers that are too young to appreciate the Leave it to Beaver references, you can go to youtube.com to see what you missed). The ECB would just give growth a chance, before giving Greece, Italy, and Spain the boot. But seriously, if growth was just a matter of politicians sitting around and agreeing to implement growth strategies, what the heck have we been doing for the past decade(s)?!? You mean we needn’t go through business cycles? Booms and busts? All we have to do, to have consistent sustainable growth, is to say “Make it so”?
The reality is that growth strategy is synonymous with government spending in politician speak. The entire European Union has been implementing “growth strategies” since the formation of the EU. If deficit spending truly resulted in sustainable economic growth then Greece would have the fastest growing economy on the planet, followed by big brother and big sis, Spain and Italy. They have cumulatively spent their way into deficits that are 200% or so of their GDP, saddled their banks with bad debt, and killed off their private sectors in return for the Euro, and more cheap borrowing. You simply do not keep feeding a drunk alcohol to cure alcoholism.
The reality is, the entire G-8 has financed a global boom with massive government borrowing. The end result is that private sector growth has been stunted as capital has been siphoned off to the public sector. Now, when the accounting numbers no longer add up, debt needs to be repaid, there is just not a large and vibrant enough private sector (translation: not enough jobs and the jobs we have don’t pay enough), to generate enough tax revenue to maintain our bloated public sectors AND maintain payments on our accumulated debt. The only difference between us and Europe is that they are further down the road then we are. When the dust settles in Europe, it will be our turn. Pay attention. This is a rare opportunity to watch your future unfold before your eyes.
Why is my adrenaline flowing? Why am I worked up? Here is a quick story: A couple weekends ago I was asked to speak at a conference in Atlanta. It was hosted by one of the largest clearing firms in the US. One of the other speakers was a chief equity analyst for a very big domestic investment company that we all know and love. In addressing the European situation, he said “We see about a 5% chance that the Euro will break up”. I challenged that assessment, asking for his data that would suggest the anyone has enough money to actually get all of Europe solvent again. His reply, and I paraphrase was, “ We really don’t have any data, we just believe that a breakup of the Euro would be so catastrophic, that it just won’t happen.” Really. As he spoke visions of Wall Street bankers flashed through my head, circa 2007, and I wondered how many had said those exact same words referring to mortgages and the mortgage backed securities market?
Here is the bottom line. Risk is not about the odds of something happening. It is about the consequences if it does. The question you should be asking yourself is not whether the Euro fails or not. The question is, what happens to my investments, my retirement, my kid’s education, my sanity, if we go through another market crash as seen in 2000-2002, and 2007-2009. And if you are not willing to accept the consequences of another 50% loss or so to the equity portion of your portfolio, you need to take steps now. Either get out, lighten up on risk, or plan an exit strategy. If Greece exits, the global financial markets will be in trouble. If Europe holds it together, we will be knocking on the door of the next secular bull market – you’ll have 15 – 20 years to make some serious money. Being on the sidelines for the first 3 – 6 months or so, would really not be a big deal.
Up next: The indicators we’re watching and how we’ve prepared our portfolio’s.