Eurozone Debt Crisis: Now It's a Hopeless Game of Whac-a-Mole
The Eurozone debt crisis that was supposed to have blown over long ago instead has become more like an endless game of Whac-a-Mole, with both new and old problems popping up faster than European leaders can bop them.
As Europe's finance ministers gathered in Dublin today (Friday), they faced at least half a dozen major issues threatening the fiscal health of the Eurozone.
Although Europe's leaders, in concert with the International Monetary Fund (IMF), have succeeded in keeping a lid on each successive crisis over the past three years, that streak can't survive in the face of the new and old fiscal woes that have been peppering the Eurozone.
U.S. investors can't let those past successes deceive them into thinking the Eurozone is no longer a worry.
When the Eurozone debt crisis finally implodes – and sooner or later, it has to – it will hammer stock markets around the globe.
Berkshire Hathaway Holdings Show Buffett Hunting a Big Elephant
Warren Buffett's Berkshire Hathaway holdings have undergone some major changes in the third quarter, according to the company's latest 13F filing.
Not only did Buffett and Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) sell more than $750 million in two American giants, they initiated four new holdings and eliminated three positions entirely. Overall, Berkshire's reported portfolio, which only includes long positions, increased to $75.3 billion for the quarter ended Sept. 30, up from $74.3 billion the previous quarter.
While some think Buffett is taking profits where he can, others think he is building up a stockpile of cash for a major move.
"Buffett may be selling the consumer stocks to provide more funds to his deputies while reserving money for a large acquisition," David Kass, a professor at the University of Maryland's Robert H. Smith School of Business, told Bloomberg News.
"He may be really wanting to keep that aside for his big elephant," said Kass, who is referring to Buffett's quote in a letter to shareholders last year where the 82-year-old investing legend stated, "Our elephant gun has been reloaded, and my trigger finger is itchy."
Only Buffett and Berkshire's new portfolio managers, Todd Combs and Ted Weschler, truly know why they made their latest moves, and so without further speculation, here they are.
Gordon Gekko Was Wrong: Sometimes the Pig Gets Eaten
As longtime readers know, I have a real affinity for old investing adages – in large part because of the very real lessons the best ones convey.
And one of my favorites tells us that "Bulls make money, bears make money – and pigs get slaughtered."
With apologies to Gordon Gekko, while greed may be good, excessive greed can be hazardous to your health – and to your portfolio.
And a news item I spotted last week drove that point home.
Last Monday, the trade journal Canadian Business reported that Canada has issued a "thumbs-down" verdict on a deal that calls for Malaysian state-run energy giant Petronas to pay $6 billion for Progress Energy Resources Corp. (PINK: PRQNF), a natural-gas producer that's based in Calgary.
Canadian Industry Minister Christian Paradis said Ottawa nixed the deal because the administration of Prime Minister Stephen Harper was "not satisfied that the proposed settlement is likely to be of net benefit to Canada," Canadian Business said.
Needless to say, the free-market crowd is using the Harper Administration for target practice – alleging the rejection will have a chilling effect on all foreign investment north of the border.
Greed is Not Always Good
Of course, that's a political concern. My focus today is on the investing fallout … and the lesson we can learn from it.
As a result of the decision, the value of other resource companies – especially ones investors thought might serve as decent takeover candidates (at a nice premium) – have also been hit.
And that brings me back to my "pigs get slaughtered" point.
You see, Permanent Wealth Investor Editor Martin Hutchinson twice recommended Nexen shares to Private Briefing subscribers – first in early September 2011 and then again in early July of this year … just two weeks before CNOOC offered to buy Nexen for $15.1 billion, or $27.50 a share.
Afterwards, the stock jumped to $26 – 33% and 54% above where he'd recommended it to you, but a full 6% below the "offer" price of $27.50.
When the Nexen deal was announced, a lot of folks asked us whether they should cash out and take their winnings, or hold out for that last 6% – which, admittedly, is a significant amount of money in today's zero-interest-rate world.
Martin didn't hesitate. In fact, he gave readers the same advice he gave his own subscribers (who, by the way, pocketed 68% on the deal).
Investing in Philippines: Escape the U.S. with a Low-Debt, Low-Inflation Economy
Along with its various countries and economies, the Asian investment thesis has certainly evolved over the years.
Those born in the 1960s and 1970s surely remember the 1980s when Japan's economy rose to global prominence, showing the world that at least at that time, Japan truly was the land of the rising sun.
The Asian financial crisis struck in the late 1990s, but that even only temporarily chased Western investors away from the continent. Caution would give way to ebullience earlier this century as investors became enamored by the Chinese and Indian growth stories.
Flush with statistics about that pair representing two of the fastest growing economies in the world and that one or both would one day pass the U.S. in terms of economic heft, investors were once again seduced by Asian opportunities.
Renewed appetite for Asian exposure coincided with another boom, that of the exchange-traded fund (ETF) industry. As the Chinese and Indian economies became juggernauts, ETF sponsors have met investor demand for exposure to these countries coming up with everything from ETFs focused on Chinese technology companies to Indian small-caps.
ETF issuers did not stop there. As investors clamored for ways to access other Asian markets, ETF sponsors obliged.
In other words, the Chinese and Indian growth stories gave way to the burgeoning economies of Indonesia, Thailand and others. Since the March 2009 market bottom, the iShares MSCI Thailand Investable Market Index Fund (NYSE: THD) and the Market Vectors Indonesia ETF (NYSE: IDX) have been two of the best performing ETFs of any kind.
Those funds are still performing well, but a case can be made there is a new sheriff on the Asian investment block.
What 700 Million People in the Dark Says About Investing in India
For years now I've preferred China over India.
When invariably asked to compare the two as investments, my answer has always been the same.
Somewhat tongue -in-cheek, I'd point out "that India has trouble keeping the lights on from one end of the country to the other."
Little did I know that those comments made in jest would actually become reality.
Earlier this week, a massive power blackout left more than 700 million people without power in India as not one, but three, regional electrical grids failed.
If that isn't a glaring sign that India isn't ready for prime-time I don't know what I can say to make you see the light – pun absolutely intended.
Don't get me wrong. There are clearly a few select Indian companies worth the risk.
But as a whole, the scope of this power failure suggests India has a long way to go before it achieves the global superpower status it seeks and a dominant position in your portfolio.
India Needs to Put its Own House in Order
Not that this will stop India from trying.
It's now the 8th largest military spender in the world, having tripled defense spending in the past 10 years. It's no secret India desperately wants to have a permanent seat on the United Nations Security Council.
And, it's making great strides in international diplomacy that it believes will pay off later in increased foreign recognition and direct investment.
But as this embarrassing power failure demonstrates, India would be better off getting its own house in order first before it steps onto the world stage.
Many investors take issue with these views. They cite the fact that India is the second-largest English-speaking nation in the world, that 58% of its economy is consumption-based, that it has huge numbers of tech-savvy and well-educated people.
I don't dispute any of that.
However, on the other side of the ledger is a laundry list of reasons for investors to be wary.
Try as He Might, Mario Draghi Cannot Save the Euro
Of all the pyramid schemes that governments and banks have perpetrated in the last decade, the Eurozone debt crisis is the most damaging.
No amount of posturing by European Central Bank President Mario Draghi can change that fact.
The market may like what Draghi has to say about the fate of the euro, but tomorrow's big ECB meeting will change little.
The massive amount of money Draghi will need to print is far too great for the German taxpayer or the ECB's balance sheet.
Eventually, the Eurozone will break up and drag the global economy right down with it.
In the long run, that will mark the beginning of the recovery, but in the short run it will precipitate a banking and economic crisis that will make 2008 look like child's play.
As investors, we had better be prepared.
Politicians Doomed the Euro
The Euro was a reasonably sensible idea, although without political integration it was always likely to cause trouble.
What's more, the technical side of it was for the first ten years handled very well by Otmar Issing at the European Central Bank. Issing spent his career in the Deutsche Bundesbank and knew what a decent currency looked like.
However, two decisions taken by politicians doomed the currency.
One was to admit Greece into the union, which to any competent observer was a hopelessly corrupt and uncompetitive economy propped up by giant EU subsidies.
More important, though, was the design of the TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) payments system which was replaced in November 2007 by TARGET 2.
As I wrote in an earlier article, it is the secret system that blew another hole in the euro.
Target 2 requires all payments between banks in different countries to go through the national central banks (thus giving those otherwise redundant entities something to do).
Theoretically that's the same system as in the U.S., where many payments are made through the regional Federal Reserve Banks.
However, in the U.S. the larger banks deal direct, and outstanding payments in the regional Fed banks are cleared regularly. What that means is that if Alabama runs a payments deficit with New York, no large balances are allowed to build up.
Conversely, there has been no automatic clearing between the central banks in Europe. This may sound arcane and boring, but I promise you it is not.
These payment imbalances have two nasty side effects.
How to Boost Your Income in a World Where a Six Figure Salary No Longer Cuts It
It may sound impressive, but a $100,000 salary isn't all it's cracked up to be. What would have cost you $100,000 in 1976 would cost you a whopping $380,000 today.
And that's just adjusting for inflation…
In fact, to get the same benefit from a "six-figure salary" that you would've earned in yesteryear, you'd need to make about $250,000 today.
Welcome to the magic world of 2012. It's a place where taxes go up, prices soar and the middle class gets pushed closer and closer to the brink.
The same thing is true for retirees.
Thanks to the Federal Reserve's zero interest rate policy, a $2 million nest egg isn't what it used to be, either.
For instance, did you know that Moody's recently changed its pension fund return assumptions to 5.5% because of today's low interest rates?
At those levels, a $2 million nest egg would "only" throw off a $110K income stream, which is pretty marginal, especially when you allow for inflation and spiraling medical costs.
What's more, it's not obvious to me how exactly you can guarantee that 5.5%.
As for the 8% returns you were promised all of your adult life on your pension funds, those are long gone, too. In the low-growth economy facing us now, those types of returns are going to be impossible for big funds to achieve.
Take CalPERS, for instance. It's the California Public Employees' Retirement System pension fund-the biggest public fund in the U.S.
CalPERS only recorded a 1% return this year, a long way indeed from the 7.5% return their actuaries were assuming.
But don't worry, there's a way investors can earn better returns and create income streams that can help to put them comfortably above that benchmark six-figure salary-even during periods of low growth.
One of these investments actually yields 8.6% and is heavily undervalued at the moment. More on that later.
These South of the Border Bargains Offer Investors Real Growth
While the news worldwide seems universally gloomy, it doesn't mean that there aren't any bargains to be had.
If you're looking for opportunities to grow your money in ways that are not dependent on changes in monetary policy or a solution to the Eurozone debt crisis, here's a good one.
It's a brand "new" market that has just had a stroke of good fortune, which means its prospects now look much better than they did before.
It has a decent-sized market, with lots of companies listed in the United States, and low political risk.
It may surprise you to know that I'm talking about Mexico.
Now, I know that Mexico hasn't exactly been at the top of list when it comes to finding safe investments.
For the last decade, Mexico has been bedeviled by the stranglehold of oligarchy, slow growth and an economy which is excessively dependent on the United States.
Admittedly for investors, there did not seem to be much to go for. The big companies, such as those controlled by Carlos Slim, the world's richest man, sold on sky-high P/E ratios and seemed to offer more risk than opportunity. Meanwhile, smaller outfits were stifled by Mexico's bureaucracy and slow growth rate.
But the truth is things have been looking up recently for this down-beaten market.
The Economist panel of forecasters predicts Mexico will grow at 3.7% in 2012 and 3.8% in 2013.
That's nearly double the 2% GDP growth U.S. investors can expect and much more than double the forecast for the Eurozone, which is flirting with a recession.
In today's markets, Mexico is one of the few places that offer investors real growth.
Change South of the Border
But there's another reason for investors to begin to look south of the border.
The Eurozone Crisis is Far From Over
The Greek election last weekend has brought us a brief reprieve. The nation and the Eurozone have stepped back from the brink.
But the larger truth is that little has changed.
Yes, the Eurozone has survived its latest test, yet there is little indication where it will go from here. Considerable continental support for the common currency remains, and EU officials will soon introduce initiatives to consolidate banking and financial policy in the European Union.
Still, the problems keep mounting, and there is very little resolve to fix them.
At this point, a lot of actions (or lack of actions) could still upset the entire apple cart.