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Stuart Varney, host of the aptly named and very highly rated "Varney & Co." program on Fox Business, put the following question to me in his usual direct style: "Will we have an agreement on Wednesday out of Europe and what will that mean for the markets?"
Yes, I began, we probably will – but for all the wrong reasons, and it will never last.
There are three reasons why:
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1. You have 27 nations that now have to agree to review what, in effect, is the treaty that holds the European Union (EU) together. That's not conducive to anything even remotely resembling quick decision-making.
2. What's happening in Europe is much the same thing happening here, in that the debt situation has become government at the people rather than for the people or even by the people. That means politicians are still smoking in bed while the house is burning.
3. They have to say something to avoid contagion but that's already baked into the cake if you examine the cost of credit-default swaps (CDS). The data suggests traders are now turning their crosshairs on Italy, Portugal and Spain even as leaders work towards a solution. So recapitalizing the banks to the tune of a few hundred million euros is but a one-shot deal; the continued thing to focus on is the near-complete lack of fiscal discipline at the government level.
The bottom line: This is not over by a long shot. In fact, I expect it to drag on well into next year.
Still, in the short-term, the next 1,000 points the market moves in either direction are going to be the direct result of whatever "solution" comes out of Europe tomorrow (Wednesday).
The better we understand this situation as a nation and as investors, the better off we'll be.
A Misguided Mission
At issue is the very nature of the "recapitalization." The fact is Europe's debt has gotten to the point that it can no longer be sustained.
Much like our own debt situation here in the United States, there are many causes, including completely incompetent government, irresponsible decision-making, feckless leadership and paltry economic growth.
Citizens on both sides of the Atlantic understandably have had enough.
But the problem is that the policies that led Europe to this point were decades in the making. So it's unreasonable to expect them to go away any time soon even if the EU announces a solution on Wednesday.
Furthermore, the use of comparatively healthy public balance sheets to shore up irresponsible banks and speculative trading houses is a big mistake that removes the free hand of risk that is a required element of capitalism.
Now, this could come to a quick resolution – if the politicians would stop their meddling. Yes, companies would fail, banks would fail, and the markets would take the brunt of it on the chin.
But – like Iceland, which fabulously ignored international advice and undertook a complete reboot – the sooner we take our medicine, the sooner we can begin healing.
It's not too late, but whether it becomes too late is a question for the world's central bankers and policymakers who have yet to become serious enough about what's needed.
The Downward Spiral
Barring any sort of massive economic growth, neither the EU nor the U.S. can make a dent in the debt cycle and the stuff eventually will hit the fan.
When it does, there are four ways out:
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1) Default. This lets the markets take care of the deleveraging process for politicians and by far would be the messiest alternative. Yet, in a way it would be the cleanest, since it would wipe out decades of ineffective policies while also cleaning the financial zombies up once and for all.
2) Austerity. I put this in the "yeah right" category. If tiny Greece, which accounts for about 2% of the EU, cannot do this without riots, imagine what will happen when the reality of sinking pensions, diminished benefits and higher taxes hits home in the world's primary economies. Nobody will be singing peacefully around the Occupy Wall Street campfires. Not in Paris, not in London, not in Berlin, and not in New York.
3) Repression. Mohammed el-Arian of PIMCO notes that America is intensifying repression by keeping interest rates low for an exceptionally long period of time. He speculates, as do I, that the U.S. Federal Reserve will attempt to engender unanticipated inflation. Call me skeptical, but this won't work. It has never worked throughout history and will not work now.
4) Growth through redistribution. Government stimulus is really an involuntary redistribution of wealth from the private sector to the public sector. New taxes, lower budgets and more failed government investments like Solyndra are all part of the terribly misguided policies we will have to endure. But until politicians are completely backed into a corner by unruly mobs, they will continue to order up.
Which course we end up taking is yet to be seen. But I do know this: Whatever comes out of Europe tomorrow will directly affect the markets to the tune of 1,000 points in either direction.
As investors, our most prudent course of action is to shield ourselves from the fallout.
Staying Ahead of the Game
So here are some things to think about.
This is a time to buy resources that will help preserve value and wealth – and not just metals, either. Jim Rogers and George Soros, two of the most famous investors of all time, are reportedly buying farmland.
This is a time when cash and bond equivalents, including the U.S. dollar, may be the best looking horses in the glue factory.
It's also the time to do some serious bargain hunting.
So what if we are not at a bottom, let alone the bottom. Stocks usually offer the greatest returns to those who buy them when everybody else is terrified to invest.
Companies like Caterpillar Inc. (NYSE: CAT) and Apple Inc. (Nasdaq: AAPL) prove that you can still knock the stuffing out of the ball even if the global economy is circling the drain.
Dividends are king when you can get them. On "sale" is even better, especially when it involves companies like the dividend royalty, which have increased payouts for at least 25 consecutive years.
Take issue with this if you want, but companies that are providing the stuff that people "have" to have still lead the way. Many actually have stronger balance sheets, lower debt ratios and report higher productivity than before the financial crisis.
T he only people who have made money over the past 15 years are those who invested through 2001-2004 and during the crash of 2008-09. That's why you must stay in the game if at all possible and even if it hurts like hell.
And don't forget the specialized inverse funds that I've mentioned so often in Money Morning that I feel like a broken record. If you're following along and use trailing stops as a means of selling into strength, you'll have plenty of cash available. So you might as well invest in something that profits even if stocks take their own "Greek Holiday" (again).
News and Related Story Links:
- Money Morning:
Four Moves to Make Before Greece Defaults
- Money Morning:
One of These Banks is Europe's Lehman Bros. – And We're Going to Profit From Its Collapse
- Money Morning:
Don't Buy Into Europe's Latest Rescue Effort – The Continent's Banks Are About to Go Bust
- Money Morning:
As Greek Debt Default Nears, Investors Need to Take Cover
- Money Morning:
The Only Way to Solve the European Sovereign Debt Crisis
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.
forgotten the criticisms of Margaret Thatcher and her Government for
not wanting to join the Euro. Please review her reasons, it will teach
many of us how wise her Government was.
Thatcher destroyed the United Kingdom with her disasterous privatisation programme where private losses were subsidised by the taxpayer much the same way Ireland has sold the silverware to pay for the gambling debts of investors on the property market.
Always to the point. GET READY!!
Clearly, the author favors a free market approach (no. 1 on the list), no matter what the casualities. History shows us that's how we got to the Great Depression; the banking and market reforms after that were an attempt to avoid the peaks and valleys of the booom-bust cycle that had marked this country's economy during the 19th and early 20th centuries. More intensive regulation of the derivatives market and the home mortgage industry could have avoided the current crisis. Government investment does not always end badly; the government's loans to GM save thousands of jobs and taking over the company's pension plan that would have cost billions in underfunding. Every probem we face in this country is solveable if we have the polictical will to do it. We all agree that the current benefit levels in social programs are unsustainable; why can't we also agree that more revenue to address past overspending and future benefit levels is necessary.
Good points.
However, seems like a huge contradiction to say "This is not over by a long shot. In fact, I expect it to drag on well into next year." And then claim "Still, in the short-term, the next 1,000 points the market moves in either direction are going to be the direct result of whatever "solution" comes out of Europe tomorrow".
Theres a broad range of things that could come out of Europe tomorrow that would leave the markets guessing for a long time yet – including most likely – more stalling, postering and equivocating.
Inerresting comment on Government at the people or by the people rather than for the people. The topped it with it is like the politician still smoking in bed while the house is burning. Is there anything in or under affirmative action that the politician can do or do they literally sit there in bed smoking while the house is burning up. Who comes to put the fire out? They haven't stopped the politician smoking in bed and extinguish his or her cigarette first before they put the fire out in the house. We run into it one time while in the military and on bivouac. The mess tent caught on fire and top come through with an open can of beer and dumped a little booze on it and made the statement, "When you are hot you are hot,when you are not you are not"!
One breath before we go under. Are you all ready for the fight?
Good points made again.
Do you still feel that the repercussions to the market, if negative, will be much more severe in Europe than here in US as you said in your "Euro Whip-saw" video? It seems from this at least both the US and Europe may suffer big losses if a good solution isn't reached. Please clarify your thoughts
Dom
As private Frasier said "We are all doooomed!"
I am of the generation which required a mortgage but the bank refused to take into account my earning as I might get pregnant. Only my husband's earnings were counted and then we have to have saved a deposit of at least 25 per cent. If these rules had continued house prices would not have risen so dramatically and we would have avoided this current mess.
Brilliant to the point and correct.
A very intersting article, but one must remember 1929-1930 in America. Without Profit, Capitalism is doomed, no matter how Investors try to deny it. Or how many wars they may want to start to push up production.
Without Profit, no matter how small, never mind the companies, look at the investors, or even the hope for some profit, even if years down the line. The investor will desist to throw good money after bad, because they would be throwing their profit, their dividend, their interest out of the window.
Investment Advisers try to bypass this quandry, by inventing new terms, new derivatives and new economic theories, always forgetting the basis fact. No Profit, No Company… Never mind the Debt of a government, because if the Tax payers cant pay the Tax, because the companies are going bankrupt and his wages are not coming in, he must be supported by the government, in exactly the same way he had to support the government. If this applies to a Government and the investors in that State cannot get the slightest return for their investment in whatever company, then the bulk of investors will be decimated, because, they forgot the Basis. WITHOUT PROFIT , your money is gone. So, even your savings account is a godsend, because you profit from it. And that at present is all most of us can hope for.
But here comes the Common Sense Question. How long will a government be willing, without money coming in, to subsidide its shareholders , read citizens. Maria Antoinette and her blissfully ignorant:"Let them eat cake" provided the answer , every government fears. Storming the Bastille was no easier than occupying Wall Street, and the occupation of the White House, the House of Commons or the Bundestag will be just as easy, when the unpaid guards let the protesters in. Remember… Without Profit, Capitalism is doomed.
The following Paragraph makes no sense. The second sentence does not follow from the first.
RE: "Staying in the Game
T he only people who have made money over the past 15 years are those who invested through 2001-2004 and during the crash of 2008-09. That's why you must stay in the game if at all possible and even if it hurts like hell."
The paragraph should instead read:
-The only people who have made money over the past 15 years were the ones who were were astute enough to stay out of the market during the worst of the bubble '2005 through 2008' and again are staying out of the market from 2010 on until the market goes at least below the 2009 bottom.
Money Problam