Europe ready to call the whole thing off?

Nov 11, 2011

Paris, France

You say Papandreou
I say Papademos
Let's call the whole thing off!

How many dear readers have any idea what that little ditty is about? You have to be a certain age to remember... You have to recall Louis Armstrong...

But heck, who cares about song lyrics?

Europe is falling apart. "Italy's days in the eurozone may be numbered," writes Nouriel Roubini in the Financial Times.

"France plots eurozone breakaway group," adds the Daily Telegraph.

And here's Ambrose Evans-Pritchard, at the Telegraph: "Europe's debt crisis is threatening to push large parts of the world into recession."

The Wall Street Journal elaborates: BRUSSELS-The European Union slashed its growth forecast for the coming year and said it can't exclude the possibility of a "deep and prolonged recession."

The European Commission, the EU's executive arm, said Thursday in its semiannual forecast that the 27-nation bloc's economy is struggling amid weak confidence, financial turmoil, government austerity packages and slowdowns in Europe's main trading partners.

The EU's gross domestic product, adjusted for inflation, is expected to grow just 0.6% in 2012, the commission said, sharply down from its forecast only six months ago of 1.9%.

The commission's forecast for the 17-nation euro zone is 0.5% growth in 2012, also short of the May outlook for 1.8% growth.

Since May, the euro-zone sovereign-debt crisis has intensified, undermining investment and consumer confidence, the commission said. Austerity packages have suppressed growth across the bloc. Domestic private-sector demand, which economists had hoped would drive recovery, has failed to pick up the slack.

"The probability of a more protracted period of stagnation is high," said Marco Buti, head of the commission's economics division. "Given the unusually high uncertainty around key policy decisions, a deep and prolonged recession complemented by continued market turmoil cannot be excluded."

Despite the wave of austerity sweeping Europe, public debt as a percentage of GDP is expected to peak in 2013 at 90.9% of GDP. Greek debt is expected to soar to 198% of GDP next year. Six months ago, forecasters had predicted Greek debt at 166% of GDP.
Many Europeans are ready to call the whole thing off. Many would rather leave the EU than face a "deep and prolonged' recession. They know that inflation would cure a lot of their troubles. They could quickly reduce the real price of their own labor, for example, rendering their economies more competitive again. They could reduce employment. They could go back to the good ol' days. Back to the days when they could listen to Louis Armstrong on the radio...while drinking coffee in a local bar...and ripping off the tourists with their funny money.

How can they bring those good ol' days back? Say goodbye to the EU...shuck the euro...return to the lira or the drachma...and inflate the hell out of it. Will they do it? Who knows? But while the forces of the last 300 years pushed people together. Now, they pull them apart. World trade slows. Doors are closed. Long-festering wounds and resentments burst out into the open. Old scores, like unpaid bills, wait to be settled...

Meanwhile, a slump in Europe probably means a slump in the US too. Statistically, and historically, that's what happens. But at least we don't have the euro! And there's no danger of Mississippi or Montana going its own way...yet. Abraham Lincoln solved that problem!

"You want independence? You want to go your own way?" he said, or words to that effect. "It'll be over my dead body."

Lincoln was dead soon after. But by then, the freedom proclaimed by Jefferson and Hancock were dead issues too. No more right to self-determination. No more sovereign states. Instead, we've got the Californians and the New Yorkers in the same union, whether we like it or not.

We've also got the dollar. It is managed by Americans, not Germans. Its managers fear depression, not hyperinflation. They don't mind a little money-printing if it is for a good cause.

The crisis faced by the Italians and the Greeks seems far away. After all, these sunny places always had shady finances. The cause of their problems now is too much debt. And on that point, you may be surprised to find out that there is not much difference between Greeks, Italians and Americans. We all have around 3 times as much debt as GDP to support it. The Greeks a little less. The Italians a little more. We are all the same...all living under the same Vesuvius of debt...and all screwed in the same way.

Right now, it's the Greeks and the Italians who are having trouble financing their debts and deficits. Eventually, Americans will have the same problem.

Perhaps sooner, rather than later.

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*** We agreed to write a book on "family money," that is, on how families get and keep their fortunes over generations. We are completely unqualified to write the book, because our family never had any money. Still, it is a fascinating subject...and the more we look into it, the more we write about it, the more we come to understand what it is all about. It is not about "safe, conservative" strategies. Instead, it is a manifesto for the most dynamic capitalism on the planet.

The rich are not like everybody else. They shouldn't try to be. Most people don't have any money. People who have money are different. If you want to have money, it stands to reason that you have to do things differently. It's that simple. Especially if you want to have money for more than a single generation.

For example, everybody is trying to find the stock that will go up. They all want to be an alpha investor - the big man on campus who puts his money into Google when it opened for business...or the guy who bought Berkshire Hathaway back in the '70s. That's the whole game, they believe...seeking alpha.

Alpha is what they call the above-market gains you can get by selecting the right stocks. But the trouble with alpha is that it is as unreliable as a teenage employee. You think you've got him all set...and he doesn't show up for work. You choose one stock that goes up. Then, you choose two that don't. And then you get a real nightmare stock....and you're wiped out. Over the long run - by definition and observation - most alpha-seeking investors cannot beat the market averages.

But what choice do you have? You're a typical investor. You've got 10 years to build up a small pile of savings into a retirement fund. You do your homework. You take your chances. You hope to get lucky.

If you did that for a long time, your successes and your failures would about balance themselves out. Sometimes you'll beat the market. Sometimes the market will beat you. Provided you didn't make any major mistakes. But you don't have forever. You can't get average, long-term performance. You don't have long-term. You only get a piece of it...and you hope it will be the good piece.

A serious family, with a serious long-term wealth strategy, on the other hand, has to do something different. It knows that chasing alpha will give it only average returns over time. It knows that average, long-term returns are very small. It wants to do better than that. And it has time on its side. So, how can it do better? Not by chasing alpha at all. Instead, it goes after 'beta.'

A beta strategy is completely different. Instead of trying to beat the market you make the market your friend. You don't try to beat it; you just want to join it. And go along with it. But you need to be careful to choose join. You want the market that will take you to your destination. And you need to get aboard at the right moment.

We've explored this you could have multiplied your money 150 times just by making three simple investment decisions in the last 40 years. And two of the decisions were exactly the same! Note that these are not alpha chasing decisions. These are beta decisions, choosing which market you want to be in...and waiting until the best possible time to get in.

So let's go back. You know how Richard Nixon cut the dollar's link to gold in 1971? It didn't take much imagination to see what would happen next. Inflation rates would probably increase...and they would inevitably drive up the price of gold.

So, imagine that you started with $10,000. And in the early '70s - you had years of opportunity - you bought gold. Just to keep the math simple, we'll say you paid about $50 an ounce.

By the end of the '70s your gold was shooting over $500 an ounce. You made 10 times your money. You were not sure what would happen next, but you read the paper. Paul Volcker, head of the Federal Reserve, vowed to crush inflation. He seemed serious. And by the early ' was beginning to look like he might win his battle against rising consumer prices.

Again, you didn't have to have a Ph.D. in economics to realize that falling inflation rates wouldn't be good for gold. On the other hand, they'd be very good for stocks or bonds. So, you made your second decision. You sold the gold and put the money into the stock market. Gold rose over $800, but let's say you locked in your sale at $500...a "10 bagger," as they say. Again, you had plenty of time to make your move. The price of gold stayed over $500 from the end of 1979 until well into 1981.

The stock market took its sweet time too. But that's the way beta investing goes. One decision. Lots of waiting. The Dow lollygagged around for five years after 1980 before it hit 1,500. So, let's say you waited 5 years and bought at 1,500. Then, you waited again. Gradually, the Dow rose. And rose. And rose.

By the end of the '90s, the Dow rose over 10,000. By January, 2000, it was over 11,000. Then, there were so many warning bells wringing you would have had to be deaf not to hear them. The Dow was up 1,000%. People were starting businesses with nothing. No business plans. No sales. No profits. They were making millions selling them to investors. Something had to give.

What should you have done? You should have made your third investment decision in 30 years. You should have sold stocks and bought gold again. Stocks were overbought. Gold was oversold. Adjusting for inflation, gold was down 80% to 90% from its '80 high. Stocks were up 5 times, inflation adjusted, from their '80 low.

If you'd done that you would have multiplied your money another 6 times. Your original $10,000 would have become $300,000. Then, in gold since 2000, you would have multiplied your money another 5 times - for $1, 500,000.

But let's say you missed the clanging bells in 2000s. You just held your stocks. In fact, after a brief drop, they continued to go up. The Dow eventually rose over 15,000 - giving you a total of about $500,000 at the top. Not too shabby, right?

That's what beta investing can do for you. That's what the smart money, the old money, the family money does.

In any event, that's what we try to do in our family office.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Europe ready to call the whole thing off?"


Nov 11, 2011

The most difficult thing about investing is not the choice of stocks.
One has plenty of time to research them.
It is the WAITING for the right price and time that kills your investment.Your fingers itch to place a buy order.You may rue that everyone around you is making money while you sit idle.
More often than not the quick positions leave you in a bad spot and sometimes wipe you out.
OR one holds these dead stocks for years in the hope that they will pick up one day....
disclosure: I hold one such stock bought in my early days.

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