In Search of the Perfect Investment

If I lived in Europe, I’d be buying American dollars and Swiss francs with every Euro I could lay my hands on. I’d be selling all my European stocks and bonds. I’d be at the bank removing every Euro I had. I’d sell anything and everything  I owned.

The Euro is about to become toxic.

Europe is spinning out of control. These are not my words. This morning,  Bank of England governor Mervyn King said the euro crisis is going to get worse, and that the UK government and its central bank are developing “contingency plans” to be implemented if the crisis were to spin out of control. Remember, England still has sterling, not Euro.

My parents fled Europe in 1939. They lived through the hyper-inflation of the 1930s, when it took a wheelbarrow full of money to buy a loaf of bread. My father told me he paid his workers twice a day — and gave them time off to rush to the store and buy groceries before the price went up, again.

When I grew up, money came in two flavors –  white and black. White money was money that taxes had been paid on. Black money was all the rest.  There were always two prices for everything — the white money price and the black money price, which was typically cash and much lower. Southern Europe runs on black money. No one pays taxes in Greece. That’s why the Greek government can’t pay its workers. It has no money.

Germans load up suitcases full of Euros, drive across the border and deposit them in Swiss banks. If you bring cash into Switzerland, you get charged a “transport” fee — the cost to the Swiss bank of shipping your paper back to your country and swap  them into  Swiss francs.

Parts of Europe are in deep recession. Unemployment in several countries exceeds the worst of our Great Depression.

None of the biggest-mess countries, like Greece, Spain, Italy or France, have the tools to solve their mess. They can’t devalue and start all over again (e.g. Argentina). They’re stuck with the Euro and all its encumbrances and burdens.

Countries can’t go bankrupt. They can print money.

Ooops, they used to be able to.

This is not going to end well.

You should not own stocks or commodities — like oil or gold.

Below is an article from today’s New York Times. Read it.

Facebook is hiking the size of its IPO. 25% more shares will be sold. Total proceeds will be nearly $20 billion. This tells you two things:

1. There’s a huge demand for the shares. Most people who want them, can’t get them.

2. A lot of insiders are cashing out. They have as much faith in the long-term future of the company as I do. To wit: GM is pulling its advertising from Facebook because the advertising simply doesn’t work. For the GM news, click here.

Let’s face it, how can you make a real long-term business from this nonsense — viz, an email I received this morning:

I should care that Ted likes my status?

A couple of days ago, I  wrote on my Facebook page, “I want to buy a Samsung TV.” One friend said buy the 8000 series. It’s great. (He’s right.) Another friend said “Go for it.”

That isn’t what I wanted to hear.

What I really wanted was for Facebook’s computers to figure my my TV “want” and drop an ad for Samsung, BestBuy, or a local TV retailer.

No such luck. I got ads for stuff I don’t want — like retirement finances, a game called Battle Pirates, a model home in New Jersey, hair loss treatment, Honda Manhasset dealer (miles away) and false teeth….

The joys of visiting Rome.
A woman was at her hairdresser’s getting her hair styled for a trip to Rome with her husband.

” Rome ? Why would anyone want to go there?” said the hairdresser, ” It’s crowded and dirty.. You’re crazy to go to Rome. So, how are you getting there?”

“We’re taking Continental, We got a great rate!”

“Continental?” exclaimed the hairdresser.. “That’s a terrible airline. Their planes are old, their flight attendants are ugly. They’re always late. Where are you staying in Rome ?”

“We’ll be at this exclusive little place over on Rome ’s Tiber River called Teste.”

“Don’t go any further.. I know that place. Everybody thinks its gonna be something special and exclusive, but it’s really a dump.”

“We’re going to go to see the Vatican and maybe get to see the Pope.”

“That’s rich,” laughed the hairdresser. You and a million other people trying to see him. He’ll look the size of an ant. Boy, good luck on this lousy trip of yours. You’re going to need it.”

A month later, the woman again came in for a hairdo. The hairdresser asked her about her trip to Rome .

“It was wonderful,” explained the woman, “not only were we on time in one of Continental’s brand new planes, but it was overbooked, and they bumped us up to first class.. The food and wine were wonderful, and I had a handsome 28-year-old steward who waited on me hand and foot. The hotel was great! They’d just finished a $5 million remodeling job, and now it’s a jewel, the finest hotel in the city. They, too, were overbooked, so they apologized and gave us their owner’s suite at no extra charge!”

“Well,” muttered the hairdresser, “but you didn’t get to see the Pope.”

“Actually, we were quite lucky, because as we toured the Vatican , a Swiss Guard tapped me on the shoulder, and explained that the Pope likes to meet some of the visitors, and if I’d be so kind as to step into his private room and the Pope would personally greet me.

“Five minutes later, the Pope walked through the door and shook my hand! I knelt down and he spoke a few words to me.”

“Oh, really! What’d he say ?”

“Who screwed up your hair?”

Harry Newton who is thrilled. Hayfever season has passed here in the NorthEast. He coughs up no more green stuff. His nose is suddenly clear. And — wonder of wonders — he can breath through his nose.. The shoulder rotator cuff tenodnitis responds to icing and special (boring) lifting exercises – with two pound weights. This is no Mr. America stuff. But my energy has returned.

There are no lessons here. No anti-allergy pills worked. Nothing worked. Even complaining was, in the end, useless. God fixed it, in His good time. I’m back in the land of the living. Whoopee!

From today’s New York Times:

A Tempting Rationale for Leaving the Euro
By EDUARDO PORTER

Some two decades ago, when Europe’s leaders worked out the details of their grand vision to connect the European Union with a single currency, virtually every economist on this side of the Atlantic – and most of those on the other – figured out that the euro would be fatally flawed.

What took economists some time to understand was that Europe’s leaders didn’t much care what they thought.

“The European Commission did invite economists to present their views. It was a Darwinian process,” said Paul De Grauwe, professor of European political economy at the London School of Economics. “I was invited, but when I expressed my doubts I wasn’t invited anymore. In the end only the enthusiasts were left.”

The single currency served an overriding political objective. Like the single market before, it was conceived primarily as glue to bind Europe more closely together, tie Germany’s prosperity to that of its neighbors and prevent a third world war from the Continent, which had brought us two. A few engineering flaws wouldn’t be allowed to get in the way of such an important project.

A little over a decade since the first euro bills hit the shops in Madrid and Berlin, the euro’s design flaws have pushed much of the European Union into a deep economic pit. And political imperative is again being deployed as a major reason to stick to the common currency. “This enormously important motivation is often underestimated by outsiders,” argued the Financial Times columnist Martin Wolf, the most sober analyst of Europe’s economic maelstrom.

Yet for a project intended to draw Europe together, the euro did surprisingly little to build solidarity. German voters endured a recession two decades ago after bringing in their brethren from the Soviet bloc. They now appear unwilling to spend a pfennig to help the Greeks, Spaniards, Portuguese, Irish or Italians.

Conceived as a tool for integration, the euro could, instead, tear Europe apart.

The longstanding political order in Greece, a country in an economic tailspin and dependent on the International Monetary Fund and its European partners to pay its debts, imploded on May 6. Voters punished the main parties for agreeing to a budget-cutting strategy that has contributed to an unemployment rate above 20 percent. With no party able to form a governing coalition, Greece is headed to new elections in June.

Turmoil – the economies of about half the countries in the euro area are shrinking – has spawned political crises across the Continent. Eleven euro area governments have fallen in just over a year. Extremist political parties are on the rise. Almost two-thirds of the population in euro zone countries still support the euro, according to the latest Eurobarometer poll taken last November.

Yet angry nationalism and mistrust are overpowering Europe’s sense of common purpose. Trust in the European Union fell to a low of 34 percent in November from 48 percent in the fall of 2009.

“The paradox would be that the monetary union that was supposed to be a steppingstone to more union becomes a steppingstone to less union,” said Mr. De Grauwe, who is also a former member of the Belgian parliament.

Social upheaval across the euro area suggests that it may be time to call it quits and try to work out an orderly process to re-establish national currencies throughout the bloc.

Europe would be in much better shape if the euro didn’t exist and each member country had its own currency. Monetary union has shackled together nations with vastly different economies, depriving them of an independent monetary policy that can help them through rough times. The interest rate and exchange rate that serve Germany also have to serve Spain, though that country has more than four times Germany’s joblessness.

The main problem is that while leaders eagerly embraced the monetary bond, they rejected its necessary complement: a central budget that would transfer money from successful regions to underperforming ones, as the United States government sends tax dollars collected in Massachusetts to pay for unemployment benefits in Nevada.

The euro fed the illusion that Greece, Spain and Italy were as creditworthy as Germany or the Netherlands, propelling a decade-long credit boom in Europe’s less-developed periphery. And it was spectacularly ill-designed to deal with the shock when capital flows to those nations suddenly stopped. Weak countries not only had to rely on their own devices; they had to do so without a currency or a monetary policy of their own to absorb the blow.

There was no European budget to help Madrid out when its housing market and economy imploded and its unemployment rolls surged. Spain had no central bank to flood the economy with pesetas – to backstop its banks and to stimulate lending and investing.

The European Central Bank helped some by letting Spanish banks post government bonds as collateral for cheap three-year loans, providing some relief to the banks and leading to lower interest rates. But the central bank and its German paymasters have so far been unwilling to countenance a credit boom and higher inflation in Germany to juice economic growth in its neighbors.

Devaluation to strengthen Spain’s exports was, of course, out of the question. The only thing Spain could do was borrow to pay for unemployment insurance and other safety net programs that have exploded even as tax revenue shrank. When investors would lend it no more at bearable rates, it had to slash public spending, digging itself a bigger economic hole.

Germany’s leaders insist the solution for Spain and other sickly countries is to devalue “internally” to regain competitiveness, essentially, slashing wages to reduce labor costs. Yet it is unlikely that a democracy could sustain such an adjustment for long. Labor costs in Spain are still rising though almost one in four workers does not have a job. How deep would unemployment have to be for wages to start to fall?

Against the punishing austerity demanded by Germany, an exit from the euro – followed by a sharp devaluation – might not seem too bad a proposition.

This has been done before. In 2001 Argentina dropped the peso’s decade-long peg to the dollar, virtually wiping out the savings of Argentine citizens. Banks went belly-up. Real wages plummeted. Foreign investment dried up after the country defaulted on its foreign debt, and the government had to slash spending to live within its means. But though the Argentine economy contracted 11 percent in 2002, it bounced back sharply to experience a decade of rapid exports and stellar growth.

Despite its flaws, there is one powerful reason to stick to the euro that even some of the most skeptical economists accept: the prospect of breaking away from the euro is very scary. It’s difficult to forecast how such a dissolution would unfold. There is, in fact, no legal way to leave. And it would be searingly painful for many countries.

Greece probably couldn’t be surgically excised. Once investors realized that countries could leave the euro, interest rates would soar on the next most likely candidates. There would be a huge capital flight out of peripheral countries into Germany, as savers tried to protect their euros from potential devaluation.

Even with a well-coordinated separation, households and firms with debts across borders could go bankrupt if their wages and savings were devalued but their debt remained the same. Banks in a number of countries might collapse. Companies could abruptly lose access to funds. It would probably require long bank holidays to prevent capital flight and allow for new currencies to be minted. A messy divorce could reverberate through the streets and political systems.

Still, the risks of unscrambling the monetary union omelet must be evaluated alongside the risks of leaving it scrambled.

On the campaign trail this year, Marine Le Pen, presidential candidate for France’s far-right National Front party, referred to the European Union as the “European Soviet Union,” which was ruining France’s economy and “imposing on us a model of living which is not our own.” She proposed to “get out of Europe.” In the first round of elections, the National Front got a record 18 percent of the vote.

For the sake of European unity, letting go of the euro may be the better option.