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Another debt-based disaster to pummel the markets this summer?

Stockmarkets collapse because lots of people, and lots of entities can’t repay their borrowings.

Crises appear quickly and tear our nice order apart.

Things change ultra quickly.

Greece, China. Ukraine. Turkey. Puerto Rico.

Suddenly, their problems are front and center.

They hurt us emotionally — but earnings wise? Not so much.

Will they wreck our summer in the market?

Some of my friends are loosening. My prescient friend Peter Wunsch sold 15% of his stocks before this happened. Other friends are cautiously down to about 15% cash. Others are selling calls, figuring the market will go further down. (Today it’s up.)

You can’t time the market. Unless you’re a Soros or an Icahn.

The name of the game is to dump stocks with poor prospects. Ones also that have fallen to our stop loss percentage — 8% to 10%. And load up on good prospects.

What’s different? Don’t go bottom fishing, also called catching a falling knife. too early for that. Events may turn on us. Apple? Berkshire Hathaway. Doing awfully. But FIT doing fine. Sentiment is the Apple Watch isn’t killing Fitbit. They’re right. Health on my Apple Watch is miserable.

CNBC’s correspondent in Greece started her report this morning:

Greece. The Puerto Rico of Europe.
Incredibly similar places. Right? Big bloated public sectors .
Very uncompetitive economies relative to all the economies around them.
And both stuck in a currency union in which they cannot print their own money.
And therefore their lack of competitiveness really kills them.
And then there’s all the debt and everything else.

In the last Greek crisis, the Greek government agreed to the lenders’ austerity measures and other economic reforms. They were meant to lead to a 4% annual growth. Look what happened to Greece.

GreekGDP

Noted economist, Joseph Stiglitz recently wrote:

The economics behind the programme that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

You get some idea why the Greeks are so annoyed with Europe.

Read Stiglitz’s remarks here.

My friend John in Australia writes:

Dear Harry,

You really think the Greeks fudged their true financial position to get into the euro, and that the rest of Europe didn’t have a pretty good idea what they were up to? A poor country, largely dependent on tourism, and run behind the scenes by shipping magnates who were masters of tax avoidance, suddenly becomes a paragon of economic virtue? And that all happens without any major reforms in a system known to be chronically inefficient and corrupt? “Nod, nod , wink, wink, say no more” – or perhaps, “ask no more”. The idea on of many of the pro-euro politicians was to get the dodgy countries into the currency and any problems would either sort themselves out, or be sorted out, later.

The same thing happened with Italy. It HAD to be part of the new currency (so the pro-Europe politicians said) – after all it was one of the six founding members of the Common Market. And the French, for example, wanted Italy “in” for their own, far from fraternal, reasons. They were sick and tired of seeing the lira steadily devalue against the franc, thus making Italian products cheaper than similar French products, and in the longer term, enticing French manufacturers to set up in Italy to export cheaper goods back to France. So magically, Italy “sort of” met the entry criteria for the euro – and if not quite, then near enough was good enough. It was extraordinary to see Italian bond yields converge with German bond yields in the late ’90s when the two countries were, financially speaking, almost on different planets.

There are two things to remember about the whole euro “project”. The first is that it’s political more than it’s financial. The creation of the common currency was a project to produce a unit of trade and investment to rival the US dollar. The French, in particular, have always loathed the primacy of the dollar, going back to the days of De Gaulle, and, believe it or not, even to the monetary settlements made in the 1920s after World War One. After World War Two, De Gaulle regularly and repeatedly presented US dollars to the Treasury in Washington and demanded gold in exchange. He thus played a large part in diminishing the US gold reserve to the point where Nixon “closed the gold window” in 1971. It was part of a quite deliberate policy to humble the “mighty dollar”.  Even the Germans, who are much more sensible in their attitude to the US, have bought into the French narrative that it’s only by having a currency to rival the dollar that Europe “can be taken seriously on the world stage”. Frau Merkel has said as much this week. When this is your political aim, then its very easy to adopt the policy of “the more, the merrier”. You’ll close your eyes to a lot that’s wrong with a country for the sake of welcoming it into “the European family”. The narrative for public consumption was: “Can’t you see? We have almost every European country in this project, and those that aren’t in, are banging down the doors to get in. We’re every bit as strong as the US.”

The Brits didn’t buy into this political narrative and so stayed out of the euro. In fact, on her last day as Prime Minister, Mrs Thatcher spoke prophetically in the House of Commons about the “euro project”:

Thatcher

For her speech, click here

The second thing to remember is that the Euro was the product of a long, secular bull market in the Western world. It would have been impossible to put together the Euro when the secular bull market began in 1982, but by the mid- to late 1990s the stage had been reached where it was ever “onwards and upwards”. We were at “the end of history” and, if the US was as dominant as ever, all the more reason to construct a new currency while economic conditions were easy and almost any European country could borrow at will to paper over the cracks. The whole process of “convergence” to enable various countries to meet the “entry criteria” to the euro was lubricated by plentiful credit available to any major european country at very low rates. The euro was introduced to world markets over the period 1999-2002, right at the top of the secular bull market that ended at that time. The mindset that always exists at the end of a long term bull market only encouraged the belief that this was a wonderful new step forward for Europe. Soon after it was introduced, the Euro fell to its all time low against the dollar (in late 2000), but then rose upward until 2008, when the problems that had been papered over with unlimited credit began to emerge. You know the story since then. Even with interest rates at all time lows, the “project” still will not work, and southern Europe remains mired in depression. France isn’t much better.

The best investment advice (old, but good)
The 98-year-old Mother Superior lay dying. The nuns gathered around her bed trying to make her last journey comfortable. They tried giving her warm milk to drink but she refused it.

One of the nuns took the glass back to the kitchen. Then, remembering a bottle of Irish Whiskey that had been received as a gift the previous Christmas, she opened it and poured a generous amount into the warm milk.

Back at Mother Superior’s bed, they held the glass to her lips.

The frail nun drank a little, then a little more and before they knew it, she had finished the whole glass down to the last drop.

As her eyes brightened, the nuns thought it would be a good opportunity to have one last talk with their spiritual leader.

“Mother,” the nuns asked. “Please give us some of your wisdom before you leave us.”

Mother Superior raised herself in the bed,  looked at them and said: “Don’t sell that cow.”

HarryNewton
Harry Newton who mourns his dear friend Fred Tarter, a brilliant entrepreneur, who died on Sunday.

FredTarter

Fred, I’m sorry it ended so quickly. I loved our many lunches, meetings, dinners and theaters. May you rest in peace. You’ll be missed.  There’s an obit in today ‘s New York Times. Click here.

One Comment

  1. John S. says:

    As always the big question concerning the markets is: “What does Bill say?” Bill Gross is, and always has been for as long as I can recall, the market maker. His comments are parsed and weighed and analyzed like no other. When Bill speaks, the world stops. Right now Gross is pessimistic on long term prospects for the stock and bond markets. Sir Bill has spoken. The world listened. And now we wait.