The problems of the eurozone continue to cast their dark shadows over the worlds markets. Despite numerous summits we still look to the European Commissioners to present and implement a solution that would boost economic activity and drive down unemployment. As we see it there are only two choices they can either default or print. The rhetoric that surrounds this issue is nothing more than white noise, embroidery, red herrings and outright lies,that you should totally ignore.
If you now take a close look at the people at the helm in the Eurozone you will note a frightening lack of experience and know-how when it comes to business and industry.
José Manuel Barroso and Herman Van Rompuy have no business experience whatsoever and Martin Schulz, the new president of the EU’s elected assembly, has some experience as a bookshop proprietor, well we guess that’s a start, but it does not raise our level of confidence in his ability to manage such a diverse economic area.
As investors we need to understand how they will behave when faced with their current difficulties. They have never had to read a companies balance sheet and take the appropriate action to place that company on the road to prosperity, so they will ignore it, along with the perilous state that they are wallowing in.
Corrective action requires certain attributes such as experience, analytical capability and common sense to mention just a few. When you consider that is has taken a mere ten years for this horrendous mess to develop, then you realize that the leaders of the Eurozone are totally incompetent, so what can we expect from them?
In order to anticipate what they will do we need to understand what their objectives are. They are career politicians and believe that big is beautiful. They have seen their empire grow and expend it terms of land mass, which adds to the need for good governance, which they believe that they are capable of delivering. They enjoy going to meetings, traveling first class, staying in the best hotels and dining on fine food and wine.
They believe that they deserve it and they are determined to protect their way of life regardless of the sufferance they inflict on the citizens of Europe. So protectionism in terms of their own livelihood is a top priority. Based on this premise, Greece or any other country leaving the Eurozone is not an option in their eyes. So they will print, in the form bond purchase schemes, quantitative easing, whatever it takes to preserve their empire. The downside to all of this will horrendous for the PIIGS, Greece in particular, as it will be required to transfer its assets, its right to govern, its sovereignty, etc, to Berlin. Their political, financial and economic policies will no longer be decided by the Greek people, those will be determined by the European Technocrats, Germany's puppets. The debasement of the Euro will continue hitting those who save in this type of currency very hard. However, the benefits for European exporters, such as Germany will be welcomed. Such a devaluation will not go unnoticed by other nations and they will also endeavour to weaken their own currencies in an attempt to remain competitive. The race to the bottom in the fiat currency league will continue unabated.
Part of the solution for investors is to reallocate a greater portion of their investment funds to something tangible, such as hard assets, including land, property, antiques, art, etc. Our own preference is to acquire both physical gold and silver, acquire a small selection of good quality producers and put some cash to work in the options market. This has been our strategy since gold prices were around the $400.00/oz level and to date it has served us very well.
Going forward we will continue to acquire the physical metal, however our stock purchasing programme has been on hold for some time as this sector has failed to perform. In order to shoulder the myriad of risks inherent in mining sector we need to see a return above and beyond that of gold and silver which is not available to us today. We do monitor this situation closely and once we are convinced that the tide has turned in favour of the producers we will look to add to our current holdings. If indeed this sector is oversold and about to embark on a dramatic reversal and head to higher ground, we would also look at the possible opportunities to acquire call options on those stocks which are likely to outperform their running mates. This would be an attempt to get a triple whammy, whereby the underlying asset moves higher, the stock moves higher on a ratio of say 3:1 and the options go ballistic. This type of trade appeals to those of a more adventurous nature, but should not be ruled out as it can give your embattled portfolio a serious boost.
Other than the above we will continue to monitor the ECB and the Fed in order to identify the clues that will lead to us to when and by how much money printing we can expect. Otherwise the month of August looks to be a quiet one with Europe on vacation and North America in neutral, at least until Labor Day, 3rd September, when the traders return to their desks looking for action.
Use this time to do your due diligence and plan your next move, it could be the most critical call you ever make.
Have a good one!
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