GREECE WILL RECEIVE A BAILOUT, AND THE BAILOUT WILL BE AIMED AT STRUCTURING FINANCIAL SECURITY FOR EUROPE AS A WHOLE
European financial officials from sixteen nations and some supra-national organizations met last weekend and announced that Greece will get a package of loans to be delivered to them over three years. Why is this happening? This is happening because if Europe does not support Greece, the government debt contagion that we have been discussing in recent memos will continue and spread. It will spread to Spain and Portugal and later to many countries in Europe including Italy and possibly France. Because they fear the spreading contagion, Europe wants to stop the crisis as soon as possible. In other words, Europe is getting a bailout, not just Greece.
In addition, Greece already owes several European nations a great deal of money, and they do not want Greece to go bankrupt and renege on all of their debts.
For an illustration of Europe’s motivation, please click on this link, and use a full screen to view the chart:http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?ref=weekinreview
This chart is stunning and speaks eloquently to the need of Europe to get their fiscal house in order, and to stop living beyond their means before the entire system, (not just Spain, Greece, Italy, Ireland and Portugal) collapses. It is no secret that France is also indebted, and Britain, although not in the Euro community, is equally poorly positioned for the future.
THE CITIZENS IN EVERY COUNTRY SHOULD RECOGNIZE THAT UNFUNDED PROMISES BY SHORT-SIGHTED POLITICIANS TO SHORT SIGHTED CITIZENS ARE RESPONSIBLE FOR THE DECLINE IN THEIR STANDARD OF LIVING. The root of the problem is that promises have not been backed up by the money to pay for them.
Europe is not going to be healthy and secure just because some irresponsible European governments get temporary bailouts. No problem is solved by these actions…the problem is just extended. Europe will eventually renege or pay back these debts by: 1) devaluing the Euro 2) implementing quantitative easing thorough government purchases of the debt of the weak countries, and 3) possibly by nationalizing employee pensions and forcing the pensions to hold government debt. It is an age-old scam that politicians and kings have imposed upon the taxpayers and serfs for centuries.
In the years following World War II, the decision was made to provide much of western European’s citizenry with many entitlements…without setting aside the money to pay for the entitlements. The bill for those entitlements is currently coming due.
EUROPE IS NOT ALONE
The U.S. also suffers from a similar problem. Politicians play an old and shopworn game in the U.S. Currently the U.S. has over $12 trillion of national debt. There is about $54 trillion unfunded liabilities for Social Security, Medicare, and other healthcare. The politicians try to ignore these facts. They do not include the unfunded liabilities in the federal budget. Many politicians think that the public is distracted and caught up in the ephemeral handouts that they receive, or the politicians deflect voter attention from their failures by laying blame on others [currently bankers].
Over the last few decades and looking into the future, in order to insure the best interests of the political class in Europe and the U.S., the public on both continents has been and will continue to be duped and penalized. Until the unfunded liabilities are handled, and a plan is engendered to create a positive resolution to these problems, no major new entitlement programs can be responsibly legislated.
Until a plan to admit to the imbalances and to systematically set aside money to correct them is instituted, the public’s standard of living will continue to fall and their children and grandchildren will live a much less secure and comfortable life. This is because in lieu of repaying debts, politicians will depreciate currencies and raise taxes to pay for their folly. The solutions employed, currency depreciation and higher taxes, diminish the standard of living of the public in any country.
U.S. FINANCIAL REFORM BILL
Both U.S. political parties are working to weaken the Federal Reserve as a result of rising financial populism. In our opinion, without an independent Federal Reserve, the safest investment that one can make is to buy assets that benefit from inflation such as gold, oil, real assets, etc.
INFLATION WILL ARRIVE IN LATE 2010 AND 2011
We do not see rapidly rising inflation for the next few months, and as a result many people will forget about the longer term problem that we expect will rise in late 2010 and in 2011.
There are two reasons why we believe that inflation will rise.
Reason One: Corporations are cutting costs and in doing so they are limiting the supply of certain goods and services that are offered for sale. This has the effect of causing prices for these same goods and services to rise.
Reason Two: Government stimulus and liquidity pumping will cause capital to flow into commodities, which are rising in value. Oil, gold, and food should attract this liquidity. This liquidity injection combined with foreign demand will cause an increase in prices for food and raw materials. Higher raw materials prices will gradually be passed on to prices at the retail level, causing inflation at both wholesale and retail levels to rise in 2011.
By 2011, we may be experiencing a world where supply of goods is decreasing, while demand is increasing. This combination will lead to higher prices.
THE CURRENT MELT DOWN IN EUROPE IS CREATING SOME SPILL-OVER PANIC IN ALMOST ALL MARKETS, CREATING GOOD BARGAINS IN STOCKS, OIL, AND GOLD
We believe that in the next few weeks we will be able to buy good companies in several fundamentally strong markets at lower prices. If the markets which we favor fall due to the side effects of the panic that has been induced by the European sovereign debt melt down, we will use our substantial cash balances to buy good companies at lower prices.
We do not see any change in fundamentals for strong Asian countries or for the U.S., Canada, Brazil, and Australia. The melt down is strongly positive for gold and strongly negative for the Euro. We also favor Singapore, Korea, Indonesia and possibly Thailand in Asia. If Indian and Brazilian markets fall by enough, we will be active buyers there. In short, we see the crisis as an opportunity. It has been created by a panicky atmosphere and good companies are currently available at lower prices. The economic backdrop in most of the world outside of Europe is strong and this pull back may give us a chance to find bargains in coming days and weeks.
Finally, because the melt down is due to fiscal irresponsibility by several European nations, the price of oil and gold should benefit as European, Chinese, Indian, Japanese and other buyers seek safety and diversification out of the Euro, British Pound, and other weak currencies. These commodities are widely fungible and traditional havens during times of uncertainty. Havens can also be found in the Australian, Brazilian, Singaporean, U.S., and Canadian currencies which are rising versus the Euro and Pound.
Thanks for listening
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