The European commission president, José Manuel Barroso, really asked for it when he said in Lisbon, ‘I think we can say that the existential threat against the euro has essentially been overcome. In 2013 the question won’t be if the euro will, or will not, implode.’
The question is, will the Eurozone implode in 2013? There’s definitely an existentialist threat.
If things go badly on ‘the continent’, there may well be a crash in the Aussie stock market. Your retirement savings could be torn to shreds. Your life will be ruined. You might as well…wait…what’s this?
Did it work? Did you immediately stop thinking about your coming financial woes and believe Manuel’s claim that all will be well? Who’s Manuel anyway? Who cares? Just look at that grumpy-sniffle’s face. It’s so cuddly.
OK, so what’s going on here? Well, the prestigious newspaper the Financial Times decided to combat the worsening euro crisis with a clever new strategy: Superimpose puppies onto European sovereign debt charts. Hopefully nobody will notice everything in Europe getting worse. They’ll just see wet noses and floppy ears.
Don’t believe it? Check it out for yourself here. You’ll need a log in, so here are two of their charts, as proof:
Never mind what the chart says, just look at those puppy-dog-eyes.
Clearly, the Financial Times needs to rethink their strategy. You can still spot the disastrous levels of debt. Making the dogs bigger, a whole lot bigger, might help. In fact, the little puppies are going to have to become huge, because Europe is getting steadily worse, despite what Manuel Barroso might say.
We’re sick of being criticised for our regular pessimism, so here’s our attempt at the puppy dog strategy. (For an example of how not to use the puppy dog strategy, click here.)
As you can see from the chart above, unemployment in the Eurozone reached an all time high of 11.8% recently. Unemployment for workers under the age of 25 is now higher than 50% in Greece and Spain. 22% of the Irish population live in jobless households. In fact, many European countries are experiencing problems worse than during America’s Great Depression. All this has many analysts worried about the potential for social unrest in Europe in the worst hit areas.
Even the wealthier countries like Germany are starting to struggle. French and German manufacturing activity has fallen for 10 months in a row. Even Germany’s record 2012 exports took a hit as the year ended.
We’re not sure how Europe’s finance ministers could possibly ignore all these facts during their last summit.
They won’t be able to continue ignoring them for long though. Things are expected to get even worse in coming years. Goldman Sach’s Economics Research team calculated their forecast for real GDP growth. A long recession is in the cards and it may take three years for Europe to recover to its previous level.
Greece remains worst off and a new bailout may be needed soon. Greece’s banks alone are expected to require a 30 billion euro recapitalisation all up. Their non-performing loans are at a remarkable 24% high. The worst thing is that the debt write down of Greek government bonds has left the same banks without the revenue stream from those bonds. And there ain’t much they can make money off at the moment.
Citigroup analysts believe there is a 60% chance Greece will leave the euro in the next 12-18 months.
The thing is, if one country leaves the currency, others will likely follow.
Elga Bartsch from Morgan Stanley reckons there are ‘fundamental flaws in the euro’s institutional set-up’. Sharing one monetary policy amongst different countries simply creates too many problems. Regulation, economic fundamentals, moral hazard and much more.
Plus there are also far too many issues left over from the 2008 financial crisis which need to be mopped up. Spanish houses are rumoured to be selling 70% below their crisis peaks and Irish property prices may be in for another fall.
The most recent developments out of Europe involve Cyprus. The banking system there is in deep trouble. The German parliament’s key opposition parties are kicking up a fuss over the bailout terms. You see, Cyprus has a reputation as being a banking centre for Russian oligarchs and their dirty money. The Germans want assurances that their taxpayer dollars aren’t going to end up in Russian billionaire’s wallets.
In the end though, the German taxpayers are expected to cough up the money. Their bark is worse than their bite.
Meanwhile, in France, even the bankers are going on strike over cost cutting plans. But French companies have little choice and a socialist government on their back. Shawn Tully explains the state of France at Forbes:
‘Corporate profits have plunged to 6.5% of GDP, about 60% of the euro zone average. That’s because French exporters are losing market share, and the ones that survive must lower margins to charge competitive prices. As a result, they lack the funds to invest in new plants and technologies. France now has half as many exporting companies as Germany and, amazingly, Italy. German industry benefits from 19,000 robots, five times the number in France. As for R&D spending, it’s dropped 50% in the past four years.’
Tully reckons the problem behind all this is that countries stuck in the euro can’t devalue their currency to make their exports competitive. Without competitive exports, it’s tough to grow an economy. The thing is, devaluing your currency is cheating. It’s like making your house bigger by changing how many centimetres are in a meter. You still have the same house.
The only way to truly make an economy competitive is to enhance productivity, lower wage costs, reduce the regulatory and tax burden and stop bailing out the people who run a business into the ground.
In other words, Europe has gone to the dogs.
If bad financial news gets you down, but you enjoyed this uncharacteristically enthusiastic edition of Money Morning, you can probably guess what ‘investment’ you should buy in 2013…
But the puppy strategy is just a bit of fun. In short, it’s just like any other diversion tactic. You could look at the bad news coming out of Europe and just ignore it. Plenty of people will do and have done that.
And unfortunately, there are more investors who don’t even know what’s happening. They watch the mainstream news. They see and read the stories about all the measures the central bankers are taking to fix things.
They see the proposal about the USD$1 trillion platinum coin and think, ‘Why not? Just do it, if it helps.’
Now, you can use that approach if you want. Cover your eyes and try to ignore it. But as even any six-grader knows, covering your eyes doesn’t make something go away. Go on, try it. Stand on a rail track as a train approaches and cover your eyes. Second thoughts, don’t try it. We both know what will happen.
The same goes for investing. And that’s why it pays to take notice of what’s really happening to the economy and markets.
So, aside from a four legged friend, what investments might do well while Europe implodes? Well, there are two strategies that fit the bill. The first is a crisis strategy. Could your wealth withstand a complete collapse of the banking system without the governments of the world being able to fund bailouts?
You could ensure part of your wealth is that robust by owning precious metals and other physical assets. A house is still a house, even if it falls in price. What matters here is that your ownership is direct. When you own a home or some gold, there is nobody standing between you and your asset. There is no Banksia Securities, MF Global or investment bank you rely on.
Another interesting strategy takes advantage of the fact that the train wreck of Europe, and the rest of the world, is a slow motion one. You should invest in assets that pay you to wait. Dividend stocks, bonds, options and many other investments can keep your bank account ticking over. That way you’ll be collecting cash while everyone else frets about the price of their investments.
These two strategies are what Money for Life Letter readers read about in their first two issues. But in December, we revealed that Australia’s banking system might actually be in trouble, just like Europe’s. And how that could mean cancelling your mortgage in 2013. You can find out about all three opportunities here.
Have a great weekend,
Nick Hubble
Editor, Money for Life Letter
From the Port Phillip Publishing Library
Special Report: The Fuse is Lit
Daily Reckoning: Let the Iron Ore Wars Begin!
Money Morning: What Lower Interest Rates Mean for Australian Stocks in 2013
Pursuit of Happiness: Is it Really Possible to Make Money from Your Home?
