Faceoff on Greece: An Interim Update

About two years ago the situation in Greece was at a flashpoint. It was at the top of the list of investor worries.

Leading that argument was John Mauldin, who had written over thirty posts tagged Greece culminating with aggressive statements in June, 2012. He also has a book on the impending collapse of Europe using Greece as the poster country for a debt-ridden collapse. Mr. Mauldin has noted in his interesting and lively weekly reports that he has met with Congressional leaders who were influenced by his reasoning.

At the same time, I suggested to readers that the Greek situation was overblown. Investors could achieve a significant edge by taking a contrary position. Here is what I wrote in June, 2012:

I have a long-term forecasting record on this which has been pretty accurate on general European developments.  It is dragging out longer than even I expected, but I still see the following conclusions:

  • Some sort of deposit insurance for Europe, ending the bank run worries that have dominated the stories for the last several weeks.  Do you really think that European leaders have no plan for this?  This will be the first news.
  • More powers for the ESM — either direct lending to banks, or giving bank powers and leverage to the ESM.
  • Expanding the war chest — this will happen gradually.
  • Concerted action by G8 powers — quite possible, and already rumored.
  • Political and fiscal integration — probably happening since most countries will benefit.  I do not know about Greece, but I will note that an exit now is much less painful than it would have been a year ago.  This illustrates why it is useful for leaders to buy time.

The Interim Update

US stocks are up about 40% since June of 2012. The European situation has not collapsed. It was (yet another) scary thing for the average investor, who was told to fear Greece, Europe, and world-wide debt.

Those who made these predictions are doing their own version of “kicking the can” by insisting on the same old themes and saying “Not yet…but eventually.”

Meanwhile, Hugo Dixon, writing at Breakingviews, highlights Greece Unbound. Here is his account of the success of European policy — at least so far.

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent.


Athens’ debt is still almost 180 percent of GDP. But it is not nearly as burdensome as the headline figure suggests because the bulk of the debt is owed to other euro zone governments as a result of its two bailouts. Not only do these loans pay a low interest rate of a little over 2 percent, Athens doesn’t need to start repaying them until 2022 and then has another 20 years to complete the job.

And in conclusion…

This is not to suggest Greece is out of the woods. A quarter of the workforce is still unemployed. To bring this down to acceptable levels, the government will have to continue with its reform agenda and the economy will need to grow for many years.

The biggest risk is politics. Only last week the government was shaken when a video was released of the prime minister’s chief of staff talking to the spokesman of the far-right Golden Dawn party. The aide, who has since resigned, said two government ministers had told a judge to arrest the Golden Dawn’s leadership. The ministers have denied this. It doesn’t look like the government will fall. But if it does, a government led by Syriza, the radical left opposition, would be less investor friendly.

That said, the imminent bond issue is an important milestone in Greece’s recovery.


Investor Conclusion

John Mauldin has over a million readers. He has monetized his eyeballs with subscriptions, conferences, taped replays, and paid promotions. His business model has been brilliant. He is a hard-working and charming person. I admire entrepreneurs and I congratulate him on is success. I have corresponded with him, and spoken on the phone, but never met in person.

My readership is small by comparison. My only revenue comes when my investment conclusions are correct – as they have been on Europe. Collecting revenue whether you are right or wrong is certainly a better business model! I modestly suggest that Mr. Mauldin owes us all an update on Europe. Does he still see a collapse? When? What would be the catalyst?

And he should not complain about policymakers, since that is part of the investment question. If you cannot accurately predict government policies, you are crippled in your investment forecasts.

We do not yet have a final verdict, of course, but those scared out of the market by European fears have clearly missed out. That has been true for US investments, and especially true for Europe itself.

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  • Chris Tinker April 9, 2014  

    Like you I admire JM’s business model and sometimes appreciate the different perspectives that his letters can bring – linking to other, interesting observers in his outside the box piece, for example, is a great opportunity to access other thoughts out there.
    However, the benefit of that is changing. When Ben Hunt ( Epsilon theory) was flagged up by JM I started accessing his work directly and appreciate its perspective but now that Ben is top of the Seeking Alpha reading list his views are (rightly) gaining a profile of their own. The problem that I have with JM is that like Roubini and others, their profile garners them access to policy makers in a manner wholly disproportionate to their skill set. Personally I find JM’s own analysis disappointing and sensationalist and now rarely read past the conclusions. It is written with the view that to be scared of the world is correct and that every investor needs a guide though the financial underworld by a visionary who understands the risks and realities (buy my book).
    As a result, the narrative that he continues to propose is one that is designed to undermine investor confidence in the persistence of returns over time – indeed his failure to acknowledge the role that time has as a solution to anything (everything collapses in the immediate future for him it seems) marks him out as a short-term noise and news provider – not a serious analyst.

  • Robert Martorana April 9, 2014  

    You are quite right about Greece, and I appreciate your assessment of Mr. Maudlin’s posts.
    I have heard that tabloid journalism is based on two simple rules: Simplify and exaggerate. A long-term investor, on the other hand, is interested in research, track records, and accountability.
    Perhaps you have written articles that contrast tabloid journalism with long-term investing. If so, I’d love to read them. These days I grow increasingly frustrated with the media’s focus on pageviews and popularity at the expense of accuracy.

  • Ian April 9, 2014  

    Yeah, the reason why disasters rarely happen is that everyone is doing their best to stop them! Mauldin and his readers failed to grasp this astonishing fact! Great post!

  • stock April 11, 2014  

    I would say that when the “bulls” are backslapping themselves, is perhaps the most likley time for a good turn down.
    the obvious manipulation at every level of the markets makes one point clear. It is all a joke….be a bull, until you shouldn’t or just take your money from that playing field of deceit and disgust.

  • Johan Lindén April 15, 2014  

    Good post by Jeff, and good comments above!
    Also interesting to see that someone else than me found Ben Hunt through JM.