The Investor Edge from Europe
Here is a surprise for you. European leaders did better than your favorite pundit!
They will also do better in the future.
For the last two weeks the dollar has moved higher versus the Euro and stocks have moved lower — almost an unbroken string.
The European story fit nicely with trader pre-conceptions about selling in May, following the pattern of the last two (count 'em!) years, and the lack of more QE.
Setting this up was a revival of the disaster scenario — a 2008-style Lehman like event where banks would topple and the financial system would crumble. Everyone's favorite conspiracy website teed this up by multiple posts predicting a continent-wide bank run. The leading CNBC commentators are bombarded with email and tweets from traders. In the modern age, the tweeters influence the content.
The bank run story has gotten widespread play, with journalists all solemnly agreeing that a Greek exit from the Euro would be a disaster.
The traders and pundits see European leaders as clueless bozos who did not do what they thought was correct, and did not do it in the time frame they thought was right.
Let us put aside that many pundits sought austerity while many others advocated growth. They all agreed that leaders were wrong for ignoring their recommendations.
An Objective View
This is going to be difficult for most people, but try to be objective about the various parties in Europe. Here is the question:
Has delay and bargaining improved things? Let us start by considering it party by party.
- Greece. Clearly improved. Negotiated a better deal on debt on round one, and in the bargaining for round 2. The citizens want to stay in the Eurozone and they want less austerity. They may well get both.
- France. Much the same story. Some agreement to reforms followed by pushing back from voters.
- Germany. Position improved from last year. There were concessions on political sovereignty and commitment to more austerity. Last year it was a cliff-diving scenario.
- ECB. Better now. The ECB exacted concessions for austerity and structural reforms before agreeing to more liberal lending. This was much better than caving in a year ago.
- IMF. Better now. By bringing together various European parties, the story was improved and the incentive for the rest of the world to participate was enhanced. The IMF has not yet reached the target in raising funds, but it is doing much better than it would have a year ago. Wasn't that when DSK had his problems?
- Other Potential Investors. Also better now than a year ago. I am still expecting China and Middle Eastern sovereign wealth funds to join in. Why? Because it is in their self-interest to do so. Europe is China's biggest trading partner. No nation benefits from a European collapse. The terms for involvement are better than a year ago, and the concessions from the various parties are better.
Turning from the particular participants to the collective, are things better or worse?
In the best case, things are much better than a year ago. Banks have more capital. They have lending from the ECB, with the chance to profit on the spread.
In the worst case, things are also much better. The original Greek debt with the threat of CDS payoffs was a major systemic threat a year ago. Those debts were negotiated, and things are a bit different. There are various current paths for Greece. Whether it is an exit from the EZ or another discount on debt, the stakes are lower than a year ago.
This is a continuing story of compromise and negotiation. Each party is benefiting from the delay. So far, it has also helped the collective.
Those complaining about "kicking the can" have been wrong. Those criticizing European officials have been wrong. Those predicting disaster have been wrong. Do you see a pattern?
The mainstream media has a fixation for trader/pundits who have all of the answers, even if they did not take Poli Sci 101. They translate everything into how they would do it in their own business — immediate and decisive action.
No matter that the recommended actions are in complete opposition, depending upon the political predispositions of the pundit.
Markets can and do pursue irrational themes. You can almost guarantee that it will happen each year. When this occurs, the long-term, Warren Buffett style investor should be prepared to step up.
Mr. Buffett uses his own values and treats the market as giving him mis-priced opportunities. This is a concept that some investors understand in theory, but few can implement.
I have been following all of the Europe news closely. I will try to provide a range of useful perspectives in the next installment. At the moment, everything is on sale. I especially like cyclical stocks like Caterpillar that do not even emphasize Europe, technology stocks like Oracle, which has been very resistant to slowdowns, and growth stocks like Apple, which seems to be trading in line with the dollar.