One of the recurring topics that I have been asked about this spring concerns the fate of the Euro and the European Union.
I know that there was a deal finally hammered out to keep the functionally bankrupt Greece from collapsing and perhaps taking the entire euro-zone with it.
However, no mainstream investment strategist that I follow thinks that this agreement is the end of the broader Euro crisis.
More debt crises are coming and the worst case outcomes are very bad indeed, with depression hyperinflation, civil unrest and authoritarian governments all being presented as real possibilities.
How could something so obviously flawed in retrospect as the Euro and the European Union have been allowed to happen?
When the euro became the currency of most EU countries in 2002, the intentions were honourable.
The idea was that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) would use the low interest rates and the ready loan availability to recapitalize and revitalize their economies.
That part of the plan worked. Euro-denominated sovereign debt came to be viewed as a single market and the PIIGS were able to borrow at interest rates comparable to the core countries like Germany.
This was pleasant for all concerned, pumping up core country’s trade surpluses and tax revenues while allowing peripheral countries to ‘boom’ without apparent consequences.
In retrospect, the European Union idea had some design flaws, beginning with the assumption that simply imposing the same currency on a group of disparate nations would somehow cause all of them to suddenly adopt Germanic thrift, efficiency and budgetary restraint.
Degenerate spendthrifts continued to spend far beyond their means, but the reduced the interest rates paid actually meant that they could afford to borrow even more.
The result was a variety of debt driven ills, from housing budgets to soaring deficits to insolvent banks.
As a result, today’s European financial sector is seen as an emergency room full of over indebted countries and mega banks.
As usual, the discussion boils down to the essential investor question of, “So what do I do?”
First, don’t try to forecast what is going to happen and then redesign your portfolio.
It’s impossible to guess the future and unprofitable and unwise to base the design of your investment portfolio on it.
My other reminder to investors is that price is the difference between a ‘good business’ and a ‘good investment.’
I’ve learned to become very suspicious of any consensus forecast because if everyone believes that only one outcome is possible then everyone will be on the same side of the trade.
In this case, the consensus (a synonym for consensus is ‘herd’) is that they should be selling low!
There’s a very good reason that successful investors are contrarian—you make more money.
The European Union and the euro will evolve into whatever they will evolve into.
No one knows for sure what that will be. I am certain only that if you invest rationally and unemotionally, you will have better results than those that don’t.
