Submitted by Rich Toscano and John Simon on July 15, 2012 - 17:21
The following is excerpted from a
letter sent to clients on July 9, 2012.
The Eurozone crisis has been covered thoroughly in the
mainstream media, so we won't rehash the entire situation here.
However, we thought it might be helpful to provide some big picture
thoughts on how we think it might all turn out.
In brief, we believe the European Monetary Union will remain intact.
There is simply too high a cost at this point to unwind the Euro
If Germany were to exit, it would still be owed a huge amount of
Euro-denominated debt by the peripheral countries, much of which it
would effectively lose in real terms. Meanwhile, a rising
Deutschmark would crush Germany's huge export sector and likely lead
to a severe economic contraction. All in all, Germany would likely
lose more money by leaving the EMU than it would by staying and
bankrolling a rescue of the peripheral countries.
We believe that Spain and Italy are also extremely motivated to
remain in the union, as an exit would likely lead to economic and
currency disaster for them. It is rarely mentioned that both
countries have made significant economic reforms and gone a long way
toward cleaning up their fiscal acts. (The same can't be said for
The economic and political basket case that is Greece may actually
end up leaving the EMU, but this has been prepared for and could
happen without too much damage to the Eurozone. The economic
calamity that we'd expect for Greece if they exited could well
provide a good example for other peripheral countries, showing them
that exiting the EMU is a brutally painful option and encouraging
them to get in line with further reforms.
We also believe that European Central Bank will eventually abandon
its purportedly anti-money printing stance and will find some way or
another to monetize huge amounts of European debt. This is a key
part of our forecast and will be crucial if the Euro is to be saved.
Money creation on this scale eventually causes its own problems, but
it could eliminate the possibility of default and effectively end
the current crisis.
Salvaging the Euro will require many difficult political choices, to
be sure, but we believe that a breakup of the EMU is improbable.
There is a lot of brinksmanship going on, though, as everyone
involved hopes someone else will make the politically difficult
moves first. Thus the crisis will likely have to get more severe
before the dramatic moves, most importantly the significant ECB
money printing we expect, are made. So we should be ready for
continued volatility coming from the Eurozone, but we should also
keep in mind that the endgame could very well be less dire than the
consensus seems to believe.
In the meantime, some good investment values are being created in
Europe. European stock market valuations are now at more than a
one-third discount to US stocks (despite the fact that unlike
Europe, the US has done absolutely nothing to slow the growth of its
crushing debt burden). We are watching these markets closely, and
should the crisis get worse in the short term as we expect, we hope
to be able to take the opportunity to buy some assets that are
priced for very good eventual returns.