Don't expect a financial catastrophe in Europe. The Eurozone's problems are serious and will take time to work out, but the currency crisis is a much-needed catalyst for important changes.
This article published with permission from InvestmentU.com.
I’ve been a table-pounding bear on the euro for almost two years now. With each passing day, that currency looks more and more like a failed government experiment.
Painful, structural changes are needed — and the profligate Greeks need to be booted out. And, even then, the euro is likely to continue its decline against other major currencies.
But the euro, perhaps in an altered form, will survive. So don’t believe the doomsters who say we’re headed for another world financial calamity like we faced in 2008.
Too many investors are nervously sitting on the sidelines, missing great opportunities in today’s market. If you understand how the euro crisis is a good thing, you can start making serious money again.
Aside from being chief investment strategist for Investment U, I also oversee the investment decisions of The Oxford Club — an exclusive community of like-minded investors. As I write, we currently have 21 open positions in our Oxford Trading Portfolio. Our average gain on open positions is 36%, even though our average holding period is 197 days.
During this volatile year, we also stopped out of 17 other positions. Five of these were sold at a loss. The other 12 were profitable. Our average total return on these 17 trades was 21%. (By comparison, the S&P 500 is up 2% for the year.)
One of the reasons we’ve prospered is that we ignored all the macro-economic squawking from week to week and focused instead on finding great businesses selling at compelling prices.
“That all sounds well and good,” an investor told me the other day. “But what are you going to do when the Eurozone collapses?”
Despite all the gloomy forecasts, that won’t happen.
One of the main reasons is Germany. Officials and citizens there aren’t panicking about the problems in the Eurozone because, in some important ways, they see it as an opportunity.
Yes, problems there are serious. Greece is a complete basket case. Italy, Spain, Portugal and Ireland also have too much debt. But their problems are more manageable.
Germany knows this — and understands what’s at stake in the Eurozone. Germany is a world-class exporter. Yet, because it shares a currency with weaker nations, its currency is cheaper and so, too, are its exports. The currency union has been like rocket fuel for Germany’s exports.
However, Germany doesn’t want to be put on the hook for bailing out smaller, spendthrift nations. And the country is particularly sensitive to criticism that it’s attempting to dominate Europe politically or economically.
So Germany is hanging back, treating the crisis much as the Republicans treated the debt-ceiling impasse earlier this year. The Germans see this as an opportunity to secure important policy concessions rather than an emergency to be solved at all costs.
Who can blame them? German unemployment is 7% and falling. Deficits there are coming down. Germans don’t want to dictate to other union members. They want them to take responsibility and make serious reforms to their unemployment insurance system, their health care sector and other pieces of the welfare state.
Politically, these measures will be tough to swallow. That’s why we’ve seen so much leadership turnover in Europe lately. But the time for half-measures is over. Even Nicolas Sarkozy had told French citizens the uncomfortable truth: The state is simply unable to provide existing generous benefits much longer.
Once Europeans understand this in their bones, the necessary reforms can be made. And then, who knows? Americans may get serious about entitlement reform, too.
So don’t expect a financial catastrophe in Europe. These problems are serious and will take time to work out. But the currency crisis is a much-needed catalyst for important changes.
Recognize that and you can return to world equity markets with confidence — and start meeting your investment goals again.