Now that the elections in France are over, it is clear that the voters want an end to austerity. Assuming that governments in France and elsewhere agree to increase spending, deficits will increase. A significant portion of the increased spending will go to transfer payments, not investments. Growth rates will move only slightly. Inflation will increase. The Euro will decline in value relative to the dollar and remnibi.
European inflation may influence U.S. inflation. Therefore, it is prudent to shift into inflation-resistant investments, especially income-producing real estate, consumer goods stocks, railroads, and other companies that have big moats around their business model.
---
Some older news related to the ending of austerity in Europe:
Bundesbank’s Weidmann Says What No Politician Wants to Hear
http://www.bloomberg.com/news/2012-04-22/bundesbank-s-weidmann-says-what-no-eu-politician-wants-to-hear.html
Hollande Vows Not to Ratify Euro Pact, Auguring Merkel Clash
http://www.bloomberg.com/news/2012-04-25/hollande-says-france-won-t-ratify-euro-fiscal-pact-as-it-stands.html
Europe awaiting France to temper austerity: Hollande
http://www.reuters.com/article/2012/04/25/us-france-election-idUSBRE83I0EZ20120425
Thursday, May 17, 2012
Will Greece Be Ejected from the EU?
(As usual, I am looking for the objective observation. This is not a prescription for what I think should happen, it is observation of what is likely to happen. Failing to stay objective is a mistake that costs money.)
Voters in Greece are rejecting austerity. The newly-elected government failed to coalesce this week, so there will be new elections in June. Predictions are that more seats will go to left-leaning parties which will, of course, deliver policies requested by the Greek people.
Greece would like to remain within the euro zone. It benefits from the stability of the Euro. By comparison, returning to the drachma would likely result in inflation, and most Greeks believe that returning to the drachma would be a disaster.
If you are a Greek citizen, why would you vote for austerity? It causes a loss of Government jobs. And why would you vote to lose the Euro and switch to the drachma? You wouldn't. That would result in inflation. If you were in their shoes, you too would want to have your cake and eat it.
Therefore, Greece will ask the euro zone countries to continue supplying money while it suspends interest payments. Voters in other countries will reject this scenario. They will reject the additional taxes required to maintain this state, by voting out politicians if necessary. The politicians in these other countries will then need to make a choice: Leave the euro zone themselves, or request that the EU act as a unit to prevent Greece from using the Euro. This will lead to the EU pushing Greece out.
Germany will get 99% of the blame, even if the vote to expel is unanimous.
Stocks in U.S. markets are in a correction at present in anticipation of these events. The greatest part of the discount is from uncertainty over the method of Greece's exit and the ramifications for the rest of the euro zone. I have no way of calculating the correct discount. The greatest turbulence and discount in prices of stocks will be now, when there is a lot of uncertainty. Once the news of the separation occurs, stocks will rise as uncertainty recedes.
It has already been reported by various news services that banks in Greece have been preparing for several years for a possible return to the drachma. Greece's central bank owns the necessary printing presses for printing new drachmas, if it has to.
Over the past week Greeks have pulled nearly a trillion Euros from banks in Greece. This is capital flight, a run on the banks, confirming that the common expectation among voters themselves is that Greece will be departing from the euro zone.
Voters in Greece are rejecting austerity. The newly-elected government failed to coalesce this week, so there will be new elections in June. Predictions are that more seats will go to left-leaning parties which will, of course, deliver policies requested by the Greek people.
Greece would like to remain within the euro zone. It benefits from the stability of the Euro. By comparison, returning to the drachma would likely result in inflation, and most Greeks believe that returning to the drachma would be a disaster.
If you are a Greek citizen, why would you vote for austerity? It causes a loss of Government jobs. And why would you vote to lose the Euro and switch to the drachma? You wouldn't. That would result in inflation. If you were in their shoes, you too would want to have your cake and eat it.
Therefore, Greece will ask the euro zone countries to continue supplying money while it suspends interest payments. Voters in other countries will reject this scenario. They will reject the additional taxes required to maintain this state, by voting out politicians if necessary. The politicians in these other countries will then need to make a choice: Leave the euro zone themselves, or request that the EU act as a unit to prevent Greece from using the Euro. This will lead to the EU pushing Greece out.
Germany will get 99% of the blame, even if the vote to expel is unanimous.
Stocks in U.S. markets are in a correction at present in anticipation of these events. The greatest part of the discount is from uncertainty over the method of Greece's exit and the ramifications for the rest of the euro zone. I have no way of calculating the correct discount. The greatest turbulence and discount in prices of stocks will be now, when there is a lot of uncertainty. Once the news of the separation occurs, stocks will rise as uncertainty recedes.
It has already been reported by various news services that banks in Greece have been preparing for several years for a possible return to the drachma. Greece's central bank owns the necessary printing presses for printing new drachmas, if it has to.
Over the past week Greeks have pulled nearly a trillion Euros from banks in Greece. This is capital flight, a run on the banks, confirming that the common expectation among voters themselves is that Greece will be departing from the euro zone.
Tuesday, May 15, 2012
Family Vacation or Budget Deficit?
In the Wall Street Journal Demetria Gallegos writes about taking a vacation with her four daughters without her husband. She wrote about differences of opinion over affordability and location (Los Angeles and Disney), but appears to have skipped many other issues. Issues like control (did he have any input into planning?), frequency of their Los Angeles trips (is this the fifth trip there?), proximity to relatives (hers?), style (shopping and Disney trinkets vs. history and culture), trip efficiency ($ per day), and budget (was money saved for this trip, or is it coming from credit cards?). The responses tended to be polarized, with perhaps half of the commentators castigating the husband, and the others supporting him. Several were quite harsh, suggesting the wife divorce the husband.
One of the dangers of frugality is that other people attack it. It is difficult enough for some of us to refrain from spending money we shouldn't spend. When we do, we are being sensible. Ben Franklin would be proud. A penny saved is a penny earned. When other people attack that frugality, it is much easier to give in to the criticism and resume overspending.
Something more than "good parenting" was at stake in this article. Most of us know that a good shared experience can pay dividends for the family for many years. Time passes, and you cannot get it back. Children grow up, and if you don't seize the initiative to travel with them, you won't get that opportunity later. It evaporates.
What was missing from the article, though the author implied that her husband did understand all of that, was any discussion about whether this trip would be a memorable trip. It is possible that the husband calculated that circumstances would result in a poor "memory" payoff for the cost involved. Certainly those commentators eager to attack him gave no consideration at all to this payoff calculation.
The bigger issue is the people dynamics. It is possible to be sensible and do the right thing about your finances, to be great at getting high returns from both expenses and investments, and still someone will come along and berate you for reasons that are emotional. You were happy, but now they are doing all they can to make you believe that you were wrong for being happy.
I have to wonder about some of those commentators. Did they really have other motives in making those comments? An over-spender may be anxious to force others to also overspend, as a way of justifying their behavior. Or it may be simple competitiveness: They want the husband to be as miserable and broke as they are. How dare he escape the vacation dilemma with money left over! Something tells me, however, that there is something even more sinister than that afoot.
One of the dangers of frugality is that other people attack it. It is difficult enough for some of us to refrain from spending money we shouldn't spend. When we do, we are being sensible. Ben Franklin would be proud. A penny saved is a penny earned. When other people attack that frugality, it is much easier to give in to the criticism and resume overspending.
Something more than "good parenting" was at stake in this article. Most of us know that a good shared experience can pay dividends for the family for many years. Time passes, and you cannot get it back. Children grow up, and if you don't seize the initiative to travel with them, you won't get that opportunity later. It evaporates.
What was missing from the article, though the author implied that her husband did understand all of that, was any discussion about whether this trip would be a memorable trip. It is possible that the husband calculated that circumstances would result in a poor "memory" payoff for the cost involved. Certainly those commentators eager to attack him gave no consideration at all to this payoff calculation.
The bigger issue is the people dynamics. It is possible to be sensible and do the right thing about your finances, to be great at getting high returns from both expenses and investments, and still someone will come along and berate you for reasons that are emotional. You were happy, but now they are doing all they can to make you believe that you were wrong for being happy.
I have to wonder about some of those commentators. Did they really have other motives in making those comments? An over-spender may be anxious to force others to also overspend, as a way of justifying their behavior. Or it may be simple competitiveness: They want the husband to be as miserable and broke as they are. How dare he escape the vacation dilemma with money left over! Something tells me, however, that there is something even more sinister than that afoot.
Corruption Perception Indices in the Eurozone
I was wondering about correlations between the country scores in the Corruption Perception Index compiled by Transparency International (http://cpi.transparency.org/cpi2011/results/#CountryResults) and national budget deficits. Here are the Corruption Perception numbers for members of the Eurozone, with 1.0 indicating very high corruption and 10.0 indicating zero corruption:
Austria 7.8
Belgium 7.5
Cyprus 6.3
Estonia 6.4
Finland 9.4
France 7.0
Germany 8.0
Greece 3.4
Ireland 7.5
Italy 3.9
Luxembourg 8.5
Malta 5.6
Netherlands 8.9
Portugal 6.1
Slovakia 4.0
Slovenia 5.9
Spain 6.2
Three Nordic countries not in the Eurozone have very high scores:
Denmark 9.4
Sweden 9.3
Norway 9.0
For comparison, the United States scores a 7.1 on this scale, just slightly ahead of France, but well behind Germany, Finland, and the Netherlands.
Greece has the lowest score among all Eurozone countries. The only other countries that are close are Italy and Slovakia.
Austria 7.8
Belgium 7.5
Cyprus 6.3
Estonia 6.4
Finland 9.4
France 7.0
Germany 8.0
Greece 3.4
Ireland 7.5
Italy 3.9
Luxembourg 8.5
Malta 5.6
Netherlands 8.9
Portugal 6.1
Slovakia 4.0
Slovenia 5.9
Spain 6.2
Three Nordic countries not in the Eurozone have very high scores:
Denmark 9.4
Sweden 9.3
Norway 9.0
For comparison, the United States scores a 7.1 on this scale, just slightly ahead of France, but well behind Germany, Finland, and the Netherlands.
Greece has the lowest score among all Eurozone countries. The only other countries that are close are Italy and Slovakia.
Wednesday, May 2, 2012
Trading Psychology Revealed by Share Buybacks
Share buybacks by companies stir up the emotions of some traders. It is a telling sign. Why would something as mundane as a change in the denominator get traders so stirred up? Perhaps this is one way to tell the difference between an investor and a trader: The investor looks at the relative price to value, while the trader looks for various technical factors surrounding the transaction. As to whether share buybacks are good or bad, the trader will almost always label them as "bad," while the investor will ask about the price relative to book value or enterprise value.
The pseudonymous "Jaded Consumer" writing at Seeking Alpha seems to have caught Motley Fool's Rick Smith thinking like a trader:
http://seekingalpha.com/article/549621-why-american-capital-is-buying-american-capital
For reference, here is the original Fool article, which doesn't really make a valuation-based case for criticizing an American Capital Strategies share buyback:
http://www.fool.com/investing/general/2012/04/12/2-stocks-that-are-wasting-your-money.aspx
In this situation, we have what might look like a turnabout: The supposedly sensible Motley Fool writer has been found to be trading, while the pseudonymous "Jaded Consumer" is offering much clearer thinking, and better writing as well.
It is worth mentioning that none of my comments here are intended to reflect on the relative merits of investing in AAPL or ACAS.
The pseudonymous "Jaded Consumer" writing at Seeking Alpha seems to have caught Motley Fool's Rick Smith thinking like a trader:
http://seekingalpha.com/article/549621-why-american-capital-is-buying-american-capital
For reference, here is the original Fool article, which doesn't really make a valuation-based case for criticizing an American Capital Strategies share buyback:
http://www.fool.com/investing/general/2012/04/12/2-stocks-that-are-wasting-your-money.aspx
In this situation, we have what might look like a turnabout: The supposedly sensible Motley Fool writer has been found to be trading, while the pseudonymous "Jaded Consumer" is offering much clearer thinking, and better writing as well.
It is worth mentioning that none of my comments here are intended to reflect on the relative merits of investing in AAPL or ACAS.
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