Investment Strategy Newsletter

At its introduction a decade ago, the euro was not very popular, especially not in Germany. As it turned out, the European Central Bank (ECB) has managed the currency quite well, just like the Bundesbank did previously. But a strong currency is not a good thing for everyone. If you are used to living beyond your means, with easy money for the boys sprinkled around, you actually need a weak currency with good inflation to keep things cosy. A generous devaluation every now and then certainly helps. There should have been a big, cigarette pack-style warning sign on the euro: “Using this coin will make you lose your beloved printing press and thus end the easy life for you.” Obviously Greece and a few others didn’t think through the consequences of using a hard currency. Now they are facing some hard choices.

I don’t think a default by Greece would lead to the end for the euro. If Orange County in California, or Chicago, or Idaho default on their bonds, it would not end the dollar. Let’s assume we all used gold coins as our currency. What would it mean if some guys ran out of gold? Should we abandon gold then, and use sea shells, or paper instead? In fact, it’s time to let everybody who can not manage his affairs properly, go bankrupt. The welfare state can not take care of all incompetents on top of the weak, old and lazy ones. In big European cities, more than 50% of the population is living on transfer and welfare payments. The pool of workers and employees who have to pay for all this waste and welfare is shrinking and getting angry. I say: liquidate the bloated welfare and waste and let the incompetents go bankrupt. In Greece’s case that means: let the IMF handle it, they are the clean-up squad.

It is very likely that in the near to medium term speculators, who have smelled blood, will keep the euro under pressure. Therefore it might be advisable to keep a substantial part of one’s investments in dollars for the time being.

Equities have not been great if you just held on to them over the last 10 years. They’ve gone nowhere. My guess is the next 10 years will be quite similar. Lots of ups and downs with a flat end result. I’m afraid that might be the lucky case. A worst case would probably look similar to Japan’s: there, the market is down 75% over the last 20 years, and the future looks bleak. This is not a good time for “buy and hold”. But I’d make an exception for some solid, dividend paying stocks like Nestle, Exxon, Pfizer and the like. Everything else needs to be watched carefully and has to be bought and sold on strict parameters. Some gold, at least 5-10% of a portfolio, should be kept regardless of short term noise. It’s the one insurance that doesn’t depend on somebody else’s goodwill and solvency.

And finally: we have to come to terms with the fact that the US’ and Europe’s relative weight and importance are shrinking. 100 years ago, China had less people than Europe. In a few years, the middle class there will be bigger than the whole population of the old continent. But even China will suffer from an aging population, just like Germany, Italy, Japan and most other Western and North Asian countries. There will be, however, billions of young people in Africa, the Middle East and South Asia, most of them Muslim, for whom the old and still comparatively wealthy countries will be attractive destinations. This is already a fact, but we don’t like it much, and we have no good solution for it. My advice is to think quietly about the long-term implications for all kinds of investments under that scenario.