Wednesday, December 7, 2011

Bet on growth because that is where we’re heading.

The European debt crisis seems to be stabilizing; a solution seems to be in sight. We’re all sick and tired of the shrill screams of pundits that, no matter the topic, always shout “Too little too late!” Whether it is a political commentator, a member of the opposition, financial pundits or ratings agencies, their entire vocabulary, no matter the topic, seems to be “too little too late!”

S&P and Fitch have lost so much credibility that even the threat of downgrading the ratings of several European countries at once results in a mere shoulder shrug by the markets. These agencies are the real losers of the debt 'crisis'. Investing is about confidence and the ratings agencies have shown their shortcomings and their hysteria. What else can it be called? They can no longer be trusted.

Think a tiny 30 years back, when inflation in Canada and the U.S. was over 10% - the early 1980s. Did government bonds then yield below 7%? Of course not! They were in their teens and did did that bankrupt Canada and the U.S.? The answer is ‘No’, so why should Italy go broke if their bonds yield rises above 7%  for a few panic days ?

In the past governments defaulted on debt not because they could not print money to pay the interest. They defaulted because they no longer possessed the political will to make their debt payments. Yes, default was the remedy often choosen by the debtor country – they basically said “Sorry guys we’ve decided not to pay you back”. So short are our memories as Ken Fisher states. Of course, lenders will not lend any more money to the ‘defaulting’ country. But... just wait a few years and after the election of a ‘new government’, lenders are at it again. There always seem to be suckers to lend governments money.

The real issue in Europe is that if Greece or any of the other Euro denominated countries would default, that this would reflect on the other Euro countries as well. No longer can any Euro country default by itself and no Euro country can inflate their debt into oblivion by itself. This in effect makes European debt more secure! It also explains the reluctance of the other European countries to let the ECB print money to devalue Greece’s and Italy’s debt – it would cause inflation and poorer (i.e. more expensive) credit for all.

If the weaker countries need help from the EUC, the ECB or the IMF, it comes with strings attached – the price is less fiscal sovereignty and more power to the EUC overall. It looks to me that Europe under leadership of Germany and to a lesser degree that of France is moving towards a community with stronger financial oversight of its members. This, in the end will make Europe even stronger. Yes it has a $500 billion stabilization fund and now it provides the IMF with another $200 billion Euro in back-up funds to support the debt of its weaker members. The total backstop for 'risky' loans is now approaching the magic $ trillion line, but… That is far for the printing press output in the U.S. which is a somewhat smaller economy than that of the EUC. Yet, the U.S. printed close to $7 trillion TARP money not to mention market manipulations such as operation Twist and QE2.

Neither region is truly in trouble, they are bickering politically and the markets don’t like bickering. But in the end, the bickering may not change a lot in Europe’s debt load nor that of the U.S. The austerity plans may slow down debt growth but it also will reduce government spending and thus economic growth. It is really economic growth that will bail them out some years from now. Here is something to consider for the doomers: corporate profits are growing; corporate jobs in the U.S. are on the increase the only reason the total number of job growth is stagnant are government lay-offs that counteract all the growth. When we’re limping on one leg, is it any wonder that we go slower than when sprinting on both?

All the whining has created uncertainty in the markets amplified with the remnants of the 2008-2009 stress syndrome The result is that markets are willing to lend money to, out of all governments, the U.S.  at a near zero rates – that is before taxes and inflation! We’re so afraid of risk that we don’t want to pay for tax-advantaged dividends and we’re pushing stock down market valuations and commodity prices by sheer anxiety.

In the short term, markets are driven by emotions, by fears that ‘this time it is different’ and that the ‘end of the world is near’. Don’t tell me that the average investor is that smart when he/she cannot even outperform mutual funds that are handicapped by MERs and commissions. Don’t tell me that ‘the efficient market theory with smart well informed investors’ is here at work. In the short term the market is a ninny! Over the long term it will come to its senses and it is likely to go even overboard to the upside!

A truly smart investor will realize that the current anxiety will come to an end. Remember the debt-ceiling debacle, the down grading of the U.S. credit rating? Is that why U.S. treasuries trade at such incredible low yields? The world was supposed to have ended already many times over if you believe the politicos and pundits; strangely enough it hasn’t happened. We should be in a major depression if you believe the Harry S. Dents, Rosenbergs, Roubinis and other self-professed doctors of doom! It hasn’t happened. Instead the U.S. is growing, Canada is growing and even Europe is not in a recession yet.

I think 2012 will be better than 2011 and 2013 will be even better yet. I think the negative thinking will exhaust itself. Markets will realize: ‘he we haven’t died yet! Wow!’ then they will regain their confidence or become even over-confident. Markets will first drive stocks to fair and then to excessive valuations. You can buy now to profit 2 or 3 years from now; you can buy now to enjoy every increasing dividends for years to come. But don’t forget that right now dividends are popular and that the real companies in the penalty box are ‘growth stocks’ and U.S. financials. Don’t forget to place a few bets on growth because growth that is where we’re heading.

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