November 2, 2011

Dodging A Bullet?

“Nothing in life is so exhilarating as to be shot at without result.”
–Winston Churchill


Stable?  Did You Say Stable?

The recent Euro agreement forcing large banks to take a 50% haircut on Greek bonds, along with expanding the region’s bailout fund (European Financial Stability Facility/EFSF) by leveraging it up four-five hundred percent (to a trillion euros)[1]was met with great satisfaction by broad-based markets.  At least for a few days.

Immediately following the agreement, German Chancellor Angela Merkel stated, “This brings us one step further along the road towards a good and sensible solution. I have always said we would not be able to do this overnight, but this does bring us to a stable situation.”[2]

It depends on one’s definition of a “stable situation.”  The EFSF, which has already been used to bail out Greece, Portugal, and Ireland — may soon need to be tapped for economically larger Spain and Italy.[3] Especially since Spain and Italy appear to be closer to the abyss, as evidenced by the falling value of each nation’s bonds subsequent to the recent Euro agreement.[4]

Interestingly, the source of additional money for the EFSF bailout fund hasn’t been decided upon yet.  China and the IMF are being discussed as possible options.[5]  But China does not seem terribly eager at this point.[6]

How I See It

So here’s how I see it.  Greece is irretrievable economic toast.  Spain and Italy are in serious trouble and very likely in need of substantial additional bailout funds from the EFSF.  The EFSF was already woefully underfunded to meet its expanding needs (i.e. to bail out overly-indebted countries, along with banks unwise enough to invest in their debt). Euro leaders (fiscal-monetary bureaucrats) recently met and agreed to increase the EFSF bailout fund via leveraging (borrowing) 4-5 times its current value.  One minor detail — lenders to provide money for said expansion have yet to be identified.  Broad based equity markets subsequently rallied.

Has the world gone mad?

It’s my opinion the ultimate source of funding for the EFSF will be massive government money printing.  Who else would want to lend to such an unsavory borrower?  Thus, I believe the only rally following the recent European debt agreement should be in the shares of well-run companies who produce things people need every day (which can’t be printed by governments), and which also go up for auction all over the world.  Because it’s my opinion the result of continued monetary inflation will be reduced purchasing power and rising prices as currencies are debauched.

When I examine the recent debt agreement along with the entire Euro situation, Churchill’s quote above comes to mind.  A former cavalry officer who participated in charges on horseback, he personally knew the exhilaration of being “shot at without result.”  The recent Euro-debt “agreement” caused euphoria, as broad-based markets seemed to feel “shot at without result.”  Young Churchill got lucky.  I believe the verdict is uncertain at best regarding the fate of overly indebted nations (the U.S. included).

I maintain my positive outlook.  That outlook is based on my belief a bear market in one thing is often a bull market in another.

As we enter this critical time – now, more than ever – I believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances.  Others may feel free to contact us to learn more.


Stephan R. Ernharth, JD
Vice President
Ernharth Group

Go to to read past articles from our Economic Commentary series.

[1] Forbes, “Europe Agrees To Greek Write-Down, Boosts Bailout Fund” October 27, 2011
[2] Ibid
[3] Ibid
[4] Bloomberg, “Italian, Spanish Bonds Fall on Bailout Concern” October 31, 2011
[5] Forbes, “Europe Agrees To Greek Write-Down, Boosts Bailout Fund” October 27, 2011
[6] Bloomberg, “Italian, Spanish Bonds Fall on Bailout Concern” October 31, 2011