As the Eurocrats prepare to wheel the latest Trojan Horse bail out scheme into the Reichstag for a vote this week, it remains to be seen if German politicians have the stomach to face the voters wrath in a lame effort to bail out the profligate spending of fellow fiscally challenged EU members. We are not optimistic. Too Big to Fail (TBTF) meets the sovereign risk Twilight zone! For all of us euro sceptics out here in portfolio management land, it comes as no surprise that Greece has passed its fiscal failsafe point. We have long believed that the Euro experiment was flawed and rotten to the core and the ECB’s one size fits all monetary policy would fail its first major global challenge. It has…miserably. Frankly we did not expect that the EU would unravel so quickly which is only further evidence of the huge fissures in its structure. Unfortunately it appears that the Eurocrats don’t see the writing on the wall and are attempting to fix the problem by throwing good money after bad….the politically expedient, kicking the can down the road strategy. Ironically it appears that the other weak sisters in the Club Med countries; Portugal, Spain and Italy are also being asked to contribute to the Greek bail out. So let’s get this straight….the even weaker Club Med dominoes are being asked to bail out the first to fall Greek domino? Club Med will quickly morph into Club MAD for Mutually Assured Destruction.
Enter the IMF which recently expanded its back up $50billion financial reserve fund by $500billion…..it is reported that the US share is 20%. Now the IMF is knee deep into bailing out Greece to prevent contagion.
Who’s next? The funding announcement over the weekend comes in close to a whopping $150billion. We know how poorly German taxpayers feel about bailing out Greece. How do American taxpayers feel about it? My guess, after the mainstream media finally picks up on the story, probably the same as the Germans given our own fiscal challenges and our huge concerns with the concept of TBTF and bail outs.
The bottom line? The EU and ECB experiment requires significant restructuring if not outright abandonment. The Eurocrats are prolonging the inevitable and merely taking the easy road by throwing more money at the problem and in so doing just making the situation worse. The contagion risks are huge. Therefore our global asset allocation strategy remains unchanged…relative to client benchmarks we remain significantly underweight International Equities…with a large underweight in the Euro zone and emerging markets; we are neutral on US equities as they have reached our performance targets for the year and overweight in bonds and cash.
This is a guest post from the Peter Stock of Stock Investment Management Inc in Manchester, VT.