Short-Term Key: Negative Long-Term Key: -94 (Negative-to-Neutral)
The latest news from Europe confirms our long-term pessimistic view of the continent. Greece, the birthplace of democracy, has become a financial basket case on the verge of defaulting on its $360 billion worth of debt.
That's doesn't mean everyone who bought Greek bonds will be stiffed, but a default will have big consequences.
These days, there are those who try to put a positive spin on everything. One of the funniest comments on the situation we read this weekend came from a European Union official who stated that Greece's problems are not about to cause the break up of the EU since, after all, the EU has been around for 50 years.
Maybe he was trying to reassure people. However, 50 years is not a long time for any political union. It's less time than the Soviet Union held together. Even a quick glance at the history of the world shows that nations come and go much more frequently than any government wants to admit.
Our guess is that the European Union will fail – eventually – though we cannot say for sure when that will happen. After all, European nations have been fighting each other for the better part of the past 400 years – from the 30 Years War, to Napoleon's campaign of conquest, to World Wars I & II. Far from being a homogenous group, Europeans are a composite of many different cultures with no common language, history, type of economy, or political outlook to unite them. For that matter, every small region in Europe has its own accent, its own festivals and traditions, even its own variety of cheese and wine. Odds of the current union surviving are slim against this background of division.
As for Greece, one of the nation's biggest problems is that it sits next door to Turkey, and their relationship has not exactly been neighborly. Consequently, Greece feels obliged to spend more money on defense than the size of its economy can justify.
The question is … what happens if Greece fails? For that matter, what if other fragile European nations fail, such as Italy, Spain, and Ireland?
Certainly, failures in these economies would not be good news for the euro as it stands today. But it doesn't necessarily mean the world's economic system would blow up. Today, the EU is no longer a critical cog in the world economy. Important, yes. But European growth no longer matters the way it once did.
If the weak nations like Greece were to fail, there would be a temporary crisis, possibly leading to massive bailouts to protect lenders. We could see a deflationary episode. Stock prices could fall. But in the end, as in 1998, the problem could be solved with money.
Ironically, the failure of Greece would ultimately be bearish for the U.S. dollar. The break-up of the EU would see one or two strong currencies emerging that could better provide investors with security than the dollar or the euro today. After all, the euro is partially tied to the fortunes of Greece and the other weak EU members. Take out the weaklings and the currency would benefit from the strength of Germany and other such members.
Alternatively, the euro could dissolve into a variety of independent currencies, as was the case in the past. But again, a new German mark would likely be stronger than our dollar.
Our guess is that whatever happens in Greece will do little to change the major long-term trends taking place in the world. The dollar will continue to lose value. Resource prices will rise. Inflationary pressure will mount.
And speaking of resources...
THE OTHER AFGHAN MISSION
One other news story caught our eye recently. It was published in the Shanghai Daily, which certainly has its own bias, as do most papers. However, when it comes to reporting news that is bad for China, it's fairly trustworthy.
The story in question dealt with the kidnapping of two Chinese engineers in Afghanistan. Many Americans might wonder why Chinese engineers are working in Afghanistan. Unlike the thousands of U.S. troops there, these men were not part of any war effort. Rather, they were busy building infrastructure so that some of Afghanistan's copper reserves could be mined and shipped to China.
China's focus is on growing its economy, and it is scouring the world for the resources to do so. That's the big long-term picture. Far more important than Greece is the economic growth taking place in the developing world, the impending shortages of raw materials, and the inevitable rise in inflation.
As for the U.S. economy...
2ND DERIVATIVES NO LONGER IMPORTANT?
We find it interesting that no one seems to be talking about second derivatives any more. A few months back, when the rate of unemployment growth seemed to be slowing (so that its second derivative was turning positive) second derivatives were on every commentator's lips. Everyone who had taken first-year calculus in college was finally able to dust off their calculator and put this tool to good use. Second derivatives were treated as an important economic indicator.
So why is it that now, when the second derivatives are turning negative, no one seems to mention them or consider them important anymore?
Well, that's show biz – now that show biz has replaced objective economic reporting. It seems the only statistics that matter any more are positive statistics, and as soon as a stat turns negative it's dumped like any has-been entertainer, perhaps to be someday resurrected on a reality show called, “Dancing with Statistics.”
Meanwhile, the lack of improvement in stats that are too big to be ignored – such as unemployment - will have consequences. Our guess is that the Fed will soon be forced to reverse its decision to stop buying Treasury bills and other assets in March.
And that change of heart could be the spark that ignites gold prices. Hold on to your positions in gold and other precious metals, because they could be very rewarding. Gold is an asset class in itself that deserves a place in every portfolio.
For that matter, a default by Greece could also trigger a surge in gold. Any economic trouble these days risks causing an initial deflationary episode followed by an increase in inflationary pressure. Gold is the one investment that can thrive on such chaos, so don't be caught without it.
