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August 2012

Update on Europe, and Go Ride a Bike!


Although the markets and the economic news have seemed somewhat calm here recently, the ongoing European debt crisis is far from over, and is still has the potential and probability for major impacts on global markets going forward. Lets review some recent updates that have relevance to us as investors. How We Got Here

First, a quick recap of the crisis: many nations of the European Union (EU), especially Spain, Italy, Greece and Portugal (The PIGS) are suffering critical financial troubles. Several decades of reckless spending, unsustainable social programs, and massive amounts of debt have brought these nations to the brink of ruin, and they are facing the prospects of imminent bankruptcy and massive civilian unrest. To make things even worse, perhaps much worse major European banks are the primary lenders to these troubled nations, and these banks might also collapse along with the nations they have

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 2 lent to. If the banks collapse, there is a very real possibility of major deflation, in other words the prices of assets like stocks and real estate might fall sharply. There are two possible solutions to try and solve this crisis. One the least popular, is austerity. In this scenario, the nations in crisis would undergo major belt tightening in the form of reduction of all spending and social benefits, higher taxes, and a long painful recovery until they are back to financial health and balanced budgets. This solution, while it should work in the long run, will almost certainly result in lower asset prices and lots of pain for investors everywhere. The second solution, and the path of least resistance, is for the governments and central banks to print more money, and lend this new money to the countries and banks in trouble with the hope that with enough time, they will be able to increase their revenues, reduce their deficits and resuscitate themselves so that they are no longer in critical condition. This money printing solution may or may not work, but it does buy time and delays facing the root problems. Most importantly to us as investors we have some clues on how to allocate a portfolio, as this type of fiscal policy tends to lead to higher asset prices (inflation) and/or a weaker currency. Still another possibility is that of an unplanned catastrophic collapse of a nation(s) and/or banks. The European Central Bank, IMF and other nations are working very hard to try and avoid this but if something like this was to occur it might have very adverse impacts on the markets and our investments. So, as investors we need to be very carefully watching Europe and try and discern what direction things are heading and which of those scenarios look most like current events. You may recall from our previous letters that we suggested that the money printing solution seemed to be the road that Europe is following and that we may want to cautiously position our portfolios towards that end, however there is still an unusual amount of risk. So with that recap, lets review some current headlines and happenings. Which direction is Europe moving? Is it austerity or money printing? You be the judge. 1. More QE coming, Bank of England minutes show Minutes of the Banks Monetary Policy Committee meeting this month showed that, although the decision to hold rates at 0.5pc and leave quantitative easing unchanged at 375bn was unanimous, the decision was finely balanced for some of the nine members. The release of the minutes coincided with separate comments from deputy governor Charlie Bean and fellow rate-setter Paul Fisher, both of whom suggested that QE still has a role to play in helping the recovery. The MPC voted 7-2 in favour of adding another 50bn to QE in July. It is expected to increase that again by 50bn before the end of the year. According to the minutes, some members even considered doing more this month since a good case could be made at this meeting for more asset purchases.

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 3 http://www.telegraph.co.uk/finance/economics/9477121/More-QE-coming-Bank-of-England-minutesshow.html (QE stands for quantitative easing, a method central banks use to create new money.)

2. Five years on, the Great Recession is turning into a life sentence China is sufficiently alarmed by the flint hardness of its "soft-landing" to talk up trillions of fresh stimulus. The European Central Bank is preparing to print whatever it takes to save Spain and Italy. Markets are pricing in an 80pc chance of yet more printing by the US Federal Reserve in September or soon after. There is no doubt that the three superpowers acting in concert can launch a mini-cycle of growth early next year - assuming they deliver on their rhetoric - but the twin headwinds of debt-leveraging and excess manufacturing plant across the globe cannot easily be conjured away. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9471018/Five-years-on-theGreat-Recession-is-turning-into-a-life-sentence.html (Now even China is contemplating stimulus a euphemism for printing money.)

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 4 3. Rescue Fund Controversy: France and Italy Seek Ultimate Firepower for ESM Several leading euro zone states including France and Italy want to give the permanent euro bailout fund, the European Stability Mechanism (ESM), unlimited firepower by permitting it to obtain unlimited credit from the European Central Bank (ECB), the German daily Sddeutsche Zeitung reported on Tuesday. Leading members of the ECB's governing council support the idea, the report said. But the German government and the German central bank, the Bundesbank, have in the past opposed the move because it could fuel inflation, endanger the ECB's independence and breach European Union treaties that forbid the ECB from financing euro-zone member states. According to the Sddeutsche, the plan now being discussed would involve the ESM supporting countries like Spain and Italy through large-scale purchases of their government bonds. That would lower their borrowing costs which keep rising to unsustainable levels whenever markets are gripped by new uncertainty about the crisis. http://www.spiegel.de/international/europe/euro-zone-states-discuss-plan-to-give-esm-unlimitedfunding-from-ecb-a-847415.html (Translation: the ECB wants to print an unlimited amount of money which it would use, among other things, to buy the bonds of the nations in crisis.) 4. Bernanke Sees More Scope for Easing to Spur U.S. Economy Federal Reserve Chairman Ben S. Bernanke said the central bank has the ability to take additional steps to boost the economy. There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery, Bernanke said in a letter dated Aug. 22 to California Republican Darrell Issa, the chairman of the House Oversight and Government Reform Committee. Bernanke repeated the statement from the Federal Open Market Committees Aug. 1 meeting that the Fed will provide additional accommodation as needed. He has an opportunity to expand on his views in an Aug. 31 speech at the Kansas City Feds annual economic symposium in Jackson Hole, Wyoming. http://www.bloomberg.com/news/2012-08-24/bernanke-sees-further-scope-for-easing-to-spur-u-seconomy.html (Fed chairman Bernanke will speak this week, and may announce more easing, another euphemism for money printing.)

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 5 5. Greece 'on the brink' as cash reserves dry up Near-bankrupt Greece is fast running out of cash while it waits for its next installment of aid from international lenders, a deputy finance minister has said, sounding the alarm on the country's precarious financial position. Greece's European partners have repeatedly promised the country will be funded through August, when it must repay a 3.2bn (2.5bn) bond, but the details of the funding have yet to be disclosed. In the absence of that money, Greece would run out of funds to pay everyday public expenses ranging from police and other public service wages to pensions and social benefits, Reuters reported. http://www.telegraph.co.uk/finance/financialcrisis/9440771/Greece-on-the-brink-as-cash-reserves-dryup.html (Years of financial recklessness have ruined Greece.)

6. Swiss National Bank overwhelmed in desperate campaign to devalue franc There is a "new China" active in the currency markets, according to analysts, as Switzerland's battle to weaken the franc inflates its stockpile of foreign currency reserves. The Swiss National Bank was forced to buy tens of billions of euros in May and June after the Eurozone crisis worsened, creating strong haven demand for the franc and threatening the ceiling the central bank set for its currency last September. The SNB is prepared to buy as many euros as it takes to hold the franc at SFr1.20 against the euro to protect the country's exporters. http://www.ft.com/cms/s/d3176586-db29-11e1-be7400144feab49a,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0 %2Fd3176586-db29-11e1-be7400144feab49a.html&_i_referer=http%3A%2F%2Fwww.gata.org%2Fnode%2F11623#axzz24zOKGF B2 (Surprisingly, even the ultra-conservative Swiss have now resorted to a form of currency manipulation.)

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 6

7. Draghi tells Germans ECB action needed for stability (Reuters) - The European Central Bank must employ "exceptional measures" at times to fulfill its mandate of delivering stable prices, ECB President Mario Draghi wrote in an opinion piece on Wednesday aimed at calming German angst about the bank's policy course. The ECB is drawing up a new bond-buying plan to lower the borrowing costs facing Spain and Italy, which Draghi is expected to detail after a September 6 policy meeting. Germany's Bundesbank - highly respected by German voters - opposes the plan. http://www.reuters.com/article/2012/08/29/us-ecb-draghi-idUSBRE87S0AM20120829
8. Draghi: ECB to do "whatever it takes" to save euro

FRANKFURT, Germany (AP) European Central Bank President Mario Draghi promised Thursday to do whatever it takes to save the European single currency and raised expectations that he could step in to lower the high borrowing costs that are crippling countries like Spain and Italy. Draghi told an audience of business leaders in London that the ECB would "do whatever it takes to preserve the euro" and added, "believe me, it will be enough." http://news.yahoo.com/draghi-ecb-whatever-takes-save-euro-135406314--finance.html (No one is quite sure what exceptional measures, and whatever it takes means, but remember that a central banks one and only tool is control of the currency.)

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 7

History shows that once an enormous debt has been incurred by a nation, there are only two ways to solve it: one is simply to declare bankruptcy repudiate the debt. The other is to inflate the currency and thus to destroy the wealth of the ordinary citizen Adam Smith
So what conclusion can we draw from the recent news? It seems, at least for now, that Europe is more intent on printing money and increasing debt as their preferred means to deal with their crisis. If this is true then the preferred allocation includes a diversification to assets that tend to do well in times of excessive money printing and weakening currencies while still being very careful and cognizant of the level of risk in your portfolio in unusual times like these still the same thesis we have been advocating for a number of years now. Go Ride a Bike! To turn away from gloomy economic news for a moment, and to stay in synch with summertime, here are a couple of my favorite vacation ideas to try and (at least temporarily) escape reality, and enjoy some recreation and rejuvenation. Bicycle Adventures An old dear friend and former training partner of mine runs a bicycle touring company called Bicycle Adventures. If you have on driven on I-90 East from Issaquah recently, you might have noticed their building as the company headquarters are in Duvall. Bicycle Adventures runs guided and supported bicycle trips in various scenic locales in the US and around the globe. They basically do all the work for you; provide a guide, all the gear and bikes, make arrangements for lodging and food, and all you need to do is show up and pedal. Their trips are available at different levels from very easy to more strenuous, and are in some of the most beautiful areas imaginable. Some friends went on a tour with them to New Zealand and raved about their trip, and other families we work with have also used them. If you feel a little zest for a more energetic vacation you might consider them! http://bicycleadventures.com/ A Boat Cruise in Eastern Washington My family and another family planned a houseboat trip on Lake Roosevelt this summer. I have to confess that when my wife told me that we were going to spend 6 days stuck on a boat, I had some trepidation as I tend to be on the hyperactive side. My fears were unfounded though, as we had an absolutely exquisite adventure. Swimming, jet skis, fishing, hiking, reading and lots of eating filled our days, and we ended each night under the glow of a warm Eastern Washington sunset with a campfire, songs, and toasting smores. We had seven kids with us, and they all agreed, along with their parents, that it was the best time ever.

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 8

It may not be as luxurious as a conventional cruise ship, but we had a glorious time and are all eager to do it again someday. I would highly recommend it! http://www.lakeroosevelt.com/ I hope that you and your family have had a glorious summer. My family and I are enjoying the last few warm days of the year on a staycation. We have some traditional end of summer activities that we enjoy doing; river rafting, berry picking, a swim across Lake Washington (The Puget Sound Blood Center Swim for Life), and sleeping on our deck under the stars are all on the list as well as some mountain biking and fly fishing. I have to admit that it has been a little bittersweet, as my two oldest boys headed off for college at the end of August, leaving our home a little quieter than normal. All of my best wishes to you and your family, and I look forward to our next meeting and speaking with you again soon.

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 9 Warm Regards,

William R. Gevers Financial Advisor PS: We have been repeatedly asked by clients if they could share these e-mail notes with their friends or neighbors. Please feel free to forward this with the stipulation that it may only be forwarded if done so in its entirety with no portions omitted. We would be delighted to share our comments and opinions with your friends, and welcome your comments and feedback. If you received this and would like to be included on our newsletter list, please email us at wgevers@geverswealth.com

Copyright 2012 William R. Gevers. All rights reserved.

Gevers Wealth Management, LLC I-90 LakePlace Center 1605 NW Sammamish Road, Suite 250 Issaquah, WA 98027 Office: 425.657.2238 Fax: 425.657.2138 E-mail: wgevers@geverswealth.com
The views are those of William Gevers, Gevers Wealth Management, LLC, and should not be construed as individual investment advice. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors can not invest directly in an index. Please consult your financial advisor for more information.

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Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 10

US Money Supply, US Dollar, and Inflation/Deflation Watch


US Money Supply Adjusted Monetary Base

http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS#

US Dollar Price (DXY) USD Index Measured against Other Currencies

(http://data.cnbc.com/quotes/.DXY/tab/2)

Update on Europe, and Go Ride a Bike!


August 2012 Gevers Wealth Management, LLC Page 11 Inflation/Deflation -Year to Date Price Increase in Commodities and Basics as Measured by Futures

(http://www.finviz.com/futures_performance.ashx?v=17)