March 2012

Europe Debt Crisis Update The Fat Man gets New Clothes. Will Angels Save the USA?
The debt crisis in Europe is perhaps the significant economic event occurring in the world today and will have a major impact on our investments over the coming months. We have written about Europe extensively in several of our recent letters. Let's revisit the current status of affairs across the Atlantic, and how they might affect us.

The Story of the Fat Man who Outgrew His Clothes

In his best-selling book, Lords of Finance, author and hedge fund manager Liaquat Ahamed wrote a powerful and descriptive word picture about a country in financial distress which very aptly and accurately describes today's problems in Europe. According to Ahmad, a country that has gone deeply into debt and has unpayable financial obligations, as Greece has, and to a lesser extent Italy, Spain, and Portugal, is a like a man who has put on weight and is having a hard time fitting into his clothes. The undisciplined and obese man is now faced with a dilemma, and has one of two choices. He can choose deflation - the difficult, albeit better and more healthy road, to restrict his diet, to exercise, to live a disciplined lifestyle and try to lose the weight he has gained, and thus fit into his clothes again. Alternatively, his other choice is devaluation - to accept his new larger waistline as irreversible, and buy a whole new set of larger clothes. The parallel and analogy is this; a country deeply in debt is just like that fat man who has gained too much weight. One option to deal with this problem is deflation (or the current buzz word in the press austerity) which is to slash spending, cut expenses, and undergo a dramatic fiscal change to pay off debt. Alternatively a country deeply in debt can choose to devalue that is to print more money and pay their debts with a diluted and less valuable currency. Unfortunately, the leaders of Greece and some of the other countries have been unwilling to enact the kind of austerity measures necessary to really solve their problem. Even worse, the citizens of those countries have also been unwilling to accept a moderate level of austerity, and have signaled their

Europe Debt Crisis Update The Fat Man gets New Clothes. Will Angels Save the USA?
March 2012 Gevers Wealth Management, LLC Page 2 rebellion in wave after wave of riots, protests, and violent demonstrations. As the prime minister of Luxembourg said recently,

We all know what to do, but we dont know how to get reelected once weve done it.
The application for us as investors is that austerity is often linked to or followed by deflation, and deflation almost always results in a sharp drop in asset prices. In other words, the stock market may lose a great deal of value. We will want to closely watch both the European situation as well as what's happening here in the U.S., and if it looks like austerity does become the norm in the future, it may have a great impact on how we allocate our investments, the level of risk we're willing to take in our portfolios, and in our overall investment philosophy. The alternative scenario of the fat man buying larger clothes is printing more money and devaluing the currency in order to pay existing debts. Unfortunately, this is exactly what is happening in Europe now. Since the last week of December, there have been a number of new "bail-out" agreements and schemes, each of which involves the major countries and central banks of the world printing vast new amounts of money, and issuing trillions of dollars and euros of unfunded bonds to pay for these bailout measures. So as we stand today, it looks like the fat man, Europe, is not willing to exercise, is not willing to diet, but is intent on buying larger clothes, which is again, a word picture for the devaluation of currency. So what's the implication of the larger clothes/devaluation for us as investors? First off, economic problems are not solved by this money printing. Rather, it's just a ruse to bail out the large European banks, which as I wrote about before, are really the crux and at the heart of this crisis. Secondly, history has showed us over and over that when countries and central banks print excessive amounts of money, as they are doing today, the stock markets tend to rise. Obviously there are no guarantees for the future and that phenomenon might not occur again as it has in the past. It is important however, for us to note as investors that when there is a great deal of money printing, stock markets in general tend to rise, at least for a while. This might be some of the reasons the stock markets of the US and the rest of the world have done so well since the end of December, when these bailout measures were first announced and approved. I have to admit; I personally don't like the strategy of devaluation and money printing as I think its wrong, and may even create the potential for even more problems to manifest themselves later on because underlying root problems have not been solved. But, as an investment professional, we can't help but notice how history has favored stock markets during times of excessive money printing and we may want to consider that historical fact as we think about our stock portfolios for the near future. So the fat man has outgrown his clothes and it looks like, at least for today, that he, Europe, is intent on

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buying new ones. And that will help drive our investment thesis and strategies for the coming months or until things change otherwise. Let's update some other facts and information about the European crisis.

Central Bank Balance Sheets

Lets review some more evidence of how the countries of Europe and their central banks are trying to solve global debt problems by printing more money. One easy clue to confirm this is to review the balance sheets of Central Banks. When the balance sheets of Central Banks grow, it is often and primarily due to the exercise of Quantitative Easing (QE) the purchase by central banks of that countrys debt obligations (bonds). As we reviewed in great detail in our Nov. 2010 client letter, QE Will the Feds Financial Experiment Work? QE is a backdoor method to create large amounts of money out of thin air. Examine the chart below and notice how the aggregate balance sheets of the worlds major central banks have ballooned over the last several years, almost tripling since 2006 clear evidence of massive amounts of new money injected into the world financial system, and unbacked by anything other than that countrys promise to pay.

http://www.ritholtz.com/blog/2012/01/living-in-a-qe-world/

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The Bailout of Greece THE BANKS

The REAL problem in Europe is not Greece or any of the other PIIGS. Rather the root problem that is causing so much fear and consternation is that major European banks have written billions upon billions of loans to Greece and other countries and face the prospect of insolvency and collapse if one or more of these countries default on their bonds. It is the possible collapse of the European banking system that is motivating the bailout talks, and driving the draconian deals and back room central bank shenanigans, as it is feared that a banking collapse might cause severe economic distress to all of the Euro member countries. The good news is that the many of these major banks; Societe Generale, UniCredit, Deutsche Bank to name a few, are seeing some recent improvement in their status. This is to be expected with the immense amount of liquidity that they have been provided. (Please see chart.) The hope of course is that this money printing will lead to a long term fix for the banks and the PIIGS.
http://www.spiegel.de/international/europe/0,1518,817730,00.html

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The Other PIIGS Have a Fever

The health of a countrys financial system and the markets opinion of its ability to repay its debts are often signaled by the interest rate market. In other words, if the prevailing interest rate on a countrys bonds is low, it is a sign of strength and creditworthiness, but if rates are high and rising it is a sign of trouble. Interest rates are a like fevers in small children. When my kids were little they would sometimes get sick, and on a few occasions they got fevers. These fevers would come very quickly and often spike rapidly, a sign that a trip to the doctor was immediately necessary, and led to some very worried parents! In the same way, a rapid spike in interest rates of a countrys bonds is a sure sign of distress in that countrys finances. We all know of Greeces problems, but what of the rest of the PIIGS? (Portugal, Italy, Ireland, Greece, Spain.) Italys government bonds almost doubled by the end of 2011 (to about 8%), but have fallen in recent weeks. Portugals fever was even worse; their government bonds were recently priced at a 21% interest rate in late January. They have since retreated somewhat but are still far higher than they were only a year ago.

http://www.bloomberg.com/quote/GSPT2YR:IND/chart

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http://www.bloomberg.com/quote/GBTPGR2:IND/chart

The PIIGS (still) have a fever, and the European Central Bank and government leaders are worried, just like my wife and I were for our sick kids.

Where Do We Go From Here?

If the Fat Man decides to commit to exercise and a stringent diet (i.e. Austerity) that is arguably the best long term fix but might lead to short term pain in our investment portfolios as austerity is linked with deflation and a drop of all asset prices. This does not currently look like the direction that any of the major countries are following for all the reasons mentioned above. If however an austerity/exercise & diet regime is widely adopted perhaps that would demand us to rethink our investment portfolio diversification plan. For now it looks like the European Fat Man is buying larger clothes and merrily printing away vast amounts of new money. In this kind of environment, a portfolio well diversified, including a suitable exposure to stocks and a healthy allocation to inflation friendly/USD weak assets still seems to make the most sense. We will be watching our corpulent man in Europe carefully and report again on further progress, and possible impacts on longer term investment trends.

Europe Debt Crisis Update The Fat Man gets New Clothes. Will Angels Save the USA?
March 2012 Gevers Wealth Management, LLC Page 7 As always we look forward to reviewing these with you at our regular review meetings. Please do not hesitate to call us if you have questions before our next scheduled appointment.

Will Angels Help Save the USA?

I had the great privilege of attending a recent meeting of the Northwest Energy Angels as a guest. NWEA (http://www.nwenergyangels.com/) is a group of successful entrepreneurs and executives that fund new businesses in the clean tech energy sector by investing seed capital, and through providing management and leadership guidance to these start-up companies. The group are named angels because they are so called angel investors who provide money to start-up companies and acquire an ownership share in exchange for that seed cash. The agenda of the meeting was companies presenting their new technologies and explaining their business plan with the goal and hope that the angel investors in the group would invest in, and otherwise help their fledgling companies to grow and succeed. The presenters/company owners were brilliant scientists and talented engineers who were trying to turn their intellectual discoveries into a business success. I was fascinated by the presentations, and reflected later that these folks were really the heart of our capitalistic system and the real soul and fabric of our free enterprise system. These men and women were risking a great deal; their time and energy and finances with the dream of creating a viable and profitable business out of their ideas and talents. If they succeed, (and many of them may not based on the history of start-up companies,) they might improve our country in numerous ways. A successful company hires many new employees and provides vital jobs and careers. A successful company becomes a buyer of services and goods from their vendors, suppliers, landlords and service providers and thus creates demand and success in other firms. A successful company pays local and federal taxes and supports our governments. A successful company provides goods that consumers want and make their lives better. And, in the case of the type of companies that NWEA is trying to support, these successful companies are reducing our usage of energy, reducing impact on the environment and offering money- saving energy technology. Finally of course these visionary business owners also hope to become wealthy themselves, as do the angel investors. Creating wealth while helping others and improving our country and environment that is the ideal of the American Way. What a breath of fresh air after the economic travails of the last several years, and story after story about the big banks and Wall Street firms and the many problems their shoddy and unethical practices have wrought on the US and our economy.

Europe Debt Crisis Update The Fat Man gets New Clothes. Will Angels Save the USA?
March 2012 Gevers Wealth Management, LLC Page 8 Some of the technologies presented that day included; a former Detroit engineer who has created a one wheel electric scooter, that is fun, inexpensive, and a possible alternative to cars in urban areas. You can see his invention here. http://www.youtube.com/watch?v=ojv8vIRvf6A There was also a physicist who is one of the worlds leading researchers and scientists in the area of fusion. He has invented a prototype for a relatively small cold fusion plant that promises to provide inexpensive electricity with little or no environmental impact. You can read more about their research http://woodruffscientific.com/wp/fusion here: Another company had a new technology for quickly and efficiently recycling food waste into fertilizer and natural gas which they in turn will sell for a profit. They are in the process of working with large grocery store chains and restaurants to install these plants behind their stores to take their waste and produce natural gas and organic fertilizer. You can read about their goals here: http://wiserg.com/the_problems.html Another engineer had built the worlds fastest electric motorcycle. His company had taken that technology to create a plug and play electric motor from sizes that would fit a Kia, a Porsche, or even a military tank with the hopes of retrofitting cars and vehicles with these energy saving, efficient and environmentally friendly electric drives. You can see his motorcycle here: http://motoczysz.com/ They may succeed or they may not, but this really is a lot of the hope and future of the American Economy; talented and smart people willing to take huge risks, and working for the promise not only of increasing their own wealth, but the satisfaction of improving the world in the process. With hope for the future, Warm Regards,

William R. Gevers Financial Advisor

PS: We are adding something new to our periodic client letters. Recent economic and market trends have been driven largely by US monetary and debt policy and the strength or weakness of the USD. Potential adverse outcomes include inflation (increasing asset and commodity prices) or the polar opposite, deflation (decreasing asset and commodity prices.) Pasted below are some current charts showing the growth of money in the US, the price (strength) of the USD and year to date price changes for many of the major commodities and basics of our everyday life that we can watch to help us spot inflation or deflation.

PPS: 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

Europe Debt Crisis Update The Fat Man gets New Clothes. Will Angels Save the USA?
March 2012 Gevers Wealth Management, LLC Page 9 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.

Securities and advisory services offered through Financial Network Investment Corporation, Member SIPC. Gevers Wealth Management and Financial Network are not affiliated.

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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#

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

(http://www.fxstreet.com/rates-charts/usdollar-index/?version=0)

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Inflation/Deflation -Year to Date Price Increase in Commodities and Basics as Measured by Futures

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