My Big, Fat, Never On Sundays Story

My Big, Fat, Never on Sundays Story February 11, 2010, David Kotok, Chairman & Chief Investment Officer

The deal is done and the details will be revealed soon.  A structure to provide fiscal support Greece by EU members is evolving.  France and Germany are the two largest economies in the euro zone and they have agreed to an EU-oriented solution.  They will also preserve the independence of the European Central Bank.  That decision is paramount.  It means the detractors of the euro who predicted that several countries would leave the euro zone and that no new ones would come in will be completely wrong.  More thoughts on this are below, but first we offer a parable which we will entitle “My Big, Fat, Never on Sundays Story.”

It is the month of February, on the shores of the Adriatic Sea.  It is gray and raining.  The little Greek town looks totally deserted.  

It has been many months of tough times; everybody is in debt and everybody lives on credit.  The government has run out of money and the unions are constantly striking but getting nothing because there is nothing left to be gotten.

Suddenly, a rich German tourist comes to the village.  He enters the town’s only hotel, lays a 100 euro note on the reception counter, and goes upstairs to inspect the rooms in order to pick one.

The hotel proprietor takes the 100 euro note and runs to pay his debt to the butcher.

The butcher takes the 100 euro note and runs to pay his debt to the pig grower.

The pig grower takes the 100 euro note and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 euro note and runs to pay his debt to the town's prostitute, who, in these hard times, provided her services on credit.

She runs to the hotel to pay for the rooms she rented on credit when she brought her clients there.  She hands the proprietor the 100 euro note.

He lays the note back on the reception counter so that the rich tourist will not suspect anything.

A minute later, the wealthy German comes down the stairs, announces he did not like any of the rooms, puts the 100 in his pocket, gets into his Mercedes, and drives away.

There were six financial transactions.  No one earned anything.  Nothing was added to GDP.  However, the whole town’s debt-GDP ratio changed dramatically.  The village folks are now out of debt and look to the future with a lot of optimism.

Oh, if it were only so easy?

We had emails very critical of the view we recently articulated on sovereign debt.  Some cited Glen Beck as a seer to reckon with, since he predicted the recession and is now predicting large failures of sovereign debtors.  We were also reminded of Marc Faber’s warning that all sovereigns, including the US, UK, and Europe, would default. 

Other emailers accused us of naïve blind faith in corrupt politicians.  Obviously, those writers do not know us.  We were called a Democrat and a socialist and a Republican and a tea-party conservative all in the same day. 

We thank those writers who email us negatively as well as the ones with positive comments. We appreciate the comments and constructive criticism.  We only object to the nasty and four-letter-word name calling, which is a surefire way to get removed from our list.  The world has enough rudeness and violence.  There is no need to call me a “@X*#R&%!” in order to make your point. 

Now to the issue of investment strategy.  Simply put, after 40 years in this business, we believe that there is opportunity in crisis.  The worse it looks the better the chances that markets have mispriced assets and that we are nearing a bottom rather than trading at a top. 

We can make the case for everything to default and no one to pay and all governments to fail. That is the case for anarchy.  It is possible but not likely.  We can make the case for nuclear war or a bird flu pandemic that kills millions.  That is the case for death.  It is possible but not likely.  If you expect these things, do not own investment assets.  They are irrelevant.

But if you decide to manage risk, then you have decided to also take risk.  And that means both risk and reward have to be continually measured.  It also means that if you take a position today you must be prepared to change it tomorrow.  As Lord John Maynard Keynes said, “When the facts change, I change my mind.”

Presently, our Global Multi Asset Class is deployed with a strong dollar component.  That has been the case for months and throughout the crisis.  We will revert to a strong euro position when we believe it is appropriate.  As of this morning we are maintaining our strong dollar bias.

Lastly, it is important to understand the territory of this issue.  The 27 members of the EU and the 16 of them that are in the euro zone, and most of the other 11 that want to be in the euro zone, will coalesce and deal with Greek debt in the fiscal policy arena.  Budget deficits will decline, although they may not decline as fast as projections.  Economic growth will occur, although it may not be as fast as projected.  Taxes will rise.  Public sector employment benefits and compensation will be pressured to compress, and the workers will resist but eventually compromise.  By the way, that will also happen at the federal level in the United States and with the 50 sovereign state debtors that make up our country.  Think of us as a US dollar zone, just as we think of them as a euro zone.  They are new at it.  We have had a century of practice and need only another few hundred years to get it right.

Also remember that the euro is a product of a “rapprochement” between France and Germany.  It was born after these two cultures decided to set aside 1000 years of war.  They realized they needed to protect the currency from devaluations and from inflation.  That is why the ECB is protected by a treaty that insulates it from the politics of any member state.  Greece has unwittingly validated that concept with its fiscal profligacy.  So the way to view this crisis is to separate the fiscal issue from the monetary issue.  That is why the euro will not be undermined and will emerge even stronger than before.  

We thank Jim Smith and other economist friends for sending along the little story that we rephrased for use in the current situation.  It is an apt metaphor in a certain way.  When Greece restated its GDP some years ago it “found” added output in the service sector.  Two of the subsectors were money laundering and prostitution.

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