Investors are running for the hills because of the uncertainty in the eurozone. Many are acting on false assumptions. Here are four reasons why the euro will survive and US equities will thrive as this global debt crisis matures:
(1) A breakup of the eurozone is not in the best interests of Germany or France. German Finance Minister Wolfgang Schaeuble explained clearly that
The joint European currency, the joint European economic area were right. There is no comparable alternative to them in the 21st century in the age of globalization. That is why we must defend the joint European currency.
He is right. A fragmented Europe would have no global power. In addition to power, the euro is actually doing what it was designed to do. If Greece was still using its native currency, the drachma, this potential debt default would have turned into a reality because of the resulting devaluation of the local currency and higher inflation.
But with the euro, and the support of the European Union and IMF, Greece’s problems can be contained. All 16 eurozone countries have access to this benefit in time of need. Unity creates stability.
(2) Greek austerity measures are the solution to end the crisis. Through these measures the eurozone has strengthened its weakest link. The Greek parliament voted 172-121 for the measures, worth $38 billion through 2012 on top of the $140 billion in bailout funding.
Although Greek citizens are rioting against it, the tax increases and spending cuts that include higher taxes on alcohol and cigarettes, public sector pay cuts, and tighter retirement rules will provide them with time to clean up the balance sheet. The future of Greece looks much more viable.
German Chancellor Merkel adds,
I have always said that the problem has to be approached at its roots and now the point is securing the complete security of the euro. I believe that the best security we could have come up with is that Greece has made a very ambitious austerity program with great political courage.
(3) A low euro will ignite economic growth. BNP just released their report (here) suggesting that the European Central Bank will soon use monetary instruments to confront the crisis which will send the euro massively lower. They are forecasting that money will pour out of European equities and by Q1 2011 the euro will hit parity versus the dollar. France, Greece, and Spain will all see substantial economic growth as Americans return to the area for the first time in a long time. A low euro will cause international capital to flow to US equities which will help tourism that much more.
(4) Many are fearful that the Greek crisis will spread to Spain and Portugal. I find it interesting that both countries are healthy enough to contribute their fair share to the bailout. Let’s assume the worst, and say that Spain and Portugal will need to receive bailout funding as well as pass their own austerity measures. The best historical comparison to this circumstance would be the early 1980’s when Argentina, Mexico, Venezuela, Brazil, Chile, Costa Rica, Dominican Republic, Ecuador, Panama, Peru, and Uruguay all defaulted.
According to some terrific research by Brian Wesbury, we know that 8 of the largest US banks has 260% of their capital lent to Latin American countries. In spite of this global debt crisis, the total return on the S&P 500 during 1982-1983 was 49%. International investment capital flowed to US equities as a safe haven.
Investors will want to use this as a buying opportunity for a stock like Apple (AAPL) that has been throttled along with the rest of the market. We are starting to reinvest cash back into the market but we are also maintaining our hedge positions in the short run. It will take the market some more time to digest the euro situation, but over the next 6 months a lot of money can be made from this correction.