If your portfolio is long any risk assets, including gold, the Germans are causing you a world of pain. I thought I would write a short post to try and better understand what the Germans may do and help investment choices.
If the present situation were to occur in the US the Fed would have intervened long ago (possibly over 1 year ago, certainly 6 months ago). The present situation would not be happening. So why the difference.
The reasons lie in the 'psyche' of nations. The Germans psyche includes:
- No interest as to what people think about their actions.
- A long term perspective. They are not interested in short term fixes and will resist any short term fix that they feel will make the situation worse. If the long term solution means short term pain, they will take the pain.
- No interest in stock market levels. If stock markets fall hard and fast they will still take the long term perspective. Stock markets are not even on their radar.
- They will put their interests before other nations (as do all countries) even if it is to the detriment of the other countries.
- They are incredibly sensible and very analytical.
Can you see how far away this is from the decision process of the US and the UK?
To make a decision as to what they may do, you need to fully analyze the situation and estimate what you would do in the very long term, regardless of its short term effect. Then disregard the short term effect on markets, whether positive or negative. Put the German interests before all other EU countries and disregard their reaction to your actions. If you look at the situation through these glasses you may get a better handle on their likely response. I am also sure that looking at the situation from this perspective will lead you to a different outcome than you are presently expecting. This may well help you with short term investment decisions.
My take is that the Germans presently have their best analysts finding out the costs of Germany staying in the euro and those of leaving the euro. If the costs are reasonably the same for either option they will end up leaving. If the costs are much higher for leaving, they will stay, but only pay for the costs of staying once they have gotten the Treaty changes they want, including:
- Forcing undisciplined nations out of the euro so that they no longer have to pay for them.
- Some mechanism for future fiscal control over financially imprudent nations that stay in the euro (the French).
Will they hold to this line even if a financial collapse occurs during the process of treaty change? Hard to say for sure, but I wouldn't rule out that they would just cope with the collapse and move on. Germany taking the above action would end up forcing out Portugal and Greece from the euro and possibly several other nations.
If really pushed to give an exact view how the crisis will end, i would say that the Germans will leave the euro. They will then join under a different currency with Holland, France, Austria and Finland initially. The present euro will continue with all of the weaker nations. They will then allow other countries to join them but with proper fiscal integration. A different euro, without all of the flaws of the present one, would then be created. However it is not a prediction that I have high conviction in as there are too many possible permutations.
Additional disclosure: I am long RWM