Greece Bailout Postpones the Inevitable: Stick With Conservative U.S. Stocks

Includes: ERO, FXE, IEV, SPY
by: Glen Bradford

Make no mistake: We have just seen what amounts to a default.

Greece can't pay? No problem, let's give them another loan that they can't afford. To me, this is very similar to the MCI Worldcom scandal. What the global monetary powers that be simply do not appear to understand is that you can't hold people accountable that clearly aren't accountable. People that have speculated that it will be Germany that leaves the euro are likely wrong simply because if the euro disappears, the country that loses the most is Germany.

Game theory is telling you what's really happening behind the scenes. The people of Greece have lost faith and are yanking money out of their banks so that it can't be expropriated. Somehow, this bailout suggests that these people who have lost faith in the powers that be are going to keep supporting it? Not likely.

For the most part, governments over the last 10 years have played a big role in the game of extend and pretend. Clearly the US banking bailout isn't helping things as we continue to see US housing prices fall. Give someone a home that they cannot afford and pretend that it's a good loan because home prices are trending hire and you lay the grounds for systemic risk. Raise gasoline prices and force people to choose between driving to work and paying their underwater mortgage and suddenly a lot of loans go bad.

Don't worry, because now banks don't need to mark these mortgages to market. The quantitative easings have simply been a recapitalization of banks at the expense of public taxpayers. This is effectively making what was uncontainable private stupidity and trying to bill taxpayers, who already have an unsustainable tax bill given the forecasted cost of other entitlement programs like Medicare, Medicaid and social security.

Meanwhile over in China, the numbers look as rosy as ever. The problem with that is the numbers are all bogus and the speculation, greed, and fear is worse there than it is anywhere else in the world. This is only a problem because the rest of the world is counting on a perceived rising economic superpower of communism to lead the world in the coming decades. The gray swan is that China is far worse off than the rest of the world and their central planning has been propping up fake valuations for far too long to the point where a correction is immenant.

In a situation where things are genuinely unsustainble, profit margins are at historic highs, I still am perplexed in regards to how people can argue that stocks are cheap. Most are not cheap when you take into account the systemic risks out there.

So, Greece got another bailout. We're heading down a path of perpetual bailouts. Perhaps that's the new normal? Perhaps it's perfectly acceptible to expect that people that don't pay their debts will eventually change their mind and play by the rules that someone dictated? I don't think so. This decade might as well be defined by bailouts, austerity, and other incredibly suspect logic. Nothing is sustainable but everyone is excited to short term game the system as people pile into and out of crowded trades.

We are heading towards a huge, global financial crisis in my opinion. I perceive that deflation is a greater threat than inflation, because valuations are being propped up by inconsistent policies. As much as I dislike holding dollars over the long term, dollars are likely to be a net beneficiary of a crisis situation where currency is in high demand and short supply. To say that everyone is going to be running around trading gold back and forth is proposterous. Gold is an epic bubble but we are still on the upswing... for now.

The quickest way to a crisis is to take something that isn't sustainable and add leverage upon leverage. Some people have correctly questioned, "How can the world's derivative market be larger than the world's financial assets?"

As systemic risks continue to pile upon themselves, it doesn't make sense to see valuations get richer, especially when corporate profit margins are unsustainably high. There are some companies in America, however, that would be net beneficiaries of a crisis. These companies, like Google (NASDAQ:GOOG), are raising cash at low interest rates and preparing for a storm where they can scoop up assets at attractive valuations in the future.

Basically, if there is anything to buy, it is conservative US companies with lots of cash whose numbers you can trust.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.