The Delusion du Jour

 | Oct 28, 2011 | 11:45 AM EDT
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My daughter and her fifth-grade class had the privilege of being extras on an episode of Mike and Molly, and watching the shoot this week got me to thinking about this industry that turns fantasy into reality. I am not talking about Hollywood, but rather our own beloved financial industry. Although Wall Street lives in the here and now more than any profession except, perhaps, law, investors sometimes are impressive in their ability to delude themselves.

The delusion du jour is the Greek bailout. I respect a rally as much as the next guy, and clearly tension was running so high in Europe that any sort of good news would have engendered a relief rally. The package does so little to solve the problems, however, that I am sure we will be in dire straits again shortly -- perhaps before the end of the year, even.

Greece now has nine years to get its sovereign debt load down to 120% of gross domestic product, which is laughable considering that is after the 50% principal reduction! At the same time, they will get 100 billion euros in new loans -- nearly the same amount as the haircut. The European Financial Stability Facility (EFSF) will be "levered," meaning they think they can find some private suckers to buy sovereign bonds on the verge of default (the only time the EFSF would need to be tapped).

Spreads on the Italian and Spanish debt barely moved on the announcement of this deal, meaning the bond markets clearly understand it will be ineffectual in propping up the real problem countries. By the way, how long will it be until Portugal and Ireland ask for their haircuts? My guess is: a matter of weeks at the most.

I am not alone in picking apart this pathetic "deal," but the real question is how to trade it. Longer-term, I believe the odds of the euro surviving are not particularly good, but that could take years to fully play out. In the near term, the European Central Bank will be monetizing like crazy, so inflation is going to roar in Europe over the next couple years. We won't see it in the dollar-euro cross, however, because the U.S. is debasing its currency just as quickly.

I want to be long the "hard" currencies, especially in the resource-rich countries such as Australia and Canada. Gold still looks really good to me as the ultimate hard currency. I am long SPDR Gold Shares (GLD), and will be so until the euro crisis fully plays out -- likely until 2013 or so. Finally, I like companies with pricing power, as those equities can always thrive in an inflationary environment. Tobacco comes to mind.


Since it is Friday, let's end the week on a light note. All you investment-management types will appreciate this "xtranormal" video on portfolio managers vs. analysts. This next one, meanwhile, is a great riff on the life of a venture capitalist.

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