What I Said and Should Have Said

 | Nov 07, 2011 | 10:00 AM EST
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Several of you have e-mailed me for a summary of my comments at the TheStreet's conference last week in New York.

So here it is:

  1. The Solution to the European Crisis. Experience has shown that at least in small countries, austerity beats Keynesian stimulus. Three years ago, a handful of European countries, the Baltics (Estonia, Latvia, and Lithuania) as well as Ireland found themselves in the same boat as Greece and the rest of the PIGS do today. A policy of real austerity ( yes, the kind that results in banks going bust, public and private sector wages plummeting and GDP collapsing by double digits) is painful. But much like Big Bath accounting in a troubled company, it works. Estonia and Ireland are now the fastest-growing economies in Europe, while the current Greek Prime Minister, whoever he may be this week, plays the role of a modern Nero.
  2. Prospects for the U.S. Market. The pessimism about the U.S. is so bad, that it's good. Consumer sentiment hasn't been this lousy since March 2009, precisely when the market bottomed. And when consumer sentiment falls below 50 (it's currently below 40), the U.S. market has been up 18 out of 18 times over the next 12 months, with an average gain of 22%. That, combined with the markets strong seasonality between Nov. 1 and May 1 makes me bullish over the next six months.
  3. The Euro's Coming George-Soros Moment. If any European country exits the euro (the current favorite is Greece) the euro will have its George-Soros moment much like the pound Sterling did when Soros famously made $1 billion in a single day. Recall that in September, 1992, the U.K. was in a similar position to Greece in that the pound was tied to the euro and its economy was crumbling from the weight from an overvalued exchange rate. On Sept. 16t the U.K. decided to exit the Exchange Rate Mechanism (ERM), which tied the value of the British currency to the euro, and the Pound Sterling collapsed. The contemporary version of that story will be the euro collapsing, at least over the very short term, as investors question the single currency's viability. The timing of this exit is uncertain. But if you want to profit from your own George Soros moment, buy some far-out-of-the money calls on a leveraged position against the euro through the ProShares UltraShort Euro (EUO)

The one thing I didn't say, but I should have:

The Collapse of China will be the Global Economy's Next Black Swan Moment. The biggest risk in the markets between now and 2012 (and beyond)  is not Greece, whose economy is the size of Rhode Island. It's the popping of the Chinese bubble. I spent a good chunk of my academic career studying economies run by Communist parties. I still remember reading serious economic literature arguing that the East German economy was more efficient than the West Germany. Economists thought that the short-term success of doped-up East Germans Olympic gold-medal winners also translated to superior economic achievement. It turns out a lot of the economic numbers were fudged. And you can put up all the impressive skylines you want, but in economic terms, they are a massive misallocation of resources that actually subtract economic value.

And those in the know are worried. The wealthy Chinese are taking their money out of China as fast as they can make it. They understand they are sitting on a political and economic powder keg, which when it explodes, will be felt on the shores of the U.S. much more than the fall of the Berlin Wall ever was. When the China bubble pops, commodities-based economies -- in particular, Australia and Brazil -- are going down with it. When that happens, the price of the dollar and Treasuries will soar.

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