Friday, June 15, 2012

The Greece Election: A Potential Lehman Event For Financial Markets

All eyes of the world will once again be on tiny Greece over the weekend. They are holding a major election on Sunday that will determine a great deal of their future and the global economy.

Over the past 30 days the Syriza party has stormed the polls and is now neck in neck with the New Democracy party heading into the weekend. What does Syriza promise? An end to the current bailout imprisonment structure in place with Greece and the Eurozone. They promise to rip up any current agreements and move Greece back into the freedom of the Drachma currency.

If I lived in Greece I would vote for the Syriza party. Would things be better right away for the country? No, it would be much, much worse. The country would enter a massive depression that is far greater than anything they have experienced up to this point. Weak banks would fail, capital would flee the country, unemployment would rise significantly, and the cost of living would surge.

It would most likely take 18 months for the country to reach bottom. And then, they would reach bottom. After defaulting on their debts and cleansing their toxic banking system, with a new budget in place the drachma currency would find a bottom. At this point investment capital would begin moving back into Greece. Smart business owners would set up factories inside Greece's borders and export goods out to the rest of the world through the drachma currency. Intelligent real estate investors would purchase assets at steep discounts through a discounted currency. The stock market, after collapsing, would look very attractive.

The alternative is to suffer a much slower and painful death over ten to twenty years where there is never a bottom and there is never a recovery.

The leaders of Europe and the heads of the banks have done everything they can to proclaim that "the world will end" should Greece leave the Eurozone. One thing is for sure: their world would end. A politician's only goal is to push back immediate trouble through the next election with additional debt and money printing. A banker's goal is to get through the next quarter and bonus period before things turn down.

Any downturn would lead to a politician losing their job and a bank CEO being let go by their board. People vote based on what is happening now. They do not care if a politician is doing the right thing for their country in the long term because the average voter understands very little about economics and finance. Ironically, based on their immediate pain this has given Greece the opportunity to do the right thing, with the people not understanding it will only bring even greater immediate pain.

I am excited for Greece to at least have the opportunity to do the right thing, even if the Syriza party loses over the weekend.

In America we have a president who promised hope and change, but only brought the same policies (stimulus and money printing with an economy smothered by the current banking system) as his predecessor. Obama, however, has taken the failed Bush blueprint and applied steroids to it. Our elections in the fall have him pitted against Mitt Romney who will endorse the same exact Bush/Obama policies after his election. We know this because we can view his top campaign contributors, which looks like a top ten list of the largest banks in the country.

Greece leaving the Eurozone would provide the next "Lehman" moment. There would be massive strain in the financial system and stock markets followed by an earth shattering response from central banks around the world (money printing). The basic investment strategy would be to have capital ready to invest before the sell off and be ready to pull the trigger on specific assets when panic engulfs the markets.

The world could be a very different place on Monday morning.

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