By the end of the coming weekend, investors should have some inkling of how the next installment of the European soap opera will unfold. On Sunday, Greece will vote on leaving or retaining the Euro and the outcome should be clear by June 18.
Based on this column Wednesday by my former FP colleague Barry Critchley, Europe will eventually solve its multiple and seemingly intractable problems. As usual, investors must decide whether to stand pat and await the outcome, or to place an advance bet on whatever outcome they think most likely.
As Tony and Rob Boeckh write in the June 6 edition of The Boeckh Investment Letter, there’s the potential for a buying opportunity or a bust. The problem is that in the short term the fate of the Euro appears to be in the hands of a “traumatized, polarized and naive electorate, many of whom believe that Greece can end austerity and stay in the euro at the same time.”
As the election approaches, there are early signs of panic—or perhaps we should say rising anxiety—with yields in perceived safe-haven fixed-income markets in Germany, the US, UK and Japan accelerating to what the Boeckhs term “ridiculous levels.”
If an equity sell-off resumes, there may be a great “buying opportunity for those who have remained underweight risk assets and have built up enough liquidity to feel comfortable taking advantage of the great value opportunities that will arise.” That translates into potential large rewards for those willing to risk it, the newsletter says.
Odds of another QE program are growing
Of course, if the Greeks do put Europe on high alert, the rest of the world will be forced to respond. Boeckh suggests if the eurozone financial situation deteriorates, the US Federal Reserve will likely take the much-anticipated QE3 off the back burners. “The odds of another QE program are growing by the day.” Such expectations, coupled with hopes for a coordinated policy response in Europe, have kept markets reasonably buoyant of late.
It remains to be seen if a significant bottom has been formed but the newsletter would prefer to wait for a more oversold condition before bottom-fishing for stock bargains (perhaps through ETFs focused on all of Europe or certain countries within it, depending on your view on currency).
But it’s also tricky identifying safe parking vehicles. Boeckh says safe-haven bond prices have provided some protection by being negatively correlated with stocks but that bonds are risky at this juncture, since they are “significantly overvalued.” Historically, creditors are often “oppressed” through some combination of inflation, controls and regulation. Boeckh continues to recommend that investors hold 10% to 15% of their assets in gold and related assets, as long as they can stomach the volatility.
In short, we continue to be in the midst of “The Great Reflation” that Tony Boeckh described in his book of the same name, which I reviewed a few years ago. You can find it here (half way down) and the Boeckh Investment Letter here. I strongly recommend it for anyone seeking financial independence.