Hopefully we don’t sound like a broken record, but the news from Europe is, and will be for the near future, the deciding factor for the direction of the market.  The potential problems with the Euro were well known when it was created.  Recent documents from Germany demonstrate that there were concerns about the Euro’s viability from the beginning, especially as it relates to Italy.  One of the things the creation of the Euro has done is create political upheaval.  The next sure bet is that Angela Merkel will lose next year’s election in Germany.

As mentioned many times in past market updates, there are significant economic imbalances that have been caused by the introduction of the Euro, but we have always believed that political strain will be the primary reason for its dissolution.  The election results in both Greece and France demonstrate that the strain is increasing and, in our opinion, will eventually cause the collapse of the Euro.  The real question is: “Can they kick the can down the road further or is this the end of the road?”

Brando and Jim attended the annual CFA conference last week in Chicago where the Euro was discussed by several European economists.  The conclusion reached by these economists is that we are pretty close to the end of the road.   Can it continue further?  Yes, it can if Germany agrees to subsidize southern Europe or if the ECB prints, as one expert said, “many trillions more Euro.”  We think its unlikely German citizens will accept the role of a nanny state for southern Europe and printing more Euro will create a sugar high (much like the LTRO program did earlier this year), but does nothing to fix the long-term problems of the Euro.

Some in Europe are saying they need to grow the economy through government spending (i.e., Hollande in France).  They call this spending a new “Marshall Plan.”  The original Marshall plan helped Europe recover after World War II.  One of the major tenants of the plan was to decentralize government and empower individual citizens.  The “growth” plan advocated today is a complete opposite of the Marshall Plan in that it calls for centralizing power in the government.  Maybe calling it a new “Marshall Plan” makes deficit spending more palatable.  It is a nice political move, but a horrible economic solution.

What does this mean for our market?  More volatility and the possibility of significant market disruptions.  We believe the end is closer for the Euro, but the exact timing is still unclear.     Managing risk is still our number one objective in this market environment.

Sincerely,

Your THOR Team