In the time period leading up to, and in the time period since, German Chancellor Merkel’s re-election, things have been relatively quiet in Europe.  Now that her re-election is behind us, we believe the problems we have written about in the past – which have yet to be solved – will begin to resurface.  Full integration of the European Union (“EU”), both politically and financially, continues to be a problem.  Unemployment, especially in Southern Europe, continues to remain at unsustainable levels and social complications still prevail within the EU.  , Below, we have compiled a list of interesting events from Europe which may provide the underpinnings for the crisis to reemerge once again.

1)    The German Constitutional Court sent a case to the EU court on the European Central Bank’s (“ECB”) program to save the Euro.  At first glance, this appears to be a routine matter.  However, the majority of the German court justices came to the conclusion that the ECB’s Outright Monetary Transactions “OMT” policy (where the ECB makes outright purchases of sovereign country bonds) is a clear violation of the European Union’s treaty.  Specifically, OMT violates the section that forbids member states from assuming the debts of other states.  The German court is giving the EU court a chance to rule against OMT and reign in Draghi.   If it does not, the German court may act on its own.

2)    Switzerland voted to limit the number of immigrants allowed into their country.  This is a direct challenge to the European Union’s “open border” policy.  What is interesting about this development is that the person leading the charge is Christoph Blocher, the same person who led the charge in 1992 to prevent Switzerland from joining the European economic area.  Norway is also considering a similar referendum.  Needless to say, Brussels is not very happy with this referendum.

3)    The ECB is publicly discussing the possibility of charging negative interest rates for banks’ deposits within the ECB.  In other words, the banks will lose money with any deposits they hold.  This is an unprecedented move and the ramifications to the banking and financial systems are unknown.

4)    News was leaked this week from the European Commission that suggests the savings of European citizens could be used for government spending.     Could this be a situation like we had in Cyprus and Italy where the government takes deposits from the bank accounts of its citizens?  The answer might be yes.

5)    Because of the social problems in Europe, the European Parliamentary elections between May 22^nd and May 25^th might prove to be a watershed moment.  It looks like anti-EU parties are going to make significant gains throughout the continent.

So what does this mean for investors?

We wouldn’t be surprised if European news was quiet until after the May elections.  The last thing the bureaucrats want is for the anti-European movement to gain more traction.  We believe though that uncertainty within Europe is slowly creeping back into the news.  The ECB and European Commission leak could be a big reason for the rise in gold last week.  Why?  It is harder for the government to confiscate gold then it is to confiscate deposits at a bank.  We expect the markets to remain volatile and believe this is a good time to have a portion of a portfolio invested in alternative investments.

Interesting fact:

Harvard’s $32.7 billion endowment fund has 11% of its assets invested in US Stocks and 40% in alternatives (real assets and hedge funds).

Sincerely,

Your THOR Team