Not much has been happening in Europe over the past few months.  This is not surprising, as many are awaiting the outcome of the German election on September 22^nd.  With the instability of more recent elections in southern Europe – especially Italy, Spain and Greece – the last thing Europe needs is for Merkel to lose.     Buried in the headlines is that Greece is almost out of money again – wait we were told that the first two bailouts of $500 billion over the past three years would solve the Greek problem.  Shortly after the election next month, the Euro crisis likely will rear its ugly head again.  In our opinion, there are 3 possible solutions to the crisis:

1)   Germany acquiesces and agrees to transfer of payments to southern countries.  Germany has a huge balance of payment problem with southern Europe.  The Italians, Spaniards and others (government and individuals) borrowed money from Germany over the years to turn around and buy German goods.  This helped Germany’s economy, but has bankrupted southern Europe.      The only way to solve this balance of payments is for Germany to send money on a consistent basis to southern Europe.  We don’t believe Germany will be willing to pay this price and place a very low probability of this occurring.

2)   Countries are kicked out of the Euro.  This will not only help the Euro survive, but will also allow the southern countries to devalue their currencies and become more competitive.  One problem with this solution that will need to be resolved is what happens to the debt held by the expelled countries and their citizens that are based on Euro’s?  Even though the costs may be high, it would have been cheaper to go this route with Greece.  If this had occurred, Greece would have recovered from its depression.  The disruption that this will cause would bring pressure on the Euro against both the dollar and Yen.  We believe chances of this occurring are about 50/50.

3)   Europe devalues the Euro to spark economic growth like Japan did last year.  This is the most palatable solution for the politicians in the short-run.  Why?   Because they don’t have to make the hard decisions necessary to truly fix the problem.  We believe this will work in the short-run.  It will extend the life of the Euro for a few more years until inflation ruins any confidence in the Euro.  We give the chance of this occurring at a little above 50/50.

     The eye of the “Euro Hurricane” is over us now.  After September 22^nd, the back side of the storm will hit.  Solution #2 or #3 is most likely and will cause a significant drop in the value of the Euro.  If #1 is adopted, the Euro is probably fairly valued.  We don’t believe the odds of #1 being the solution is very high.  

Syria and the Market

     We don’t know what is going to happen in Syria, but we believe the outcomes are much more diverse than Iraq, Afghanistan or Libya.  We do believe that the situation will create more risk of a market disruption.  If the stock market was selling near the bottom, it would not pose as much risk to investing.   However, at a time of high stock valuations and historic profit margins, any bad outcomes from Syria likely will be harmful to the market.  This is still a time to be managing risk.

Your THOR team