Author: Charles Sizemore
Covestor models: Sizemore Investment Letter and Tactical ETF
“Be assured, my young friend, that there is a great deal of ruin in a nation.” – Adam Smith, 1777
With the benefit of hindsight, we know that the 1800s were the best century in the illustrious history of the British Empire. The loss of the American colonies proved to be little more than a speed bump in Britain’s rise to global ascendancy. The rebellious 13 that went on to form the United States were quickly replaced with new colonies strewn across every corner of the globe. At home, Britain’s evolution towards consumer capitalism and constitutional monarchy allowed it to avoid the violent social revolutions that swept across France and much of Continental Europe. And abroad, Wellington’s army defeated Napoleon and established the Pax Britannica that would define the global order until the outbreak of the First World War.
But in 1777, the future looked far from bright. Britain was not the global superpower, but rather one of several competitors for that distinction. The country was bleeding itself dry in North American wars, first against the French and then against their own colonists. This is what led the young John Sinclair to lament to Adam Smith that “If we go on at this rate, the nation must be ruined,” which elicited Smith’s skeptical reply above.
Smith’s point was that a strong nation can survive quite a few setbacks and bad decisions by its leaders, and history has proven him right time and again.
Why do I bring this up? Because today I believe that there is quite a bit of ruin left in the Eurozone and its much maligned currency. Despite the best efforts of its member states to damage it beyond repair, the euro will survive.
This is not to say that its value will not fall from current levels relative to the dollar and other world currencies, of course. In fact, that is exactly what I expect will happen. But I do not see a disorderly breakup of the Eurozone or of the broader European Union. To borrow what Winston Churchill said about the Americans, “European politicians will do the right thing after exhausting all other options.”
Those options, by the way, have indeed been close to exhausted. Yields on Italian and Spanish debt remain uncomfortably high, and even mighty Germany had a hard time selling its bonds last week. This crisis needs to get resolved in a hurry.
As events unfold, it’s looking like a two-pronged solution is taking shape that involves deeper fiscal integration among member states and an expansion of the European Central Bank’s role in acting as a lender of last resort.
I am under no illusion that any of this will be easy. Either change will involve making revisions to the European Union’s governing treaties, which will involve the ratification of all 27 member states. As the last round of constitutional reform proved, this can be difficult even in less chaotic times.
Still, when presented with the alternative—a disorderly unraveling of the entire European project—I expect cooler heads to eventually prevail. But I also expect there to be plenty of setbacks and “mini-crises” along the way. As investors, this likely means more wild swings in stock prices—and plenty of good trading opportunities.
Our core strategy of buying quality, conservative companies backed by durable long-term macro trends is working. In particular, our dividend-focused and “vice” investments have been fantastic performers for us during one of the trickiest markets in living memory.
With a little good news coming out of Europe, we expect 2011 to finish on a high note.
