Author: Tom Yorke, Oceanic Capital
Covestor models: Global Diversified Conservative, Global Diversified Moderate, Global Diversified Aggressive
While on vacation with my family, I ran across a New York Times story entitled “Greek Wealth Everywhere except Tax Forms.” It should have hit me harder, but perhaps the sun was baking my brain that day or perhaps I just needed to turn off for a while… but it all comes back to me now
Salient observations by the Times: Just 324 Greeks admitted owning a swimming pool, despite an actual count of almost 17,000. Thirty four doctors in a “trendy” Athens neighborhood claimed income of less than $13,300, a figure which exempts them from paying any taxes at all, period. Apparently Greeks with tax problems, according to the Times, have found that the way to solve those problems was to use, say, a third of their obligation to actually pay the government, a third to bribe the tax collector, and keep the other third in their pockets. (We’re sure it’s much different nowadays.)
Apparently the shadow economy in Greece is about 25% of annual GDP, costing them almost $30 billion a year in lost revenue. This means lying about your assets to Greek tax collectors is a game played by many and often at surprising levels. I guess the appeal of hanging outdoing on the Mediterranean trumps all.
So now we have seen the war of words continue and demonstrations in the streets before the actual austerity reforms are even approved or the pension funds have agreed to anything. We are just not too terribly convinced that any consistent actions will back up these words.
It reminds us of Groucho Marx and his comments about not willing to join a club that would have him as a member. Are we to believe the Greeks will wake up one morning and agree to work 40 hours a week, retire at 65, and pay their fair taxes in the meantime? Somehow we just don’t think so.
Are we nuts or does the constant refrain of the “save the US and Europe” crowd have some eerie similarity to the cry heard before the Great Depression began: raise taxes, cut spending, and inflate the dollar. Didn’t that turn Deutsche Marks into fire starters and turn a recession in the US into a depression? Well, thank goodness Mr. Bernanke this week called that one out as a failed strategy. And James Grant in his Interest Rate Observer noted that the way out of the Depression was through a smaller government and lower taxes. The real picking and shoveling in the economy is done by the private sector: give it some time to work its magic after the worst excesses have been wrung out of the system.
So what are we doing here early in 2012?
We’re in a rebalancing mode. In equity land, at least domestically, stocks have been on a tear. The question remains how to take advantage of that. We believe there are still some great companies fairly priced and some others that will get interesting with a bit of a pullback.
First off, we will likely trim a bit off our bond position, use some cash and redeploy. We will beef up the exposure to US equities, which are still “under-loved” in our view. (A continuation of this slow grind up or a sideways consolidation will likely have the same effect, continuing to drag investors into the US market. Our existing positions and some selective adding should continue to offer us some protection even if we it an air pocket or two.)
With several possible sinkholes visible around the globe, we will still be looking for downside protection. In this climate that still means adding to the US Dollar position. We will likely increase our emerging market allocation and our exposure to the commodity sector as well. Real estate exposure will give us an asset that has been run over and is beginning to recover. We think gold will likely be the best play in 2012 when it’s all said and done so we’ll keep our exposure there and perhaps trim it some as it goes along. The point is that you need to have significant exposure to a hard asset when the world is running the printing presses in an attempt to deflate their currencies … or in case the Syrian problem totally blows up and drives up commodities or the Iran situation turns into a total mess. As usual, we’re not getting too enamored anywhere … just trying to control things through diversification.
