Dear PGM CAPITAL Blog readers,
Since May of this year, Europe, the Euro-zone and the European Debt crisis are the headline of almost every news media on the planet.
Currently the head of state of the 27 European Nations are meeting in Brussels, their 21st meeting in 14 month, on the issue of the Greece Debt Crisis.
The purpose of the current meeting is to draft a debt rescue package that could be sent to EU heads of state for signature.
The estimated size of the package is around US$1 trillion, with some experts calculating the final cost of the European sovereign debt bailout will run US$2 trillion or more.
On top of this the issue of how big of a haircut will be allowed to holders of Greece Government Bonds.
Germany is backing a 60% write-down of Greek government bonds. France, because their banks have higher exposure to the Greek Government bond, is insisting on no more than 40%. All involved might see a compromise of 50% as a good “Salomon solution”.
We and with us most investors are watching this very closely because this might be become a model for handling the Debt issue of the other PIGGIIS and also the USA debt issue in the future.
Pain & Gain for Investors:
We wish and hope that Investors will learn a lesson, for the unavoidable hair-cut for Greek Government Bond holders, in the sense that Bonds aren’t as safe and secure as the have been taught at school.
We strongly believe that, the USA-Treasuries and those of most Western Countries currently are in a bubble. Chances are that the hard lesson of Greek Government Bond Holders might be the trigger for a flee out of bonds.
Those most hurt in this case will be retirees, whose pension- and social security funds are heavily invested in (Government) Bonds.
On the other-hand, the printed bail-out money dilute the value of paper Fiat-Money and will let Gold, precious metals and other commodities, shine like they have never shined before. Mining stocks due to their leverage effect, will shine even more.
Our preferred mining stock in this case is world biggest and most diversified mining company BHP Billiton Ltd (ISIN AU000000BHP4). Due to this we believe that the recent correction in the prices of Gold, precious metals, other commodities, and the stocks of their producers, have given (long term) investors a great entry point.
Last be but not least, before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities as well as the stocks of their producers can be very volatile and that sharp corrections might happen in the short term.
Yours sincerely
Eric Panneflek
Chairman
Dear Mr. Panneflek,
As usual, I totally agree with you and all the other experts in the field. Having said that, I must also point out that the logic behind your conclusion is not always confirmed by the actions of investors. Let me explain. The argument that you and other experts use and have been explaining for the past two years, increasingly so and in ever more alarming tone, has not really impacted the average investor, who, in spite of all the signs, continues to put his money where he should not: the US Treasury. We all know that this is stupid, but as long as this ‘counter productive’ action, based on blind trust in the ‘system’, continues, there will NOT be a crash in the bond market. As long as the E.C. continues to dither on the issue what to do to bolster the Euro & the EC economy & financial system, the markets will continue with the wild gyrations of the past few months. The moment the EC governments agree on a rescue plan, whereby they will have to print money out of thin air and force the banks to take their losses – as described in your article – for having been greedy again in taking the risk with the prospect of raking in interest rates way beyond normal, we will witness an enormous market surge, based on relief and the availability of money. Whether this money will devaluate the system’s very basis, is not a concern when the relief, even short-lived (and what is short-lived? months, years?) takes the form of a positive frame of mind and a belief in “better times are here again”. The stock market will surge, as will the bond market, and precious metals will again – even temporarily – take a beating. The point I’m driving home here is, that man is NOT a rational animal, but a very sensitive, anxiety prone or optimistic driven being, that will react on emotions; not on rational considerations. Therefore, my friend, although I firmly believe in the explanation in your blog, I must warn that time is the one aspect no one can factor in. Only when a few big names in the investing world start selling their bonds/treasuries, will this cause a panic and will the hordes of bond holders try to flee through a door that is much too narrow to let them through. It is then that some savvy investors will reap in huge profits, while most middle income and retired people will be driven to poverty. When? God only knows. And until then, the average investor will continue to do what he has always done: go with the flow, for what else can he do!