1) Milton Friedman famously opined that the Euro would not survive its first major financial crisis.   I just can’t help but wonder if Friedman was correct about the Euro being “flawed”.  As we see the debt crisis in Europe unfolding it’s been interesting to see just how unified Europe actually is.  Germany has effectively given Greece a nice big middle finger in what can only be described as a frustrating situation for all countries involved.  Thousands of years of bad blood are suddenly trying to be papered over by “currency unity” and the first time the you-know-what hits the fan it looks like everyone is fending for their own….As it should be.  After all, this is not the United States.  These are not unified states.  They never have been and they never will be.

Interestingly, what is occurring in Greece is what occurs to a nation that is revenue constrained under a convertible or commodity linked currency system.  In times of peril, you can’t properly defend (or spend) for your own people.  You have to beggar thy neighbor.  Does that make any sense at all?  What if Greece were attacked by a neighboring country?  Could they financially defend themselves?  Could they print money without creating massively destructive inflation?  Would Europe truly unite around Greece and defend them?   Or would they be forced to leave the Euro system just so they could print their own currency and spend it as they please?  The Euro, much like the gold standard or convertible currency systems of old, are terribly flawed.  I understand that there is some good that comes out of austerity, but the Greeks are helpless and entirely by their own choosing….The Greeks are discovering the flaws of the Euro currency system and they’re not the last country that will discover why such a currency system favors those with strong surplus driven economies and hurts those with weaker deficit driven economies.  Pure common sense tells me the Euro is not here to stay….At least in its current form.  There will be defections.  In fact, there almost must be defections.  When that will occur is anyone’s guess, but the problems in Greece are just the beginning of bigger problems within the Eurozone.

2) A big part of me is beginning to wonder if we’re entering one of those confusing periods where good news is actually bad news.  Last week, investors celebrated the lower than expected jobless claims before dramatically selling the news.  Friday’s jobs number could be north of 200K according to estimates (and don’t let anyone tell you these March jobs aren’t real because of the Census hiring – these are real working & spending citizens even if they only have these jobs for a few months).  What are the real ramifications of a big jobs turnaround?

Most analyst’s and investors knows this recovery has been largely due to government spending and accommodative Fed policy.  A job’s turnaround brings us that much closer to higher interest rates and no further government stimulus.  The uncertainty regarding such an environment strikes me as being extremely high.  We are still Japanese to anyone who takes a look under the hood and sees how disastrous the consumer balance sheet remains.  And without government stimulus and continued aid we all know what happened to Japan….

A much stronger economy might not be what the equity market most needs right now (with the consumer balance sheet in shambles)….In fact, the real Goldilocks for this market is the one that is just perfectly weak.  Strong enough to keep the government pouring the kool-aid, but not strong enough to force them to remove the bowl….If we remove the bowl before the consumer balance sheet is fully repaired (two years away by my estimates) we seriously risk a double dip….

3) I received a friendly email from a regular reader who asked:

“You are obviously level headed so why do the majority of your articles tend to be bearish?”

I replied:

“Because butterflies and rainbows don’t ruin your day.”

I’m not pessimistic by nature.  In fact, I am quite the optimist (I was very optimistic about the U.S. stock market even at the beginning of 2009).  But I view the trek up to the top of the investment mountain as being full of risks.  Seeing butterflies and rainbows sure make the trek more enjoyable, but won’t guarantee that you ever get there (just ask the millions of baby boomers who have been fooled by the myths of buy, hold & hope!).  Anyone can get caught up in the beauty and wonder of a butterfly or a rainbow (or a bull market!), but it’s the cautious observant who steers you clear of the loose rocks and the avalanche attached.   If you don’t watch out for potential pitfalls I guarantee that you’ll never get to the top of the mountain.

This website is a reflection of that approach.  Of course, I’d be lying to you if I said that I spend most of my time reading articles about butterflies, rainbows and v-shaped recoveries.  As a risk manager I spend most of my time finding risks and fending them off before they blow me up.  I still consider my move to cash in August 2008 and my October crash call as the single greatest investing achievement of my career even though it was followed by underperformance in 2009….I hope readers understand this risk management focused approach and find my (sometimes) negative bias helpful in avoiding their own potential portfolio debacles….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • scott Norwood

    Do you have a citation for the quote below that you can send me. I’m a PhD student working on a paper about the Greek crises. Also, appreciate your great website and articles!
    vr jsn

    Milton Friedman famously opined that the euro would not survive its first major financial crisis. I just can’t help but wonder if Friedman was correct about the euro being “flawed”.

  • ATP


    I would appreciate your input as a risk manager regarding the risks of muni bonds. I wouldn’t touch them with a ten foot pole but the market seems to think the otherwise. Thanks.

  • eludog

    Pessimism vs. optimism seems to me to be a function of time horizon. Short term, we may be just fine. Longer term, I’m not sure how we return to a booming economy unless we have some sort of economic restart. Over the long run taxes have to go up, government spending has to drop dramatically, and consumers need to delever. I shook my head at the savings rate report earlier this week. We are back to pumping up this economy with borrowed money. The savings rate can drop for a few more months, but then what?

  • Greg

    Soo….as it relates to common currency, Greece is a state. Hmmmm…..So that would be like California could issuing bonds and asking for an IMF guaranty? So why wouldn’t California ask for an IMF guaranty on its bonds? Ah…Now I understand Mr. Trichet’s “disaster” comment. He is correct.

  • Darrell

    “Friday’s jobs number could be north of 200K according to estimates (and don’t let anyone tell you these March jobs aren’t real because of the Census hiring – these are real working & spending citizens even if they only have these jobs for a few months).”

    Kinda makes sense. Then why not hire, oh I don’t know, about 8.4 million census workers. 8.4 million real working and spending citizens even if they only have these jobs for a few months. And heck, why just a few months; let’s have those real working and spending citizens in these positions for a few years; Imagine the joy when we have recovered all of those lost jobs!

    Just more money taken out of the economy of tomorrow and put into the economy of today, which is something we have been doing with a bit of regularity and still we need to do more of the same. If government spending in the consumer sector of the econmy is what we need, why go through the expense of hiring these guys; Why not just send them a check with the directive to go forth and spend, spend, spend!! Maybe we could even direct them to the weaker sectors of the economy. Hint – Buy a home!

    I understand your logic and I hope you can appreciate the hyperbole I use to make a point. It just that I don’t see how this “employment” is anything but a future drag for current political gain.

    By the way, I enjoy your site; keep up the great work.

  • In Banking


    While I agree that the EU is headed for some big changes, these could come in a multitude of ways:

    First, they could abandon their hopeless frugal “mission statement” thereby implicitly admitting they were wrong (we all know they wont explicitly state such) and start letting inflation run – they’ve got plenty of room for this. Then again, there are some success stories over there, mainly from countries in which the culture is built around strict adherence and confidence in the rules: Germany, Austria, Switzerland, and to some degree – France. Of course, I find this option the best choice, but not at all sure how the culture would react to such (I’m not European afterall).

    Second, (this is the scary one) – Greece’s deficit as a proportion of GDP (I believe 60%) has triggered rules of EU membership that is:

    1. Grounds for expulsion (and soon to follow would be Spain, Portugal and probably even Italy)
    2. Grounds for departure….

    This means those European “states” not faltering can simply break off and form a new currency – Euro 2.0. As crazy as this seems, it is an idea being bandied about. Germany is fuming, as are the other semi-afloat states (and the French, well they’ll follow the progressive bandwagon and this certainly qualifies as such). I find this highly unlikely, but should not be discounted in a world where it appears each day we’re getting closer to a “State of Nature” where survival is only for the fittest

    Third, well they can sit on their ass and wait and see what happens. Apparently that is until May 25th (I think?). Not much time and I don’t see anything improving there (unless there actually is a New World Order which wants to come save the world – along with Superman, Spiderman, and all our favorite superheroes). This is the most likely scenario. What happens then? Well, things only get worse, a lot of infighting begins and the Euro tumbles horribly to the point where options 1 or 2 become all that’s left (with option 2 becoming more and more likely as discussions degrade into infighting much like our own Congress).

    Finally, I wouldn’t say you’re a pessimist – more like a realist. If you manage risk and trade, you cannot afford to ever stick to one philosophy as the market is and always has been cyclical. The only survivors are those who have an edge (ie. inside info) or those who are willing to discard previous predictions in respect for vastly changing market circumstances. In a highly DYNAMICAL SYSTEM :), these are the only ones that survive.

    Some people don’t understand that there’s no real connection between pessimism/optimism and bull/bear. You can be a pessimistic bull (“I think the market’s going down, but I know better than to fight this uptrend because I could be wrong – so I’ll go long and play along…for now”). Or an optimistic bear (“This market is going down because nothing has improved and the skeletons are still fighting to get out of the closet, but I could be wrong because the nation has dug itself out of worse holes”). The ability to hold any of the four personalities at any time (or even all at once) makes a trader – not a philosopher.

    Right now, I suffer from multiple personality disorder – I don’t know which to be (though I’m leaning towards bear, both optimistic and pessimistic) so I sit in cash and watch. I’m the student and I’ll let the market be my teacher.

  • hfm

    Thanks for sharing your great thoughts.
    Though I agree with you about double dip, but I am wondering what if government will not withdraw its stimulus. They know the Japanese lessons, so they will not withdraw until they have to, when the inflation come. So what is going on is USD appreciate against Euro, putting pressure on commodity, making inflation moderate. Then they have good reason not to withdraw stimulus.
    For the market ,when there is a dip, if out of control, they use a small money to buy to trigger short covering, that is where this Feb 5 no news , no volume rally came from.
    What can this the above? The coming election or ultimate inflation, before that,I do not expect significant drop.

  • In Banking


    I think there is only one man in the world who can save this country: David Walker. This guy literally walked out of the GAO because he couldn’t stand the unbelievable hubris surrounding him regarding the fiscal situation in this country and put the problem squarely on the shoulders of the government (where it belongs).

    I would vote for this man as President any day of the week. Hell, I’d quit my job and work directly for his campaign. Problem is, I’m not sure he wants the job….

  • http://www.pragcap.com TPC

    The point is that the jobs are real even though I think they are an inefficient form of government spending. Real jobs mean real spending and real boost in aggregate demand. The problem is, the government can’t sustain such inefficient spending forever – which is basically my main point here….

  • chris

    tpc, your 3tit posts are always a good read…this time, i actually agree with most.

    as to EU, why don’t they allow member countries the annual noncumulative right to call upon the ECB for a set # euros, say proportionate to their gdp in the EU, likely upon the transfer to the ECB of some collateral…the debt would have to be repurchased before next euro call. some process that would constitute the ECB as a real lender of last resort central bank.

    as to good news is bad news, i am beginning to sense it too…think it is too early since no real inflation around that i have noticed, but can’t argue with the fact…that jobs number comes out on a closed friday should allow everyone to take a deep breath, so monday will be interesting to see

    as for being bearish, keep on keeping on…i balance you with scott grannis (who is very good and tends to be bullish), so don’t go bullish on me now

  • http://www.pragcap.com TPC

    I am not certain of the best solution for Greece. Part of me thinks they should just tell the EU to shove it, leave and bring back the drachma and call it a day. This would be the same as a default in many ways, but would be great for them in the long-run.

    The problem is that they are dependent on a foreign bank to be their banker. It makes no sense.

  • In Banking

    Yeah, I agree – default is not really a big deal…its not like anyone wants their bonds anyway. Funny part is the EU paraded the situation around thus creating a self-fulfilling prophecy. Then again, is Greece know for producing anything these days, other than Greeks?

    It does make no sense but considering how they handled themselves, it seems perhaps they thought they could piggyback to prominence on the EU.

    It really is sad to think about it: some of the oldest books, poetry, the origin of philosophy and some of the most successful and fiercest armies (whose tactics are still the core of modern warfare) all started in Greece. Now they can’t even take care of themselves. I think they should rename it to Ancient Greece

  • In Banking

    Anyone notice a small occurrence on VIX – didn’t hit the May 2008 (16.46) low and is up about 2.5% since its recent low (Mar 19 – 16.97). It’s crawling and is almost nothing worth mentioning but I have a feeling risk aversion is creeping in.

    10 year USTs have some interesting action today as well.

  • stevo

    Please see an interesting paper re. Friedman & the Euro by Prof. Dr. Antonio Martino at http://www.cato.org/pubs/journal/cj28n2/cj28n2-10.pdf

  • http://ourmaninnyc.blogspot.com/ Our Man in NYC

    As a Brit…the problem I (and most of us Brits) had with the Euro, is that for it to work you have to buy into the idea of a federal Europe.
    In essence countries have to accept that they’re going to be the equivalent of California (in terms of legislative power/global interaction/etc) in exchange for the benefits of the single currency.

    The other major problem was that most of Club Med entered the Euro at the wrong price. By that I mean, that it’s not like Greece/Spain/etc’s budgets suddenly were over the 3% of GDP (per annum) limit or the 60% of GDP (total debt outstanding) limit. The fact is they were barely ever under the 1st and never under the 2nd, but were allowed to enter as they’d shown progress towards the targets.

    Errr, behavioural finance 101 surely says that was dumb. What incentive to the Greeks/Italians/Spanish have to keep public spending down and reduce debt once they’re in the Euro! They know the others will voluntarily kick them out (in the absence of a crisis)…