What's Your Exit Strategy?

"The global economy remains too weak and unemployment is too high in many countries. There has also been an increase in financial market volatility and tightening of financial conditions."

— Christine Lagarde, President of the International Monetary Fund

The Group of Twenty (also known as the G-20) is a group of finance ministers and central bank governors from 20 major economies: 19 countries plus the European Union.

The G-20 nations represent two-thirds of the world's population and 85% of the global economy.

Formed in 1999, the G-20 members are the most-powerful, influential financial bureaucrats in the world.

Their three objectives:

  • Coordinate policy between members in order to achieve global economic stability and sustainable growth.
  • Promote financial regulations to reduce risk and prevent future financial crises.
  • Modernize global financial architecture.

Most investors pay little attention to the G-20. That's a big mistake. The G-20 members control the world's printing presses, financial regulations and tax policies. Their decisions have a dramatic impact on the stock and bond markets.

The G-20 finance ministers and central bank governors meet twice a year. At their just-concluded Moscow meeting, they agreed on a 15-point action plan with profound long-range economic impact.

Unfortunately, their solutions won't work. Here's why ...

Problem #1: Jobs, Jobs, Jobs. With the youth unemployment rate as high as 60% in some European countries, jobs are rightly a top priority. The G-20 finance ministers think more government-sponsored jobs will help.

"We do not see any revival of growth in Europe yet ... we're keeping our fingers crossed," said India's Finance Minister Chidambaram Palaniappan.

Solution: More Government Spending. More Debt.

Problem #2: Austerity is Painful. Greece, Spain and Italy (so far) are flailing under the mountain of debt, thanks to excessive spending and overly generous pensions. Yet, austerity is so severely unpopular that postponing the consequences is the easy way out for politicians.

G-20 leaders senselessly think they can revive the global economy with ... what else ... more government spending.

"Quantitative easing is justified amid economic stagnation; it doesn't even lead to higher inflation," said Russian Finance Minister Anton Siluanov.

Solution: More Government Borrowing. More Debt.

Problem #3: The Rich Aren't Paying Their Fair Share. When someone asked John Dillinger why he robbed banks, he famously answered, "Because that's where the money is."

Today we hear the same from free-spending politicians all around the world. According to them, the wealthy don't pay enough taxes.

With individual tax rates already sky-high in Europe, these modern-day bank robbers need new targets. They want to make multi-national corporations -- like Google (GOOG), Starbucks (SBUX) and Apple (AAPL) -- pay local taxes in every country where they operate.
Solution: Raise taxes on evil corporations.

Problem #4: China is Kicking Europe's Butt. China is unhappy with its 7% economic growth, but other G-20 leaders would do cartwheels for half as much growth.

This is why they talk so much about "exchange-rate flexibility." They want to rebalance the global economy by manipulating currencies.

Solution: Force China to let its currency appreciate.

What Does All This Mean to Us?

While the timing is always difficult to predict, I believe the ultimate outcome is unquestionable.

The European economy and stock markets have even more pain coming. If you own European stocks ... you need an exit strategy to protect yourself when things turn ugly.

Central bankers are so addicted to quantitative easing that they can't stop. Despite Ben Bernanke's tough talk, "tapering" is a long way off. I think interest rates will remain historically low. With long-term bonds still paying squat, income-focused investors should consider dividend-paying stocks.

If you're invested in U.S. companies with a lot of business in Europe ... watch out. Their overall global tax rates could double ... maybe triple ... and crush profits.

Companies like McDonald's (39% of profits), News Corp. (29% of profits), Ford (28% of profits), General Electric (27% of profits) and Coca-Cola (22% of profits) all depend heavily on Europe.

Many of the biggest, most-liquid names out there also have option chains available, for those of you who have a bit of an appetite for speculation and want the flexibility they offer to establish both bullish and bearish positions as appropriate. In fact, my Blue-Chip Option Alert subscribers are sitting pretty with about a 61% year-to-date gain so far, achieved with a healthy balance of call and put options.

Whatever your strategy, the best thing you can do right now is to define it, stick with it and make moves with conviction. Organizations like the G-20 are doing everything in their power to meet their stated objectives.

And in investing, it's always better to be proactive than reactive ... you make the best decisions that way, without feeling like you have to react to whatever everyone else in the world is (or isn't) doing!

Best wishes,

Tony


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Posted 07-26-2013 5:45 PM by Tony Sagami
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