Woe to the unfortunate souls still exposed to European debt. The smart money (read: people like Warren Buffett and the world’s more successful hedge funders) got out of it a year and a half ago. It almost doesn’t matter whether EU leaders will be able to create a much larger bailout fund cobbled together from three separate pools of European and IMF money, as is now being discussed in the run up to Thursday’s European Union summit. There’s little doubt that European debt is going to continue to be a very risky proposition from an investor perspective.
To understand why, forget all the complicated acronyms and the latest “comprehensive plan” thrown out by Merkel and Sarkozy, and just think about Europe as a big, dysfunctional family. Germany, the dad, has been working a dull desk job for more than a decade, and has saved up a lot of money. But his teenage kids, Greece and Italy, have taken out the family car and crashed it. Will dad pay for the repairs in full? And will the kids clean up their act and drive more safely if he does? That’s all the market wants to know – and it hasn’t gotten a clear answer yet.
So far, U.S. T-bills have benefitted somewhat from the chaos overseas, but that relative advantage may not last – even as the S & P threatens to downgrade every country in Europe, it’s also predicting there’s a one in two chance it could downgrade the US’s triple A rating, too. Double A, it seems, is the new triple A in rich countries.
One interesting upshot of all this is that blue chip stocks have become the new bonds. The smartest money has been selling government debt and buying up the stocks of large multinational franchise firms for some time now. After all, which would you rather own – exploding Eurobonds or sleepy T-bills that aren’t even keeping pace with inflation, or the stock of a large global franchise firm (think Coke or IBM) growing fast in hot emerging markets and paying out a safe and predictable 3 percent a year dividend in the mean time?
While the investment case for blue chip stocks as the new bonds is clear, what’s more interesting and unknown are the political implications. What does it mean that multinational companies (and the people who run and invest in them) continue to fly over the messy business of debt crisis and public protest going on in so much of the rich world? Does it matter that international companies and investors get richer even as individual countries are failing? I don’t know the answers, but I think that bifurcation – between companies and countries, and between stocks and bonds, will be at the center of a lot of economic news in the coming months.