Understanding the European Crisis:
Greece Is Not the Problem

Greece and its role in the European debt crisis are all over the news. But here Michael Lombardi reveals the real problem behind this dire situation.Greece’s gross domestic product (GDP) in 2010 was only $304.87 billion. The proposed Greek “bailout” by the European Union includes about $180 billion in cash and a 50% cut in Greece’s debt. This is equal to more than one year’s GDP for Greece. It’s a huge bailout. It’s free money. The Greeks would be silly not to take it…that’s why, at the end of the day, they’ll grab it with both hands.

The perceived risk is that if Greek defaults, the first member of the 17-country euro zone could be eliminated and other countries would follow. This would cause problems for the relatively new euro (an ill-conceived idea in the first place),

But the real problem is not Greece; it is Italy. The third largest economy in Europe after Germany and France belongs to Italy. According to the World Bank, Italy’s GDP in 2010 was $2.05 trillion, almost seven times bigger than Greece’s economy.

Yesterday, for the first time since September 1997, the yield on Italy’s 10-year government bond hit 6.4%. Ireland was forced to ask the European Central Bank (ECB) for a bailout when its 10-year bonds hit a yield of 6.5%. For Portugal, the magic number was seven percent.


The bottom line is that the European Union can afford a bailout of Greece and it can persuade big European banks to cut the value of their loans to Greece, because the ECB can backstop the European banks.

But, put bluntly, the European Union cannot afford a bailout of Italy. This is the real problem. If Italy defaults, major European banks could go under; the euro would collapse. We would need to bring Julius Caesar back from the dead to restore unity in the European Union.

And what’s Italy doing about their problems? Very little. The government bickers back and forth about austerity measures. The most colorful leader in the European Union, Italian Prime Minster Silvio Berlusconi, manages to continue surviving government confidence votes. Italy’s Il Sole 24 Ore newspaper ran a front-cover story yesterday saying that, despite promising an Italian “economic overhaul” to the European Union, Berlusconi arrived at the G-20 summit in Cannes yesterday “empty-handed.” What else is new?

So what does this all this risk among European Union members mean for small investors like you and me?

It means a choppy stock market for some months to come. It means the euro and European Union could eventually disappear (as I have been predicting for more than a year now). It means that gold bullion becomes even more valuable. Hold on to your gold, dear reader, it will come in very handy in 2012.

Michael’s Personal Notes:

My son says that if there is one company he would love to own, it would be Starbucks Corporation (NASDAQ/SBUX).

As he explains it to me, Starbucks took something most of us use every day, coffee, and made it into a lifestyle statement. Where Apple Inc. (NASDAQ/AAPL) can only succeed by continuously introducing new products or upgrading old ones, Starbucks simply found different ways to present an old product: coffee.

In the 1950s and 1960s, if white-collar people became stressed, they would hit the bar (especially at happy hour) or they’d have a cigarette or two…or a pack.

Today, as society has become smarter and more aware of what alcohol and cigarettes can do to the body, taking a break at a Starbucks has become a safer fad.

Starbucks did one thing so many other food companies fail to do: it made the stores, the product, the service…all consistent. Walk into a Starbucks store in London, England, or Miami, Florida. They sell the same product. The stores look the same; the service is the same.

And business is booming. Starbucks reported yesterday that its fourth-quarter net income jumped 29% to $358 million (no wonder my son wants to own it). What recession? Sales at Starbucks’ U.S. stores open at least one year rose 10% in the company’s latest quarter.

Of the widely followed and widely held big American stocks, Starbucks’ stock has been one of the few to break above its previous all-time high hit in October 2007.

Would I buy Starbucks stock today? Unfortunately, no. I expect 2012 to be difficult year for the economy worldwide. And I don’t believe Starbucks will be exempt from the pullback in consumer spending I expect.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 4.2% for 2011.

Despite being old and tired, a bear market rally that started in March of 2009 continues to prevail today. The rally has lasted longer than most analysts had expected, including yours truly.

Stocks will continue to ride the “wall of worry” higher against the backdrop of pessimism amongst stock advisors and investors, better than expected corporate profits, easy monetary policy, and lack of investment alternatives to stocks.

What He Said:

“Investors have been put into an unfair corner. Those who invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those who have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005