Getting less bullish and less long even almost bearish for now

What’s the best case scenario for the EU, the Euro, their sovereign debt problems and the banks who caused them? Is the best case scenario for each the same? Let’s dig in and talk about what should happen, what is happening, what’s likely to happen next and what all that means for our portfolios.

First off, at this point, I do think we’ve all collectively got Europe crisis fatigue. How many “financial crises” can we face in a row? It’s gotten to be that no investor is allowed to lose any money on any government or bank loan.

The latest and greatest ideas from the geniuses at the EU is that they’re going to sell off sovereign assets and impose further strict austerity in their government budgets in order to pay for a multi-trillion dollar transfer of wealth to the banks, their shareholders and their lenders. It’s a continuation of the stupid “bail out the banks in the name of saving the EU” game and apparently, no amount of popular protest or demand will change this game and the game will last til the money runs out.

The problem, that the market clearly knows but that the banks, the politicians they own and the bureaucrats who answer to those captured politicians in the EU (and in the US for that matter, just not as bad….yet) is that the existing system is bankrupt. Period. The EU and the Euro, as they currently exist, at the valuations they exist, and the entirety of sovereign debt in the region will fail. Maybe not this year (probably not this year) and maybe not next year. But we’ll have another “huge crisis” about how the debt is still unrepayable at some point no matter what they come up with this week.

Without some major overhauling of the entire financial system in both the US and in Europe within the next two years, we’re going to hear our next President and whoever’s still running the EU explain to us how we’ll need another few trillion dollars of wealth transfers to the banks “to keep our system from collapse”. Without a complete overhaul — and I’m not talking about the new international banking laws being written by bankers and their attorneys called “Basel III” — we will have endless so-called “crisis” over there til the collapse truly comes.

It’s not too late to forestall a complete collapse of the system. Ironically, though, it requires the politicians and the regulators to do exactly what they say they can’t do or the system would collapse — simply enforce the laws and contracts in place. No matter how painful it is for the people who have lent to the banks who have lent to the governments and homeowners around the world who can’t pay back their debt.

The only answer is to write down the debt obligations on every single country’s balance sheet, forcing all the banks who stupidly invested in that crap to lose everything and wipe out their shareholders and force big losses and ownership on every lender they had and to allow capitalism to rebuild the system.

You dear subscribers know how I’ve gotten sometimes almost wildly bullish when the market has panicked over Greece, the EU, the Euro, Spain, Italy, whatever. And for the last few months that’s been a very profitable and winning strategy. But part of that strategy has also been to pull in the bull horns whenever we get the big relief rallies. And we’ve not had anything quite like this ongoing rally before, which has now taken the Nasdaq up some 17% from where it was just three or four weeks ago.

So I’m not bullish like I was anymore now that the world is optimistic about Europe again. I’ll be more bullish the next time they panic because another panic will come until the stop the madness.

So the upshot is this: In the long run, the markets will suffer much more damage in correlation with however big the bailouts end up being and how long they last. But in the short run, the markets will suffer much more damage if the bailouts stop and/or if they’re not “big” enough to kick the can far enough down the road that the current batch of investors/lenders/traders know the taxpayer around the world has their back. Which means that they can loot/trade without fear of having to suffer any losses now matter how stupid and reckless they might be. Which means that in the long run, we’re badly misallocated our society’s resources. When all we’d have to do is simply enforce laws and keep private contracts between governments and banks and banks and banks and banks and lenders and banks and investors, well, private.

I’m now going to pullback once again on the long exposure in the Revolution Investing portfolio. That is, I’m selling Adtran. It’s been a great run with Adtran, which is up about 50% since I added it to the portfolio back in February of 2010. But I’m growing increasingly concerned about carrier spending patterns in the near-term, in addition to wanting to cut back our long exposure in the broader portfolio. So I’m closing out the Adtran long tomorrow.

Thanks for reading and subscribing and I’ll see you guys back here tomorrow.