Growth is something that politicians, bankers, investors and economists pretty much take for granted. In the 30 years that I have been involved in investments, the game has been growth. Of course, one vaguely remembers that the 70’s were not a time of growth but then again there are many things (hair styles, wardrobes, cars, etc.) which are better left vaguely remembered from that period.

The headline indicator on any economy, sector or individual company is the growth of the top line. Countries have sustainable growth rates. Markets have potential sizes (always bigger than today) which can be divided into shares to be captured by companies. We divide the world into winners (those in growing markets) and losers (those whose prospects are diminishing). The investment decision for most is how to hitch one’s wagon to the winners and avoid tying up with too many losers.

Politicians like growth as well and will happily pile on promises to voters, confident in the assumption that, on aggregate, those same voters will work hard to provide the economic growth required to pay off those promises in the distant future (ie. past the next election date). With growing populations and rising productivity, leveraging the country made sense.

Lesser Depressions, Great Recessions or Long Stagnations present a big problem to the Growth approach. In these tough times, the Global GDP “Top Line” does not grow fast enough to spread the magic growth dust far and wide amongst the multitude of investment opportunities which present themselves. The problem is doubly hard for the politicians who have to contend with shrinking tax revenues (which make past promises harder to fund) and increased demands for the safety net (which has been extended to “too big to fail” enterprises as well as those who face dire employment circumstances). Japan is a 22 year cautionary tale of how things can go from “Japan as Number One” by Ezra Vogel to “a bug in search of a windshield” by John Mauldin.

So, leaving aside the issue of debt (I agree with those who say we are still overleveraged but others with PhDs and Nobel prizes say we just need more debt to kick start a recovery), the real question is:

How can we find growth to invest in?

The answer is that we will need to be opportunistic for now and in the foreseeable future.

Because the size of the overall pie is not growing rapidly, the answer lies in finding out who has figured out how to take a bigger slice. That bigger slice could be in terms of producers vs. consumers, new innovations that wipe out established players or consolidators who manage to roll up a significant corner of a market at what will come to be seen as fire-sale prices. And, the winners and losers are likely to change positions a few times before we are finished with this segment of the business cycle.

Speaking of opportunities, the catalyst for the next round is just around the corner.

The chance of a major European banking crisis in the coming six months is very high. Why? Because Basel 2 allowed banks to stack up sovereign debt without allocating any capital against those positions. And just like the rogue trader at UBS, the European banks drove huge amounts of euros through that loophole. When banks buy an asset that goes badly (a liar loan mortgage packaged as a Triple A tranche or a Greek Government Bond), there is a severe hit to capital where one was not expected. Since banks still have to maintain capital against their “risky” loans, there is very little cushion when the “safe” assets crater.

Now that the world has reacquainted itself with the concept of sovereign default, we get the spectacle of European politicians making desperate promises that Greece’s bonds (and Spain’s and Portugal’s and Ireland’s and Italy’s…) will not default. Unfortunately, the math doesn’t work. Greece will default in the not too distant future. The only issue now is how (not whether) German taxpayers will pick up the pieces. Oh yeah, and whether investors get 50, 40 or 10 cents on the dollar.

Will a Greek default impact the TBTF banks in the US? Absolutely. Will it sink one or two of them? Hard to say. On the one hand, the FED takes a very different approach to the FDIC when it comes to banks in trouble. On the other hand, the electorate has seen alot of money showered on the TBTF banks with very little to show in return. Save your “bottom fishing” hooks for opportunities other than the IYF’s of the world.

Big things are shaking elsewhere as well. Just in the technology/consumer products area alone, we have seen three household names undergoing significant corporate restructuring. HP is thinking of pulling itself apart, Motorola spun off cellphones and Kodak is trying to avoid bankruptcy by selling off patents. Google and Apple are circling like Great White sharks trying to decide whether to acquire, sue or both. But there are plenty of other companies looking to take advantage of the upheaval. History suggests that the next Google is out there waiting to be discovered.

But for now, the Fund King System is telling us to continue to keep our powder dry. The weakness of our methodology is that the System is almost guaranteed to miss the real bottom by several weeks. The strength is that it will help you avoid perhaps a dozen “false bottoms” while we wait for the real one to emerge.

In the meantime, when you hear a politician, central banker, economist or corporate leader speak, ask yourself the simple question: “Is there anything here that points to growth?” If there is, take note and perhaps investigate. If not, don’t waste your time and move onto the next idea. Investing now is not about spreading your sails wide to smooth out the bumps in your double digit investment returns (diversifying, buy the dips, think 80’s and 90’s) and more about avoiding the sharp rocks that threaten to rip holes below the waterline of our portfolios (think Titanic).


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