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Five Indispensable Investment Insights Greece Has Taught Us

We are not a news organization per se. That is, here at Wyatt Research we don't jet people off to investment hotspots to glean the latest news. 

That said, we do have our own unique sources of information. In fact, we have our own man on the street – or should I say our own analyst on the street – in Germany and Greece. High Yield Wealth research analyst Steve Mauzy is spending time in both countries, and he's been funneling information on the zeitgeist and general investment climate in both countries.  

As you might expect, things really aren't as bad as the Internet and mainstream media outlets lead us to believe. In popular media, if something bleeds it leads. That's to be expected, even if it's not representative of the majority.

I can say that from Steve's account from Frankfurt, Nuremberg, Athens, and Crete, there is little bleeding. 

In Germany, it's business as usual. Most Germans take little time out of their day to ponder Greece. And the investing class in Germany thinks how Greece might impact investments that are tangentially attached to Greece, namely a few large European banks.  

In Greece, Steve tells us there is a feeling of discontentment and some thought of betrayal. But there is no mayhem, nor are there any calls for mayhem.   

As Steve has been traveling through both countries, he's been relaying information that I thought was interesting to investors, particularly regarding the Greek situation. Though Greece isn't a hot bed of investing for U.S. investors, it is an exemplar of what investors need to consider before investing abroad. 

While pondering the Greek situation, I derived five characteristics of wealth destruction that every investor should seek to avoid.  

  1. Avoid high moral hazard incentives. A political apparatus structured to invite transactions that internalize rewards and externalize losses invites excessive risk. 

Greece has been able to issue bonds at a low rate of interest to a ridiculous degree because of  implied guarantees provided by the European Central Bank. In fact, until recently Greece's government had been able to borrow at nearly the same rate as Germany. With no record of fiscal prudence, Greece borrowed and borrowed at a subsidized rate so that its debt-to-GDP ratio is nearly double Germany's. Of course, no one politician's head will roll for such fiscal malfeasance, as losses are externalized to the general population.   

  1. Avoid countries with high levels of regime uncertainty. In other words, avoid countries where the political apparatus regularly changes fiscal and monetary policy on a whim. 

One of the constant laments Steve hears in Greece is too much change and uncertainty. They want stability and certainty when it comes to taxes and regulation. Greece's approach to taxes and regulation is haphazard and ad hoc. According to Steve's conversations with the locals, that simply creates too much uncertainty, which in turn leads to underinvestment and stagnation.

  1. Avoid countries with high levels of corporatism. When a few large corporations are able to influence the political apparatus to implement polices – subsidies, tariffs, quotas, restrictions – to best fit their needs, that leads to regime uncertainty for everyone else.  

In our own hemisphere, we can look no further than Mexico. Carlos Slim is the richest man in Mexico and the world largely because his Telmex telecommunications holdings control 90% of Mexico's landline telephone market. Markets where a few oligarchs can control a market through political patronage produce lousy investment environments for everyone else.   

  1. Avoid excessive egalitarianism. A political system or an underlying culture of egalitarianism produces a poor investing environment. 

That fact is that we are dissimilar. We have different talents and abilities. We make different incomes because we have different abilities to satisfy market needs. That's not a bad thing, either, because we don't live in a zero-sum world. Bill Gates makes a heck of lot more money than I do. But that has no bearing on what I earn, so I really don't care what he earns. 

The problem in Greece – and many other countries for that matter (including our own) – is an overarching desire to get the rich to pay for everything. When pushed to the extreme, the rich simply leave and take their money and capital investment with them. That leads to capital flight and poverty for all.  Greece is suffering from severe capital flight.

  1. Avoid fantasies. 

Greece's capital flight has stirred resentment among many Greek citizens. They're peeved that the rich would take their money and leave the country rather than leave their wealth exposed to endless expropriation.  (Taxes in Greece are progressive, high, and omnipresent).

Many Greek citizens don't understand why the rich won't join the bigger cause of helping the country lift itself from its fiscal morass. The answer is simple: Everyone everywhere is driven by self-interest. If self-interest means leaving, that's what the rich will do.  The result is the capital flight that I mention above. If you provide enough incentives – excessive taxation, excessive regulation, regime uncertainty – for capital to leave the county, don't be surprised when it does. 

You'll notice that the warnings I provide are indicative of many emerging market economies. You'll also notice that many emerging market economies always seem to be emerging, yet never emerge to the level of the United States, Germany, Great Britain, or Japan. 

I suppose, then, I should offer a sixth warning: Avoid countries that remind you of Aesop's fable of the frog and the scorpion. If you are unfamiliar with the fable, a scorpion persuades a frog to ferry him across a river. The frog, rightfully apprehensive, wants the scorpion to assure him he will do him no harm. The scorpion assures the frog. Halfway across the river the scorpion stings the frog, dooming them both. The incredulous frog protests; the scorpion replies that he couldn't help himself. It was in his nature. 

In some countries – the majority really – it's simply in their nature to implode themselves. I suppose Greece is only one of many.