The following interview was conducted by David Kuo of our sister site across the pond, Fool U.K. David interviewed Global Gains advisor Tim Hanson. To listen to or download this podcast, click here.
David Kuo: This is "Money Talk" coming from Greece, and this week we want to know: What have the Greeks ever done for us? My guest is Tim Hanson, co-advisor of Motley Fool Global Gains. Welcome to "Money Talk," Tim.
Tim Hanson: Hi, David, how are you?
Kuo: I'm doing very well. Now Tim, I'm prepared to concede that the Greeks gave us Plato, Aristotle, Pythagoras, and even Archimedes. They also gave us Telly Savalas, Nana Mouskouri, but best of all, in my opinion is, they gave us Jennifer Aniston.
Hanson: Ah, I didn't know that.
Kuo: But what, apart from those people, have the Greeks ever done for us, apart from giving us a headache that Hippocrates of course would have trouble curing right now?
Hanson: Well you know, the Greek cuisine is certainly something that I think is worth enjoying.
Kuo: OK, is that the reason why you went to Greece? I mean, tell me why did you go to Greece? For people who don't know, you went to Greece a couple of months ago, so why did you go?
Hanson: Well, the cuisine was a side benefit, but the main reason we went, we were looking for investment opportunities. Obviously there's a lot of uncertainty over there. The classic [Baron] Rothschild quote is, "to buy when there's blood in the streets," so I'm not sure if he meant that literally, but Greece has certainly become a very interesting situation. We went there intending to find companies that might be worth shorting, because our original impression was that Greece was in serious trouble, and that even the euro would be in question.
We left Greece with a slightly different conclusion actually, and started to recommend buying a few things, mainly because we thought there was more political will than we originally anticipated. To save the euro and protect the Greek economy, that doesn't mean it won't be volatile, that Greece doesn't have problems, but obviously we're just looking for mispricings.
Kuo: But paint the picture for me -- when you went to Greece, I mean how bad were things over there?
Hanson: When we were there, it actually was not that bad. We went to cover and check out a few of the protests and the riots, and this was a few weeks ago.
Kuo: It wasn't all that wine you were drinking when you were over there, was it? I mean, all that ouzo? Were you conscious when you were over there?
Hanson: Absolutely, we went to a firefighters' strike, and roughly 30 guys milling around drinking iced coffee, but curiously the next day ...
Kuo: But no wine?
Hanson: ... in The Wall Street Journal, they also covered the firefighters' strike, and they had painted a much more onerous picture and included a small photograph of fully dressed riot police. I'm not sure where they got that photograph, because we saw no riot police at all, and it was actually a very casual strike, but that's when we started to put together the fact that maybe the protests and whatnot in Greece weren't quite as bad as the media and others were portraying.
Our contacts in Greece actually told us that, by Greek standards, the protests were very benign. It's changed since then, and obviously there were a few tragic deaths, and that bank fire bombing, but we still get the impression that the protests aren't being heavily attended, and that the government does have more political credibility than I think a lot of people think to enact the needed austerity reform.
Kuo: Now the thing is, clearly things are very different now to when you were there, so how do you think Greece will be able to survive this financial crisis that it's in?
Hanson: Well, I'd like to point out -- we went there before a lot of the plans that have been announced were announced, and we walked away, we wrote our report and published it on April 1, and said, you know, what we expect to happen is that the EU, despite sort of the saber-rattling by the Germans, the EU will ultimately come together with a bailout plan, which they did. We said, ultimately the Greek government would be able to enact austerity reforms, which they have. Their plan is actually a fairly reasonable one, it's actually based, unlike most government plans, it's actually based on realistic assumptions about their economy, and their prospects for tax collection.
So far we're two for two in predicting what would happen in the chain of events. The stock picks we selected haven't responded yet, but we think that's more of an opportunity than a difficulty at this point, because at the end of the day, Greece has real financial problems, but they're getting after those problems with the austerity plan, with crackdowns on tax evasion, and on corruption and bribery and those sorts of things.
Kuo: The thing is, you are an internal optimist, aren't you? But how will the Greeks be able to convince the public, I mean the Greek public, that the spending cuts are imperative? They don't seem to be doing a very good job, do they?
Hanson: Well, they don't seem to be, but aren't these ... there's actually more support for the cuts in Greece than the media is reporting. If you look at some of the polling data, the majority of Greeks are in favor of the cuts, and remember that this is a new government, this isn't the government that was in power when they racked up all these deficits and under-reported them. This is a socialist government that was elected with the support of the unions, who are the ones who are organizing the strikes.
What we keep hearing from our contacts over there is that these are sort of token strikes, like the unions would lose a lot of credibility if they didn't do something, because obviously these cuts will be painful, people are losing salaries and benefits and those sorts of things, but at the end of the day, the government will be able to marshal some support from its political base, and put these cuts through in order to rectify the economy.
Kuo: But the thing is, can you see any alternatives to the austerity program that Greece is putting together?
Hanson: In terms of things that they can do to ...
Kuo: To revive the economy, that's right, yeah.
Hanson: Well, the goal of the austerity plan is not to revive the economy. In fact, it's probably going to do some damage to the economy -- they're predicting about a 4% decline in GDP this year, and a 3% or 2% decline in 2011. Obviously these spending cuts are going to take money out of the system, and they're going to raise taxes, which obviously isn't conducive to growth in the economy, but the reason they're doing it is so that they can get the [International Monetary Fund] and EU support for the bailout loans to help them meet their obligations, and without the cuts the IMF obviously would not support lending them any money.
Kuo: But the thing is, cutting is only part of the equation, the other part of the equation is to try and raise taxes. Now one of the things that's always been said about Greece is its black economy, and the ability for people to dodge taxes. How bad was that when you went over there?
Hanson: The statistics are shocking about the tax evasion in Greece. They said this is the wealthiest country in the world that pays the fewest taxes. Just some statistics to put this in context: There's a tax in Greece on swimming pools, and they found that 324 people in the wealthy suburbs around Athens reported owning swimming pools. That struck the government as low, so they fired up the Google Maps satellite view, and went looking for swimming pools, and found 16,974 swimming pools in the suburbs outside Athens!
Kuo: So those people who declared the fact that they had a swimming pool, didn't they have a good tax accountant, or something? Or were they just very very honest people?
Hanson: Again, do the math -- they mean that there may be less than 1% of people in Greece actually declaring these swimming pools. So there's an opportunity here for the Greek government to close some of those tax evasion loopholes and get after tax collection, so the tax increases don't need to be as steep necessarily as they would be if they had an efficient tax collection system.
Basically the other statistics are, well most EU countries collect about 8% of GDP in the form of taxes; Greece collects 4%, despite having approximately the same personal income tax rates. So there is an opportunity, there is some low-hanging fruit here for the Greek government to improve their tax collection practices, and I think they're finally motivated to do it.
Kuo: Will that be enough to actually get them to cut their budget deficit, which is almost as bad, in percentage terms, of the GDP, it's almost as bad as the deficit that we have here in the U.K.?
Hanson: That's correct; it's not enough on its own. Obviously they have to pull a number of levers at once, but I think it's important to draw the distinction: I'm not necessarily predicting success for the Greek austerity efforts, or even success for Greece over the next two or three years. As an investor, what I'm saying is, I think a few of the Greek and European stocks are priced for worse news than I think will materialize over the long run. Because the Greeks and other governments in Europe do have maybe more "outs" (to use some poker speak) than many are giving them credit for.
Kuo: Now the thing is, it's interesting you talk about stocks, because I remember going to Greece and the areas of industry that I saw were in tourism, shipping, and olives. Now what do you think about these three particular sectors? Olives in particular.
Hanson: There is no better farmers' market in Greece than the one down near city hall. The number of olive stalls is incredible. In terms of the Greek economy, obviously shipping is a huge part of it, but is not as driven by activity in Greece and in mainland Europe than some of the other industries; it's more driven by things like demand in China for goods, and whatnot.
So we stayed away from those, because those are being sold off for different reasons right now, but we actually looked at the National Bank of Greece
Kuo: That makes it OK then, does it?
Hanson: Well, basically the stock is being treated as though it's a pure-play Greek stock with a serious problem with Greek debt on its balance sheet, when in fact the problem on its balance sheet isn't so bad, and 50% of the business is outside of Greece. When you put those facts together, like I said, it doesn't mean necessarily that National Bank of Greece is going to be growing gangbusters over the next two to three years, but what we think it means is that the current price is less than what the bank can achieve.
Kuo: So that's almost like a bit of bottom-fishing for you then, is it?
Hanson: Right, it's just an expectations game, yep.
Kuo: OK, so what else did you see in Greece apart from the National Bank of Greece, then?
Hanson: What we looked at, their local gambling monopoly, OPAP (Pink Sheets: GOFPY.PK), which is another interesting story, basically because it has a 10-year government monopoly, and is obscenely profitable, as you'd expect a capitalized gambling monopoly to be. The risk with OPAP is that the government would subject it to a number of windfall taxes in order to help it raise revenue. So we did the math, and if you believe that the national, the Greek government right now, their No. 1 goal is obviously to raise revenue, to pay down debt, and to meet its austerity plan goals.
So if you do the math though, it makes more sense for the government to extend OPAP's monopoly, so to sell it another 10 years on its monopoly, which would get the government money, and then to, after it gives that certainty into the stock price, and ostensibly boosts the valuation on the stock, they then sell its shares to the company and reap another windfall profit, and then they can enact taxes after that. So our thesis is basically that the Greek government is motivated to raise the stock price there in order to maximize their revenue potential. So again, these are not necessarily bets on Greece succeeding, but rather bets on the fact that there's some Greek stocks that are being treated very badly by the market today that actually have some sort of realistic opportunities to see their stock prices increase.
Kuo: OK, and what are the companies that you look at as a play on Greece?
Hanson: Well, the last play we did was very much a euro play, which is that obviously, as the European union comes together to bail out Greece, you end up in a situation where Greece's balance sheet is now tied to the balance sheets of Germany and France, and Spain's balance sheet is tied to those stronger countries as well.
So what you've ended up with is one union, for better or for worse, and when the spreads on their debt were so wide, Greece was trading up in the 8%-9% range, while Germany was still down in the 4%-5% range, ultimately those are going to have to merge together, revert together. So when that happens, we feel that obviously the euro is a reserve currency that is sought by risk-averse investors.
As the risk profile of Europe changes, our thesis was that people would try to flee the euro. We've seen that happen since we came back, so we recommended sort of a pair of trades to buy Philip Morris International
Ostensibly Philip Morris would decline, but decline less than the euro, given its emerging markets exposure, and then ultimately to roll the proceeds of the euro short into Philip Morris, when Philip Morris got cheap enough. So far that's working out very well, though Philip Morris is down about 10% since we came back, while the euro short that we picked is up about 25% to 30%. So if you did both positions, you're in a net gain right now, and now you're biding your time to roll your proceeds into what we think is a very good business in Philip Morris International.
Kuo: So the thing is -- let me get this right, Tim. What you're actually sort of painting is a picture of Greece being a nation of people who smoke, people who gamble, and as a result of that you're going to short the euro -- is that right?
Hanson: At its absolute core level, I guess that's right.
Kuo: I'm just trying to reduce everything down to its lowest common denominator.
Hanson: But it sounds like a pretty fun country, when you put it that way.
Kuo: Well so far, so good. I'm actually sort of thinking of emigrating over there. So how have all these companies done? How has Philip Morris, OPAP, National Bank of Greece and also the ProShares UltraShort Euro
Hanson: Well as I said, Philip Morris is down about 10%, and then to pair with that, the euro short is up about 25% or 30%, so that trade is working out very well so far. OPAP and NBG are both down approximately 20% to 25%, which has been disappointing thus far, but these are longer-term stories.
Obviously there's a lot of negative news out there about Europe and about Greece right now, but like we said, we think there's a discrepancy between the headlines and what's being priced into these stocks, and into the reality of both stocks, namely with OPAP, that the government is incented to try to raised the stock price, and with NBG, that its balance sheet is going to be stable, and that it's going to continue to see decent growth in Turkey, even if its Greece business struggles.
Kuo: So are you saying there is no reason for the fall in the share price of OPAP and also the National Bank of Greece then?
Hanson: Well there's certainly a reason for the fall, which is that investors are freaking out ...
Kuo: They're rubbish ... yes!
Hanson: ... but if you have the opportunity to be patient, and you can stand some volatility, obviously never invest more than you can afford to lose, and we also preach diversification at The Motley Fool. If you can do those things, both stocks look like very interesting values right now. OPAP, for example, is offering a 12% or 13% dividend yield.
Kuo: So do you think there is still more room for the ProShares UltraShort Euro to make gains? Because I mean this is actually a short where you get twice the amount of the fall in the euro, isn't it?
Hanson: Yes, it does reset daily, so there's a bit of a trading quirk with it, that if people are interested in the topic, they can peruse online, it's a bit technical for this format. But in terms of where the euro is going, I think it's going to remain under pressure for the foreseeable future, and that's not necessarily fundamentals-based, but obviously people are fleeing risk left and right. You've seen that in the sell-off in emerging market stocks, which we're actually quite bullish on for the long term, but people just don't want to be at risk right now, and that's why we here in the States are benefiting from a very relatively strong dollar, and very low mortgage rates, despite the fact that we probably don't deserve that.
Kuo: OK, so are you reasonably happy to hang on to these four shares then?
Hanson: Yes, all four would be considered in the holding pattern right now, as we're awaiting information or awaiting pricing data.
Kuo: And would you recommend adding more to OPAP and the National Bank of Greece, since they've fallen the most?
Hanson: Yes, as I've said before, if people are willing to tolerate what could be very stomach-wrenching volatility, again we think these aren't necessarily, this isn't like a Google or one of those businesses that's going to be churning out 15% to 20% growth, but rather these are sort of, very sort of contrarian value plays that will be volatile, but as I said, if you believe the two theses I described earlier, it should have some upside potential over the long term.
Kuo: Can I have a look at two other countries in Europe as well, and this is Portugal and Spain?
Hanson: Sure.
Kuo: Do you think these two highly indebted countries are going to be in trouble in the same way that Greece is?
Hanson: Well, I think they're already in trouble from a balance sheet perspective. I know Spain unemployment, I don't know the most recent number, but it was upwards of 20% not too long ago, and may have gotten worse. I know Spain's natural rate is higher than most countries, it's a very laid back place, but in a lot of trouble. If you look at the results that have been posted by Spanish companies, or companies who are doing business in Spain like CEMEX or like Inditex, what's coming out of Spain are very very bad numbers.
I'm not sure what their move is, obviously it's a much bigger economy than Greece. But that's not to say that there aren't opportunities, one stock that we've been looking at recently is actually Portugal Telecom
Kuo: Now the thing is, when you went to Greece, you almost drove the nail into the coffin lid there, didn't you? So are you planning a trip over to Portugal and Spain, before I dip my toes into those two markets?
Hanson: We're going to go on the chaos tour I think, Thailand and South Korea would be next on the list. Obviously there's a lot of turmoil in the world today, but actually our next trip is going to be our annual trip to China in July.
Kuo: OK yeah, because the last time you were on this podcast, you were talking about these wonderful companies you found, companies that grew hundreds of percents over there.
Hanson: Oh yeah, I'll say those China picks, unlike OPAP and NBG, which are right down, those are all up big since we last chatted. I'm glad to say, I'll point that out, before I lose all credibility.
Kuo: OK, now in your opinion, do you think Europe has done enough to draw a line under this European debt debacle that we have here?
Hanson: In terms of solving it for the long term?
Kuo: Well that's right, because I mean, every day now we seem to be sort of hearing some kind of bad news coming out from Europe, and it really is shaking the markets over here.
Hanson: Yes, you know I think that their problem is that they didn't get out in front of it in a big way, and they've been sort of chasing after incremental solutions, which is something that, when we had our mortgage debacle here in the United States, which hopefully is wrapping up to some degree now, but the TARP and the stimulus, they got a lot of criticism at the time, but the government here made a huge step and dropped a large sum of money to defend the economy, and it sort of worked.
I mean, the TARP payback is proceeding much better than anticipated, and credit to those guys for a plan that actually seems to have worked reasonably well. Contrasting that with Europe, they denied the problem for a long time, then tried to isolate it as a Greek problem, and it was only very recently that they sort of got together for a pan-European solution, which may be should have been where they started.
Now Germany is doing all sorts of strange things, like banning short selling and whatnot, which I think probably does more harm than good in terms of investor confidence, and helping keep the markets transparent and investors confident. So at the end of the day, I think Europe probably has enough resources to marshal, I don't think the Continent's going to implode on itself, but I currently don't think Europe is an attractive place overall. I wouldn't buy a European index, for example, I don't think it's an attractive place for consumers today, and investors looking at most stocks over there should probably be very cautious.
Kuo: One thing that people say over here, and that is, they don't fully understand where this bailout money is coming from, because it almost seems as though it's one indebted country lending money to another indebted country. So where is this money going to come from? They say they've got a war chest of about a trillion dollars, which they can use for bailing out particular countries, but where is this money coming from? Nobody really knows.
Hanson: Well, obviously the multinational organizations contribute a little bit, taxes will contribute some, the euro still is a reserve currency, so they should have some opportunity -- in Germany, for example, they'll be able to sell bonds, that was the idea behind this bailout plan for Greece was that, instead of Greece trying to borrow money from the markets, Europe as a whole would borrow money from the markets and lend it to Greece, and when you put what you have together as a Continent, the lending rate comes down, because obviously there's a larger tax base, and some of the countries, such as Germany and France, have more of an ability, have done a better job managing their balance sheets than others.
Kuo: Yeah, I mean, what's going on here? It reminds me of an old Chinese proverb that says, you cannot cure hunger by drawing a picture of a cake, and I think this is a bit like that, because they don't seem to be coming up with anything particularly concrete. Like the Americans, they say, here is this money, here is this pile of money, you can see it, whereas over here they just say, we can get this money together when we need to, but at the moment it's just a picture.
Hanson: Well, I wonder if that's also a flaw with the EU. Like I said, when we first went to Greece, we were extremely skeptical of the ability of Europe to come together at all to do anything, mainly because the EU's obviously a fairly weak, or relatively weak, supernational body, it was established to protect the sovereignty of the nations more so than collectivize the nations.
I think for most key EU pieces of legislation, Ireland, a tiny country, gets supported to a popular vote, where larger countries just get to approve it. So there's some flaws in the system, and it will be interesting to see how this crisis causes them to rethink the way the EU is designed, but there's a saying over here apparently, in the White House, that a crisis is a terrible thing to waste, because it gives you political capital to make some changes.
Kuo: That's very cynical, isn't it?
Hanson: It is very cynical, but politics makes people cynical.
Kuo: Just two very quick final questions: The first one is inflation. Are you worried about inflation at all?
Hanson: Here in the United States, or ... ?
Kuo: Everywhere, global inflation, yes -- are you worried about global inflation?
Hanson: Sure, I mean cheap money would generally lead to that, in the United States. Obviously the tricky thing though is what to do about it, because gold is obviously, depending on how you measure it, is at record highs.
Kuo: Over $1,200 an ounce today.
Hanson: Yeah, that looks expensive. The dollar, the euro, the yen, don't really look like attractive places to hold your currency relative to their risks of inflation, and then you've got emerging markets, but even if you expect emerging markets, the political volatility in those countries doesn't make them attractive places to invest for risk-averse investors.
So the strategy we've been detailing for people is to basically be diversified, to hold a basket of emerging market currency exposure, so instead of plowing all your money into Brazilian reals, to hold a basket of reals and rupees and South African rand and Chinese RMB and whatnot. So that's one opportunity, and then to also buy exposure to commodities like fertilizers and food and oil, things that are denominated in dollars, but should increase in price if inflation does kick in.
Kuo: But wasn't it Warren Buffett who said that diversification is only good for somebody who doesn't know what they're doing?
Hanson: Well, Warren Buffett is shockingly diversified, for someone who said that.
Kuo: Yeah, don't do as I do, do as I say?
Hanson: Exactly, see he's changed as an investor over the past 40 to 50 years, and obviously that's another conversation. But the danger to concentration is volatility, so if you can stand the volatility, and knock yourself out, but I think for most people who are less sophisticated investors, who just don't have the time to watch their investment portfolio all day, diversification is an important tool and there are great opportunities today, just spread your money across asset classes, countries and commodities and things like that, thanks to the advent of ETFs and global markets.
Kuo: OK, and I promise this will be my final question, and that is, we're at the end of May at the moment -- what is your outlook for stock markets around the world between now and the end of the year?
Hanson: Volatility. Lots of volatility, so I mean, recently we've been doing a lot of work in China obviously, it's one of our favorite countries to research and work on for a lot of reasons, but that market has just been crushed for lots of reasons, such as the property curbs they're putting in, the purchasing of real estate curbs they've put in place. Also just foreign money pulling out of the country, because it's now risk-averse. But I think long term, five to 10 years, China's a great place to be invested, we're finding a lot of great values of the stocks we're buying today. Do I expect them to be significantly in the green by the end of the year? Probably not. Will I be happy holding them, for the long term? Absolutely.
Kuo: That's wonderful. As you well know, Tim, I end each podcast with a quote. Now, I did find a Greek quote today, but I won't be doing it in Greek, I'll be doing it in English, and the quote comes from Plato. Now Plato says, "The excessive increase of anything causes a reaction in the opposite direction." Does that make any sense to you?
Hanson: That is your classic reverting to the mean theory, and we see it in the markets time and time again, and I see it in my home life, when my wife gets upset, we always get back to normal.
Kuo: And I hope that happens with OPAP, and also the National Bank of Greece, which seems to have gone excessively in the opposite direction.
Hanson: I hope the same, David. Thank you.
Kuo: So anyway, this has been "Money Talk," I have been David Kuo, and my guest has been Tim Hanson, co-advisor of Motley Fool Global Gains. Now, if you have a comment about today's show, you can post it on the Money Talk blog, which you can find at www.fool.co.uk/podcast, and if you have a suggestion for future shows, you can email me at [email protected].
