Will the debt write-down, the diminished contagion, and the recognition of the policy problems be enough to make the second bailout work as agreed to, with Greece fulfilling the required conditions? Unfortunately, the answer is probably no.

The IMF forecasts for Greek economic growth are too optimistic, and some Greek politicians, including Antonis Samaras, leader of the major conservative party, have already said they will try to change the conditions of the agreement after the upcoming election. The bailout is front-end loaded, with about €90 billion of the €130 billion paid at the start to recapitalize Greek banks, sweeten the debt deal, and finance the budget.

The solution his lawyers came up with is for him to adopt his girlfriend as his daughter. The man and his lawyers say that he didn’t wait too long to take asset protection and estate planning actions, and the purpose of these moves isn’t to avoid paying damages in the coming lawsuits. Instead, the trust was created and funded many years ago. The point of the move is to ensure his girlfriend and her two young children from another marriage are taken care of, along with his children who also are beneficiaries of the trust. They also say the move gives input into the decisions made by the trustee. The man isn’t happy with the actions the trustee is taking with trust assets, and his children are too young to object. Their mother apparently is pushing the trustee to make the changes. Adopting the adult girlfriend as his daughter makes her a beneficiary and provides a strong voice to complain to the trustees about their proposed actions.

It’s unique, and apparently created quite a firestorm in the local media.

His current view is that the problems aren’t over. The 2009-2011 period was an interlude. Because of high government debt levels in Europe, Jpaan and the U.S. and private debt in the U.S., it’s only a matter of time before there is another great crisis. All the liquidity pumped into the economies by central banks makes the situation very volatile and uncertain. He’s recommending that investors focus on the return of their capital first, maintaining high cash and short-term bond positions, and be ready to deploy the cash to capture opportunities that have a high  margin of safety.

Phase 2 is now beginning and I think we are on the cusp of a decade of extreme economic and financial market turbulence. Uncertainty as to the effects of high system wide financial leverage and the outcome of the battle to determine what the proper roll and magnitude of government should be within an economy are key elements in this future turmoil.

…

On December 21, the ECB established its new Long-Term Repo Operation (LTRO) that provided €489 billion of three-year 1% loans to 523 banks. At almost twice the expected demand, it demonstrated the seriousness of the banking crisis. A second LTRO takes place on February 29. Shorter-term borrowing costs have declined but longer term sovereign debt yields for Italy, Spain and France, remain elevated indicating that serious reservations persist about the program’s potential long-term success. “Banks represent about 80 percent of the lending to the euro area,” according to ECB President Mario Dragi.9 The linkage between banks and their sovereign governments will likely increase since many expect these loans to be recycled into additional sovereign debt, hopefully into more periphery debt. Additionally, the ECB relaxed its lending standards so that, in some cases, single-A asset-backed securities may now be pledged as collateral. These initiatives are nothing more than rescues or backdoor bailouts that further reward unsound fiscal and financial behavior.
Will this ploy resolve the euro-zone crisis? I believe for only a short period, unless a fundamental restructuring of the EU occurs. Italian Prime Minister Mario Monti’s December budget plan introduced rules that allow banks to issue bonds, guaranteed by Italy, as collateral for loans from the ECB. Playing this game of recycling money to the banks, so they can buy sovereign debt, allowing sovereign countries to go on their merry way, resembles a shell game. It’s DELUSIONAL! I am skeptical there is the will or the ability to reform the EU because it will require ceding fiscal sovereignty to another. The combination of fiscal austerity and rising interest rates means Europe is either near, or already in, recession. The Euro’s structure will face additional tests until at least one or more members exit. Should the weaker countries exit, a stronger Euro is likely. If there are no exits, it means transfers of wealth from the northern to the southern euro-zone countries, which would result in a weaker Euro and a more unstable EU. On January 13, Standard & Poor’s downgraded France, Italy and seven other European countries while assigning France and 13 other euro-zone nations a negative outlook. Without any exits, the next round of downgrades will likely encompass Germany’s AAA status. EU structural uncertainty and high system-wide leverage should make for a difficult European investment environment.

The second strategy is known generally as the buckets strategy. Some also call it time-based segmentation. In this strategy, you put money you’ll need in the next two to five years in safe investments. Money you’ll need in up to 15 years is put in a little more risky investments. Money you don’t expect to need for 15 years or longer is invested in risky investments such as stocks.

There’s an ongoing debate over which is the better strategy, and we’ve aired the debate in Retirement Watch. Many people believe the two strategies will have essentially the same investments, but the buckets strategy gives some people more comfort and makes them less likely to sell at the bottom of a bad market.

The Principal Financial Group decided to compare the two strategies with hypothetical scenarios. The white paper (which is available to financial advisors but not to the public) is generally evenhanded but concludes that the buckets strategy is more complicated to implement and might not provide portfolio changes as often and as timely as those offered through a traditional portfolio, such as a target date fund. The buckets strategy does tend to make the investor feel more secure. The systematic withdrawal strategy is likely to generate better financial results, says the Principal.

So, why is the thing being stretched out?

One reason might be the credit default swaps (CDS), which is a form of insurance against bond defaults. When someone lends money or purchases a bond, the person can buy a CDS from a bank or other firm that’s willing to guarantee it will pay the debt if the debtor doesn’t. The reason AIG was bailed out is that it wrote an enormous number of CDS and couldn’t pay them after Lehman Brothers failed in 2008.

But, what happens if the CDS aren’t paid? Would that lead to a lock up of global bond and debt markets? Would people stop lending if they believe they couldn’t obtain insurance via CDS?

Here’s a good analysis of why CDS are the real problem and why we don’t know enough about them to make good decisions. It’s why we need to be cautious with our portfolios regardless of how good the economic data looks and how accommodating the central banks are.

Now traders fear the issue will come back again with a vengeance.  The [finance] ministers do not want to see a lot of CDS contracts triggered since they don’t know who owns them or, more importantly, who wrote them.  That could become a domino-like contagion ala 2008.

But, traders fear a worse outcome might occur if the CDS contracts do not kick in. What good is insurance that doesn’t pay off.  That could lead to the assumption that all CDS insurance was useless.  That would stratify debt around the globe.  Great credits could get all the money they wanted, but less than great credit would be shut out because it could not be insured.  That could make the future one in which “the haves” will have whatever they want and all others nothing.  Welcome back to the Middle Ages.

Of course, there are differences. The index fund is far more volatile in value than the money market fund. Also, managing the index fund probably takes considerably less work than managing a money market fund in today’s climate. Fees matter, but they aren’t the only thing that matters. When you have strategic or practical reasons for holding cash in a money market fund, the fees are the cost of meeting your goals. In the March issue of Retirement Watch I discuss the options for people who seek higher returns on their safe cash without significantly increasing their risk.

A Fidelity spokesman responded to the criticism by highlighting the research costs associated with money market funds, especially amid European debt worries. “Fidelity has long made a significant investment in its money market research capabilities,” says spokesman Adam Banker. “Fidelity’s research team makes its own independent minimal credit risk determinations on every issuer or security in the money market funds.”

Well, the same thing seems to be going on in the latest rally, and it’s due to one stock not the largest 10 or 20. Apple is dominating and overshadowing all the other stocks. Apple is doing so well that its earnings, profits margins, and other factors as well as its stock price growth are distorting the averages and making the entire market look better than it is.

* The significant change in global policy the last few months that should change your outlook and strategy, and how I’ve adjusted my recommended portfolios.

* Where you should look now to earn higher yields on safe cash, and what you should avoid.

* How safe is your brokerage account, and what can you do to make it safer?

* The major estate planning mistakes and how to avoid then; plus, how a Roth IRA can be a valuable estate planning tool.

You can read these and other items right now. If you aren’t a member, click here.