Cumberland Advisors’ David Kotok: The Eurozone Crisis and The U.S. Economy

By Scott Rubin

Benzinga Radio recently had the opportunity to speak with David Kotok, the founder and Chief Investment Officer at Cumberland Advisors.

Kotok is a frequent contributor to CNBC, Bloomberg, Fox Business, Yahoo Finance, and other financial media outlets. His articles and financial commentary have also appeared extensively in The New York Times, The Wall Street Journal, and Barron’s, among others.

According to Kotok, at this point, Italy has become the center of the crisis. If the Italian government is unable to roll its debt, it will signal the next leg of contagion has arrived and the situation will deteriorate further. Conversely, if Italy is able to access the markets, it could potentially become a turning point, he said.

“If the market doesn’t provide financing, then there is a real problem,” Kotok said, “because Italy is the third-largest issuer of debt in the world. It is a huge amount of debt, a large country in Europe, and has a very high debt-to-GDP ratio.”

The second major event, Kotok said, will take place in Greece. The country must roll its debt in the second half of December. Greece, however, does not have access to its bond markets and will be forced to rely solely on EU bailouts.

“At the same time, Greek revenue does not match expenditures – even if we cut the expenditures,” Kotok said. “So, the country is not sustainable. We have a real collision course in Greece.”

While the European Central Bank (ECB) reactivated its bond-buying program in August in an effort to help shield Italy, Spain, and other debt-strained euro nations from rising yields, there is considerable political pressure – including from the U.S. – for the ECB to do more.

A contingent of global leaders want the ECB to become the lender of last resort to the struggling EU nations and essentially fully monetize their debt through massive bond purchases financed by money printing. Kotok thinks that in the end, this is likely to happen. He said that while the ECB clearly does not want to take this step, there may be no choice.

“Central bankers don’t like to monetize,” Kotok said, “but central bankers also have another test. That is, when you are faced with catastrophe, do you let the economies melt down into a slump, or do you provide the emergency finance, even though you don’t want to do it?”

According to Kotok, European banks also find themselves in a similar situation as the sovereigns with regard to their ability to roll debt and access the markets. The issue is exacerbated by complex oversight mechanisms within the EU, where banks are surveyed and regulated by their respective national banks.

On the home front, Kotok told Benzinga that he is of the view that the U.S. can continue to grow despite the current turmoil in Europe. He said that he thinks growth is picking up slightly in the fourth quarter and that he is not currently in “the recession/double-dip camp.”

“There is a lot of evidence – especially recent data releases – to support the fact that we will have slow growth, but that’s not shrinking,” Kotok said. “That’s growing.”

As a result, Kotok said that he thinks that stocks are cheap, but he did concede that it all depends on your view of whether the U.S. economy is headed towards another recession. In this, his outlook is pretty straightforward.

“So, the real question is: do you bet on a recession, or do you bet no recession?” Kotok said. “If you bet no recession, then you want to own stocks, because they are cheap. If you bet on a recession – you think we are going to have one – then you don’t want to own any stocks. You want to live in the cave and bring in bottled water and canned food.”

Listen to the full episode on Benzinga Radio here.

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