1. Exchange Capital Management, Inc.
Ann Arbor, Michigan
(734) 761-6500
INVESTMENT STRATEGY..
Summer 2015
Canute the Great
…He commanded that his chair should be set on the shore, when the tide began to rise.
And then he spoke to the rising sea saying “You are part of my dominion, and the
ground that I am seated upon is mine, nor has anyone disobeyed my orders with
impunity. Therefore, I order you not to rise onto my land, nor to wet the clothes or body
of your Lord”. But the sea carried on rising as usual without any reverence for his
person, and soaked his feet and legs. Then he moving away said: “All the inhabitants of
the world should know that the power of kings is vain and trivial, and that none is
worthy the name of king but He whose command the heaven, earth and sea obey by
eternal laws”.
The Chronicle of Henry Huntingdon, 12th
Century
Though much of his legacy has been lost to history, Canute the Great has been described
as the most effective king in Anglo-Saxon history. Unfortunately, most of us know him
for his futile (though possibly anecdotal) attempt to order the tide at his feet to recede.
As the tide brazenly ignored his orders and crept inexorably closer to his feet, King
Canute learned a valuable lesson that is often lost on today’s technocrats and central
planners: That the best-laid plans and predictions are often worthless in the face of the
broad and unpredictable power (some say “wisdom”) of the crowd.
Psychologists have termed a version of this condition the “illusion of control.” It is a
condition whereby a person feels a sense of control over outcomes to which they have
no demonstrable influence whatsoever. An example of the illusion of control which
comes immediately to mind would be seeing an individual driving a 7,000 lb SUV at 85
mph less than 10 feet from the car ahead of them. Sure, there are brakes on the SUV
and, yes, the cars are not literally touching but let’s be honest: There’s just no way that
SUV will be able to stop in time if it really needs to.
Chris Georgandellis, CFA
PORTFOLIO MANAGER
Hcgeorgandellis@exchangecapital.com
Investment Strategy Committee
Thomas J. Costigan, CFP
Kevin D. McVeigh, CFA
Michael R. Reid, CFA
Kathleen Slocum .

2. Exchange Capital Management | INVESTMENT STRATEGY
Summer 2015 Exchange Capital Management, Inc.
Page 2 Ann Arbor, Michigan
(734) 761-6500
Thus the technocrats of the world find themselves in 2015 standing on the same beach
upon which Canute stood 900 years prior. The Eurozone Central Bank, with Germany
as its de facto head, has ordered the Greeks to simply “pay up” like they should so that
we can all move on. European finance ministers cannot understand why their diktats are
not having the desired outcomes.
Further East, Emperor – err, General Secretary – Xi of China has ordered Chinese
markets to stop falling. Upon seeing that markets have thus far refused this command,
he has proceeded to simultaneously tell some investors that they have to buy, and other
investors that they cannot sell. No doubt he and his handlers believe that these actions
will provide the tide of retail selling the confidence to reverse itself, just as it has been
commanded to.
The financial markets are about to witness the classical collision of an unstoppable force
and an immovable object unfolding on two fronts. The so-called “Grexit” – a Greek exit
from the Euro common currency – was once the Voldemort of the Eurozone: It that
shall not be named. Today, the odds are better than even that it will eventually happen.
The only problem there is that you can’t just pull the Greek thread out of the Euro
sweater: Ultimately, you’re likely to end up with a messy pile of yarn.
In China, decades of red-hot growth are at risk of coming to an end in the form of a
spectacular stock market fireworks show; whose grand finale will feature the
Communist Party of China lighting its hard-earned accumulated reserves on fire in a
desperate attempt to keep a party going that should have ended long ago.
Against this stands, in contrast, a pretty tame U.S. economic and financial picture.
Initial reports of a large drop in 1st
quarter GDP ended up as a better-than-feared 0.2%
decline. The S&P 500 continues to tread water at the same level today as it was in late
November of last year. The market remains neither cheap nor expensive – the current
12 month forward price to earnings ratio stands at 16.4, which is only slightly higher
than the 25-year average of 15.7. The U.S. housing market – while nowhere near
housing bubble 2005 highs – continues to recover with new home sales rising steadily.
The unemployment rate – by all measures (U1 through U6) – continues to fall with the
main measure (U3) at 5.3%, a level not seen in 7 years.
As they say, it could be worse.
0
200
400
600
800
1,000
1,200
1,400
HousesSold(x1,000)
New One Family Houses Sold
Year-over-Year Comparison by Month, 2005-2015
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: U.S. Census Bureay, St. Louis Federal Reserve/FRED, Exchange Capital Management
The financial markets are about
to witness the classical collision
of an unstoppable force and an
immovable object unfolding on
two fronts.

3. Exchange Capital Management | INVESTMENT STRATEGY
Summer 2015 Exchange Capital Management, Inc.
Page 3 Ann Arbor, Michigan
(734) 761-6500
You Can’t Squeeze Blood from a Stone
By now, the inevitability of a Greek exit from the Euro has made itself painfully clear.
For almost six years the world has kicked the can down the road on the question of how
best to deal with fiscal and monetary profligacy within the European Union, with
nothing but festering sores, band-aids and volumes of finger-wagging financial morality
to show for it.
Many of you have heard of the notion that “the cure is worse than the disease.”
Whatever problems Greece faced in 2008 have been made demonstrably worse by the
repeated efforts of the world’s financial community to “help” the embattled nation.
Unemployment in Greece has risen from 9% to 25%; disposable median net income has
fallen over 30%; Greek residential property prices have fallen almost 40%, and Greece
is now experiencing a net migration of its people of close to 7% of its population a year.
Greece is now well entrenched in a vicious cycle: The more austerity that is demanded
of it, the worse its economic situation becomes, which in turn reduces its capacity to
pay, thus producing more demands for austerity.
If something cannot go on forever, it will stop – it’s that simple.
Depending on the social and economic credo you follow in life, you either think that
Greece is the victim of a poorly planned and executed currency union to which it should
never have been admitted, or it is a land of rife with lazy and entitled “takers” who
simply won’t take their economic medicine and live within their means as their
neighbors seemingly have.
Say what you want about the Greeks – hapless victims or entitled takers – the reality is
that you cannot squeeze blood from a stone. Since 2008, Greek GDP has fallen over
30%. To help put that in perspective, it would be the equivalent of the United States
losing the economies of California, New York and Florida altogether – then being asked
to close its 7% budget deficit, produce a 2% budget surplus, and promise to pay back all
of its accumulated debt within 30 years. Every presidential candidate since 1980 has
promised exactly that, and you see where we are today. The traditional avenue to
economic recovery – the one used by nations with a sovereign currency (such as the
U.S. and the U.K.), which is to simply print money and inflate their way out of debt – is
not available to Greece. Imposing austerity on an already devastated economy, even if it
was possible, is increasingly viewed as a morally dubious proposition.
John Maynard Keynes noted in his 1919 book “The Economic Consequences of Peace”
the lunacy of collecting from a devastated post-war Germany what would amount to
almost $440 billion in today’s dollars (note that Greece owes approximately $350
billion):
“I cannot leave this subject as though its just treatment wholly
depended either on our own pledges or economic facts. The policy of
reducing Germany to servitude for a generation, of degrading the lives
of millions of human beings, and of depriving a whole nation of
happiness should be abhorrent and detestable, - abhorrent and
detestable, even if it were possible, even if it enriched ourselves, even if
it did not sow the decay of the whole civilized life of Europe. Some
preach it in the name of Justice. In the great events of man's history, in
the unwinding of the complex fates of nations Justice is not so simple.
And if it were, nations are not authorized, by religion or by natural
morals, to visit on the children of their enemies the misdoings of
parents of rulers.”
If something cannot go on
forever, it will stop – it’s that
simple.

4. Exchange Capital Management | INVESTMENT STRATEGY
Summer 2015 Exchange Capital Management, Inc.
Page 4 Ann Arbor, Michigan
(734) 761-6500
The Morgenthau Plan
I might have titled this section “Never underestimate mankind’s capacity to make poor
decisions.” However, it’s important to give credit where credit was due; in this case it’s
to Henry Morgenthau, Jr., the Secretary of Treasury under President Franklin D.
Roosevelt from 1934 to 1945. The Cornell-educated son of a prominent New York City
real estate mogul and diplomat, Mr. Morgenthau was no idiot.
In late 1944, with the German army reeling from defeat on all fronts, Mr. Morgenthau
drafted a memorandum titled “Suggested Post-Surrender Program for Germany.”
Without going into too much detail, Mr. Morgenthau proposed the following: Giving
away the most valuable pieces of Germany to its neighbors; breaking Germany into two
countries; confiscating all of Germany’s machinery, wrecking all of its mines, and
destroying any industrial equipment that could not be taken away. The memorandum
concluded that “the plan’s program...is looking forward to converting Germany into a
country primarily agricultural and pastoral in its character."
Critics of the plan noted that only 60% of the then-current German population would be
able to live off of the land. Mr. Morgenthau’s plan – one ostensibly based on justice and
with a future peace in mind – envisioned leaving 40% of the German population to
essentially starve to death.
With body bags in the West piling up and a determination to prevent Germany from
doing in the future what it had already done twice in the recent past, Mr. Morgenthau’s
plan found traction among policymakers. It was codified and officially put into practice
when the Allies occupied Germany beginning in April of 1945.
Mr. Morgenthau’s plan can be successfully credited with accomplishing two things:
First, when word of the plan leaked out before the end of the war, it stiffened German
opposition to the point of frenzied despair. General George Marshall declared that the
Morgenthau Plan was “worth 30 divisions [of troops] to the Germans.” Second, it led
directly to the starvation and death of at least 500,000 Germans and the (initial) inability
of Europe to recover from the 2nd
World War due to the absence of the German
industrial base.
By 1948, a stalled European recovery and the emergence of the Iron Curtain exposed the
folly of this poor decision. The Allied nations put in place the now-famous Marshall
Plan, which has been widely credited with bringing about the rapid recovery of post-war
Europe and enabling the European economic engine we know and depend on today.
There’s a term for what the Morgenthau Plan was – it’s known as a “Carthaginian
Peace.” After its defeat in the second of two costly wars with Rome, Carthage was
destroyed; nearly all of its citizens were killed with the rest sold off into slavery. It is
alleged that the Romans plowed over the city and salted the earth upon which it once
stood.
With the destruction of the Greek economy through demands for harsh austerity and
rigid repayment terms, and the potential to transform future generations of Greeks into
debt slaves, it has been suggested that Germany is essentially offering to impose a sort
of economic Carthaginian Peace on the nation of Greece – an irony that should not be
lost on readers of this piece.
Never underestimate mankind’s
capacity to make poor decisions.

5. Exchange Capital Management | INVESTMENT STRATEGY
Summer 2015 Exchange Capital Management, Inc.
Page 5 Ann Arbor, Michigan
(734) 761-6500
Greece is a Problem, but it isn’t the Problem…
So let’s assume for the moment that what we insisted wouldn’t happen over the past five
years – indeed, stressed that it couldn’t happen – in fact happened: A total Greek
default on its debts, a repudiation of its obligations to the Eurozone and an exit from the
currency union altogether. Sounds like bad news, right?
Some might argue that “the European Cancer” – that is, a country which should never
have been part of the Eurozone to begin with – will have been excised. Time to triage
the viable parts of the Eurozone and move on, right?
Not quite.
You see, the citizens of Portugal, Italy and Spain are wondering to themselves that if
Greece can do it, why can’t they?
Without some sort of meaningful debt forgiveness program, Greece will default on its
debt. Regardless of what the ECB says about “no country being allowed to exit the
Euro,” they will find a way to show Greece the door. When that moment happens – and
with a Greek debt repudiation, you can count on it happening – countries like Italy and
Portugal, themselves feeling the flames of unsustainable debt licking at their feet, will
make the logical decision to make their exit as well. It is in this way that one poor
policy decision – not allowing for debt forgiveness – tends to set off the sort of
contagion that most sincere policymakers can’t – or don’t want to – ever foresee.
Of course, we must always acknoweledge the possibility – though not the probability –
that Europeans might be able to snatch victory from the jaws of defeat. Stranger things
have happened in the history of the world. However, always remember that if your
investment thesis depends on the success of the improbable, you’re likely doing
something wrong.
Keep calm; carry on – and enjoy your summer.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
55
75
95
115
135
155
175
%ofGDP
Total Central Government Debt
Greece Italy Portugal
Source: St. Louis Federal Reserve/FRED, Trading Economics, Exchange Capital Management
Italy and Portugal's debt levels today
are higher than where Greece started
in 2008...

6. Exchange Capital Management | INVESTMENT STRATEGY
Summer 2015 Exchange Capital Management, Inc.
Page 6 Ann Arbor, Michigan
(734) 761-6500
Analyst Certification
Exchange Capital Management, Inc. is an SEC registered investment advisor located in Ann Arbor’s historic
Kerrytown district. Founded in 1989, the firm provides fee-based investment management and advisory services to
private clients & families, foundations, and financial institutions. The opinions expressed in this report are based on
information deemed reliable. All opinions are subject to change and should not be regarded as specific advice.
Investors should consult their own legal and tax advisors prior to taking any investment action.
From time to time Exchange Capital Management, Inc. may hold in discretionary client accounts, positions in some
or all of the securities mentioned in this report. Officers, directors and/or employees of Exchange Capital
Management, Inc. may hold a position in any of the securities mentioned in this report.