Money & Politics with Larry Kudlow

With Greece Nearing Euro Exit, Is Cash King?

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As talk of Greeceleaving the euro zone intensifies, two money experts offered competing investment strategies.

“I don't believe the Greeks leave the euro. If they did, it would bring the most severe penalty down upon the people of Greece first and foremost,” Stifel Nicolaus market strategist Kevin Caron said Thursday on CNBC’s “The Kudlow Report.”

Yet while Caron thought Greece’s exit from the euro was unlikely, he also imagined that the process could go one of two ways.

“There’s a disorderly way, which the financial markets don’t want to see and the banks don’t want to see, and then there's a more gradual, orderly way, which will take a longer period of time and really require a lot of negotiation and compromise, not only from Athens but also Frankfurt,” he said. “That’s a longer process, and that is something that I think markets could tolerate much more easily.”

Caron’s comments resembled sentiments expressed by St. Louis Federal Reserve Bank President James Bullard earlier this week.

“I’m one that thinks that Greece could exit, and it could be handled in an appropriate way without causing too much damage, either in Europe or in the U.S.," Bullard told Reuters.

The remarks came as European Union officials worked on in the event of a Greek departure.

Michael Pento, president of Pento Portfolio Strategies, dismissed the notion that European banks could survive as national economies founder.

“What do banks hold in their assets? They hold sovereign debt,” he said. “So, the countries are insolvent, and the economies are insolvent. Of course the banks are insolvent. That’s massively deflationary, and yes, Greece must leave the euro zone. Absolutely.”

Another concern was deflation.

“This reminds me a lot about the housing crisis we had in 2007-2008,” he said. “Remember it was contained; it wasn’t going to do harm to any nations outside the United States. In fact, it wasn’t going to harm the United States. Now they’re trying to tell me that a sovereign debt crisis isn’t as deflationary as a banking crisis - complete lunacy.”

Caron said the euro crisis was somewhat different, likening it to a “slow-motion train wreck.”

“What we saw back then here in the United States with the housing crisis was something that came on very sudden. Expectations were not there, and there was nothing in place to prepare,” he said. “This has been going on for three years.”

Given their diverging viewpoints, the investment pros also provided an overview of their approaches to investing in the current climate.

“The Pento Portfolio Strategies is about 80 percent cash. We hold some gold,” Pento said. “We sold before May because we realized that deflation is not a very good time to invest in commodities, sold our commodities. We held a little bit of the miners because the miners have priced in the metal going down to about $900 an ounce.”

Caron found some common ground in cash: His portfolio held about 20 percent cash.

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“I think that the best thing an investor can do is focus very much on the long term,” he said. “Don’t be swayed by the day-to-day market noise that we’re going to hear a lot more of. When you look at your portfolio, if you’re looking at equities, very solid balance sheets are the way to go. Fortress-like balance sheets, not a lot of debt. There’s no reason to go there. Consistent profitability is the way to go. We like to have some dividends coming off the portfolios.”

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