A number of people have asked me what my take is on what is happening in Greece and China. They have read articles and heard the media “experts” but don’t fully understand what is going on and how it will affect them and their clients and have asked me for a simplified version. I’m not sure I can do that, but I’m going to try. If you subscribe to my Audio Insights, you should have gotten a recording on this.
To fully understand the situation in Greece you need to first know the background. In 2001, Greece entered the Eurozone. It agreed to abandon its country’s currency (the drachma) and adopt the Euro as its sole currency as a member of the European Union (EU). As a condition of membership, all member countries had to prove the stability of their economy so as not to jeopardize the stability of the newly minted Euro. Greece lied. It inflated the stability of its economy, betting the olive farm that the upcoming 2004 Olympic Games in Athens would give it a much needed boost. It didn’t and Greece was forced to ask for assistance. Germany, the IMF, the ECB, and others bailed Greece out.
Fast forward to 2015, the loans are due and Greece can’t pay them. The Greek people vote on July 5 to reject the bailout terms offered by their creditors. A few weeks later, Greece finally agrees to refinance their debt and to implement austerity measures.
Basically the creditors are answering a borrowing situation by giving more money and trusting that Greece will do better in the future. I don’t think they will. I’ve been telling people since 2010, “This is not going to end well.”
What I believe is going to happen is that Greece is going to get its money, but then they will be right back at the bailout table a year or two from now. I think it is a short-term fix. The bigger issue, in my opinion, is that it sends the wrong message to Italy, Portugal, and Spain. Those countries have strong socialist parties, and if those countries have economic downturns, those socialist parties are going to say, “Bail us out like you did Greece.” They will, essentially, thumb their noses at the IMF, ECB, and EU creditors and tell them to keep sending money. And creditors will because they don’t want them to abandon the Euro.
I think you will see this throughout Europe. Countries will let Germany and other EU member states pay for them. Is it a bad thing? Not necessarily – until it is. Until there is a Lehman Brothers moment, until an economy just falls apart. Then the risk of containment (??) is huge. I’ve heard “experts” say that Greece doesn’t matter. That it is, by comparison, the economy of South Carolina. That’s true. But for Greece (or Italy, Portugal or Spain) to leave the Euro would be a very big deal by threatening the stability of the Euro.
Side Note: Puerto Rico
Closer to home we have Puerto Rico. Puerto Rico is doing the same thing Greece is doing. They are going to bankrupt, they are going to privatize some stuff, they are going default on some loans, but eventually, the US tax payer is going to be on the hook for it. But that’s what happens in societies that spend money that you don’t have. The US is doing it too, but we are a great engine of growth. And that’s the difference. If we can continue to grow, even slowly, we’ll be ok.
What does all this mean to you and your clients’ portfolios?
What I know it will mean is more volatility. You are going to see people get in and out of the market, which is what people do. The swings are going to be more pronounced – but we’ve been seeing it since 2008, haven’t we? Remember how we thought the world was ending when the Dow was down 250 points just recently and then, a day or two later, when the Greek deal was announced, it went up 200. The swings are and will continue to be dramatic and, to some, scary.
In times of volatility, remember the basics: Focus on the client’s goals, time-line, risk tolerance, personal financial circumstance, and cash flow. Assure clients that the daily direction of the markets should not dictate their investment strategy. Remind them that emerging markets like China have always been risky and then review their portfolio with them to ensure that it is properly balanced. Make sure they are secure for short-, mid-, and long-term needs and objectives. That’s what it’s all about anyway, right?
There is a lot of noise out there right now. Keep it in perspective. I do believe the markets will be fine… until they are not. And you can’t really trade on that.
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