The Fate of Greece

Written by Joe Pitzl, CFP® | 20 September 2011

In recent months, the U.S. and global investment markets have been bouncing around unpredictably from one day to the next, and every time there is a major move, you hear analysts mumbling something about the debt crisis in Europe. On the up days, they talk about light at the end of the tunnel. On the down days, they talk about the possible collapse of the Euro as a currency, or the breakup of the Eurozone. The assumption seems to be that if Europe were to devolve back into multiple currencies, there would be dire consequences for the global economy…and your stock portfolio.

On September 29^th, the German parliament will vote on a major bailout. The countries of Austria and the Netherlands are expected to vote on similar proposals soon thereafter. Continued high volatility is likely in the next week or so, as pundits, economists and day traders speculate on which way the political winds are blowing.

But how important are these votes, really?  What if the gloomiest predictions are right?  What if Germany decides to leave the Greeks to their fate, and Greece were forced to secede from the Euro and start printing drachmas all over again?  What if Ireland took back control of its own currency?  Or (what seems to be the scariest scenario) if Italy were to drop out of the Euro to fixate on getting its own fiscal house in order?

A recent analysis by Stratfor Global Intelligence points out something that many people (especially investors) seem to have forgotten: Europe's individual countries were the world's leading economic powers for centuries without the convenience of a common currency, and often while they were engaged in fierce wars with each other.

Prior to the advent of the Euro, the various countries of Europe had been operating a local free-trade zone since the aftermath of World War II. But even as they adopted common guidelines for managing fiscal policy and ultimately voted to create a common currency, they never gave up their local languages, customs or pride in their individual nationalities.

The Stratfor article points out the obvious: that Germany and Greece are still different countries in different places with different value systems and interests. The idea of sacrificing for each other was always a dubious concept, especially the idea of sacrificing in order to hang onto a mutual currency that nearly 50% of both populations never wanted in the first place!

If Greece (or any other nation, for that matter) were to secede from the Euro, it might actually relieve the pressure that the world is experiencing now. In fact, as the the Stratfor analysis suggests, this breakup might be inevitable anyway, and the market may already be pricing the initial shock in.

Stratfor's conclusion is that Europe will remain an enormously prosperous place under either scenario, bailout or not. Does anybody seriously disagree with that? And yet isn't that what the pundits and others are ultimately calling into question? 

At the end of the day, there is a massive amount of uncertainty about what is going to happen and what the aftermath will look like. European banks are clearly at the epicenter of this crisis and they certainly carry the greatest amount of risk (and reward). Since our focus in managing your portfolios is on minimizing the downside, you have very little direct exposure to this mess. That certainly does not mean that the fidgety behavior of investors today will not lead to continued volatility in the short run, but your portfolios are anchored in extremely healthy, globally dominant companies such as Coca-Cola, Nestle, Procter and Gamble, 3M, General Mills and Target, who will continue to manufacture and sell a lot of products worldwide regardless of what a few foreign governments decide to do.

In the event there is a broad ripple effect that puts downward pressure on the stock markets in the short-term, you will unquestionably have elements of your portfolio zigging while the broad markets are zagging. Volatility never really feels good, but it creates opportunities to rebalance and reallocate investments into beaten down areas of the market.

Peak to trough, the current market decline still has not been as severe as the spring of 2010. Folks that panicked then (with the exact same set of global issues in front of us) missed out on some nice gains throughout the second half of the year. This is precisely what Shelby Davis had in mind when he stated that “you make your money in bear markets, you just don’t know it at the time.” It is also precisely what we mean as we write and talk about managing behavior and emotion as the most critical elements of investment success.

Intelligent Decisions.               Simplification.               Peace of Mind.