FALL FROM A GREEK TRAGEDY

Blaming speculators as a response to financial crisis goes back at least to the Greeks. It’s almost always the wrong response.

-Larry Summers

My phone has been ringing off the hook over the last week or two as nervous clients call to get my view on the financial crisis in Greece and how it relates to their portfolios. Is this crisis a trigger that will continue to send global financial markets spiraling lower? Or, is this an isolated, local European-only issue that shouldn’t derail the global stock market rally for the long-term?

Readers of this column shouldn’t have been surprised as this crisis escalated, as I predicted this would happen two months ago in my column “The End of the Euro?” It’s important to realize that the economic solvency issue is not specific to Greece. As I mentioned in my article, Portugal, Spain, Italy and Ireland all have major economic issues as well. Will these problems cause a global panic or will investors step back and realize that these countries, while nice vacation destinations, don’t add to or detract much from global economic growth? Israeli economist Dr. Yacov Sheinin said, “The huge deficits now being reported by Greece, Portugal, Ireland, and Iceland are unlikely to have a material effect on the global economy. Their aggregate GDP is less than 1% of global GDP, and they cannot cause a general collapse. These are very small countries relative to the global economy, very developed and very wealthy.” Dr. Sheinin is of the belief that this crisis is temporary and will blow over quickly.

While I agree with him on a certain level, I think that this crisis will permanently change Europe and it could take some time before this crisis fades away. After all they are trying to solve a debt crisis by issuing more debt! What if a Spain or Italy suffers a similar fate to their Greek neighbors? Analyst Karl Denniger writes, “It’s shocking all right. Indeed, it’s stunning that anyone would believe that a nation or group of nations with too much debt could solve its problems by taking on more. Not even Dubai was that dumb – they instead forcibly restructured theirs, at least for a while. That makes sense – you don’t pay what you can’t, and you use the threat of outright default to get people to go along with some sort of reasonable means of restructuring existing obligations.”

Look in the Mirror

So Europe is a mess but does that mean that the panic will spread globally? After all Japan is an economic disaster, many analysts feel that there is a huge bubble in China that will soon pop, and the state of California which has a bigger economy than the country of Greece, is insolvent. Not a lot of reasons to be optimistic, but maybe there is a glimmer of hope. While politicians are printing money 24/7, there is a huge groundswell of opposition from the masses against all of this irresponsibility. In local German elections this past weekend, citizens stood up for fiscal responsibility and handed Chancellor Angela Merkel a stunning loss. In the US, the anti-incumbent, throw the bums out movement promises a big electoral shift in November. One gets the feeling that an era of governmental fiscal discipline is right around the corner.

Your Portfolio

So what should an investor do? Investors may want to avoid Europe for now until all the shoes drop. As for the rest of the world, the recent market pullback means that stocks are a lot cheaper than they were just a few weeks ago. And as I mentioned recently, there is a big disconnect between corporate profits and the general state of the economy. For investors looking to invest in companies maximizing profits, now has the potential to be a great time to invest. After all, corporations have succeeded in significantly cutting expenses and are now very lean. This means that not only are they more agile and able to quickly adapt to changes in the marketplace, but when the overall economy starts improving, they are poised to post very strong profit growth.

With all the recent volatility, now is a good time to check in with your investment advisor to make sure that your portfolio is well positioned to both weather and profit from the current global crisis.

 

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il