Uncertainty in the Markets and Greece’s Difficult Situation

On Friday we wrote … “The underlying fundamental* (*primarily corporate earnings, but also government measures of GDP, and acquisitions of companies at strong premiums to market prices) condition of the markets is very good.  Unfortunately the uncertainty that surrounds the markets is thick.  Greece and its troubles with carrying its debt (let alone reducing it), other European “rim” countries – such as Ireland with similar troubles, potential slowing in the global economy, impact of recent higher energy prices, ending of the quantitative easing program by the Federal Reserve, and political wrestling involving the U.S. debt ceiling is an extremely volatile mix…”

Underlying market uncertainty CAN change quickly.  In March of 2003, as the invasion of Baghdad was halted in order to re-align the supply chain, uncertainty was high.  But by the following Monday, victory appeared certain and the stock market here in the U.S. responded enthusiastically.  Uncertainty had lifted and the stock market rally was on.   Last September, when the FDIC (Federal Deposit Insurance Corporation) reported in their quarterly report that banks were needing to set-aside LESS for loan loss reserves, uncertainty lifted and the market began to gradually lift higher.

Now however, uncertainty has again descended on the markets – like a thick fog.  We simply do not know where this market is headed next.  So we are careful.  We do not believe that there is anyone who knows for sure where this market will head next.  Be careful of those who sound overly confident.  These are simply times of unprecedented stimulus and indebtedness.  A modern, robust currency (euro) could undergo major surgery, if Greece were to decide to exit the European Monetary Union, or if Germany decided that it would no longer fund debt of highly indebted nations.

The European Monetary Union (EMU) was a bold step by leading European nations to cut-through the cumbersome and expensive commercial problems of a highly fragmented market of nation states in close proximity to one another – which each had its own currency.  They united these nations in the EMU, which IS SEPARATE from the European Union.  The EMU became a unified market with similarities and scale comparable to the USA, with guidelines established by the Maastricht treaty.   The currency of the EMU is called the “Euro” and was introduced as the currency in the 12 original members of the EMU on January 2, 2002.  There are 300 million people in EMU countries vs. 307 million in the USA.

Greece was part of the 12 original EMU nations.  Why?  Ever since WWII, Greece has been courted politically and economically as a stabilizing force in the eastern Mediterranean – where the Arab world and former Soviet world geographically meets European democracies.   Even with the fall of the Soviet Union, this hasn’t changed.  Greece is an important stabilizing force.  Greece is also a member of NATO (North Atlantic Treaty Organization).  This reality of stabilization and the cost thereof is being put to the test.

The Maastricht criteria for the allowable national debt of individual nations within the EMU was set at a maximum of 60% of gross domestic product (of the individual nation).  Greece is way beyond this point now at +167% of GDP!

Last week, the Greek prime minister survived a no-confidence vote, which allows his coalition to continue its roll-out of austerity measures (austerity measures = intense budget cutting).  This week the Greek parliament must vote on these budget measures, which are very unpopular to the Greek general public.

In the past, when a nation like Greece – at that time, with its own currency and central bank – ran into troubles with having spent too much money and acquired too much debt, it could undercut the value of its own currency (print more money) and lower interest rates, thereby stimulating exports and investment – which increased local employment and business revenues, which would increase tax revenues, which could be directed at paying down the debt.  Now however, as a member of the EMU, Greece doesn’t have that ability.  All Greece can really do is cut their budget and gradually pay off debt.  As they cut their budget, private and public spending continues to decline, jobs are lost, tax revenues decline, costs of unemployment INCREASE and it becomes HARDER to pay off the debt.  The situation becomes even worse because the markets are requiring HIGHER rates for Greece to borrow to meet its current expenditures as it tries to pay down its debt.  It’s an almost impossible situation – and everyone knows it.  The public response is getting explosive – both in Greece – where the public justifiably wonders what the way out is and in countries like Germany – where the public doesn’t want to throw more good money after bad.

The markets are focused on the outcome in Greece,  the unfolding drama in the USA with the U.S. congress debating debt ceiling limits, and concerns about the slowing economy.   After 2+ years of the stock market rallying,  the stock market has become very narrow and volume is low.  There are opportunities that will unfold, but we have to be patient for them.

 

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