Another Brick In The Wall – Part ??

By David B. Armstrong, CFA | Jul 07, 2015 | Weekly Market Commentary

“So ya … thought ya … might like to … go to the show.”  From Frankie to Pink Floyd … I’m on a roll.  All my Gen-X’er, middle-part, back pocket comb touting, feathered back hair style loving peeps out there get this lyric right away.  If Greece was a protagonist in a story about current events, we’d be referring to her as Pink Floyd and this would just be another brick in the wall.   Greece, ”Oooohhhh ahhhh … is it just a waste of time?”

By now you know the vote took place in Greece yesterday and voted “No.”  Here’s what I said in our blog on June 29^th:

“Voters snub the bailout package – This would be a “NO” victory, which would land us right where we are now … Greece would try to renew negotiations with the creditors for better terms, and would probably be rejected. In this situation, Greece would likely enter grave financial and economic agony and create prolonged uncertainty. We don’t believe this is the high probability outcome. For investors who do believe this outcome will come true, trimming back any heavy exposure to euro-area investments is something to consider.”  (I added the bold this week to highlight that part.)

Anyway, do you want to know who I’ve picked to win this year’s World Series?  No?  Really?

So, it looks like I whiffed on that prediction, BUT, here’s what else I wrote:

“Of course the situation in Greece is fluid and can change quickly, but regardless of which direction the vote goes, we believe that the impact of this latest crisis will be relatively short-term in nature. In the longer term, we just don’t think there will be a huge negative impact due to the following:

1. Economic improvements we are starting to see in Europe
2. Better central bank safeguards
3. The ECB signaled it would do whatever it takes to keep the euro together
4. The previously mentioned lack of private market (bank) exposure to Greek debt
5. The relatively small size of the Greek economy

We do not think Greece will lead to the end of the U.S. economic expansion or the bull market regardless of which path it takes.”

So now all eyes turn to July 20^th, when Greece must pay the European Central Bank 3.5 billion euros … miss that payment and Greece defaults.  Moreover, this ‘no’ vote likely keeps banks closed unless the government starts printing its old currency, which is the drachma.  At least it’s fun to say…”The DRACHMA.”

What Does This Mean for U.S. Investors?

It seems to me that the markets are remaining somewhat composed, meaning that even if Greece defaults, most of the people who are really read in on this thing seem to think that there won’t be contagion across credit markets in Europe, nor are people speculating that it will spread to the U.S.  Then again, after agreeing with most people last week on predicting the outcome of the vote, I’m echoing David Gilmore when he sang the sentiment of young Pink, “I am just a new boy, a stranger in this town.”

So here are some thoughts to back up why I don’t think this whole mess will spread:

1. The Euro – If the markets were expecting a serious fallout, we would likely be seeing a sharp drop in the euro. We’ve seen a slight drop since this mess came on to the front pages again, but nothing alarming.

2. Euro Schm-euro – Don’t care about the euro?   Take a look at gold, which fell only slightly last week. My opinion is that if there was a real impending crisis, people would be buying and burying gold in their back yard … but there does not seem to be any sort of “flight to safety” into the traditional hedge against uncertainty.  Remember 2011 and 2012? I wrote about Gold Bugs in a U.S. News and World Report column way back then.  You should go back and read that.  Here’s a second chance (MASH ON THIS THIS HERE LINK NOW).  As Standard & Poor’s assigns a 50% chance Greece will exit the Eurozone, no one is buying gold and dusting off their home gold smelters?

3. Gold Sch-mold – Fine, want another reason? Hardly any of this debt is owed to the private sector … most is owed to Eurozone government, the IMF, and the European Central Bank.

So, where could I (and a few others) be wrong?  It is unknown whether some big institution like a hedge fund, (and then by proxy a big bank), is overexposed to Greece. I remember finishing up my 1998 summer internship with a small $2b buy side equity shop in Greenwich, CT as the collapse of the hedge fund Long Term Capital Management was taking place.  That nearly created a huge financial crisis which was only narrowly averted with a hastily arranged rescue package.

That small shop is no longer around.  It’s a shame, because it was what made realize that I wanted to own my own shop one day.  Quality dudes. They taught me a lot.

So the unknown, that is the one caveat. It’s the one caveat to everything, not just this.  No one truly knows how this will eventually play out and more volatility is possible, but those three indicators above are what lead me to believe that a huge crisis is not at hand.

So the short term is now.  You may have become comfortably numb, but beyond the short term, we remain confident that the contagion from Greece will be contained and the euro area’s economic recovery and global economic expansion will remain on track.

“Oooooh Ma, Ooooo Pa – must the show go on?”

Yes young Pink, the show must go on.

If you are looking for some advice on what to do now, I’ll point you to June 29^th’s missive which can be found here.  That blog in a sentence can be summed up in three words, “don’t do anything.”

Warmest regards, and please let us know if you have any questions or any other lyrical interpretations of one of the most interesting albums of my time (in my opinion).

Next week, get ready for references from Justin Bieber’s most important work ever: My World 2.0.

 

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