This Greek Drama Has No Mask

By David B. Armstrong, CFA | Jun 15, 2015 | Weekly Market Commentary

Just like that friend who keeps saying they hate drama by over-dramatically complaining about it on their Facebook feed … the Greek drama continues.  While we all use Muses for different things, I will attempt to draw on all nine Muses of Zeus for inspiration in writing my blog, because what else is there to say about this subject? Jimmy McMillan in the picture kind of says it all, but I’ll try.

Greece

At the heart of the problem, Greece simply has way too much debt relative to its capacity to be able to repay it. If Greece were Colt Defense, LLC or a 2008 Detroit-based unionized American automobile company, this would simply be a case of bankruptcy and reorganization.

Here’s the rub – everyone in the European Union (outside Greece) finds the idea of debt relief … how do I put this without inserting the “F” word … unreasonable.  Of course Greeks find the idea of reform plus austerity without debt relief even more (again without an obscenity that begins with “F” and ends in “ing”) unreasonable.

It seems obvious that the solution is reform in exchange for debt relief, but the issue is now much more of a political one than an economic one.

What’s interesting is that euro-zone officials are formally discussing a Greek default.  This is a first, and I think it probably has a lot to do with strategy, public posturing and maybe even a little bluffing.  This is ratcheting up some short-term volatility and has caused tension to rise between Greece and its creditors.

So what’s our guess?  Probably another short-term deal that puts off the tough decisions to a later date. It’s possible that we actually see real reform that helps put Athens back on the road to success … but don’t hold your breath for that outcome. Those odds are extremely unlikely.

As for an actual default? Well, while rising, the odds of an outright default remains relatively low since both Germany and the European Central Bank actually want Greece to stay in the European Union (there are 19 nations that share the Euro as its common currency).

If Greece defaults, we enter uncharted territory and the consequences in Europe and beyond are unknown.  Since no one can predict the outcome, equity investors will have to ride it out.  See some of my recent advice here, or if you really want to go back in time, see my thoughts and advice in this blog from 2011.

Economic Data

We have written extensively about how economic growth slowed sharply over the cold winter months. Like Stannis Baratheon’s food supplies in Game of Thrones, good economic news was in short supply.  However, recent data are finally signaling a long-awaited pick-up in economic activity.

Initial claims for unemployment compensation, which is a good leading indicator of economic activity, has been holding at pretty low levels over the past few months. First-time claims have been below the historically low level of 300,000 for 14-straight weeks.  Since layoffs are low (otherwise that initial claims number would not be low and would probably be going up), it’s a sign that companies are holding onto workers among stronger activity.

During the first week of June, employment jumped by a solid 280,000 in the month of May. This marks the 14^th month over the past 15 where employment has risen by over 200,000.

Next we have some retail sales data.  Last week’s report revealed that retail sales rose 1.2% in May. If you remove auto sales, which can be volatile on a month-to-month basis, and gas station sales, which help filter out the wide swings in gasoline prices, then so-called core sales were up a very respectable 0.7%.  We wrote about hot car sales in this recent blog. 

Keep in mind, we need to be careful about taking monthly numbers out of context, because we can get volatility on a monthly basis that shrouds any trends. The chart below shows that the three-month annualized rate for core sales, which evens out some of the volatility, is signaling that consumers are re-engaging. The arrow swooping up is a good thing which any self-respecting Gen-X’er from Northern New Jersey would tell you, “No Doi.”

What to Do Now

If you know you will need cash for something over the next 12-18 months, either raise it now or have a plan to access it in a way that will not be swayed by any potential market pullback.  If you have cash to invest, use market pullbacks to get it to work.  If you are fully invested, plan to stay that way.  You should be a long-term investor, and should not be messing around guessing about things that may or may not happen.

Please call with questions.

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