If you have been paying attention to the news then you most certainly have heard about the Greek debt crisis and have probably noticed the coinciding drop of our own stock market. What's the connection? Is there a connection? The simple answer is yes, there is a very important and critical connection. So, what's going to happen? That is the million dollar question. Is it possible that everything will work out in the European Union and that they will successfully deal with the Greek debt issue? Sure. One thing I have learned is that you should never underestimate the resourcefulness and determination of market forces to stabilize potentially damaging situations. However, what's more interesting, and scary, is what the situation in Greece is showing us.
The situation in Greece is fairly simple. Like nearly all other European Union member countries, Greece has a socialist society. By socialist I simply mean that the government provides cradle to grave benefits for its citizens which are paid for with pretty steep tax rates. When the global market melted down, so too did corporate and personal income tax payments. Greece, much like the US, ramped up spending and debt with the assumption that revenue from taxes would keep increasing. Well, we all know what happened. Greece now lacks the money necessary to make the interest payments on their outstanding debt and is relying on the EU to bail them out (write them a check for $12 billion to make their immediate payments). The problem is that Greece will be in the same situation 60 days from now. The long and short of it is that if Greece defaults it will send shock waves through the banks that own Greek debt could create a crisis much like the collapse of Lehman Brothers. The most concerning aspect of this is that there are several other EU countries that are in similar shape. Actually, the most concerning thing is that the US is in similar shape. So, what does this say about the market and your 401k?
There are 2 ways to deal with the problems that Greece, the entire EU, and the US are currently dealing with. The first method is to monetize the debt. This means simply that you print money to pay off your debts. Monetizing the debt is precisely what we, along with the EU, have been doing. The hope here is that the increase in the money supply that is caused by all of the printing will feed into the economy and will result in greater tax revenues which will enable the government to slowly and gradually balance the budget. Well, as we all know, the economy is not cooperating. The only other way to fix the problem is to drastically cut budgets. Politicians in the US and abroad refuse to do this as providing expensive social services has served as the most effective way to stay in office. Basically, the problem is quickly coming to a head and the governments around the world, including ours, are running out of time. At some point, the printing will have to stop. When this occurs, the economy and the society, as we are seeing happen in Greece, behaves much like an addict coming off heroine. Riots break out and social services come to a grinding halt. As you can imagine, this has devastating effects on the stock market as commerce is gravely hindered. Markets crash.
Now, this may be a worse case scenario but it is all too possible. Basically, now is not the time to be aggressive. Investors should be focused on preserving principal rather than making profits. Commodities have taken a bit of a hit lately but stick with them. If you don't own gold in your portfolio, buy some. Gold stocks are taking a hit right now along with the rest of the market. However, they are suffering from guilt by association. Gold is the one thing that has held up, nearly unscathed, during this recent market downturn. Gold stocks will bounce back as soon as the market realizes that they are being unfairly punished. In fact, the mining sector may be the only sector to garner healthy profits in the months to come. As the fears of default and more money printing build, gold will continue to rise as it is seen as the only way to hide from the wide spread currency devaluation.
Once again, if you have any questions or would like further information on how to protect your investments, never hesitate to email me. If I can't help you I can certainly direct you to someone who can. Best of luck
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