Is it all negative, or are there opportunities to consider because of the crisis?
October 4, 2011
Struggling for the best worst-case scenario. Greece is redoing its financial system, but it is still facing one of five potential (and painful) outcomes.
This all sounds very gloomy, but prospects may emerge from the gloom.
A(nother) golden opportunity? In the event Greece defaults, the search for safe havens could mean a quick flight to gold. If a Greek bailout succeeds, there may still be fiscal instability among EU members, and presumably an easy monetary policy fostering loose credit. If Greece defaults, then you could see big drops in the spot prices of currencies plus some competitive devaluation. All of this could make gold look very, very good.
On the other hand, if true systemic risk hits global markets, investment banks and hedge funds might need capital fast ‚Äď and gold is easily liquidated. So a gold selloff could also possibly occur if the situation becomes dire.
What about Treasuries & the dollar? Treasuries remain popular, and demand for them could jump after a Greek default. What other choices do central banks have if they want to shop around for a stable, readily available, reasonably liquid investment? The euro is hardly a rival to the greenback right now.
How about emerging markets? Here is another option. The BRICs and some of the other emerging-market nations have managed to ride out the recent volatility fairly well ‚Äď there has been some ‚Äúdecoupling‚ÄĚ, if you will.8 No one is saying these markets would be immune from a continental banking crisis or a flight from stocks, but you have to concede that emerging markets have the capability for independent behavior.
Would it still be worthwhile to own blue chips? Keep in mind that the Dow did not fall to 4,000 after the Lehman Bros. and Washington Mutual failures and the initial rejection of TARP by Congress. Stocks did pull out of that plunge, and spectacularly so; bargains abounded, for that matter. So it might certainly be worthwhile to hold onto stocks in the coming months, especially as some European governments have hinted at possible capital injections for banks if the need arises. On September 13, German chancellor Angela Merkel noted that the EU would not let Greece fall into ‚Äúuncontrolled insolvency‚ÄĚ and reports surfaced of China getting ready to purchase Greek debt. Treasury Secretary Timothy Geithner even got involved in the search for solutions in mid-September.3
Europe‚Äôs biggest private lenders may be deemed ‚Äútoo big to fail‚ÄĚ by the EU and ECB, and if unwinding of any financial institutions is needed, the authorities should do everything within their reach to try to make it gradual.
It could be that Wall Street has already priced in a Greek default and will just wince, not stumble, at its confirmation ‚Äď assuming the news arrives with more inevitability than frenzy.
The biggest fear of all: contagion. Italy and Spain may be ‚Äútoo big to fail‚ÄĚ in the eyes of the EU and IMF, but they also face big debt problems. Standard & Poor‚Äôs cut Italy‚Äôs credit rating to ‚ÄėA‚Äô in September; Moody‚Äôs Investors Service is weighing downgrades for Italy and Spain before November.4,5
We will watch the markets with you and keep you informed as events unfold.
Edward J. Kohlhepp, CFP¬ģ, ChFC, CLU, CPC, MSPA
Edward J. Kohlhepp, Jr., CFP¬ģ, MBA
Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
1 - business.financialpost.com/2011/09/21/preparations-for-greek-default-gathering-steam/ [9/21/11]
2 - bbc.co.uk/news/business-14977728 [9/21/11]
3 - thestreet.com/story/11246102/1/stock-futures-sept-13.html [9/13/11]
4 - nytimes.com/2010/01/29/business/global/29bailout.html [1/29/10]
5 - businessweek.com/news/2011-09-20/italy-credit-rating-cut-by-s-p-as-crisis-contagion-spreads.html [9/20/11]
6 - montoyaregistry.com/Financial-Market.aspx?financial-market=advanced-estate-planning&category=30 [9/21/11]
8 - firstpost.com/economy/asian-markets-eye-china-data-for-signs-of-decoupling-66749.html [8/23/11]