2nd Quarter Commentary: Greece is the Word


GREEK TRAGEDY: (noun) \’tra-juh-de\ (in ancient Greek theatre) a play in which the protagonist, usually a man of importance and outstanding personal qualities, falls to disaster through the combination of a personal failing and circumstances with which he cannot deal.

  • Nothing makes me think this is anything like the 2008 – 2009 crisis. At the core of that crisis was a world of bad debt – here, in Europe, in China – and the uncertainty that when the music stopped, no one would know who owed what to whom or whether or not they’d be able to collect on the debt. Today’s tragedy is one very small country – economically speaking only 1.8% of the EuroZone (EZ) – which may leave the EZ and default on its relatively small amount of debt. While this is undoubtedly a tragedy for all of the poor Greeks standing in the ATM line waiting only to find the well has gone dry, it is not likely a tragedy for the rest of the world.
  • The world financial system is in much better shape than it was going into 2008. There is so much less leverage in the system globally, and leverage is to an economic situation what gasoline is to a fire. Furthermore, 85% of Greece’s sovereign debt is held by the European Central Bank (ECB), the IMF, or other EZ countries (not banks). This makes the risk of contagion much less than that caused by the mire of debt owned, pledged, collateralized, and re-collateralized by nearly every private financial institution in the run-up to the 2008 crisis.
  • Greece has literally been in sovereign default for 90 of the last 180 years since the modern state was founded, so this is nothing new. What is new and what makes this situation more complicated is the currency tie-in with EU. In hindsight, I think it’s highly debatable as to whether they ever should have been let into the EZ in the first place. In my estimation, doing so was like putting a team of Greece’s finest first graders onto a soccer pitch against the German national soccer team – and without any handicap; if there was any doubt about that, it was erased when the Greek citizenry elected the socialist Syriza party last year.
  • Although painful (and to be honest, either outcome is going to be painful if you’re Greek), I wonder if Greece leaving the EZ won’t end up be a good thing ultimately…good for the EZ and good for the Greeks, geopolitical considerations notwithstanding. Greece has been an economic albatross around the EU’s neck since day one. Portugal, Spain and Ireland have all made significant and reasonable strides toward putting their economic houses in order, and while Greece has made some strides, there are huge cultural and social barriers in Greece that have limited their economic rehabilitation (to wit: last year’s election and their reluctance to reconsider the early retirement issue immediately). Were Greece to leave the EZ, it would remove an economically diseased state from the EZ and make the EZ a more viable long-term economic entity. Although painful, Greece would have to re-adopt its own currency, the drachma, which will make it nearly impossible for them to import any goods (because who wants to exchange anything for a drachma — or a million of them?); however, with a significantly devalued and free-floating currency, they would eventually be able to manufacture and export competitively, which there was no chance of with them matched up against the likes of Germany as a competitor on a playing field leveled by the Euro currency.
  • All of the above notwithstanding, I fully expect that there will be those who take their canned goods, their gold bars, and their Cable TVs and descend into their bunkers until the apocalypse-du-jour has subsided. That’s just the way it is. Heaven knows we’re due for a correction at some point and maybe this is the spark that will set it off and clear out the dead wood. That said, nothing that is going on would stop me from investing in the 13,000 businesses around the globe that I own – and that you own – in our portfolios, nor would it cause me to sell out of those 13,000 businesses. Just as we went into the 2008 crisis at Dow 14,000 and are now at Dow 18,000 (or thereabouts), I imagine – Greece-be-saved-or-not – after this crisis and the next one both pass, that we’ll be left standing on higher and firmer ground…and need I add that in 21 years of doing this I have yet to see anyone either get out of the market and then having been better off in the end for doing so, or seen anyone stop investing in the markets for a period and been glad in hindsight that they did.

    Although I’m sure you have heard me say before – and at the risk of being redundant, it bears repeating: investors lose far more money in opportunity costs by trying to avoid future market downturns while the markets are still going up, than by holding their ground during actual downturns in anticipation of a recovery. In every case so far, including world wars, the threat of nuclear war, Presidential assassinations and terrorist attacks on US soil, the US market has eventually made up the ground it lost in every bear market we’ve experienced. In both the economy and the broad markets, the downturns have always been temporary and the gains eventually permanent.

    Case-in-point #1 is Leon Black, well-known and well-respected financier from Apollo Capital. Two years ago Black said his firm was selling everything that wasn’t nailed down due to high valuations. Two years later, the MSCI World Index is 18% higher than it was the day he made that pronouncement. Case-in-point #2 is the US Debt Crisis of 2011, when Congress refused to authorize additional government spending, sending the US into a technical default on its sovereign debt and resulting in a downgrade of the country’s credit standing. From May through October of that year, markets fell by 19%, dropping from 12,876 to 10,404. If you take only two things away from that particular incident, I would suggest it be these two: 1) Things always seem to get resolved. It’s not always clear how they will get resolved, but they do; and 2) The Dow was at 12,876 before the 2011 US debt crisis. As I write this on July 1st, the Dow is now 38% higher than the 2011 pre-debt-crisis Dow and 71% higher than it was at that crisis’ peak (and the market’s nadir) and is once again within one good day of 18,000.

    With all of that said, I hope these comments are helpful as you perhaps contemplate the never-ending drumbeat-of-doom that is modern cable news. I am more than happy to talk over so please let me know if you’d like to do so if there is anything we can do for you … and I hope you enjoy a celebratory Fourth of July. As I’m sure you are, I’m glad I’ll be spending mine here and not in Greece.

    A Few Addenda

    1. Despite the goings on in Greece and Europe of the last few weeks, our international holdings at large continued to do better than US large company stocks (the S&P 500) over both the past quarter and the first half of the year. Because of the US’ strong second half in 2014, the one-year numbers are still better for US holdings, but the last six months have continued to be an international story. Here are few selected categories to illustrate the point:
    Asset Class3 Mos6 Mos
    International Small Cap5.24%9.33%
    International Large Value2.48%6.72%
    International Large1.20%5.47%
    US Small Cap1.02%4.18%
    US Large Cap (S&P 500)0.28%1.23%
    Emerging Markets-0.13%1.34%
    US Real Estate-10.23%-5.65%
    1. In what I’m sure will be a surprise to many, the Euro currency just had its third-best quarter ever against the US dollar, gaining 3.9% this past quarter. This boost definitely added to international stock returns as expressed in US dollar terms. Let me restate that just to be clear: despite the worries about Greece’s exit (“Grexit”) from the EU and the effect it would have on the EU, the Euro rose in value against the dollar over the last three months. Who would have guessed?
    2. If you’d like to read more on various aspects of Greece’s never ending struggles, here are three articles I can heartily recommend. All are worthwhile, entertaining, and well worth your time.