Austerity, Riots, Drama and Time

Greece has big problems.  And so do many of the other countries in Europe.   In fact, there is some concern that the Euro is going to collapse as a reserve currency (like the dollar) and that the European Union (EU) will not be able to survive the current problems they are facing.  The problem, of course, is debt – HUGE amounts of debt.  The country of Greece alone currently owes more than $400 Billion.  Greece is trying to secure a 110 Billion Euro loan (just over $140.2 billion) from other EU countries and the International Monetary Fund (IMF) just to be able to meet its obligations and cover HUGE interest payments by the middle of the month of May (2010).

 

This has set off a wave of growing concern over the debt issues of the entire EU, notably Greece, Portugal, Spain and Italy.  This has been a concern for many months now with many in the investment community referring to these four countries as the PIGS.  (Portugal. Italy. Greece. Spain.)  This is more than just a Greek issue; this is an issue for the entire EU.  Great Britain, which is not part of the EU, is starting to be a cause for concern for some economists and investment managers.  In fact, the United States has issues of its own.  (I’ll write more about this in another article.)

 

Greek Austerity

 

Over the last several weeks, you may have heard about the “Greek Austerity Plan” or something that talks about the changes that the Greeks are going to have to make in order to even be considered for a loan from other EU countries.  The Greeks had to put a plan in place to raise 30 Billion Euros ($38.23 Billion), just to be considered for the loan from the other EU countries.  Here are some of the highlights of the austerity measures:

 

·         Increase the retirement age from 53 to 67

·         Government workers to lose annual bonuses worth an extra two months pay

·         10% increase on alcohol, cigarettes and petrol (gas)

·         Three-year wage freeze for all public (government) employees

·         Early retirement will be limited or abolished altogether

·         VAT (Value-added Tax) will increase from 21% to 23%

 

This is not the place to discuss why Greece is in this situation.  However, these austerity measures are why there are so many Greeks upset and rioting.  This is one of the various reasons why the global markets are nervous.  Not necessarily the riots themselves, but more that countries – and the peoples of those countries – will not be able to accept the tough decisions that need to be made. 

 

What happened on Thursday (May 6, 2010)? 

 

Was it human error in the form of a “fat finger?” (That is, typing a “B” for Billion instead of an “M” for Million.)  What it a technical glitch?  While the real answer may not be known for several weeks, it is likely that the dramatic 700 point drop and then almost as dramatic 600 point rise on the Dow Jones Industrial Average is due to computerized programs that were triggered to sell stocks because of specific global events. 

 

These computer programs are designed to buy or sell stocks on a variety of different factors or inputs. The factors in Greece and the EU were some of those factors that could have tripped certain triggers in these computer programs. To be sure, most of the global stock markets were already down 2% to 3% (or more) at the time of the “drama”.  However, the issues in Europe did not cause the DJIA to drop 1,000 points.  Until this week, the global stock markets – led by the U.S. – were performing quite well.  Yet, many of those gains are now gone for 2010.

 

This may be a correction or it may be something different. 

 

Should we be concerned?

 

What the last decade should have taught us is that there are certain economic inevitabilities.   Economies expand and economies contract and then they expand again.  Markets go up and down and up again.  Both of these happen regardless of government intervention. 

 

The reality of the global marketplace is this: regardless of how each country got there, many Western European countries, along with the United States, are very close to drowning in debt.  Very drastic measures need to be taken over the next couple of years – everyone knows this.  The problem is that very few are willing to do what is necessary.  That is why the Greeks are rioting and that is why the global markets are nervous.

 

We continue to maintain a positive, long-term outlook.  Many have compared what we have experienced in the last several years to the 1930s or even the 1970s.  As those who lived through those time periods (or those who have studied those time periods) know, they were some very dark and trying economic times.  Yet a globally diversified portfolio provided positive returns in each of those decades.  If you are a client of Aubry & Eustice, you are in a globally diversified portfolio that uses Evidence-Based Investing as a guide.  Please click here for more information about Evidence-Based Investing.

 

The overwhelming research on investment returns shows that achieving optimal returns in a portfolio is almost entirely a function of time in the market, not attempts to time the market.

 

To your success!

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