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European markets are signaling today that the end of the line really may be here.
Bond yields jumped in peripheral European countries like Spain and Portugal … Germany’s benchmark Dax Index fell to its lowest since February… and a key volatility/fear index for European stocks surged to a six-month high.
So what should you do as an investor? How can you game plan for a “Grexit” – Greece defaulting on its debt payments, and subsequently being pushed out of the euro currency union? It depends on which of the following possible scenarios plays out:
Scenario 1: A quick and painful, but ultimately healthy move – Let’s say Thursday’s meeting in Europe comes and goes with no deal. Greece sticks to its guns, and so do European creditors. Multiple reports suggest that would be followed by capital controls being slapped on Greek banks over the weekend, and an emergency summit of European leaders designed to contain the damage and ease the transition of Greece to a new currency system.
Things would probably get very ugly when global markets open Sunday evening. The selling would likely spread from European to U.S. stocks, as well as higher-risk bonds around the world. The euro would get hit hard, and the dollar would jump.
But after the initial shock, investors start to say “You know what? We’ve been dealing with this Greek garbage for five years. Thank God it’s over!” They decide Greece is a unique case, and that other PIIGS countries are still well on their way to recovery.
That brings bargain-hunters out of the woodwork, and the global markets zoom right back higher again. The euro actually rallies sharply from its lows, as investors conclude the currency union is stronger without Greece weighing it down.
The glaring exception to the rebound scenario is Greece. It suffers from an even-deeper recession, and losses in both stocks and bonds, as international investors and banks shun the country for years.
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The clock is ticking for a Greek deal. |
Scenario 2: Another last-minute can-kick – Greek leaders stare into the abyss at the end of the week and realize they don’t like what they see. They come crawling back to Brussels, begging for forgiveness and agreeing to European demands.
This would almost certainly spark a sharp market rally, and a big surge in the euro currency. But since it would just paper over Greece’s problems (again), that rally probably wouldn’t stick. We settle back into the trading range we’ve been stuck in for months.
Scenario 3: A long, drawn-out disaster scenario – Greece goes over the edge, and rather than breathe a sigh of relief, investors panic. They decide Greece really is a precursor to similar problems in the other PIIGS countries, and they start dumping all European bonds and stocks.
That selling spreads to Asian and American markets, causing the tentative breakdowns in select sectors to spread to the broader averages. Forget Dow 18,000. We see 17,000, 16,000, or even 15,000 in short order, and the late, great bull market that began in 2009 ends with a bang.
“Invest in sectors that have little exposure to Greek contagion.” |
So what’s the most likely? I’m leaning toward scenario 1, with a slightly smaller expectation of scenario 2. Scenario 3 looks like an outlier, but I can’t rule it out either.
My strategy therefore goes something like this:
Continue to invest in stocks and sectors that have very little exposure to Greek contagion. I’m thinking health care and consumer non-durable names here.
Balance that out with stocks and ETFs that are so beaten down already, that they’re irresistibly cheap. Those are the kinds of names that are unlikely to get hammered yet again from unrelated Greek turmoil. Put energy and select emerging markets away from Europe in this pile.
Remember that capital fleeing weak European stocks or bonds has to go somewhere. That money will naturally flow to stronger regions of the world that offer “safe haven” status. This could actually benefit highly rated, fundamentally healthy U.S. stocks. So while I’ve taken some profits recently in my Safe Money newsletter, I haven’t sold everything and ran for the hills.
Lastly, I plan to remain extremely vigilant to the possibility of the third scenario. I will keep a close eye on my indicators here, follow all the developments overseas, and call “audibles” or otherwise revise my game plan as necessary.
So what do you think of the game plan? Does it make sense to you? Any additional moves you’d make other than those I’ve highlighted here? Hit up the website to let me know.
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The spotlight remains firmly focused on Greece, and for good reason. The end game looks like it’s finally here. So what should, or will happen? Several commentators weighed in on that in the past 24 hours.
Reader Bob J. noted the futility of the approach Greece’s creditors keep pushing for the country, saying: “Too much debt and too little growth are the cause of the problem. But you can’t solve the debt problems by more austerity. Until the European countries recognize that, there can be no solution. More austerity always causes more debt.”
Reader Steve R. said Greece might seek financial salvation elsewhere if it can’t obtain it from its current creditors. His take: “I firmly believe that the Greek prime minister is off to Russia and will strike a deal for Putin to advance them some money (which he doesn’t have either). His trip is no coincidence!
“That will scare the EU, Germany, France and the U.S. to death, and they will craft a solution so that they can avert the Russian advance into Western Europe!”
Reader Donald L. said there’s plenty of historical precedent for what Greece is going through, offering this view: “Most Latin American countries have defaulted at one time or another and the sky did not fall. Although that should have been a warning to Greece’s creditors, they seemed oblivious to the possibility and went on lending them money.
“The only answer now is to financially quarantine Greece and hope the contagion does not spread. As far as the money; it’s gone, just like the WWI loans we made to Europe.”
And Reader Nick pointed out that Greece is playing a very dangerous game by holding out for a better deal. His take:
“The Greeks think that Europe is bluffing and are holding out for a better deal. But the Europeans are not bluffing because if they gave in, they would have to offer better deals to all the Club Med countries. This would become a transfer union which the German taxpayers are totally unwilling to underwrite.
“Ultimately, the Greeks still see themselves as Greeks and the Germans still see themselves as Germans. As long as those nationalistic associations remain stronger than feelings of association to Europe, then a political and economic union just will not work.”
Thanks for sharing your thoughts. Here’s the website link again if you want to add more to the discussion as the clock ticks down to zero hour.
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Will the trade legislation that failed on Friday be resurrected in another format? President Obama and Republican allies of convenience are hoping so. They continue to explore various procedures to get around opposition within the Democratic ranks in Congress.
Housing starts plunged 11.1% to a seasonally adjusted annual rate of 1.04 million in May, missing the average forecast of 1.09 million. But when you consider that April starts jumped more than 22%, the number doesn’t look as bad.
Building permit issuance also jumped 11.8% to 1.28 million, easily topping the 1.1-million estimate. That’s an indicator of future activity as builders don’t pull permits unless they plan to start construction later.
Another U.S. airstrike has taken out a key terrorist leader, this time the head of al Qaeda in the Arabian Peninsula (AQAP). Nasser al-Wuhayshi was taken out in Yemen, according to media reports. He had a $10 million bounty on his head, underscoring his significance to U.S. anti-terrorism personnel.
It’s hurricane season … and the U.S. just experienced its first landfall. Tropical Storm Bill came ashore in southeastern Texas today, packing winds of 60 miles per hour. That’s not much in the grand scheme of things. But Bill is dumping lots of rain on a region that suffered serious flooding only a few weeks ago.
As always, I’d love to hear from you on these stories over at the website here. So fire away!
Until next time,
Mike Larson
{ 42 comments }
The Greek Prime Ministers sound like they aren’t going to give in. If the European Union is really serious about not giving in, which they should be to avoid other PIIGS doing the same as Greece, Greece will default since they don’t have the money to pay the payments that are due. If Greece defaults, their pensions and other give-aways will have to end. Several cities and states, and the whole USA, are following the same recipe as Greece has been cooking with.
Mike, you gave 3 scenarios should there be a Greek exit of the Euro. You lean towards scenario #1. For me, based on macro economics, technicals, cyclicals, geo-politics, and demographics, I would have to lean to scenario #3, where in Greece is simply the tip of the ice-berg given the TRILLIONS and TRILLIONS and TRILLIONS of dollars of fiat based DEBT that exists around the world on a private, but, in this case, more sovereign basis. With deflation gaining the upper hand despite all the money printing QE and associated rhetoric and as seen by the commodities complex deflating over the last year or so, the Greek Crisis could just be the spark that sets off a major Bond crisis and ensuing Equity crisis. In fact, if you look at the capital markets from a technical standpoint, it looks like the Dow and S&P are putting in major tops as we speak…
Greek is too small too cause that kind of k-us
hiiiii
Hi Mike, How many islands does Greece want to release to the highest bidder ( existing creditors ) ? Banks take away our real estate when we go into foreclosure and then they auction it off, usually at fair market value. Perhaps we need to implement new international tax laws, so that corruption stops and the non-tax paying Greeks understand what’s required to manage a country. This needs to end now, once and for all. I might even be interested in buying a waterfront lot on one of those romantic islands in Greece !
I believe we will have a Greece deal. If Greece defaults, Russia will advance its position with Greece due to its “geopolitical” position. This will have a negative impact to US and the whole Europe in general. The solution in Greece is political not economic as it appears.
It seems creditors want guarantees. Last I knew, bankers were supposed to make loans prudently, and charge an appropriate interest rate for inflation and RISK. Who would ever lend money to of all places -Greece? The middlemen of Goldman Sacks have much complicity in this Greek debt disaster, but ultimately it’s the Bankers / EU that made the mistake; they need to take it on the chin. Haircut time!
Greece has a substantial amount of gold reserves. Why not liquidate it and use the proceeds to manage their debt?
Thayer talked too Larry waiting on $5000 gold lol so too more years might be to late
I hope your plan works better than the performance of the Safe Money Portfolio. 0.19% year to date performance is nothing to crow about. Not counting Novartis, your holdings are more than 50% negative – 25 stocks and 13 are negative. I would hope you could at least keep up with the S&P 500. I don’t own any of your stock picks. I own 38 stocks and am up 40.98%. I assume you don’t use trailing stops as I would never have had RAIL get to -35.05%. The performance doesn’t match the name of Safe Money.
The Greek game is coming to the final whistle, every one knows the maths do not add up
the national past time for Greece has been Premier division tax avoidance, and conjuring up new ways to get more euro’s from the bank of Europe for roads and bridges to no where, The real problem lies with the European market for lending the money in the first place, what on earth are they thinking, they are no better than the banks that got wiped in 2008, they have just been able to kick the can down the road a bit longer,
The gravy train standing at platform 1 in Athens has due to predictable circumstances has been delayed for the foreseeable future.
This mad scenario of events belong in a Marx brothers film, imagine Groucho looking at Angela Merkel and saying ” I never forget a face but in your case I’ll make an exception ”
If it all goes to the wall as expected a certain Mr Putin is looking for some deep water moorings for his fleet of luxury war ships,(Mooring fees paid in cash no questions asked)
Who knows the Greek national anthem could change to the Dire Straights song in recognition of Putin’s help, Money for Nothing and your Ships are Free
Could Greece just withdraw from the euromarket, and the IMF, and just say those debts were made by a previous government? If they do, and say the loans were made under duress, what could be done? No more loans, but possibly the BRIC countries would provide assistance
Excuse me Mlke, but the DAX was actually UP today, 59 points!
Greece has been a festering pimple on the butt of Europe for over a century. They nearly caused a major war with Turkey back in the 60’s and 70’s with their trying to annex Cyprus, much in the same way Russia’s brainless pustle Putin did in the Crimea. That and their mistreatment of the Turkish Cypriots shows just how little regard Greece has for any one else. Europe would b well rid of them.
Right on the money. The truth in a nutshell!
There is another possibility for Greece that you have not considered. Russia could come to the aid of Greece and help stabilize them while they get concessions to establish military bases and use of ports in the Mediterranean to build navel ports for the Russian navy. This would give the Russians another foothold to expand their control over Eastern Europe without having to go to war. Italy, Spain and Portugal could easily be the next stepping stones for expanding their power. Also they would pick up a lot of trading partners along the way. The Cold War in not over!
People don’t learn to live within their means as long as the lure of wealth dangles in front of them on a borrowing line. Blood sucking materialism does not guarantee happiness. Over-population encouraged by the corporate greed appealing to people’s fantasies merely lead to constant disappointments along with degradation of the environment and the earth we depend on. Debt has threatened our very survival as a species on this earth.
I said, many years ago, when the Euro was “born.” that it wouldn’t work and was doomed to failure. As an example, what if Iowa had their own currency and so did Ohio. Say they formed a U. S. Union. See where I’m going? The Euro is doomed. Speaks well for the dollar but the only reason is that everything else smells like toilet water.
Has anyone noticed that the Dow Transportation index is down about 10% over the last few months? When the transports move into a downtrend, the industrials soon normally follow. Dow Theory. Unless something drastic happens, that seems to be what we can look forward to in the near future. Coal shipments are sharply down, and oil production is off, meaning those shipments should be down. Without fuels moving to supply markets, production will fall. People are making a bit more now, but savings are rising as they reduce spending and perhaps try to put away a bit more of a nest-egg. That may have an effect on inflation, as producers find they need to lower prices a bit to reduce stockpiles. Will the Fed raise interest rates if deflation gains strength? Fuggitaboudit!
The City of Chicago and State of Illinois need to pay close attention to the situation in Greece. They are next in line.
If you wish to stimulate exports, then look at Income Tax. We spend $400 Billion every year to figure our taxes. That cost plus the taxes paid are added to the price of the items we export. That price is then the base upon which VAT tax is added. That costs us another $500 Billion every year in lost orders. The rust belt was created by the IRS. RWM
The key issue for Greece at this stage is whether without paying interest and debt repayment the government has enough internal cash flow to meet their obligations to to its citizens. If the internal cash flow is sufficient the strategy would be to default at the 100% level, remove itself from the Euro and devalue its currency. It would still be able to pay its pensions, health costs etc in local currency and with the devalued currency all its other industries especially tourism would become much more competitive and their growth cycle would start all over again. This worked in Argentina in 2001/02 but is dependant on sufficient government cash flow to meet its internal needs. If it doesn’t then much smaller cuts would bring it into balance. Not good for those Greeks wanting to travel outside Greece and really bad for those who hold Greek governemnt debt but good for Greece.
I believe you forgot scenario 4 – Greece exits the Eurozone and out of necessity becomes a self sufficient nation with sound monetary policy. The rest of the Eurozone has to rely more and more on loose monetary policy to keep the rest of the PIGS from failing and spends the next generation going no where. Meanwhile, after the initial shock, as Greece gets its house in order, money flow back into the country and they experience a new renaissance.
Greece is a country of 11,000,000 people and an annual budget of around $10 billion. They have 26 per cent unemployed. Social Security kicks in at age 45 and is five times higher than the European average. They don’t have the cash to make next months payments and salaries. European banks are holding over $240,000,000,000 in Greek bonds already. Just how far can the can be kicked?
Much to my chagrin I just read in IBD that Eurozone officials have more or less accepted that fact that Greece will exit the Union and feel the PIGS have enacted enough tough reforms so that they will stay in the Union and the contagion will not spread. They will not accept reforms without teeth and will just let Greece go instead. They will be greatly relieved that this crisis will no longer have to be replayed every year. It says there is still plenty of wiggle room and the can will indeed continue to be kicked down a long road. It’s beginning to look like this whole thing is much ado about nothing.
Greece has already tried with Russia, which has no money to give.
I’m thinking scenario 1, followed 9 months to a year later by scenario 3. The same fate awaits the other weaker euro countries. But the reality — that Greece is the first, not the last, and definitely no one-off — will take a while to sink in. Meanwhile, the dollar and Treasuries will eventually benefit, at least for the next year or so, maybe two.
And the whole 5.5-year saga is a scandal. Greece should have been let out of the euro prison in 2010, with transitional aid and allowed to stay in the EU, with direction on reform. It cannot grow while trapped in the euro.
June isn’t over yet and Greece will get more time. Coming Thursday is not verdict day.
I think your approach is spot on. Thank you
Jeff
I think your approach is spot on!
The Greek situation should be a great lesson for those who think Socialism is the answer and capitalism is the problem. If humans are offered incentives to work and produce they will do so every time. If you remove those incentives they will not work or or produce. It is in our DNA. It may seem compassionate to take from the workers and give it to the non workers but it is in realty a gross injustice to both and the path to economic ruin. In the Soviet Union they used to joke that “We pretend to work and they pretend to pay us”. The Greeks will recover when they rediscover free market capitalism.
Sorry Mike, but the Elliott Wave Model suggests that Scenario #3 is the mostly likely end of Greece. This has been something that will ultimately be the straw that broke the camels back, finally. The final leg of Wave C is ready to start crumbling the DOW and all markets involved, even the European Markets. They have been in depression for the last 8 years and will decend, as will America, into the last part. Even Larry Edilson has been beating the war drums, which always comes in a Wave C. If you are not out, you will get crushed. Not doom and glooming, just looking at REALITY!!!!!
C ant happiness Kent u want a wave go too the beach.
Be it remembered: The ECB and IMF bailed out the Frankfurt banks —they ‘socialized’ the ‘private’ losses which the private banks had incurred by failing to exercise sound judgement in making loans to Greece. It is quite amusing that the Northern Europeans and especially the Germans, complain so bitterly about the slothful Greeks and PIIGS when it is their bankers who actually demanded the handouts–to save the bankers. So much for free markets and capitalism! This is Bankers’ Socialism and sucker European taxpayers.
For the Euro: don’t worry! The ECB can simply do more QE and flood the markets with liquidity. Don’t you think????
Its amazing the way the government can loose a vote and then slightly change the details and put it up for a vote again. Governments do this time and again till they get the desired results. It should be one vote period rise or fall on its merit. This whole process is a political game play by a bunch of political hacks.
Mike that is a very good summary !
I am living in the UK. If Greece leaves the euro we are in uncharted waters.
For this reason on the balance of probability I suspect a fudged deal will be done.
I am not sure if you are aware that in order for Greece to exit the euro, the american will have to say yes to this scenario. The USA demanded for Greece to be included in the first place, and at present, I do not see that the USA has indicated it would allow Greece to exit. I would expect this mess to stay its course, until the USA will change its mind.
Forget it guys.. Its all US and mass media scaremongering… Mark my note.. Greece will not leave the Euro nor will it be booted out of Europe, regardless of any pain.. Come back to this point. The Euro is a political animal not a currency as such.. it was purely invented as a method to lock the warring and squabbling factions in to some general agreement.. Hence your got every tin pot country come family in the Zone now…. The Greece issue will be wrapped together in some clever Financial instrumental dreamed up buy the EU then after the Media frenzy dies down over some months will be slowly put out to die a defaulters death. While of course you all will be focused on the next pie in the sky media circus.. Print this out and look at it again on the 31 Dec 15..By then most people would have forgotten how to spell Greece let alone where it is… Steve Asia
Tsipras will meet Putin on Thursday . They could reach an agreement on a planned new terminal for Russian gas with Greece getting an advance payment of 5-6 $bio on this project.This would be a major geostrategic coup for Moscow and gives Tsipras some welcome financial aid in all cases .
BLOODY WEDNESDAY JUNE 17.2015 has passed and gone BLOODLESS. The gentleman that shouted and warned of “bloody wednesday” the at least a moral duty to apologise to us all who took the advice seriously ?
what if Russia and China step in to lend [buy in] Greece some money and shore up their pension system to pay their citizens to keep the county stable to permit some slow recovery over the next 10 years and Russia gets a new gas line to Europe and China gets a port in the Med?
I concur that with your number 1 scenario is the most likely, but Russia and China would love to throw the USA [and Europe] a curve ball–then what?
What if the USA provided the funds to save Greece? This is too rational and we are broke, but that hasn’t stopped us yet.
Have Donald Trump buy Greece for ten cents on the dollar and they can make him President their and he will get them back on track!