What a wild summer it is turning into!
Everybody is talking about Greece. As of this writing, Greek voters have handily rejected proposed terms for a bailout from the EU, and it is a matter of hours before the banks run out of money. Let the riots begin.
The China stock market is in roaring bear mode. Too much borrowing to purchase already soaring stocks is now unwinding, and the bubble deflating. Coupled with a suspect banking system, excessive borrowing levels that are not truly revealed, lack of transparency, and a slowing economy, all make for a Chinese crash.
And then there is Puerto Rico. $72 Billion in bonds are close to default while the economy of Puerto Rico continues to shrink. Much like passengers abandoning a sinking ship, Puerto Ricans are moving to the mainland in droves, easily done as the island is part of the US. The island population is shrinking.
Putin in the Ukraine, ISIS in the middle-east, unprecedented border migration, and surging crime rates …the music from a Billy Joel hit song “We Didn’t Start the Fire/ It was always burning/Since the Worlds been Turning” is stuck in my head. It’s a musical synopsis of 100 world headlines from 1949 till 1989, reflecting many of that era’s trials and tribulations.
Maybe it’s time for a lyrical update – there’s a whole lot of tribulating going on right now.
Consider Greece – it is difficult to understand why a people would vote to consider national financial suicide (though the patient may already be dead), but it brings to mind the title of an 1841 book, “Extraordinary Popular Delusions and the Madness of Crowds.” Greece has accumulated a national debt that will never be paid back, all while operating losing state enterprises, an out-sized public employee workforce, and maintaining generous pension and retirement programs.
Combined with a corrupt and inefficient tax system, the EU has asked for definitive changes to fiscal policy before any more lending will happen. This is called not throwing good money after bad.
The Greeks have decided in a national referendum that it was time to show the EU (Germany?) they aren’t going to take it anymore, now give us our free lunch! I would refer to this as the aforementioned Popular Delusion.
News update! It appears that the Greeks and the EU have settled on a last minute deal (again) to restructure finance their debt (aka bail them out). As the song says, the world keeps turning. This a lesson in why it is dangerous to be too certain about an outcome, and to avoid delusions about any belief in your ability to see the future.
The past 9 months have delivered mixed results across markets, with broad equity indexes flat to down – the same can be said for fixed income markets. Every time a little progress is made, markets find a way to correct and get back to a sideways trajectory. And as we have pointed out, there is no shortage of issues keeping markets from moving forward. When you combine high valuations and low growth rates, markets will move sideways with increasing volatility until something happens to establish a new equilibrium, higher or lower.
At crazy times like these, it is important to remember that risk management is a key leg of portfolio management. We will not engage in trying to time the market, but we have been playing defense. This means selling mature positions at or near new highs while looking for buying opportunity when markets retreat. Utility stocks and REIT’s, which had a great 2014, experienced a miserable start in the current year, so we have been adding to those positions.
Playing defense in bonds/fixed income, we have reduced or eliminated leveraged fund positions, and shortened average maturities even more – the Risk/Return trade-offs continue to remain unfavorable for longer-term bonds. Our focus is on reducing interest rate-driven volatility while still earning a return on your investment.
Be advised that portfolio exposure to mainland China, Greece, Puerto Rico is very low. Also, as markets are in historically high altitude by many measures, we have added to positions with low correlation to a broad decline while allowing for a market rally all while continuing to revieve your income.
Our responsibility is to look for the ever-present opportunities and manage risk, while diligently helping you stick to your plan.
The good news is that the US continues to muddle along, even though the growth rate remains low. Our emphasis, for now, is on the more stable domestic and global companies. Non-US exposures have shrunk in the last 2 years as part of a decision to avoid some of the rising tensions.
Longer-term, there will come a time when global growth accelerates, and Europe (which had good performance in the first half) and other depressed markets will stabilize. There is an imminent buying opportunity developing, especially in Asia.
The world keeps turning, even as it is burning. I am going to go cool off by playing a few holes of golf. It is only 99 degrees out there!