On Monday, fears of Greek default (and an ensuing Grexit) sent stock markets around the world tumbling. Investors lost a cumulative $1.5 trillion.
If that were the GDP of a country, it would be among the top 12 economies in the world — roughly the size of the Australian economy. It’s a lot of money.
And it didn’t have to vanish.
It did so because politicians are playing a game. And it’s a game we have to patiently tolerate until it comes to an end … which it will. But it’s also a game you can use to your advantage, because turmoil in the markets always means opportunity…
A coworker sent me an instant message just after the markets closed on Monday with the Dow down more than 300 points. “I’m a little confused,” she wrote. “I get why the various markets sold off today, but why did the dollar get hammered? I thought with the overwhelming fear of Greece defaulting, everyone would be scrambling out of the euro and into the dollar.”
“Simple,” I told her, “The currency market realizes a Greek default isn’t gonna happen.” The euro reflexively sold off in the early moments of Sunday night/Monday morning when news was emerging that Greece and its creditors had failed yet again to reach a solution to the unfolding debt crisis. But just as quickly, the euro rebounded, even though no new information was forthcoming.
It did so for all the reasons that I’ve mentioned before — namely that Germany cannot allow a Grexit from the euro zone without ultimately destroying the German economic miracle of the last few decades … and the Greeks outside the euro would see their modern lifestyles crumble in the face of sharp inflation and radically reduced access to the imported goods they take for granted today.
Shrinking Threat of Grexit
Investors, economists, the media, et al. don’t seem to look at the bigger picture. They react to every burp and hiccup as though it happens in a vacuum absent any other inputs or impacts. They all freaked out when Greek Prime Minister Alexis Tsipras shocked creditors by announcing he would ask Greek voters to participate in a referendum this weekend to determine whether the country should or should not agree to creditor demands.
To the Chicken Littles, it’s more proof that Greece is headed for a Grexit. Mohammed El-Erian, the former hotshot at bond investment firm Pimco, said Monday that the odds of a Grexit are now 85%. Wow … what hyperbole!
Based on my tour of Greek investment, banking and economic firms, I’d put the odds of a Grexit below 10% — and even that might be high. The ramifications of a Grexit from the euro zone are so Draconian that it would end the European Union, cast smaller countries — such as Greece — back into the economic stone ages, and rip apart the European banking system.
Consider just one point: Greek public, corporate and private debts are denominated in euro … what happens to those debts in a drachma world?
The drachma would plunge, out of necessity, against the euro, and suddenly Greek debtors from the government on down to average citizens would be so overwhelmed by debt payments in euros that they would be forced to default in massive numbers — a move that would rip through European banks and echo through the global economy.
That’s why Chinese Premier Li Keqiang is now telling Greece and the European creditors to stop playing chicken with the global economy.
Opportunity in the Chaos
Tsipras’ call for a referendum was an amateur move and a sign of political weakness — an indication that Tsipras is incapable of making the right decision for Greece because he’s being pulled in opposing directions and doesn’t know what to do.
The far left of his political party, Syriza, wants to abandon the euro and return to the drachma — a move that would be utterly disastrous for Greece and Europe (refer back to challenge of paying euro-denominated loans with cheap drachma).
On the other side are Greek citizens who overwhelmingly want to remain in the euro. In poll after poll, Greek citizens say they’re willing to accept a bad deal over leaving the euro zone.
For Tsipras, those are diametrically opposing views that cannot be welded together.
A real leader would take a stand — and side with the wants of the vast majority of Greek citizens, even if it meant betraying a powerful, though cartoonish, faction inside his political party. Instead, Tsipras is letting the voters decide. He’d doing so in order to build the political cover he needs to buck his party.
Greek voters in a referendum will say “take the deal.” Tsipras, voicing false dismay at having to kowtow to creditors, will oblige. And this Greek drama will finally fade.
In the meantime, we have to be patient. Don’t react to Greek news. If anything, use any sell-offs to grab shares of high-quality European multinationals or an exchange-traded fund with broad exposure to Europe (I have my monthly Sovereign Investor readers exposed to Europe through both options).
European stocks are under pressure because of concerns that Greece will default. When it becomes apparent that default won’t happen, fear will fade and a sense of normalcy will return, and European stocks will resume their outperformance against U.S. stocks (but that’s a different story).
Until next time, stay Sovereign…
Jeff D. Opdyke
Editor, Profit Seeker