Greenville Business Magazine 2010 April issue : Page 12
››columns What the Greek Tragedy Means for the U.S. BY ALLEN GILLESPIE | PHOTOGRAPH BY IMAGE TO IMPACT “ O ne of the interesting things about the financial markets in the United States is the willingness of investors to assume that what happens “over there” or “way back when” cannot happen here or repeat itself because we modern Americans are differ- ent. My experience, however, suggests that what happens “over there” just takes its time making its way here and history just waits until we have forgotten it to make its grand reappearance. Greece, the cradle of Western Civilization, recently was forced to pay higher interest rates and seek a bailout from the International Monetary Fund and other Euro- pean countries as investors grew nervous due to the sorry state of its public finances. The Greeks are now rioting in the streets as they protest the government’s “auster- ity plan” which requires the spending cuts necessary to address the fiscal gap. 12 GREENVILLEBUSINESSMAG.COM | APRIL 2010 The U.S. Government is borrowing money from literally anyone and everyone willing to take an IOU. ” Is the United States in a better position, or are we on a delayed timeline? In 1998, there was a global economic downturn that engulfed the emerging market countries and currencies that did not hit our shores until two years later. That was a time when one could buy a barrel of oil for less than $20, gold for less than $300 an ounce, and Yahoo at over $200 a share. Those who remember the dot-com implo- sion will recall that our stocks and currency eventually crashed, too. The government’s plan to get us out of that mess was the 1 percent interest rate, tax cuts, and adjustable rate mortgages. Remember in March 2007 Bernanke’s claim to Congress that “[a]t this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.” I guess that sub-prime crisis was bigger than we estimated, as home prices broadly declined for the first time since the 1930s. The government’s plan to get us out of the housing mess is even lower, sub-1 percent interest rates, new regu- lations, higher taxes, healthcare “savings” and government “stimulus” all financed with massive amounts of borrowed money, $1.9 trillion in 2009 alone. The U.S. Government is borrowing money from U.S. taxpayers, the Chinese, the Japanese, the British…literally anyone and everyone willing to take an IOU. Charles Kindleberger, one of the most famous econo- mists on manias, panics and crashes once wrote, “details proliferate, structure abides.” With the economy on the mend, I think investors should now be turning their attention to how to prepare for the “austerity” that is likely to be forced upon the government. The details of what “austerity” looks like when it reaches our shores will probably be different than the Greek version, and
>>columns - What the Greek Tragedy Means for the U.S.
Allen Gillespie
One of the interesting things about the financial markets in the United States is the willingness of investors to assume that what happens “over there” or “way back when” cannot happen here or repeat itself because we modern Americans are different. My experience, however, suggests that what happens “over there” just takes its time making its way here and history just waits until we have forgotten it to make its grand reappearance.
Greece, the cradle of Western Civilization, recently was forced to pay higher interest rates and seek a bailout from the International Monetary Fund and other European countries as investors grew nervous due to the sorry state of its public finances. The Greeks are now rioting in the streets as they protest the government’s “austerity plan” which requires the spending cuts necessary to address the fiscal gap.
Is the United States in a better position, or are we on a delayed timeline?
In 1998, there was a global economic downturn that engulfed the emerging market countries and currencies that did not hit our shores until two years later. That was a time when one could buy a barrel of oil for less than $20, gold for less than $300 an ounce, and Yahoo at over $200 a share. Those who remember the dot-com implosion will recall that our stocks and currency eventually crashed, too.
The government’s plan to get us out of that mess was the 1 percent interest rate, tax cuts, and adjustable rate mortgages. Remember in March 2007 Bernanke’s claim to Congress that “[a]t this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.” I guess that sub-prime crisis was bigger than we estimated, as home prices broadly declined for the first time since the 1930s.
The government’s plan to get us out of the housing mess is even lower, sub-1 percent interest rates, new regulations, higher taxes, healthcare “savings” and government “stimulus” all financed with massive amounts of borrowed money, $1.9 trillion in 2009 alone. The U.S. Government is borrowing money from U.S. taxpayers, the Chinese, the Japanese, the British…literally anyone and everyone willing to take an IOU.
Charles Kindleberger, one of the most famous economists on manias, panics and crashes once wrote, “details proliferate, structure abides.” With the economy on the mend, I think investors should now be turning their attention to how to prepare for the “austerity” that is likely to be forced upon the government. The details of what “austerity” looks like when it reaches our shores will probably be different than the Greek version, and the time frame is uncertain, but the average maturity on the more than $11 trillion in U.S. debt is three years. This $11 trillion represents the largest rollover risk in the history of financial markets. Just look at what happened during the Greek crisis which involved rolling about $80 billion in debt – global equities lost about 5 percent of their value, and the Greeks are being forced to pay a two percent premium above other European bonds to place their debt.
Austerity may result in spending cuts and/or higher interest rates, as in Greece’s case, or inflation and higher prices for “stuff” because people lose faith in the value of the dollar. I feel highly confident all “austerity plans” include higher taxes, direct or veiled, to help the government’s fiscal position. Does anyone have any doubt that Toyota’s acceleration problems, Congressional hearings, and recall are timed to help the government’s IPO of General Motors in the third quarter of this year? Gotta get those sales up and there is no better way than to borrow a few sales by kicking the foreign company with the largest market share.
Right now in the markets, many people are chasing yield both in bonds and equities because of the government’s sub-1 percent interest rate policy. I believe, however, the structure of the markets going forward, after GM’s IPO, consists of austerity. I think this means investors should look for investments that hold up even in the face of higher taxes, broad equity markets under pressure, higher interest rates, higher commodity prices, and more volatility. There is no one investment which can handle all the scenarios, but a high quality investment plan should contemplate the recent Greek Tragedy.
Allen R. Gillespie is a principal of GNI Capital, responsible for portfolio management and investment research for all of the company’s managed assets.
The information contained herein should not be considered investment advice. Please consult with your investment professional before making any investment decision.
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