Dylan B. Minor PhD, MS, CFP, ChFC, CLU, CIMA
“Βοήθα με να σε βοηθώ ν’ ανεβούμε το βουνό.”
I think the phrase “It’s all Greek to me!” captures nicely this past quarter: everything was about Greece and it wasn’t always so easy to understand how this wonderful but small country was tossing around a $45 trillion dollar financial market like a storm-filled sea does some small vessel stuck in its way. To be sure, Greece has serious problems to surmount. For those of you that don’t remember your schooldays of learning Greek, the above quote means roughly that I request you help me so that I can help you, which will help us climb the mountain. Greece has a bit of mountain to climb right now. And as a fellow Euro member, Greece has asked Europe to help it so it can indeed climb the mountain. As of the writing of this commentary, it looked like Europe was poised to help Greece up the mountain by approving a bailout plan. In fact, this would be Greece’s third bailout by its friends since May, 2010.
But what exactly is this mountain? I just spent the past week talking at length about this very issue with my new colleagues at Harvard Business School—it seems that they like thinking about hard problems. Here, the problem is that Greece’s GDP has fallen by almost 1/3 since its first bailout in 2010. Meanwhile, its annual public pension payments represent a whopping 16% of the value of its economic output—compared to the US where we commit roughly 5% of our GDP to public pensions (source: IMF). Greece’s outstanding debt has approached 200% of its GDP. Consequently, there is little hope it can pay back all of its debts. It’s no surprise Europe has been wrangling over whether or not to keep Greece in the European Union—to perhaps effect a “Grexit,” as it has been termed.
Meanwhile, every time the word Greece pops up, financial markets seem to gyrate. Is this rational? In the long run financial markets tend to be quite rational—but not always in the short run. Let us have a look at the economic facts.
It turns out that Greece represents less than 2% of the European economy and roughly .25% of the world economy (source: Wikipedia). The US exports less than $1 out of every $2,000 to Greece (source: Census Bureau). In terms of stock market, Greece is valued at about $18 billion, a rounding error to the 45 trillion global stock market (source: DFA). In fact, Walmart sells more than the entire value of Greece in just two weeks: $20 billion of stuff (source: Walmart). In short, if Greece ceased to exist, the overall world economy in general and the US economy in particular would be little changed. Of course, this would be a great tragedy, as I estimate that Greece represents at least 37.56% of the world’s culture (source: figures made up by the author). So I am very much in favor of its preservation. The best way to do this, however, is still being sorted out. The Economist magazine recently wrote a nice piece that lays out some initial ideas on the way ahead, which can be found here.
Meanwhile, what actually happened this past quarter in the financial markets? Ironically, Greece’s stock market handily outperformed the US stock market with an almost 7% gain. US stocks were close to flat while bonds generally lost 2-3%, reversing the first quarter’s gains. Even worse was real estate, which lost some 10% as measured by US REITs. Gold lost a bit. In contrast, the market for wheat witnessed an almost 20% jump in value for the quarter. Smaller and midcap stocks tended to outperform large stocks and short term bonds outperformed the longer term ones (source: DFA). In short, despite plenty of ups and downs from all of the quarter’s news, markets behaved as if the economy is continuing to improve. And indeed it seems it has been: Fed Chairwoman Janet Yellen most recently suggested that the Fed is still on track to raise rates for the first time in over 9 years by the end of the year. In other words, she also feels the economy is doing just fine, even with Greece.
So although it has seemed every economic and financial story is about Greece, the reality is, Greece should be seen in a much different light. Instead of watching the financial news, we should enjoy some amazing Greek dish. Rather than reading the financial section in the paper, we should marvel at a Greek literary work. Instead of visiting money.cnn.com, we should visit here a thought about a visit to Greece. Greece should be something embraced rather than feared. Remember your wealth management firm is, after all, Ωmega…
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