It won't make much difference for stocks. Europe is coalescing to save one of its own by throwing more money at the problem. Greece has over -spent for decades, and now reality has set in. It's a natural law: you can't keep spending if you don't have income to cover it. Eventually you can't get any more credit, and the owners of your debt want their interest payments. Greece is learning this the hard way. Several other countries are nervously watching as they try to get their profligate ways under control.
Germany has taken the lead, along with France, in trying to figure out a bailout for Greece. It amounts to more money. Of course, there are strings attached, and austerity is the new catch phrase. But that was the case in the last round of generosity. Greece didn't make the cuts, and now it needs more help. So in order to save the Euro zone ideal, Germany and France and others will create a superfund that will be used to keep Greece, and most likely others, going. But that won't be the final solution.
Ultimately, Greece will have to stand on its own or be cut from the Euro union, as would any country not pulling its own weight. There's also talk of stratifying the Euro into two trading units, one that incorporates the strong countries and one to reflect the weaker members. It all doesn't matter. Because what will make Europe strong (and investors comfortable) are governments that manage their budgets in such a way as to first balance them, then create a surplus. Simply pouring more money on the problem now won't solve the problem permanently. It rarely does.
So why does that matter to U.S. investors? Because the Euro problems are one of 3 major concerns at the moment. The other two: jobs and housing. Let's say the new Euro Savior fund is formed, and money goes to Greece. How long will that keep the crisis at bay? No one knows. But the current euphoria in the stock market suggests it's enough to make many happy. That's short sighted. Even if the government gets funded, it still has to deal with excessive expenditures and a mountain of debt demanding interest payments. That will be eliminated for a little while with new money. But for U.S. investors, it's only when jobs and housing are adequately addressed can they really celebrate, and no doubt will.
In the meantime, don't be fooled by the current upward move in stock prices. They're temporary, even with a new round of funding for Greece. Once investors look past that, they'll re-focus on the real issues that need correcting: jobs and housing. Without more jobs, the U.S. economy can't grow. Consumers can't spend, and they're about 2/3 of the GDP. Housing is one of the major engines for jobs since it takes many ancillary products and services to create homes.
Either create new jobs by cutting taxes and starting to balance the budget so businesses have a sense of some certainty going forward or encourage housing with tax incentives so builders can hire workers. Both ways will create jobs and allow workers to spend which in turn will drive more demand and require more jobs.
In the meantime, keep a very skeptical mindset as well as cash. The market's not going very far up as long as major problems are unresolved. It can't. Ultimately those problems are reflected in lower profits at companies that aren't selling as much. So even if they give Greece more money, it isn't going to help profits in the U.S. It only helps the bond holders of Greek debt and current Greek politicians.
If you're determined to invest, buy stocks with good dividends and wait for the inevitable days when stocks are pushed lower. Great dividends are in the REIT's (Real Estate Investment Trusts) and mortgage securities REIT's. Good yields can also be found in telcoms like AT&T (T) and Frontier Communications (FTR) or mutual funds specializing in income such as DWS High Income (DHG). (Stocks are given as examples, not recommendations.) Get paid to wait and suffer during the next several months. It's going to be a rough patch for a while yet, even if they bail out Greece. (For more investing ideas, see The Online Investor (www.theonlineinvestor.com) or subscribe to our Free Newsletter on the site.)
- Ted Allrich
October 12, 2011