It's never prudent to cause undue alarm. This is why European
policy makers continue to speak of tactics and strategies to help
Greece avoid any economic meltdown that would lead to
defaults and a departure from the euro. To speak publicly of these
outcomes would jeopardize the ongoing dicey talks aiming to keep
all the stakeholders at the table.
But the writing is on the wall. Simply put, it's impossible to see
how loans on top of more loans are going to create a long-term
solution for Greece. Instead, the odds are rising quickly that
Greece will need to do what Argentina did a decade ago. Back then,
was tied to the U.S. dollar, making itseconomy uncompetitive with
neighboring countries such as Brazil. Argentina eventually broke
with the U.S. dollar and let its currency fall by more than half.
Within a few short years, the Argentinean
was back on its feet, led by a surge in exports. Right about now,
Greek citizens would welcome that move, even if major banks on the
hook for billions in loans would not. "Tough luck," said Argentina
to the banks, and soon, so will Greece.
Nearly two years after a rescue package was first developed for
Greece, its economy continues to shrink. Citizens have been loath
to make major labor and retirement concessions, and they scoff at
the notion that selling off nationalized industries will do any
good. The clear path is to make Greece a bargain by going back to
the (presumably much cheaper) drachma, the country's currency that
had been in circulation for centuries. This will attract tourists
and also boost Greece's standing in export markets.
What does this
for you as an investor? Plenty. Note that the broader European
economy represents a trading bloc as large as the United States,
and the region represents our largest trading partner. In the past
decade, a unified currency and the elimination of national border
crossings have enabled a lower the cost of doing business many
European countries, making them very competitive on global markets.
The troubles in Greece threaten to undermine many of those gains.
Let's assume Greece indeed leaves the European Monetary Union by
re-instating its own currency. Quite quickly, other struggling
countries such as Ireland, Portugal and perhaps Spain would see the
benefits that such a move brings.
Without those members, the euro would quickly strengthen. Remaining
strong members such as Germany and France would be seen by
investors as less risky without the need to support weaker states.
Indeed, the Swiss Franc has been at record highs in recent years
simply because of a strong economy and solid government finances.
And a stronger euro is great for American companies, making them
more competitive against European importers on the home turf and
more competitive against these rivals in foreign markets as well.
A stronger euro also threatens to sharply increase global trade
tensions -- especially with China. The Chinese yuan has lost ground
against the euro in recent years and would lose even more ground
against a rallying euro. A wide range of European manufacturers are
already incensed at the persistent trade deficits with China and
increasingly look set to take retaliatory action. One of those
moves may involve a decision to shift jobs from China to Eastern
Europe, which also has low costs in addition to geographic
Lastly, you can't ignore the potential distress on major European
banks that dread the day when they need to sharply write down their
loans to Greece (and perhaps Portugal and Ireland as well).
Action to Take -->
There are several takeaways from a possible major move by Greece.
First, expect to see long-term gains accrue to U.S. manufacturers
such as automakers
Ford Motor (NYSE:
as well as traditional industrial firms such as
Johnson Controls (NYSE:
, which my colleague Tim Begany
Second, look for an investment surge in places like Hungary, the
Czech Republic and Poland, thanks to their low-cost manufacturing
bases. Country-specific exchange-traded funds (ETFs) may be the way
to play that trend.
Third, you should review any European mutual funds you own. If they
hold lots of stock in European banks, major
write-downs would likely put ample pressure on those bank stocks.
Finally, if there is any Greece-induced panic in global markets
that sends the U.S. market down in sympathy, you may want to look
at this as a buying opportunity. Our economy and its leading banks
are unlikely to feel much pain from Greece's moves.
-- David Sterman
P.S. -- We've just identified six surprising events that could
break your portfolio wide open in 2011. Knowing these pivot points
in advance lets you focus your investing strategy like a beam of
light in the dark... and make a lot of money in a hurry. Get them
free by simply watching this video presentation.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.