Friday, July 10, 2015

Why I Am Not (Too) Worried About China and Greece

Should you be afraid of a meltdown in the Chinese Stock market or Greece leaving the Eurozone?  Maybe.

In the fear media today, gloom-and-doom talk about the meltdown in the Chinese stock market and the implications of Greece leaving the Eurozone.   Both events, we are told, will drag down the US stock market and cause it to crash.

Maybe.  Actually, a lot of voices are saying otherwise - that while we will take a hit as a result of these events, they will not necessarily hurt the US economy.  In fact, if the market goes down (as it has) it may be a good time to buy stocks or mutual funds, as many are at a 6-month low.

But why I am not (too) worried about these events?   Well, my direct exposure is limited.  I own a few thousand dollars of a European bond fund.  That will take a hit, to be sure.   And I am sure some of my mutual funds are invested in some "emerging markets" such as China.  But since I don't have all my eggs in one basket, it won't take me out entirely - lets hope.

That being said, I lost enough in the last few days to buy a fairly nice car.  That is the problem with having money in your IRA or 410(k) - you have to just take your lumps and not panic.  I didn't panic in February 2009, I'm not going to panic now.

The Chinese stock market has been poised for a "correction" for more than a year.  In the last 18 months or so, the value of Chinese stocks went up at a staggering rate - like Condos in South Florida in 2007.   The Chinese have a lot of money to invest - their personal savings rate is staggering.  China holds a lot of US Government debt (and no, despite what radical right-wing conspiracy sites say, they cannot "call" the debt and demand payment).   They invest in everything, and in recent months, their own stock market has taken off - with people paying ridiculous prices for stocks, far beyond what their earnings and P/E ratios would support.

So a crash in the Chinese stock market was not only expected, it was long past due.   There will be a lot of losses "on paper" but only the foolish few (Motley Foolish?) who bought at the inflated prices of the last year or so will feel real pain.  Those who invested a long time ago, for the long-haul, will still be solvent.   Don't believe everything you read in the press.  The press will say how many Billions or even Trillions were "lost" but in reality, most of that imaginary market cap never really existed in the first place.

Greece is in trouble, but we aren't.  Greece represents a paltry percentage of the overall EU market (some sources say 2% or so) and the EU will do fine without Greece.  In fact, it may do far better, not being dragged down by its wayward member.   The EU is discovering what the United States struggled to understand 200 years ago - that having a central bank and a central fiscal policy is necessary to maintain a healthy economy.  When one member State can effectively "print money" through excessive spending and borrowing, it can dilute the underlying currency.

And a lot of the posturing of the Greek government is just that - posturing or political theater.  The Greek government has to appease their constituency by appearing to be holding off the evil Angela Merkel, while at the same time, coming to the bargaining table and offering concessions, as was the case today.  So we hear a lot of brave talk and meaningless referendums, followed by concessions.   It seems that maybe the Greeks really don't want to exit the EU after all.

Whatever the outcome of the Greek debacle, reform of the EU will surely occur, with better financial  checks and balances in place.  If Greece leaves, they will suffer, to be sure, trying to re-establish their own currency as well as facing imminent bankruptcy.   On the other hand a good time to visit Greece, provided desperate citizens don't take to robbing tourists to make money.

Could the same thing happen here? That is the real question.  While the national debt of Greece is 175% of its GDP, ours is hovering just over 100%, which is not good.  Worse, some States and territories appear to be headed for financial disaster.  California has a massive pension debt problem.   Puerto Rico has obvious financial difficulties.   But are these unsolvable?

As I noted in Awfulizing and Fear, I have been told since the day I was born that the economy was on the brink of collapse.  In the 1970's, we were told that the world would "run out of oil" by the year 2010.   When I went to GMI, the professors told us the era of powerful muscle cars was gone for good.   Both predictions turned out to be wrong.  In fact, a lot of these predictions turn out to be wrong - on a large scale.

In the 1970's, we were told that New York City was going to go bankrupt.   If you visited the city, you would get mugged.  Crime was rampant, subway cars were covered with graffiti and no one gave a shit.  Porno theaters dominated Times Square.  Today, Times Square is an extension of Disney World.  Things can change - and change for the better.

Fear is not an emotion to be trusted.  And when people start to crank up the fear, you should think carefully about why they are doing this.  Usually, it is an attempt to exploit you in one way or another.

Fear, however, often disguises opportunity.  When fear causes people to exit the stock market or the housing market, it is often a good time to buy.   Fear can be useful, as when people are fearful, they make stupid mistakes.  You can profit from this, if you are astute.

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