When a country’s citizenry and national well-being are threatened, war can be declared, and all necessary defense measures become appropriate. Heads of State are afforded broader powers during times of war, and many of the normal checks and balances are suspended in the interest of expedient national defense. All other interests come secondary to ensuring the survival of the state.
Greece should declare war. Spain should declare war. So should Ireland and Italy and Portugal. Each should declare war on its own economic crisis and empower its leaders to take the necessary steps to avoid the looming fiscal devastation. At this stage in the crisis, the situation requires nothing less than an all-out commitment to defending the interests of the state. The decisions made by policymakers this year will determine the course of European history for the next decade or more. Faced with this reality, European leaders should act with more urgency. The markets have clearly rejected the tepid, piecemeal response of European officials thus far. Bold action is required.
The pain that Greece is beginning to experience will intensify. Unemployment and an absence of government support will quickly lead to a third-world environment (if they aren’t there already), and the suffering will be borne by its most vulnerable citizens. We think the populist, easy-going, compliant politicians will be far less popular at the final desperate stages of complete economic stall.
While perhaps too late to save, Greece should serve as a warning sign to other teetering European countries. It still appears possible to ring-fence Greece and save the rest of the Union. Merkel and Germany will have to show more willingness to compromise. Resolution to this crisis will not come without pain to all involved. Germany has benefited enormously by being in the European Monetary Union. Unfortunately, it will have to pay some of it back.
While Europe’s decline will create significant headwinds for the US, we are also facing our own set of fiscal problems. It seems we may be allowing our own grim hour to approach at year-end with remarkably arrogant aplomb. The so-called “fiscal cliff” approaches, and politicians are not showing the slightest bit of courage in addressing the problem. As we focus on those silly Europeans and the consuming Presidential election and summertime breezes, we tell ourselves all will be well. But putting our heads in the sand will not lead to definitive resolutions.
The action in the bond markets is telling us that investors are becoming fearful again. The yield on the 10-year Treasury is down to a record-low 1.63%, and the yield on the 10-year German bund is now 1.27%. There have been large inflows into municipal bond funds all year. Fear is trumping greed. Politicians on both sides of the aisle need to heed these warnings. When so many investors are willing to forego a return on investment in favor of a return OF investment, there is a problem. It is imperative for those in positions of leadership to do the responsible things for the long-term good of the country (and not just the responsible things for the next election).
In this environment, a defensive posture continues to make most sense. While ongoing volatility is to be expected, we still believe that high-quality blue chip stocks are relatively attractive investments considering the alternatives. Decisive and coordinated action to address the issues in Europe and to address the fiscal cliff in the US could potentially lead to a rapid upside move in stocks at any time. Missing large moves such as these can be very costly to long-term portfolio returns. Therefore, with the inability to time such moves, we believe that staying invested makes most sense.