The Greek election had the right outcome: they decided to work within the system. The problem is that there just isn’t much of a system, and the system doesn’t have any idea what to do next. Economic fires are smoldering in more or less contained ways throughout southern Europe. There is ample fuel for a heck of a blaze, and European Central Banker finger nails are being bitten to their quicks with worry over losing control.
In the US, talking heads are running their media mouths with anticipation of additional monetary intervention as the Federal Reserve Open Market Committee meets this week. Over the weekend a well-regarded Goldman Sachs economist wrote to expect additional stimulus. Others think that an extension of “Operation Twist” is more likely. Either way, expectations of some action are rising by the day.
The yield on the 10 Year US Treasury note is below 1.6%, and 30 year mortgage rates are below 4%. Even if we agree that the central bank could drive rates another point lower, how much more economic activity should we expect? Is there really a large group of potential homebuyers ready to step forward if and when mortgage rates fall another point? In short, can they do enough to move the needle?
Europe presents a larger puzzle. Certainly a means to centralize fiscal authority would help, but if a country cedes its fiscal and monetary policy-making, how much independence and authority will they retain? If some form of European FDIC can be formed to sustain the European banking system, and a coalition can be formed with resources to issue low-cost debt to fund the kicking of the can down the road, can southern Europe ever establish the workplace and workforce disciplines necessary to achieve the productivity levels of their German brethren?
The US, Europe, and China will eventually face inflationary pressures as a result of all the monetary largesse. Growth alone will not be able to escape the burdens of debt that has reached ponderous levels. So inflation will be a part of the solution.
Our best case view is a long, rolling, bumping recovery. Investors will need to access growth where it occurs around the globe while protecting their investments from the threat of runaway inflation. While commodities offer a hedge, multi-national blue-chip equities offer a hedge as well as the prospect of future earnings growth and dividend income. Greece has simply turned another page in its own economic tragedy. In the words of Yogi Berra, they came to a fork in the road and they took it. Unfortunately, the road ahead for not only Greece, but Italy and Spain as well, remains steep and fraught with danger.