In a word, "nothing." Very little has changed.
Greek voters went to the polls on Sunday, and the "pro-bailout" New Democracy Party won a narrow victory over the radical Syriza. Since New Democracy failed to gain a majority, it will still have to form a coalition with another party, and any number of surprises could pop up in the coming days and weeks.
Still, this means that, at least for the time being, we don't have to worry about the aftershocks of a Greek exit from the eurozone. That day will almost certainly come--and probably within the next 6 to 12 months--but it won't be today.
Unfortunately, Greece is not the biggest concern coming out of Europe these days. Stock markets in Asia and Europe initially rallied on the Greek election news, but the enthusiasm quickly gave way to fears over Spain. Spanish government bond yields continue to hover near euro-era highs, making it difficult for the country to roll over its debts. Each passing day of rising yields make it all the more likely that Spain will require a larger, more comprehensive bailout than the one they negotiated a week ago.
If all of this sounds scary, that is because it is. Europe's leaders have a short window of time in which to act. As I have said for the past two years, the European sovereign debt crisis is largely a political crisis, and political crises have political solutions. Angela Merkel, Germany's chancellor and the person with the greatest ability to restore confidence to the markets, appears to have finally grasped this when she stated last week that Europe was "in a race with the markets."
Where does all of this end?
Unfortunately, it doesn't, or at least not anytime soon. The kinds of political reforms needed to make the EU workable amount to major constitutional reform, and those don't happen overnight.
Still, I do expect short-term relief in the immediate future. I expect the European Central Bank to intervene in the Spanish and Italian bond markets as it did late last year, and I expect this to calm the markets.
But whether I am right or wrong in this prediction, we still have to invest. And how does one invest in an environment with this degree of uncertainty?
I ask myself the following questions:
1. How did a given investment perform during the 2008 meltdown? If it fell in value, how quickly did it recover?
2. If the investment is a stock, how did the underlying business perform during the meltdown? Did sales take a hit? If so, how quickly did they recover?
3. How sensitive is the investment to the capital markets? If the lending markets seize up like they did in 2008, will the company (or government) be able to roll over any debts it may have?
4. Does the investment pay out an income, whether it be a dividend, interest, or some other form of cash return? And do you consider that income safe under most reasonable scenarios?
5. And finally, is the investment priced cheaply enough to offer the potential for decent returns in the years ahead?
Question No. 5 rules out most bonds at today's prices, with the possible exception of junk bonds. Of course, question No. 3 should make you cautious with respect to junk bonds as well.
The sectors I am most attracted to, given this environment of uncertainty, are "boring" workhorses like utilities and consumer staples companies, oil and gas pipelines, and conservatively-financed real estate investment trusts that own high-quality properties anchored by stable, recession-resistant tenants.
Any of these investments could take a short-term hit if Europe's situation continues to deteriorate, though the risk of long-term or permanent loss would seem minimal.
Hang on, dear reader. The coming weeks should be anything if not interesting.
Greek voters went to the polls on Sunday, and the "pro-bailout" New Democracy Party won a narrow victory over the radical Syriza. Since New Democracy failed to gain a majority, it will still have to form a coalition with another party, and any number of surprises could pop up in the coming days and weeks.
Still, this means that, at least for the time being, we don't have to worry about the aftershocks of a Greek exit from the eurozone. That day will almost certainly come--and probably within the next 6 to 12 months--but it won't be today.
Unfortunately, Greece is not the biggest concern coming out of Europe these days. Stock markets in Asia and Europe initially rallied on the Greek election news, but the enthusiasm quickly gave way to fears over Spain. Spanish government bond yields continue to hover near euro-era highs, making it difficult for the country to roll over its debts. Each passing day of rising yields make it all the more likely that Spain will require a larger, more comprehensive bailout than the one they negotiated a week ago.
If all of this sounds scary, that is because it is. Europe's leaders have a short window of time in which to act. As I have said for the past two years, the European sovereign debt crisis is largely a political crisis, and political crises have political solutions. Angela Merkel, Germany's chancellor and the person with the greatest ability to restore confidence to the markets, appears to have finally grasped this when she stated last week that Europe was "in a race with the markets."
Where does all of this end?
Unfortunately, it doesn't, or at least not anytime soon. The kinds of political reforms needed to make the EU workable amount to major constitutional reform, and those don't happen overnight.
Still, I do expect short-term relief in the immediate future. I expect the European Central Bank to intervene in the Spanish and Italian bond markets as it did late last year, and I expect this to calm the markets.
But whether I am right or wrong in this prediction, we still have to invest. And how does one invest in an environment with this degree of uncertainty?
I ask myself the following questions:
1. How did a given investment perform during the 2008 meltdown? If it fell in value, how quickly did it recover?
2. If the investment is a stock, how did the underlying business perform during the meltdown? Did sales take a hit? If so, how quickly did they recover?
3. How sensitive is the investment to the capital markets? If the lending markets seize up like they did in 2008, will the company (or government) be able to roll over any debts it may have?
4. Does the investment pay out an income, whether it be a dividend, interest, or some other form of cash return? And do you consider that income safe under most reasonable scenarios?
5. And finally, is the investment priced cheaply enough to offer the potential for decent returns in the years ahead?
Question No. 5 rules out most bonds at today's prices, with the possible exception of junk bonds. Of course, question No. 3 should make you cautious with respect to junk bonds as well.
The sectors I am most attracted to, given this environment of uncertainty, are "boring" workhorses like utilities and consumer staples companies, oil and gas pipelines, and conservatively-financed real estate investment trusts that own high-quality properties anchored by stable, recession-resistant tenants.
Any of these investments could take a short-term hit if Europe's situation continues to deteriorate, though the risk of long-term or permanent loss would seem minimal.
Hang on, dear reader. The coming weeks should be anything if not interesting.
