On the One Hand
I've been reflecting on all of the news from last week, trying to assign some importance to the news compared to the risks that I've talked about in past articles. We saw encouraging news:
- Labor Department says 227,000 new jobs in February plus December and January were revised up by 61,000.
- Manufacturing and Service ISM numbers are still showing expansion.
- German exports increased 2.3% in January versus December.
- French industrial production increased 0.3% in January versus December.
- Greece successfully swapped it's debt.
- The Greek debt swap was called a default for credit default swaps (CDS) because of the use of collective action clauses (CAC) to bring bond holder participation to needed levels.
New jobs means that the economy is trying to recover. Likewise, expansion in the ISM numbers also portends to an economy trying to mend itself.
The German and French reports are important because those are the largest two economies in Europe. If there is any hope for Europe to get through its problems, its best players need to perform.
The Greek news was encouraging because finally the EU is starting to see that they have to restructure and/or default on debt in order to get through the problem. The other positive is that the committee that rules on defaults for CDS declared a default event had occurred. I'm not sure any bank would have ever sold another CDS contract had that not happened. Furthermore, who would buy sovereign debt in troubled countries if they cannot hedge their risk?
On the Other Hand
There was also conflicting data:
- US productivity was down significantly for all 2011 compared to 2010. 0.4% vs. 4.1% respectively.
- Unit labor cost, which includes wages, was up 2.8%.
- The Federal Reserve is weighing a new method of easing to keep rates low.
- The Greek debt swap was called a default for credit default swaps (CDS) because of the use of collective action clauses (CAC) to bring bond holder participation to needed levels.
Declining productivity can be attributed to many things. As employment is rising, I consider declining productivity to be the result of new workers added to payrolls - they take longer to complete their tasks. New workers would also explain why unit labor costs are also rising. The reason this is important though is it should lead to rising prices. Rising prices would cause the Federal Reserve to reconsider their easy monetary policy.
A little more on the Federal Reserve, I especially like how the announcement of their "new idea" came out the day before the Greek debt swap. As any type of new easing program is widely thought of as positive, it breathed life into markets that were looking for a new hope to cling to now that the second Long Term Refinancing Operation in Europe is completed.
Another thought on easing, if things are recovering, then why do we need more?
The Greek news was also discouraging. From John Mauldin's Thoughts from the Frontline: There Will Be Contagion (emphasis mine)
Greece itself is in free fall. The "benefits" of austerity have not become apparent, as the Greek economy saw growth rates of -0.2% in 2008, -3.3% in 2009, -3.4% in 2010, -6.9% in 2011, and...? The 4th quarter of last year saw a GDP fall of 7.5%. Do you see a trend here? The Greek economy is down by almost one-fifth in less than five years. Unemployment has risen to 20%, and 50% among young people, many of whom are leaving the country. Resentment has grown among ordinary Greeks over the austerity medicine ordered by international creditors, which has compounded the pain. Greek papers are full of stories blaming Germany for their problems.
By any standard, what will soon be a 20% drop can be classified as a depression. There is nothing on the horizon to suggest things will turn around any time soon. The country's public debt-to-GDP ratio currently stands at 160% of nominal gross domestic product, AFTER the debt restructuring. If Greece can find someone to lend them more money, it will only get worse.
The current agreement with the EU will not improve the economy, but require even more wage cuts, government spending cuts, and higher taxes and unemployment. The problem is that if Greece leaves the euro, those problems do not go away, they just take a different form. There is still a great deal of economic pain for Greece as a consequence of past decisions. It is sad, but there is no other choice, unless the rest of Europe or the world, through the IMF, simply gives Greece all the money they want. But then where do you stop?As John mentions, did you see the trend of weakening GDP? The only way for Greece to lower it's debt-to-GDP ratio is to cut spending and grow it's economy. The growth doesn't look promising.
By the way, John's letter is worth your time to read in full. These letters are free and you can sign up at www.johnmauldin.com.
Finally, have you ever played a game where someone tried to change the rules well after that game had started? If you have an ultra-competitive 5 year old in your midst, you are undoubtedly nodding in agreement. The Greek debt swap was also a negative because the CACs were added to law AFTER the bond contracts were already written. So in addition to watching the ECB get paid in full on it's bonds, investors were forced to take their losses even if they tried to hold out.
Which leads me to my next thought - what's preventing this same routine of investing in sovereign debt, having a CAC inserted into law, and then forcing a default as part of additional bail outs from being used on other countries?
So What's This Mean to Me
I honestly do not see anything that requires me to make any changes to either my Retiree Portfolio or Dollar Cost Averaging Portfolio. Every time I see encouraging news, I start to feel like I may miss out on something in my Retiree Portfolio. However I then remember that nothing has really changed the overall debt picture. Yes things look good, but as I said above, if things look so good, then why is the Fed looking to ease more? And why is the ECB lending out more money just to cover payments of previously borrowed money?
Parting Thoughts
It's spring break, and for once in Texas, I think it'll be rather nice outside. So far, 2012 has been warmer than I remember in years past. And we're finally getting some ugh needed rain. Hopefully that will continue. If you haven't been to Texas in mid-March, let me simply say that the weather is anything but predictable. I've been on fishing trips where we've gone from sunny and 80 to cloudy, rainy, windy, and in the 40s. Definitely not predictable.
However since my kids are out of preschool, my schedule will be predictable - predictably busy. Still I'm hoping to discuss the 100 Year Theory Chart again, which was first revealed in Market Risk, Are You Managing It?. I hope you have a great week!
Disclaimer: Please remember that I’m just a guy sharing information on a blog, and this is NOT official investment advice. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Please consult your investment adviser before making any investment decisions. During your conversation with said investment adviser, ask why they believe in their recommendation. If you are not convinced by their explanation, any action that you take or forego is also your responsibility. Just in case you missed that, you are responsible for your investments.
With that said, don’t let your investments keep you up at night. If they do keep you awake, you may be taking more risks than you are comfortable with. Talk to a professional about reallocating to less risky investments so that you can sleep. During your conversation with said professional, ask why they believe that their recommendation is less risky. If you are not convinced by their explanation, don’t invest. Remember:
- It’s your nest egg.
- Opportunities are easier to make up than losses.
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