Is anybody else feeling a little déjà vu? With the US earnings season complete enough for the markets to have factored in their primary conclusion (US dollar strength hurts multi-national earnings), day to day market action has shifted over to the hot headlines which seemed to come from Europe. This week’s market action was dominated by the Ukraine cease fire and whether the newly elected Greek government can re-work their bailout. Despite the fundamental significance of both issues, it seems that the market has become somewhat, though not completely, numb. A negative newsline might be enough to push the market down a percent or two, but in a few days it is likely to have bounced back. All together, it feels more like talk than action.
And why not? Who has the desire to disrupt what delicate equilibrium is in place? Russia is certainly willing and able to assert their will at a sacrifice to their broader population. The recent cease-fire is one of a series that has failed to bring the Putin’s interest in a conflict to an end. Most of Europe’s leaders are unwilling to jeopardize commercial trading and the energy supply that Russia offers in exchange for Ukraine. So Putin has succeeded in laying claim to at least half of Ukraine – particularly an area of relatively productive industrial assets. The wildcard at this point is a proposal being drafted in the US Congress to offer military aid to Ukraine which could start to tip the wheat cart.
Then there is Greece. The woes are too long to list. Debt as a percentage of GDP exploded even before the economy imploded after the 2008 financial crisis and the crucifying austerity which followed. At this point with debt to GDP over 175%, it is difficult to imagine any scenario which does not include significant restructuring. Following their own version of “extend and pretend” tactics, previous efforts to manage the issue resulted in maturity extensions and coupon cuts. At some point that ends, and that is what the talks are about this week. Who would be worse off from a Greek exit from the Eurozone? The Greeks who would be shut out of the capital markets or the Germans who would see their exports hurt by the euro bouncing higher? At this point, the market basically assumes the status quo – a lot more talk and then both parties bend to another compromise allowing each to claim political victory. Meanwhile, we remember the old financial jest to the question of “how do you go broke?” The answer is “slowly, then all at once.”
In the relative stability, we are focusing on where we have the most investment conviction for when the next bout of volatility returns.