Stocks hit an air-pocket in late June and early July over worries surrounding Greece and China.
The latest round of the ever-present Greek financial drama continued with great spectacle. There were missed deadlines, intense rhetoric, and a referendum where 61% of Greeks opposed more austerity. I suppose that’s not a tremendous revelation.
After several years of cut-backs in a country known for generous state spending, the Greek people are in a beaten state. This weekend, the European leaders are trying to hammer out a package that will keep Greece in the Eurozone and provide another round of financial assistance. It looks unlikely that Greece can make its way out of its financial difficulties.
The national debt is almost twice the level of annual GDP and with 25% unemployment. That is a big hole to get out of. It is not so much Greece itself that is worrying the market but rather the possibility that if Greece leaves the Euro, so may Italy, Spain, and Portugal.
Unlike in the case of Greece, the private sector, especially banks, owns Italian, Spanish and Portuguese bonds. Leaving the Euro would certainly cause a crisis that could trip up the global financial system.
For this reason, it is probable that the European leaders will work to keep Greece in the Euro. While the Greek tragedy was playing out, a new character walked onto the financial stage to cause more worry for investors: China.
The Chinese market’s Shanghai Exchange, fell 30% since June 12. This steep decline in such a short time sent out fears that the Chinese economy will slow more than anticipated and put more pressure on natural resource stocks and US industrial and consumer exporters.
I have written in past issues of this letter that, of the many concerns in the markets, China is the one that bothers me the most.
The Chinese command economy has supported many inefficiencies that eventually will have to be sorted out. Some amount of pain will have to be borne. The political regime is so concerned about domestic political stability that it intervenes to pour money into the economy instead of allowing the system to wring out excesses.
Even in the recent Shanghai market decline, the government has intervened to try to keep stock prices from falling. The Chinese government has a lot of money to do what it will but nothing lasts forever.
Expansion and recession are not pleasant but they are facts of economic life.
Using the US as an example, during the rapid industrialization and urbanization in the 19th century there were many booms and busts. Despite the cycles, the US continued to grow and to develop. I don’t think this is the final act in China’s development. I also don’t think the volatility in Shanghai shares will derail the global economy.
Not yet, anyway. Remember the Shanghai market doubled from December 2014 to June 2015. I still suspect the US market will grind higher over the course of the year.
— Ian Green, Pendragon Capital Management
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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.