“Two roads diverged in a wood, and I— I took the one less traveled by, and that has made all the difference.” - Robert Frost
As investors, there are two common responses to major political, financial or social events: to follow the “tweet” crowd or to mindfully analyze versus what you own to make an informed decision. The media’s concentration on the events in Greece these past several weeks has created a social media buzz for those who listen and read, but at the same time it should serve as a reminder that it is important to keep things in perspective. The first step in making financial decisions is to take the road less traveled by investing the time to learn the facts of the situation at hand (and there is always a geopolitical hot spot!).
In a nutshell, the Greek government has way too much debt and can’t pay its lenders. The European Union (EU) has been pushing politicians in Athens to raise taxes (and collect them!) and lower expenses in an effort to save Greece from bankruptcy. Greece is regarded as the birthplace of democracy; yet ironically, the economic debacle can be primarily attributed to many years of poor decision making by deeply divided political factions. Europe would only be mildly impacted financially by the impact of Greece leaving the EU; however it is important to monitor the situation closely because it could have a domino effect on other financially strained countries in the EU, which would have a much larger impact, most notably Spain and Italy.
To learn about the impact of Greece’s situation, consider these facts about Greece’s influence on the global economy:
- Population of 10.8 million
- Greece is similar in size to metropolitan Chicago. It’s smaller than metropolitan Los Angeles and half the size of metropolitan New York.
- Gross Domestic Product (GDP) of $207 million
- Approximately 2% of Eurozone’s GDP
- Ranked 44 in global GDP; similar in size to Bangladesh, Kazakhstan or the state of Connecticut
- Greece’s GDP is 1/1000th the size of California’s GDP of $2.2 trillion
The media has blown this drama way out of proportion and in particular the financial news media have followed the crowd in creating a “crisis” scenario for investors. Our view is that although we empathize with the turmoil and challenges for the people of Greece, we have followed the road less travelled in responding to this situation with investment optimism and see a pullback based on Greece as an opportunity.
Greece has and will continue to struggle with a variety of political and financial factors during their recessionary period. However, as investors, we should consider the following as it relates to large, high-caliber companies predominately based in the United States:
§ In relative terms, the U.S. dollar is stronger as a result of recent decisions by the EU.
§ Apple and Microsoft will continue to sell more iPhones and Windows software, respectively.
§ Home Depot has a store located in the city of Greece, NY, but not a single store in the country of Greece (this seems to be the closest direct investment we have in Greece!).
§ Greece does not manufacture global products that the world is dependent upon.
§ Only a trivial amount of Greek debt is owed to U.S. creditors, including institutions such as Wells Fargo and Goldman Sachs.
§ There is less than $1 billion in Collateralized Debt Swaps (CDS) on Greece debt, almost assuring failure would not be systemic (in stark contrast to Lehman Brothers’ failure).
The point is that financially strong and well-run U.S. companies, like the ones referenced above, will continue to grow and thrive despite the noise created by the events in Greece.
At Talbot Financial, our approach is to take the road less traveled and “play through” the natural feelings of “fear of meltdown” the constant news flow plants in our minds. We can do this because we have strong convictions in the prospects for the companies in our investment portfolio. As responsible stewards of your capital, you can count on us to analyze the potential investment risks associated with global events. Unknown future threats to the U.S. economy from a foreign crises may warrant us to become more defensive in our investment views. That is not the case with Greece.
We are by no means insulated from market driven downturns and corrections. However, a long-term view, driven by the fundamental earnings and growth power of the investments, allows us to see past short-term swings based on events that have no discernible impact on our equity positions.
In summary, “we have taken the road less traveled by and that has made all the difference!”