February 9, 2010
Over the last few weeks, world financial markets have been roiled, with the bellwether S&P 500 index off 8% since late January. That's a rude shock to investors who had seen markets rise steadily for the last 22 months. We get asked about financial markets every day so we need to have an answer ready when "why?" becomes the topic. And the recent answer can be traced to Greece and to debt.
What were those people in Brussels thinking when they pulled eleven countries together under a common currency (since expanded to 22)? If you recall, the Euro was hailed as a contender to replace the dollar as a world reserve currency. Right. We have enough trouble in the US trying to agree on fiscal and monetary policy and we have been one country at least since the Lincoln administration. In the Eurozone there are nearly two dozen languages and, worse, nearly two dozen fiscal policies trying to merge countries as disparate as Denmark and Greece.
Speaking of Greece, that's the epicenter of the current Euro-shakiness. The left-leaning Greek government has piled on debt and raised wages, particularly for public employees and militant labor unions. But with soft economies even softer in recession, Greece can't pay its bills and Europe is contemplating a bailout - despite a no-bailout clause in the European constitution. Other soft European economies make Portugal, Ireland, Italy and Spain look like in-line dominoes. In the old pre-Euro days, Greece would devalue the Drachma and travelers would go to Athens on vacation. Now, watch Europe bail out Greece and see Euro will weaken. Short-term pain for the markets, but the longer term portends a shift of momentum back to the US Dollar as the world's reserve currency. To paraphrase Winston Churchill: the dollar may be the worst currency, except for all the others.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).