Stocks have become the relatively safe parts of your portfolio. Bonds, which used to be your hedges of first resort, have changed entirely.
Top-rated bonds are all but useless for growth, and will pay practically zero interest for the foreseeable future. Sovereign-debt bonds, a sterling investment just a few years ago, are now almost too risky to contemplate.
What’s changed? It’s easy to oversimplify, but we’ll forge ahead: Greece. Greece has changed everything.
We’re not blaming that incubator of modern democracy, only pointing to it as a symptom. Greece is demonstrating all the perils of the Eurozone, an unprecedented experiment in a multinational currency. Greece is showing how difficult it is for 17 nations to share monetary policy while maintaining economic independence.
There are no easy choices for the Greeks. If they stay in the Eurozone, they embrace another generation of fiscal austerity — strangling any chance of economic growth. If they revert to the drachma they’ll almost certainly default on their national debt.
You say you own no Greek debt? Hold tight anyway. A Greek default, managed in the best possible fashion, will only encourage other teetering European economies to follow suit. Spain, Portugal, Italy, maybe even France, are all at high risk. This scenario, which is unfortunately one of the better possible ones and probably the most likely, means the bottom is going to fall out of the sovereign-bond market.
Forewarned is fore-armed. Think seriously about adjusting your portfolio accordingly. And spare the kindest possible thoughts for our friends and allies across the pond, who are guilty of nothing except a flawed attempt to unite their continent.
The C4:
- The Greek debt crisis is demonstrating the vulnerabilities of the Eurozone, and pointing to a grim future of cascading defaults.
- That likely result, coupled with already historically low interest rates on “safe” bonds, means we can no longer rely on the bond market as our hedge against other investment losses.
- Casual investors (all investors, in fact) need to rethink their strategy. This is a slow-motion crisis that’s giving us time to adjust. Use it or wallow in regret.
- But don’t blame the Greeks, nor the rest of the Eurozone. They tried. Economic unification is simply an idea ahead of its time.
