Last Wednesday’s bounce-back from last Tuesday’s market freak-out–again over Greece, anew over China–is an unpleasant but necessary reminder that investors remain on hair-trigger alert to news that could destabilize a still-difficult recovery from an historic global credit/financial/economic event.
We had thus far been spared the type of triple-digit down days that so typified 2011, and the few years immediately preceding it. It’s important to note, however, that last year began with similar positive momentum before events in the Middle East and then Japan reignited fears first lit in the fall of 2008 but rather dormant during the post-Mar. 9, 2009, rally.
So-called “Black Swans” certainly heighten the sense of fear of a soon-to-come apocalypse. It’s impossible to predict when, where and in what form they’ll strike. As history reveals, however, things always pop up. In this sense it’s inexcusable not to be prepared for the unexpected and what consequences they hold for markets generally and your portfolio holdings in particular.
Greece is more slow-motion train-wreck than anomaly at this point, though the news of China did strike with at least some sort of urgency. On closer inspection, however, even the latter is in keeping with a longer-term evolution–as opposed to Greece’s devolution, if you will–for the Middle Kingdom.
We should continue to expect, for example, that economic data in the US will continue to paint a mixed but generally favorable picture, susceptible to Europe and threats from the Middle East but certainly better off than it was four years ago.
In keeping with this theme the US Dept of Labor’s Bureau of Labor Statistics (BLS) reported the addition of 227,000 jobs during February, the third straight the number of new positions was sufficient to absorb new entrants to the market. And the BLS revised the positive changes in total nonfarm payroll employment for December to 223,000 from 203,000 and January from 243,000 to 284,000.
At the same time, however, wage growth was not sufficient to outpace the rate of inflation, however subdued it may be. Average earnings rose by just 0.1 percent month over month, or 1.9 percent year over year. BLS reported a 2.9 percent year-over-year rate of inflation for February, meaning spending power in an economy where the consumer accounts for about two-thirds of gross domestic product (GDP) growth could be curbed.
It also suggests that, generally speaking, low-paying jobs are being created. Temporary jobs–which can be a positive indicator, as they become full-time jobs–rose by 45,000 larger than the 32,000 in January. Construction shed 13,000 jobs, the largest decline since January 2011, though it was up by 20,000 in January.
The basic scenario is one of two steps forward, one step back, and sometimes one and a half. And there will certainly be wild cards dealt. It’s far more important, however, from the perspective of maintaining the health of your portfolio as well as your own mental well-being, to focus on operating conditions on a business-by-business basis than the happenings.
Part of the problem with the Greece story is that every minute aspect of the process has been over-scrutinized and blown out of proportion to its relevance in the larger story–that is, an orderly restructuring of Greece’s debt, what in some quarters could be described as a “default.”
We happen to have arrived at what was a critical moment, when the terms of private-holder haircuts would be determined. And in due course, ahead of key deadlines, the necessary private-sector ascensions were obtained. Not all creditors will agree; some will hold out in order to collect “insurance” in the form of payouts from credit default swaps (CDS) established to hedge their respective Greek exposure.
What to call it when the terms of Greece’s restructuring are finally known is the subject of a lot of speculation and obfuscation as well as negotiation. Holdouts continue to look for language that will trigger payment on their default insurance contracts.
There are as many ways to slice terms in agreements as complex as these as there are lawyers engaged in the process, whether directly by actually preparing documents, for example, or remotely by criticizing from the periphery of the blogosphere. The slightest request for clarification amid multilingual discussions can be described in the most binary, deal-or-no-deal and therefore incendiary ways.
And that means the issue is ripe for controversy-hungry headline writers and financial-television show-bookers eager to gather eyeballs, whether to entertain or educate a moot question where ratings and advertising are the chief concern.
But revaluing your whole portfolio based on every step in a painstaking march toward an orderly unwinding of its existing sovereign commitments–a default, in rosier, less costly terms–at this particular moment is as senseless as it was in any other instance as well.
As for the Middle Kingdom, “7.5 percent” is just a number, in this context, actually, a principle, around which the Communist Party of China (CPC) will orient the next phase of its long-term strategy to retain power and satisfy the natural yearnings of the vast population it controls. Sustaining its economy and continuing its move up the global labor value chain will take substantial resources, still.
At any rate, the half-percentage point reduction in the 8 percent benchmark China’s leaders have maintained since 2005 is immaterial.
The next phase of the Middle Kingdom’s economic development will involve a shift toward consumption-led growth from export- and capital-expenditure driven expansion. During his speech to the perfunctory National People’s Congress Premier Wen Jiabao noted that China must aim for a “higher-quality development over a longer period of time.” He added that the government would maintain its “proactive” fiscal and “prudent” monetary policy.
As was the case with the prior 8 percent target 7.5 percent represents the floor of the Chinese government’s comfort level. The reduction has also been interpreted by some observers as a signal to local officials that the rate of growth isn’t the only focus of economic development.
Mr. Wen also said the official 4 percent inflation target established last year will remain through 2012.
US labor figures are looking a lot better, but unemployment is still above 8 percent. And the Federal Reserve is said to be prepping yet another exotic monetary trick in lieu of responsible fiscal action to ensure against another severe slowdown. The US central bank has already pledged to keep interest rates near the effective “zero bound” until 2014.
For investors seeking real income there really is no other place to turn than high-quality dividend-paying stocks, wherever they may be found. This means you must be prepared to be buffeted along a rather bumpy ride but to also buy stocks when the market overreacts or simply takes them down below value-based buy-under targets.