A Greek Tragedy

In Greek epics, a hero who has died usually has his body burned at a funeral pyre. Unfortunately, countries in Europe and around the world are now contemplating doing the same to Greece.

After a good bounce off of the lows of March 2009, the market stagnated in November. During this time, the market was caught evenly between two opposing forces. On one hand, the economy has shown positive growth over the last few quarters and profit margins for companies continued to improved. On the other hand, this economic recovery has shown little job growth (unemployment still near 10%) and most pundits feel that economy is being propped up artificially by government stimulus and worry that the economy would falter once the stimulus is removed (which it still hasn’t). These two forces have worked to keep the market relatively flat, although it had crept slowly upward from November until Mid-April. The Dow / gold ratio has even stayed relatively unchanged between 9 and 10 during this time.

However, that has all changed this week with events over in Europe. Greece, a country the size of Alabama, has been causing huge headaches for the European Union. Huge mismanagement of their budgets over the last decade has led the country to the brink of bankruptcy. Since the currency that Greece uses, the Euro, is shared by fifteen other countries, this means that failure of Greece’s monetary policy could have a domino effect across Europe. Portugal, Italy, Ireland, and Spain, are in similar situations, though not as severe (the five countries are currently known as PIIGS).

With the European nations discussing a bailout package for Greece, this has basically tipped the balance the markets have been in towards the negative. Europe is the second largest consumer region after North America. Therefore, if the debt crisis continues without resolution, the region threatens to derail the global growth recovery story.

Since April 23, the markets across the globe have dropped about 10%, the last 5-6% coming within the last week alone as Greece and Europe wrestle over the details of the bailout package. Commodities have been hit particularly hard as predictions of a European slowdown has tempered demand. Technology stocks have also taken significant hits as many companies generate substantial revenue in Europe. With value of the Euro declining in the currency markets, that means that tech companies will be bringing home less revenue, meaning less profit for shareholders.

Of course, with the decline of the Euro, gold suddenly took off again as a safety play and topped $1200 for the first time ever this week. With the Dow falling 5% this week, this means the Dow / gold ratio has dropped below 9 to approximately 8.5.

So where do the markets go from here? Much like the bailouts here in the United States, markets will unlikely go up in the short term until Europe gets their house in order to the world’s satisfaction. After the crisis passes, then the market will rebound somewhat (as a reflex) until the two opposing forces discussed above begin wrestling again.

In the meantime, a weaker Euro means that travel will be a lot cheaper beginning this summer. Therefore, if you have ever wanted to travel to Europe, the next couple of years might be the perfect time to do so.