Downturns, Recoveries and Portfolio Income

The most unpleasant part of investing in stocks is definitely the periodic pullbacks. Unfortunately, these are part of the price we pay for more money in the long run.

When the stock market is going up, everybody feels good about being a long-term investor. It is the downturns that test all of our nerves and our belief in long-term investing. As one pundit put it – we can then see who the long-term “owners” of stocks are as opposed to the shorter-term “renters.”

Currently the S & P 500 is around 1946, down about 8.6% from its peak in May of 2015. The low point of the current correction was on 2/11/16, when the S & P was down about 14% from its peak. As a refresher, a correction is defined as a -10% to -20% retracement from a previous peak, and a bear market refers to a decline of more than -20%. We are currently in the 35TH correction or bear market since 1945, and during this time these have occurred about every 2 years on average. Prior to the current correction we had gone almost 4 years without a 10% pullback, so our memories of this sort of negative volatility had begun to dim.

Considering market declines of between 10% and 20% since the end of World War II, the average percentage decline is -13.8%. The average time to recover back to the previous peak level was 3.6 months from the low point. The correction we are experiencing is currently about average in magnitude, and if it were to follow historical averages we would expect a recovery sometime in early summer. Nobody knows for sure whether things will get worse before they get better, but studying past market conditions gives us some context as to the range of potential outcomes.

What do we do in the meantime? If your asset allocation is 100% stocks, we recommend that you stay with it or, if you have the ability, take this opportunity to add to your portfolio with monthly deposits (such as to your 401k or Roth IRA), periodic bonuses or other savings. If your chosen asset allocation includes fixed income, then we periodically rebalance to your target mix and add money to stocks at temporarily depressed prices.

In our portfolios that contain individual stocks, our recipe is as follows: start by focusing on high quality companies with the potential for rising earnings and dividends. Combine 35-45 such companies into a well-diversified portfolio. Regardless of what happens in the stock market over the next year, your portfolio income should be higher each subsequent year. The management teams of high quality companies with long track records of dividend increases are very reluctant to cut their dividends. Even in a recessionary environment, more companies should increase their dividends than maintain or cut them. There are many well-known companies that have increased their dividends every year for 25, 35, 50 or even 60 consecutive years. You may already own some of these companies, especially if you are a Parsec client.

Total return is comprised of two components: income and price appreciation. Over long time periods, the income component of total return has represented just under half of the overall return of the stock market. However, the variability of the income return has been much lower than that of the appreciation component. By focusing on those companies that we believe are likely to have consistent dividend growth over time, particularly for those of our clients who are retired and spending from their portfolios, we are setting up a condition where there is less uncertainty about a significant component of their overall return. For our clients with large cap mutual funds instead of individual stocks, the same general premise applies.

The equity portion of our client portfolios also includes small-cap, mid-cap and international companies, which we invest in primarily through pooled vehicles such as mutual funds and exchange-traded funds (“ETFs”). The fixed income portion is also well diversified, with a focus on short-to intermediate term, high quality instruments along with some high yield and international bonds for diversification and yield improvement.

We encourage our clients to focus on this concept of rising portfolio income to meet their investment goals and provide peace of mind during the inevitable corrections and bear markets that we will all experience at some point.

William S. Hansen, CFA
Chief Investment Officer


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Remain calm and carry on: why stocks and stress don’t mix

The popular press is generating a lot of recession-related articles lately and with stocks starting the New Year on a weak note, it’s no wonder investors feel a little nervous. Year-to-date, U.S. large cap stocks are down about 10% while most international markets are down even more. Commodities continue to slide and global economic growth has been revised lower. This is certainly not a confidence-inspiring picture, but here’s why keeping calm and carrying on is the best course of action.

First, I want to illustrate why stocks and stress don’t mix. Let’s say that stocks are down 10% year-to-date, the global growth outlook is muddy at best, and you’re seeing a lot of articles suggesting that the US is headed for a recession. Assuming the above facts and a meaningfully-sized investment portfolio, most humans are likely to feel anxiety, stress, and maybe some fear. Is the market going to fall further? Are we heading for a recession?

Having read enough about neuroscience to be dangerous, I know that when we’re feeling anxiety, stress, and fear, the more evolved part of our brain – our neocortex – is usually off-line and the more primitive part of our brain – our limbic system or brain stem (a.k.a. lizard brain) – is typically running the show. When our lizard brain is calling the shots we often make poor, fear-based decisions because we can’t see the big picture. Our brain shuts down and we become reactive instead of proactive. In these instances our capacity to think higher-level thoughts is greatly reduced.

Speaking of the big picture, did you know that from 1926 – 2015, stocks have delivered average annualized returns of 10%? Notice that includes the two largest US market declines, the Great Depression, and the Great Recession. Not bad. When we get triggered by stress, facts like these can get overlooked and we could make decisions we’ll come to regret. Here’s a schematic of how that might look:

graph 1

You can see how our thoughts and emotions affect our behavior which then reinforces the above pattern or one like it. Unfortunately, the outcome stinks and so I’d like to propose an alternative – – one that leads to a much happier, healthier outcome.

In the alternative pattern, the same triggering event happens, only this time you’re aware of the stress and anxiety it triggers. The fact that you’re aware of the stress and anxiety is huge! It means you’re not identifying with the emotions and thus your rational-thinking, neocortex brain is still online. You now have choices. Given the old pattern, one strategy would be to call your advisor and get some reassurance that the sky isn’t falling. Another option is to simply turn off the TV or the computer and take some deep breathes. Maybe take a walk around the block or engage in an activity you enjoy. The point is to interrupt the old pattern. The more you can do this, the more your awareness grows, and in turn, the more options you have.

Following through with this example you can see that giving yourself a break from the triggering event and getting some perspective allows you to stay calm, and thus make better decisions. Just like the first illustration, when repeated, this one will also reinforce itself. And the outcome is much better.

graph 3

So now that you’re hopefully in a calm, peaceful state, we can talk about the current environment. Yes, stocks have gotten off to a shaky start but the US economy remains on stable footing. Jobs growth is strong, oil prices are low, consumer debt is in-check, and wage growth is finally starting to rise. It’s true that US manufacturing is contracting but it only accounts for about 12% of GDP. Meanwhile, US services sectors, which account for 88% of GDP, remain in expansion mode.

Stocks have been spooked by falling commodity prices, slowing growth in China, and fears of deflation. But most leading indicators remain strong and every recession since the 1970’s has been preceded by a spike in oil, not a decline. Finally, and speaking of perspective, there will always be some risk of recession simply because contractions are a natural and a healthy part of any business cycle. Without them we can spiral out-of-control into bubble-like environments. I for one intend to stay calm and carry on. Nothing else seems to help anyway.

Carrie A. Tallman, CFA
Director of Research


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2015 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2015 is April, 15 2016. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range

Tax Filing Status For 2015 Contributions For 2016 Contributions
Single, participates in an employer-sponsored retirement plan: $61,000 – $71,000 $61,000 – $71,000
Married filing jointly, participates in an employer-sponsored retirement plan: $98,000 – $118,000 $98,000 – $118,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $183,000 – $193,000 $184,000 – $194,000

Do you qualify to contribute to a Roth IRA for 2015?

Modified Adjusted Gross Income Phase-Out Range – Roth

Tax Filing Status For 2015 Contributions For 2016 Contributions
Single: $116,000-$131,000 $117,000-$132,000
Married, filing jointly: $183,000-$193,000 $184,000-$194,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®


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Market Update Through 12/31/2015

Total Return


12 months YTD QTD


Russell 3000 0.48% 0.48% 6.27% -2.05%
S&P 500 1.38% 1.38% 7.04% -1.58%
DJ Industrial Average 0.21% 0.21% 7.70% -1.52%
Nasdaq Composite 6.96% 6.96% 8.71% -1.92%
Russell 2000 -4.41% -4.41% 3.59% -5.02%
MSCI EAFE Index -0.81% -0.81% 4.71% -1.35%
MSCI Emerging Markets -14.92% -14.92% 0.66% -2.23%
Barclays US Aggregate 0.55% 0.55% -0.57% -0.32%
Barclays Intermediate US Gov/Credit 1.13% 1.13% -0.73% -0.35%
Barclays Municipal 3.64% 3.64% 1.66% 0.77%


Current Level Prior QTR Level TTM High


Crude Oil


$45.09 $65.61


Natural Gas


$2.52 $3.57




$1,115.20 $1,305.70




$1.1163 $1.1835


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High-Yield Turbulence

You may have read some scary headlines on high-yield bonds recently.  We’d like to take a moment to update you on the situation and provide our perspective.  First a little background.  High-yield bonds are debt securities issued by companies with credit ratings below investment-grade.  These bonds are commonly called “junk bonds” because of the weaker balance sheets and growth prospects of the companies that issue them.  As a result of increased default risk, investors typically demand higher interest rates on these types of bonds to compensate for the additional risk they take on.  When things are going well, high-yield or junk bonds can deliver above-average interest payments and price appreciation.  When things are not going well, investors can experience sharp price declines and some companies may even default on bond payments.  In a nut shell, higher reward comes with higher risk.

Many advisors, including Parsec, include a modest amount of high-yield bonds in client portfolios.  Junk bonds are considered an asset class and can improve the diversification of a portfolio because they have lower correlations to regular bonds and even stocks.  This means when regular bonds are flat or down, high-yield bonds could actually rise.  The same goes for stocks – high-yield bonds and equities do not always move in the same direction, which confers some diversification benefits.

In addition to diversification benefits, junk bonds have historically delivered healthy returns.  The group tends to do well in the early years of an economic expansion when tight credit starts to loosen and company balance sheets improve.  On the flip side, high-yield bond performance becomes more volatile as an economic expansion starts to slow down and the spread between higher-quality bonds and junk bonds widen.  This indicates investors once again require more return to hold these higher-risk assets.

Earlier this year, interest rate spreads – the difference between high quality bond interest rates and low quality or “junk” interest rates – started to widen as energy company profits came under pressure and debt default rates ticked higher.  Since May 2015 through mid-December, high-yield bond prices have fallen over 12%*.  However, on a total return basis, the group is down about 8% as higher coupon payments were a partial offset.  While debt default rates on speculative-grade companies are below the 20-year average of 4.3%, at around 2.8%, they’ve jumped from 1.4% a year ago due to falling commodity prices that negatively affect profits**.

As high-yield returns tumbled over the summer, many investors ran for the exits.  Unfortunately, diminished bond liquidity following the 2008-2009 financial crisis made redeeming shares difficult for some.  Regulations that strengthened the banking and financial systems via higher capital requirements and reduced leverage have had the unintended side-effects of raising costs for banks and primary dealers to hold fixed income inventory.  With lower inventory levels, these critical market makers are less able to provide liquidity in the debt markets.  This was highlighted recently when investment firm Third Avenue froze investor redemptions in its high-yield fund (which is not a Parsec holding) due to liquidity constraints.  The Third Avenue fund was heavily invested in some of the lowest-ranked credit bonds, which exacerbated the management team’s ability to find willing buyers.  In the end, Third Avenue chose to freeze investor redemptions for one month.

The Third Avenue situation is unusual, but does it reflect deeper issues for the high yield space?  Our view is that current U.S. economic expansion is maturing, which suggests higher credit spreads and potentially more volatility (including downside risk) for the group.  At the same time, falling commodity prices and a strong dollar are headwinds for high-yield.  That said, U.S. jobs growth remains robust, the housing market continues to advance, and consumers are the healthiest they’ve been since before the Great Recession.  The recent Federal Reserve interest rate hike echoes our sentiments that the U.S. economy is on healthy footing.

While high-yield may see more downside, we believe investors are becoming more discerning after years of indiscriminate investing across high and low-risk asset classes alike.  This is a good thing.  It means that fundamentals, and not accommodative monetary policy, will once again drive asset returns.  Although high-yield bonds may face more headwinds in the near-term, our focus on higher-quality, higher-liquidity, high-yield debt should help us better weather a difficult environment.

Despite potential high-yield headwinds, we continue to recommend that clients remain fully invested.  This is based on our experience that market timing is a losing game, as asset class leadership can change sharply, and often without warning.  The historical record has shown that through various market cycles, both stocks and bonds have out-paced inflation over the long-term.  As a result, we recommend investors stick with their high-yield holdings.

*The BofA Merrill Lynch US High Yield Index

**S&P 500 data

Carrie A.  Tallman, CFA

Director of Research

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Holiday Retail Trends & Your Budget

In the midst of this holiday season, is your budget holding together? In this blog, we’ll look at the latest holiday spending stats, the most recent trends in giving, and offer a few tips to help you maintain a financially-stress free holiday season. While money is most definitively not the reason for the season, examining current holiday spending trends gives us some insight into the health of the U.S. consumer and might even inspire reflection on our own holiday spending habits.

According to the National Retail Federation (NRF), total U.S. holiday spending will rise about 2% in 2015 compared to 2014. NRF estimates that the average American will spend about $1,017 in holiday-related items this year versus $1,000 in 2014. No surprise that the bulk of spending, or 72% of budgets, is expected to go towards gift-giving. Family still comes first in this category as consumers plan to spend four-times as much on relatives than on friends. Spending on food comes in at a distant second, eating up 12% of the average American’s holiday budget, but arguably a very important piece of the pie. Other must-haves like decorations, cards, and flowers account for the remaining 16% of most Amercians’ holiday spending.

While holiday spending isn’t surging by any means, it’s up significantly from the depths of the Great Recession when the average American spent only $682 in November and December. For the last several years wage growth has been relatively lackluster while consumer debt has inched lower and savings rates have grown. This suggests consumers learned a valuable, if not painful lesson during the financial crisis: moderation. Lower debt levels and more savings are both net positives for economic growth and asset appreciation. These trends, coupled with signs that wage growth is finally starting to improve, suggests healthier consumers in the years ahead. Given that household consumption accounts for 70% of U.S. gross domestic product or GDP, we may be in for more holiday cheer for years ahead.

Now that we’ve covered some stats, let’s talk about gifts! What do family members want from Santa this year? A poll by the National Retail Federation found that our female relatives rank gift cards as their top gift item, followed by clothing/accessories, books, CDs, and DVDs. While men also named gift cards as number one choice, more of them wanted consumer electronics or computer-related products than women. Looking to give something a little more personal than a gift card? Check out Amazon’s most gifted list ( for a bevy of ideas by category. Some of the world’s largest online retailer’s best-selling gifts this year include the LEGO Minecraft Playset, the “Inside Out” movie DVD, Amazon’s tablet “fire”, and Adele’s latest CD, among others.

Have a twenty-something in the family mix? A survey from Eventbrite suggests that Millennials prefer experiences over things. In which case you might consider a gift card to the spa or tickets to a play or ball game for the young professionals in your clan.

All this gift-giving talk, while fun to think about, can really strain a budget if not carefully considered. While we’re more than half-way through the holiday season, it’s not too late to reassess your spending plan and even start strategizing for next year. If you’re feeling some financially-related holiday strain, now is the perfect time to stop and take inventory. What was your original holiday budget? Did you have one? And how much have you spent on holiday-related items so far?

In order to relieve money stress, the best and only place to start is by honestly looking at your current situation. The key is not to use your predicament as an opportunity to criticize yourself, but as a starting point for improvement in the years ahead. By intentionally setting a limit on the amount you’ll spend on decorations, gifts, food, etc… you’re less likely to overspend and more likely to avoid feeling financially overwhelmed during the most wonderful time of the year. If you’re already over-budget and swimming in financial strain, don’t sweat it! What’s done is done. The best thing you can do is use this as a learning experience for next year and beyond.

With that in mind, I find that planning ahead is often the best way to navigate any budget. Once you’ve determined a comfortable amount that won’t strain your finances – and you can do this as early as January – you’ll have an entire year to purchase thoughtful gifts for family and friends, on your terms. You can take advantage of sales throughout the year or simply be open to discovering the perfect gift for that special someone. By planning ahead and giving yourself plenty of time to find just the right gift, you’ll have more time to enjoy being with family when the holidays finally arrive. Instead of rushing around the mall at the last minute or spending a fortune on over-night shipping, you can relish the charm of the season and enjoy time spent with loved ones.

Good luck! Wishing you a happy and financially healthy holiday season!

Carrie A. Tallman, CFA
Director of Research


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NPR Report on Excessive Fees

Investors have a strong desire to be good stewards of their retirement funds. This often includes seeking out professionals for financial advice.  For the retirement plan sponsor, the Department of Labor (DOL) is helping by creating fee disclosure rules and requirements.  A few years ago, the DOL mandated fee disclosure rule (404(a)5) in an effort to ensure plan sponsors are able to determine if the fees for services rendered are “reasonable.”

NPR ran a story this morning about excessive 401k fees.  See link here.  If I could add to this article, I would suggest plan sponsors review their plan fees and services at least every couple of years, if not more often through a fee benchmarking process.  The generated report should give plan sponsors a general idea of how their plan compares to others of similar size.  Benchmarking has other benefits as well.  Not only will this help to uncover fees and what services are being provided, but also some service providers are willing to re-price their services to lower fees.

While many thought the disclosure rules were a bright spot in a dark corner, we feel that further disclosure and transparency is warranted in this industry.  Since not all advisors are the same, we are thankful that the DOL has re-proposed a Fiduciary Rule which seeks to make anyone giving investment advice to 401k/retirement plans (and also IRAs) to act in the account holder’s best interest.  For RIAs like Parsec, it is business as usual.  However, broker-dealers may have a bit more difficulty with this rule, as they operate under something called a suitability standard.  While not to debate the virtues of the fiduciary standard versus the suitability standard, we do feel that greater disclosure is a good thing and will ultimately drive costs down even further.

Neal Nolan, CFP®
Director of ERISA, Financial Advisor


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What’s Up (or down) with Commodities?

While stocks have been front-and-center lately given sharp price swings, fewer media outlets are focusing on commodities despite the critical role they play in global markets. They too have experienced wild price swings, although mostly to the downside. Year-to-date, the widely held S&P GSCI (Goldman Sachs Commodity Index) has fallen 20% and declined 41% over the last twelve months. What’s driving these big declines and why do they matter to your portfolio?

Commodities are defined as a raw material or primary agricultural product that can be bought and sold. This includes everything from aluminum to zinc, but also oil, natural gas, coffee, beef, and corn, among others. A key differentiator between commodities and other assets are that commodities are valuable only as an input of the production process. They’re not a store of value or wealth, like a stock, bond, or work of art. Because of their utilitarian purpose (with a few exceptions like gold), commodity prices are closely linked to global supply and demand. Simply put, when demand is strong for a commodity and supply is tight, prices go up. Likewise, when demand is falling and/or supply is abundant, commodity prices tend to fall. This causes prices to be very cyclical and closely tied to the health of the overall economy. In an increasingly globalized world, that means all economies affect commodity prices to varying degrees.

While stocks have surged over the past six years, commodities have languished. The widely-held commodity index, the S&P GSCI, has fallen 35% from 2009 to 2014 while the S&P 500 Index rose 131%. As U.S. stocks benefited from improving economic growth at home, commodities never saw a similar bounce-back given their exposure to the broader global backdrop. Lackluster global demand and excess supply of many commodities weighed on commodity prices. The supply/demand imbalance has worsened recently as China, the world’s largest consumer of commodities, has seen economic conditions deteriorate and is curbing its appetite for input products. Likewise, it continues to produce too much supply and is dumping some commodities, like steel, onto global markets, further pressuring prices. It’s a vicious cycle, one that usually reverses when excess supply is finally worked-off and most investors have given up on the asset class.

As an investor, where does this leave you? Should you include commodities in your portfolio? Is now a good time to buy? According to Dr. Rouwenhorst, a leading expert on commodities, research suggests that commodities do outpace inflation over the long-term. And he’s looked at data going back to the 1800’s. At the same time, commodity prices tend to have low correlations with other asset classes like stocks and bonds; meaning that when stocks go down, commodities tend to go up. Thus, adding commodities to a portfolio can help improve your overall volatility and gives you a good chance of out-pacing inflation.   But…we’ve also learned that during massive global crises, like the one in 2008, commodities tend to move in lock-step with other asset classes. People panic and tend to sell everything. We’ve also seen substantial price declines in most commodities over the last six years, and if you’ve owned these assets you know your portfolio has suffered as a result. What to do?

During most periods, a small position in a diversified basket of commodities such as the S&P GSCI or the Dow Jones Commodity Index can help insulate investors from wild swings in traditional asset classes like stocks and bonds. And commodities can experience periods of strong price appreciation. However, it’s difficult to identify those periods and at the same time, avoid sharp declines like we’ve seen in recent years. If you have a long enough time horizon, of twenty years or more, a small allocation to commodities can make sense, but another option is to own high-quality stocks that derive their revenue from commodities. While these companies are also subject to the cyclical nature of commodities, they often have diversified revenue streams and strong balance sheets that can help provide some insulation during cyclical downturns.

Overall, commodities are important to understand in order to gauge the health of the global economy. Although they tend to be a volatile asset class, owning a small amount can provide diversification benefits in your portfolio. Another and perhaps less volatile option is to own high-quality blue chip companies that deal in commodities and have the resources to weather cyclical downturns. This approach also provides the diversification benefits associated with commodities but often with smaller price swings then owning a basket of commodities directly.

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The “What” of Retirement Planning

Most working-age Americans focus on the “how” of retiring: how to maintain a decent standard of living today while saving enough money for retirement tomorrow, or how to play catch-up and cover their retirement savings shortfall. Sadly, another group of Americans wonder “if” they’ll be able to retire at all. The sobering statistics tell a bleak tale. According to U.S. Census Bureau data, the average 50-year old has just $42,797 in retirement savings while 38% of Americans have no savings at all. This is scary stuff considering that average medical costs alone for an individual over 65 years old are north of $100,000. Clearly we’re not as prepared for retirement as we could be. Despite lots of media doom-and-gloom about the pending retirement crisis, it hasn’t improved retirement savings trends. Thus, I’d like to propose a new approach, one that focuses on the “what” of retirement planning instead of the “how.”

The “what” of retirement planning involves an intentional mental shift, one that approaches the retirement conundrum from a new angle. Instead of focusing on how much more you need to save or how far behind you are versus your peers, try imaging what you want your years in retirement to look like. What new hobbies would you like to explore in retirement? Or what countries do you want to visit? Etc… This approach, coupled with an honest assessment of your current situation, is more likely to help you reach your goals than beating yourself over the head.

Focusing on the problem or what’s missing can increase stress levels and sap your energy – because you need more energy to help manage those higher stress levels. It can also lead to financial paralysis, which only exacerbates the problem and reinforces our old, unhelpful patterns – ensuring we get what we fear the most: not enough retirement savings. In contrast, anchoring your goal to the positive end result – your vision of a relaxing, meaningful retirement – can increase the odds of realizing that reality. Either way, you’ll feel a whole lot better on your journey there.

The point is to look carefully at the way in which you approach your retirement goals, because the methods you use will help determine your success rate. It all starts with taking an honest and sometimes difficult look at your current situation and determining what your goals are. Once you know where you are and where you’d like to be in the future, crafting a plan of action that will reinforce helpful, constructive habits is key. This brings me to one of my favorite quotes from St. Teresa of Avila, “The whole way to heaven is heaven itself.” A lifetime of berating ourselves is unlikely to lead to financial bliss in our twilight years. It will probably just lead to more stress and anxiety. Instead, it seems we’re better off focusing on “heaven” in the here and now. We can do that with a proactive, realistic plan that’s anchored on the positive feelings we’d like to experience in our retirement years. And who knows, we might even start to feel better today.

Carrie A. Tallman, CFA
Director of Research


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The International Monetary Fund (IMF) has performed a valuable public service by publishing a detailed “Debt Sustainability Analysis” for Greece on July 2. While this document is written in typically dry “bureaucratese,” it lays bare the failure of the strategy of “kicking the can down the road” that the other Euro Zone countries have been using with Greece for the past five years.

Dr. Carl Weinberg is Chief Economist at High Frequency Economics and a veteran of the mostly successful Brady Plan debt restructuring program of 1989-1992. Those negotiations took debt loads that were impossible and restructured them, in a manner similar to the way failing corporations are restructured in the US. Brady Plan deals were worked out for Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast, Jordan, Mexico (the first one in 1989-1990), Nigeria, Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela and Vietnam.

Dr. Weinberg suggests that the €323 billion ($358.3 billion) Greek debt be restructured into bonds with a maturity of 100 years, a coupon (interest) rate of 5.0 percent and a 25-year grace period before the first payment is due. This would give Greece “breathing room” and would keep all its creditors (primarily the European Central Bank (ECB), the European Financial Stability Facility (EFSF) and the IMF) from having to take a “haircut” on their holdings of Greek debt.

Not very surprisingly, the IMF analysis does not go this far. However, it rather drily suggests that extending the grace period to 20 years and the amortization period to 40 years (an effective doubling of each) together with new financing, would barely be adequate.

Greek voters went to the polls on July 5 in a hastily arranged referendum to vote “yes” or “no” on accepting terms from the creditors that were withdrawn on June 30. Thus, it’s not really clear what they were voting on. The wording in the ballot was also very confusing. It read: “Should the draft agreement submitted by the EC, ECB, IMF to the eurogroup on June 25, which consists of two parts that make up their full proposals, be accepted? The first document is titled, ‘Reforms for the Completion of the Current Program and Beyond’ and the second ‘Preliminary Debt Sustainability Analysis.’”

Despite that convoluted wording (it can’t possibly be any clearer in Greek), the 62.5 percent of voters who turned out gave a victory by a 61.3-38.7 percent margin to all those wishful thinking people who believe that reality won’t triumph. Greece is being kept afloat by the ECB. If they stop doing that, the banks will all be bankrupt. No one knows where this disaster will go.

Now the creditors need to follow the IMF recommendations, which include another €60 billion ($66.5 billion) of new money through 2018. This is in addition to the restructuring of all the existing debt.

Like so many economic problems in the world, the Greek mess will be finally resolved when there are no other options. If Greece were to leave the Euro Zone (a terribly complicated exercise), it would be hit with horrendous inflation and an even bigger collapse of the economy that the 25.0 percent decline it has already experienced since 2009.

Greece needs debt relief. It also needs to reform its ridiculous pension system to conform to those of the rest of the Euro Zone and figure out ways to collect taxes that are owed.

The Greek economy is about $200 billion a year in real GDP. That’s close to Alabama ($199.4 billion in 2014) or Oregon ($215.7 billion). Both are 1.2 percent of the US total.

A failure to follow something like the prescriptions of the IMF or Dr. Weinberg will condemn the Euro Zone to remain mired in a recession that began in the first quarter of 2008. Some people would argue that a recession lasting that long ought better be called a depression.

Either way, whatever happens to Greece is mainly a problem for the Euro Zone. It is simply too small an economy to have a major impact on the US. Most of whatever impact there might be would come through damage done to overall Euro Zone growth, rather than directly from Greece itself.

Dr.  James F. Smith, Chief Economist.


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