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You are excused for being puzzled by the U.S. market’s muted reaction toward the chaos in Greece and the stock market meltdown in China. In the past, these sorts of events would have caused significant turmoil in our markets.
Despite the defiant results of the Greek referendum that rejected further economic austerity in return for a cash infusion to deal with their debt crisis, it appears U.S. investors are betting the situation will be adequately solved. With Greece virtually out of money, July 12 is the final deadline for the country to persuade European Union leaders to provide loans in return for unspecified tax and pension reforms. Otherwise, the country will default on a July 20 European Central Bank bond payment of 3.5 billion euros ($3.9 billion). Default would set in motion a “Grexit”—the exit of Greece from the European Union and the euro currency—which would likely unsettle global markets further.
While Greece is a small player in the global economy, European officials fear that abandoning their hard-line approach would open the door for larger Eurozone countries with debt problems (Portugal, Spain, Italy) to seek similar bailouts. The European debt crisis has exposed the divisions that can occur in a currency union when stronger economies are forced to support economically weaker and undisciplined members.
How the Greek debt crisis is solved might determine whether further contagion could grip the Eurozone. Global markets would not react well if the crisis were to spread into other European Union countries.
A month ago, I wrote about the incredible 150-percent rise in the Shanghai Composite in just the past year. Since June 2014, margin debt tripled to $348 billion, fueling the stock purchases by Chinese investors. In the last week of May alone, 4.4 million brokerage accounts were opened, most likely by new and inexperienced investors. With a casino-like atmosphere taking hold, signs of a stock market bubble were present.
Well, in the last month, since mid-June, the Shanghai Composite has lost one-third of its value. In response, at least 1,331 companies have halted trading in their shares, freezing $2.6 trillion, or about 40 percent of the Chinese market’s value.
The Chinese government, in typical fashion of exerting state control, has enacted a number of measures to stem the decline, so far without much success. The central bank extended a $42 billion credit line to 21 securities firms and instructed them to buy small-company stocks to prop up the market.
Observers say the panicked government response is an attempt to shield the party from criticism and head off unrest. It also continues to call into question whether the Chinese system is equipped for a spot on the global stage.
And yet, remarkably, the Shanghai Index is still up 8.4 percent year-to-date, since it had risen nearly 60 percent through mid-June. If the Chinese market can steady, the damage will be limited to those last “investors” who bought in.
For the past two years, the U.S. markets have calmly pressed forward without much volatility. Now these two global market events will test that complacency. For stock investors, times like this can open the door to investment opportunities if prices drop far enough.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. He can be reached at 818-7827 or ken@aldebarancapital.com.
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