My crystal ball of economic goodness is very worried at the moment. On the surface, it looks as though things are ok, but there are several potential big shocks that are worrying me. The largest of these is Greece.
For now, the negotiations in Brussels seem to be inching forwards, but all this effort is for a temporary sticking plaster to keep the government able to pay it’s bills. Later in the year – June, July and August – those bills will start to come due in rapid succession.
I’m sure that Brussels will find a way to fudge the issue again and kick the can even further down the road, but there will be some very sticky moments ahead.
Will Greece exit the eurozone? Perhaps. I’d put the chances of that at about 20% or so. Its possible, but probably unlikely. There is, however, a very real chance of extreme volatility in stock markets as confidence ebbs and flows.
In the past, it was clear that the Greek government was trying to limp along, but the new Syriza government has an anti-austerity mandate and the electorate is expecting them to negotiate hard and not to give ground. This will not be easy, but it will make for more difficult negotiations, strained press conferences and brinkmanship.
The Greek economy is actually a very small part of the eurozone, an even smaller part of the EU economy and a tiny part of the global economy. However, as we have seen, the banking system is so closely connected these days that problems in one location can have unexpected consequences elsewhere in a place that nobody had even thought of.
Let’s be honest. There is only you and I here. We can do that. The banking system around the world is weak and unable to cope with more shocks. Sure, many banks are stronger than they were, but very few are truly safe these days.
If Greece fails to repay their loans, there will be banks writing down assets and some scary leverage ratios. Who knows what might happen?
Since neither side wishes to be seen to give ground, the chances of stalled negotiations are very high and that could cause lots of short-term problems.
What to do about it?
We all saw the problems caused in 2008 by banking weakness. The degree of correlation was truly frightening. Everything you could think of went down at once!
Many major stock markets are historically very high. Between now and the summer there might be a few more percentage points to be wrung out of the market, but the risk associated in doing so looks very real to me.
If you have lots of gains already, I’d suggest you find something that looks risky in your portfolio that can be sold now and turn it into cash. Be a little less exposed. If assets suddenly drop, everyone will be trying to sell simultaneously and that guarantees poor prices.
It would also make sense to reduce any market leverage you have. If markets become even more volatile, getting trapped on the wrong side of a trade becomes very likely and that can be a portfolio killer.
It is time to be more cautious.