Insights & Advice

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Welcome to the Global Village

Back in the Sixties, Marshall McLuhan popularized the term “Global Village”. It is a term used to describe how the globe has contracted to the size of a village thanks to technology and the instantaneous dissemination of information worldwide. This week, investors were feeling the consequences of this phenomenon up close.

The potential rescue of Greece from itself has been in the headlines of just about every financial journal in the world this week. This off -again, on -again bail-out by the European Community’s wealthier members has roiled the U.S. markets across the board. I believe that ultimately the Greek debt crisis, as well as the problems in the other PIGS nations (Portugal, Italy and Spain), will be resolved, but probably not in the way we Americans would choose to do it.

Europeans, in my experience, are more often behind-the-scenes problem solvers, especially when it comes to the proud and extremely independent –minded members of its community. The EU is not a group of states united under one constitution. It is a community whose common basis is commerce, not politics. Readers should remember that and not expect a U.S.-type bail-out where the banks basically became wards of the state for several months. Greece is not going to stand for any strong-arm tactics by France, Germany or anyone else. You may not agree with that, but I guess that’s why you live here and only vacation once in a while in Greece.

At the same time, China is also causing waves that are battering the shores of stock markets worldwide, including our own. Whether you like it or not, China, and not the U.S., is the economic locomotive that is pulling the world out of recession. This is the first time the U.S. has relinquished this role since WW II. China’s huge population, coupled with its enormous export prowess, has increased demand for everything from fertilizer to diamond bracelets. Its factories are consuming, on the margin, millions of additional tons of coal, iron ore, copper, oil and other materials. That has pumped up prices of everything including the stock markets.

Recently, however, China’s Central Bank, at the direction of the Chinese Government, has been tightening credit to banks in an effort to head off inflation as well as avert a possible bubble in China’s stock and property markets. Those moves in Beijing are having immediate repercussions in the trading pits of downtown Manhattan, half a world away. In some ways, when China sneezes now, the U.S. catches a cold.
That is another reason that U.S. stocks, bonds, commodities and even interest rates are chopping up and down recently. Traders are making decisions here based on the next predicted move out of the Chinese Central Bank.

I do believe that markets are over-reacting to these foreign events to some extent, but I understand that this is a fairly new development in the U.S. investment community. We, not them, have been the Big Dog in determining where world markets are going. Now that we might have to share that role, it will take some time to adjust.

As for the markets, I believe we still have some downside ahead before the markets are ready to resume their upward movement. I would use any dips to slowly add to positions and not worry too much about what happens in China or Greece. Focus instead on values presented by further declines in the market. My target remains 1,015-1,030 on the S& P 500.

Posted in A Few Dollars More, At the Market