Haircuts and Headlines

Every day seems to bring about a new story on how the global economy is being undermined by the instability of a financial system that is more connected than any politician or regulator would like to admit.  Last week, European leaders arranged for another round of funding for Greece and a 50% haircut for Greek bond holders.  This week, MF Global filed for Chapter 11 bankruptcy protection after their highly leveraged proprietary positions in European debt went kaboom.  While the Europeans are supplying the media with bold, 24-font headlines, corporate profits in the non-financial sector are up 15% year over year in the United States and GDP growth is accelerating. The disconnect between consumer confidence and consumer spending has been increasing since 2009 with spending rebounding strongly while confidence remains at all-time lows.  Stock market returns have historically been inversely related to consumer confidence, returning double-digit average annual gains when confidence levels were similar to where they are today.  Whether Greece stays in the EU or another highly-leveraged financial institution blows itself up is yet to be seen.  But before you cash in your portfolio and run for the hills, take a look at what people and businesses are doing and not just what makes the front-page news.

Sources:  Bureau of Economic Analysis –;  Sonders, Liz Ann –  Born in the USA: A Look at What Could Go Right

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