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Life After the Greek Elections

Here is what we think might happen next and what the impact to investors will likely be:

  • European leaders, along with the ECB and International Monetary Fund begin openly discussing "Plan B."
  • In spite of being able to form a coalition government and softening their rhetoric, Greek officials run out of time and money. Various government services, including utilities, start shutting down, causing a rise in social unrest.
  • Global equity markets and commodities sell off.
  • Massive bond buying by Swiss, German, English and U.S., central banks will help quell the crisis within a week or two.
  • Global equity markets and commodities rally.
  • The ECB offers emergency funds, with minor conditions. This will have very little effect.
  • Capital outflows from Spanish and Italian banks will reach record levels.
  • The ECB will lower interest rates by 50 basis points while the IMF, U.S., China, Switzerland and several middle-eastern sovereign wealth funds pledge to isolate the risks and "ring a fence" around Spain and Italy to avoid a contagion. Unfortunately, they will likely end up ignoring Portugal and Ireland, so the crisis will spread further, albeit with less dramatic force.
  • The euro will sell off sharply, nearing $1.10, as Italian, Spanish and other periphery nations' debt yields soar to new highs.
  • In the most elegant form of hubris, Greek officials ask to remain in the union and retain the euro as their currency -- as long as all is forgiven (including debts). Oh, Icarus, you do fly too close to the sun.
We think things will move quickly and bring market swings back, reminiscent of November 2008. The longer-term effects of an exit will be felt in economies around the world, as Europe will likely contract further, causing China to slowdown even more (Europe accounts for roughly 25% of Chinese exports).

This will surely impact the U.S. economy as well, as the stronger U.S. dollar will negatively impact our exports. Nonetheless, the U.S. equity markets will likely hold up fairly well and the S&P 500 index will remain within its current trading range of 1250 to 1315. Moreover, there is a chance these events have a significant positive impact.

My sincere hope is that Republicans and Democrats will take the lessons of Greece and Europe and decide to engage in real negotiations to avoid the "fiscal cliff" the U.S. is headed toward. What can I say, I am an optimist at heart, but will continue to advise investors to be defensive in their strategy. As we like to say at our firm -- optimistic by nature, defensive by strategy.

Oliver Pursche is President of Gary Goldberg Financial Services, a boutique money management firm located in Suffern, NY. Additionally, Mr. Pursche is the Co-Portfolio Manager for the GMG Defensive Beta Fund, and a Founding Partner of Montebello Partners, llc. In his role as President of GGFS, and as a member of the GGFS Investment Committee, Mr. Pursche helps oversee the investment portfolio of over 2000 clients with over $500 million dollars in assets. Mr. Pursche frequently provides market and economic commentary on CNBC and Fox Business News, as well as often being interviewed by The Financial Times, US News and World Report, Thomson Reuters, Bloomberg Businessweek, and the Associated Press regarding his and the firms views on the latest market news and events. Mr. Pursche's views on the market and investment strategies have been featured in the Wall Street Journal, Investors Business Daily, Smart Money, USA Today and other national business publications. In addition to writing for TheStreet.com, he is also a weekly contributor on Forbes.com and BankRate.com. His daily market commentary can be read at www.betafundcommentary.com or you can listen to him on www.financialtalkshow.com weekdays at 10:00 AM.
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