July 2, 2015

Dear Investor:

The Greek crisis and potential “Grexit” is grabbing all macro attention, but it’s truly just investment noise. For anyone living outside Greece, it will determine little. Greece’s economy was smaller than Louisiana’s before the bank holiday; soon it will be the size of Kentucky’s. Europe cares about the credibility of the Euro—and we must too in that it remains strong enough to buy our exports—but Greece has proven that it should be out of the Euro anyway.

In comparison to the Greek noise, the Fed’s move to raise interest rates soon requires more attention. Though telegraphed and anticipated in such a prolonged way that markets have been pricing it in for the past six months, the end of Fed accommodation will be a major turning point. The Fed won’t remove stimulus until it feels the economy can support it. In other words, the pump will be well-primed by the time it’s left to run on its own.

But the dovish Fed may let the Greek debacle delay a hike in rates and thus risk inflation. In an inflationary environment, you’d much prefer owning stocks than bonds. That’s why we’re forever balancing the two risks: the price/market risk of stocks against the interest/inflation risk of bonds. In the end, a balanced portfolio with exposure to both, is best for anyone over the age of 60.

Forgetting Greece and the Fed, we are just plain due for a major decline in the stock market. The S&P 500 is down 4% from its high and is now negative for the year (as are bonds), so we might already be in the midst of one. We have not had a 10% – 20% correction in three years, which is very unusual. Expect one soon—or even now. But no one really knows when it will come, despite what many pundits will tell you. That’s why decisions have to be made with regard only to the valuation of relative assets, not some ill-advised “view” as to when precisely the markets will collapse.

As domestic equities have climbed to the point of full value, we have sold in appropriate accounts. Conservative accounts hold unusually high cash/bond levels. On a 10% decline, I’ll be buying heavily—as I already have been in emerging markets, which are too cheap to ignore. For aggressive accounts with long time horizons, I am not worried about Greece or the Fed and will continue to keep assets invested in stocks while periodically rebalancing from the overvalued to the undervalued.