West Oak Capital, LLC
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July 2015

We welcome your call or email if you have any thoughts you would like to discuss.

Byron, Lisa, Jerry and Darin
Before turning attention to the drama in Greece, let us first say that we do not expect it will generate much financial fallout here in the U.S., other than some potential short-term market turbulence.  However, it is a cautionary tale that resonates with Puerto Rico, as well as some homeowners, businesses and a handful of municipalities that risk collapse under the weight of too much debt.  Access to cheap money can tempt some to borrow more than they can ultimately pay back.  Too much debt is toxic.  Like chocolate or wine, a little bit is nice, but overindulgence can render someone in dire need of assistance.
Greece is in big trouble.  The nation of Socrates, Plato and Aristotle now finds itself wrestling with a philosophical dilemma.  They have run out of money, and without additional funds from fellow Eurozone members, Greek citizens are facing potentially severe personal hardships.  The terms of the bailout are painful, yet the alternative is a complete collapse of the country’s financial system and likely withdrawal from the Eurozone.  It seems impossible to reconcile the government’s rejection of the bailout program with their stated desire to remain in the euro, so they are putting it up to a vote of the people.  Other highly-leveraged participants such as Portugal, Spain and Italy have a keen interest in how this works out for Greece. 
The showdown places a great European experiment in jeopardy.  The euro was founded on the notion that many countries could share one currency and abide by a common monetary policy.  Today, more than 16 years after its introduction, the euro is used by 337 million people in 19 member nations, as well as an additional 210 million people whose currency is pegged to the euro.  It is the world’s second largest reserve currency, behind the U.S. dollar.  It seems surprising that Greece, a relatively small participant with fewer than 11 million people and representing less than two percent of the Eurozone economy, is able to so defiantly push the cooperative to its limits.  There are no legal provisions for evicting a member nation from the euro, so this is uncharted territory.
Having borrowed far more than they can comfortably repay, Greece is now desperate to find the least painful way out of a terrible predicament.  Getting cash out of ATMs has been restricted, banks are closed and the flow of funds from fellow Eurozone nations has come to a contentious end.  Without access to capital, the country is not able to reopen its banks, which means people cannot get money for daily living expenses.  It will not take long before essentials such as food, water, fuel and prescription medications get scarce.  Summer is an inopportune time to be dealing with this, because nearly 20 percent of the Greek economy depends on tourism and travelers may avoid the region until conditions stabilize.  If the flow of euros cannot be restored in a relatively short period of time, it seems likely the country will have to resort to printing its own currency, the drachma, which would effectively signal Greece’s withdrawal from the Eurozone. 
Greece’s troubles do not appear to threaten the broader financial system.  The last time Greece appeared on the verge of default, there was widespread concern for the French banks that owned much of Greece’s debt.  Fortunately, that is not the case this time.  Sagging economic conditions in Greece have motivated banks and private investors to shy away from owning Greek bonds in recent years.  Roughly 85 percent of the nation’s debt is currently held by the International Monetary Fund, European Central Bank and other Eurozone governments.  The threat of “contagion” to the rest of the financial system is fairly well contained. 
Back here in the U.S., we continue to monitor the Federal Reserve.  It is still widely expected that the Fed will take small steps to raise short-term interest rates in the second half of this year.  Economic activity has been sputtering a bit, although GDP growth is forecast to improve at a modest pace for the rest of 2015.  Employment conditions are better than they were a year ago, and corporate profits are slowly nudging their way upward into record territory.  Oil prices seem to have settled in the $50 to $60 per barrel range, which has taken the edge off the cost of gasoline for motorists and business that are heavily dependent upon fuel.  Stock prices were essentially flat for the first half of the year, so investors are certainly hoping for a pick up in the second half. 
As we prepare the BBQs for 4th of July weekend, there is much to celebrate about our nation.  We hope you enjoy your summer, although you may want to postpone any planned trips to Greece for a little while.  Please give us a call if you have any questions or thoughts you would like to discuss.

Past performance is not indicative of future results. The information contained in this report is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the items mentioned. The information, while not guaranteed as accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
West Oak Capital, LLC
2801 Townsgate Road, Suite 112
Westlake Village, California 91361
Ph. 805.230.8282, Fax 805.230.8283
Copyright © 2015 West Oak Capital, LLC, All rights reserved.

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