Iron Capital Insights

  • Iron Capital Insights
  • June 30, 2015
  • Chuck Osborne

“Nip It in the Bud!”

“Nip it in the bud!” That is what Grandma would have said. If one wishes to put an end to certain behavior, then she had better make that clear as soon as possible. If one allows small transgressions, then slowly over time the transgressions will grow and grow until all authority to stop any transgression is depleted.

This timeless wisdom – the phrase dates back to the 16th century – is easy to understand, but hard to actually implement. Short-term ramifications always get in the way: the fear of being seen as over-reacting; the rationalization that this current transgression is really not that big of a deal; the fear of potentially negative consequences to making an early stand. Doing what is right is always so hard. Every parent understands this.

Now the EU understands it as well. In childrearing we call it spoiling the child; in economic terms it is known as moral hazard. Once one starts forgiving debts it becomes very difficult to convince a debtor that he really does need to live within his means. The ongoing saga of Greece’s indebtedness has finally come to a head. After kicking the can down the road for the last five years the EU has come to the same conclusion of many parents before them: We have let this go as long as we are going to and it is now time to get serious.

Polls in Greece indicate that the people there are reacting much like a child unaccustomed to discipline. They blame the creditors. How dare they expect us to actually pay what we owe? That is somewhat understandable, after all it was the Greek government not the Greek people that got the country into this mess. Many citizens whose taxes must be raised and pensions cut are rightfully upset as the politicians who got them into this mess are in much better condition than the people they claimed to care about. Of course that is often the downside to democracy; people vote for those who promise the most and then don’t really pay attention. That happens in lots of places. Everywhere one looks today one sees governments awash with debt. Are we all on the road to being the next Greece?

Those who profit from others’ fear will likely pronounce such. However, I’m an optimist. In the long run this tough stance by the EU is a good thing. Governments must take their debts seriously, and every now and then it is healthy to have that reminder, especially within the EU. If the folks in Brussels really want Italy, Ireland, Portugal and yes, even France, to get serious about being fiscally sound, then they need to show them that there are ramifications for not doing so. In other words, nip it in the bud. End this while it is still just Greece, which is so far gone.

On our side of the pond Puerto Rico is suddenly in the news as they are about to default. Of course we have seen it happen to cities in California, and the state of Illinois is the leading candidate for our own internal debt crisis. Maybe the U.S. will finally get serious about fiscal responsibility.

In the meantime, how do we invest with all of this happening? We addressed that in our last Insight, and nothing has happened over the last two weeks to alter our comments. We don’t see Greece having a significant impact. Of course there is always the knee-jerk reaction that leads to a couple of down days, but year-to-date – and even last week – international stocks have been the best place to be, so the markets don’t seem too concerned about Greece. But, even if we are wrong about that, we know what we own and we still like it for the long term. We have our risk controls in place for portfolio security and if need be we will take action.

There is no great cause for concern for your portfolio. The concern should be for the people of Greece, and over the hope that the political leaders in other countries are watching this and beginning to understand that fiscal irresponsibility needs to be nipped in the bud.

Chuck Osborne, CFA
Managing Director