Washington, DC -- (ReleaseWire) -- 06/29/2015 --DAWN BENNETT: Chris Versace is a Forbes columnist with more than 18 years of experience in the investment industry. He also publishes PowerTrend Brief, which is a free weekly e-letter that focuses on powerful trends affecting investments today. Last week, Chris published an article titled 'How an Uneven Economy Might Thwart the Fed's Rate-Hike Plans.' He started off by speaking about Greece being the focal point of economic headlines in the stock market. Chris, welcome to Financial Myth Busting."
CHRIS VERSACE: Thanks for having me.
BENNETT: Chris, in your article this week, you started off by asking the question 'Will or won't Greece leave the Euro zone?' Do you think they're going to be leaving?
VERSACE: Well, I think the question is like one of those old Clash songs, right? Should I stay or should I go? And it's interesting, because on the one hand, toward the end of last week, we saw Greek officials try and pander to Putin in Russia, trying to give him a chance to thumb his nose, as it were, at the U.S. and the Euro zone for sanctions on Ukraine, but the reality is that they cannot help; Russia is in its own problems, given the fall in oil and their contracting economy. So, back to the question at hand, is Greece going to leave? It's very tough, because it sounds as if the people want to stay. And if we think about the fall-out, who's going to hold their debt? How are they going to reintroduce another currency back into the system? So I think it's a lot of chicken—almost like that old Bugs Bunny, Yosemite Sam cartoon, 'You cross this line, now cross this line, now cross this line!' and I think at the end of the day, we're probably going to have a deal. There could be some very onerous terms, but I think we will get a deal.
BENNETT: So is Greece hurting the Euro, or do you think the Euro is hurting Greece?
VERSACE: Well, you know, if you look at the Euro zone, and they've got a cast of characters that spans 18 or 19 countries. In order to be together, you have to have certain ground rules. Like if you join a club or anything like that. Any time you have somebody on the outside with dubious or bad behavior, or something not living up to the standards to which we've agreed, you have to wonder does this degrade the integrity of the overall group? And of course it does. So on the one hand, you can understand where the EU are coming from. I'm sure we've all had times where we've had to make some tough choices and cut some stragglers to maintain the integrity of the group. But I think, because of the pandering to Putin, that they're being put kind of between a rock and a hard place.
BENNETT: I wonder if we're going to have a standoff between Greece and the EU. Do you think there's going to be a run on the banks?
VERSACE: Well, you know, there was a rumor that the banks were going to be closed on Friday, and I saw that and I'm like, 'Oh no, here we go.' Because at the end of it all, until a deal is done, and until the actual terms of the deal, there's a lot of uncertainty out there. And you know as well as I do, from studying the markets, that the market abhors uncertainty, and it gives rise to anxious behavior. I wouldn't be surprised if we found that institutional investors over the last couple of weeks have been pulling what money they might've had out of the Greek market. And you know, the great thing about the Euro zone is there is a lot of other strength out there. You could look at the economies of Spain, Italy, The Netherlands, for example, that are really starting to boom.
BENNETT: If the banks are the first domino to fall, what should Americans be thinking? Will it impact us?
VERSACE: Well, I guess there's a couple of ways to look at that. Will it impact our banking businesses abroad? Probably not. At the end of the day, Greece is rather small. Will it impact our stock market? Yeah, probably. You know, there's always the fear of contagion. But to me, when I kind of push back and take a longer term view, any hiccup short term in the market is opportunity to either pick up investments at a discount, or double down in existing investments, providing, of course, that the underlying thesis or rationale for buying whatever security it is—ETFs, stock, what have you—remains intact. So to me, I like it, to be honest with you.
BENNETT: This morning, I've been talking about America's increasingly debt-laden economy, especially with the CBO report that came out last week, and the millennial generation that's unaccustomed to hardship, unaccustomed to saving. How do you foresee these two trends actually playing out?
VERSACE: You know, I hate to go all Debby Downer, but I think you're hitting on something. If you really peer into the CBO report, I think they're looking for an average of 2.2% growth over the next 10 years. They're talking about how, as the demographics shift and more people retire, that the taxable base will fall, and subsidies and other programs like that will account for more and more of the GDP. That's a very, very scary prognosis. We have to figure out some way to spur real job creation at real wages, and to attract people to work in the U.S. to try and right-size this. At the same time, I think you make a good point on the millennials, because when you look at the unemployment among the millennials, you look at the amount of student debt that they're tapped with, because there are no jobs, and you look at them really being a drag on the housing market because of low household formation, because what are they doing? They're hanging out, surfing the internet on an iPad, iPhone, in their parents' basement, and they're not really spending money. So understandably, they are a drag to the economy. But to me, all of this gets back to an administration that does not really understand what it means to put business first, to get people to work. Rather, we've got one that is looking to redistribute wealth, that is looking to overregulate business, so it becomes harder and harder for not just large businesses, but small businesses.
BENNETT: I really think you're hitting on something, in that it's going to be about the politicians that we elect today and in the future. Do they have the ability to bring America back to lesser government, create tax programs and fiscal policy that are going to help America build and not suck it dry? I think we need political change.
VERSACE: Oh, absolutely. There is no doubt about it.
BENNETT: But this is going to be a lifetime of political change; it can't happen overnight.
VERSACE: Well, it's funny. There was that old saying that in order to get Reagan, you had to have Carter, right? So there is hope for that, but I think there's some big things that we really need to look at. And you mentioned the CBO. Obviously we've got to take a look at entitlement reform. It's a very touchy subject on both sides of the aisle, in part because, let's be honest, these guys are campaigning 24/7 now. So we have to do something with that. We have to overhaul the tax code. And is Rand Paul's 14.5% tax the right number? It's probably low, in my opinion, but it's something to get the conversation going. Can we repatriate cash that is outside the U.S., so companies can start reinvesting here in the U.S.? We need some type of tax holiday for that. But I have to be honest with you, that's why I'm partly excited that Donald Trump is in the election. And I say that not because I think he's going to win, but I think when you have 9 billion dollars, you can pretty much say what you want and stir the pot and bring the issues to the forefront. And I hope he does that.
BENNETT: Well, I agree with you. I actually would like to see a more business people continue to run, and maybe even get into the White House. I don't know if politicians are the answer anymore. Certainly he has a very aggressive, in your face way of speaking, but he does make valid points. As you wrote, for example, in your article 'How an Uneven Economy Might Thwart Fed's Rate-Hike Plans,' the truth of the matter is, there's a lot of continued weak economic data coming in. And Trump sees it. All the business people out there see it. Do you think the second quarter's actually going to show any rebound at all? I think we're already in a recession. What do you think?
VERSACE: Well, what I can say is this; there's no doubt that the economy is a lot slower than everybody thought it was going to be, both at the beginning of the year, and that expected snap-back. In the article, I trace through a couple of different data points that really point to a quick snap-back in April and early May, depending on the indicators you're looking at. And then we look at falling rail traffic, falling truck tonnage. It tells me that things are not humming along, because in order to get the economy moving, you've got to be moving parts and things around, you've got to be getting finished goods to people, and we're not seeing that in the data. And to me, the politicians can say what they want, the Fed can put lipstick on this pig, but the bottom line is we have to let the data talk to us. And I think one of the big problems that I run into time and time and time again is too many people are trying to put their opinion on the data, rather than let data help inform them.
BENNETT: If that's the case, do you think that rules out any chance of Yellen raising rates this year?
VERSACE: Well, it's funny you bring that up, because I was in the camp back in January, February that there would be no rate increase until December, and it seems as if people are coming around to that process now. Now my concern is that it might slip into 2016, and that becomes very interesting. And I say that because 2016, as we all know, is an election year. So could it happen before then? Maybe. Then the question becomes one of size, right? Maybe not a quarter point; could we get 10 basis points, just to say that we did it? But I think the reality is any initial rate increase will probably be digested. It'll be held in bonds, but it'll be digested over time by the stock market. The looming question out there is when's the next one?
BENNETT: Yes, I think the stock market is starting to price that in. Semi-conductors, for example, have completely retraced their temporary surge. And even Apple, its peak was on February 23rd, four months ago, and their stock is down about 5% from there. And Apple, of course, is the highly touted stock out there, but it doesn't seem to be a smash hit. I'm thinking that we're already starting to see the market adjust.
VERSACE: Yes, and the market's a forward looking beast. And if you were to trace the S&P 500 back until, I believe, early to mid-April, we've been in this very tight trading range. It's almost as if the market is saying, 'All right, okay, let's just do this. Let's get this over with so we can move on.'
BENNETT: What about Greece? I still keep coming back to that. For example, is a nationalization of Greek banks likely, and will that carry over to the United States?
VERSACE: You know, I can't speak to the former on that; maybe it happens, maybe it doesn't. As for here in the U.S., I don't think that would be well received at all, to be very honest with you. I think it kind of goes against who we are and what we're doing. I think it's speaks to issues that we need to fix, quite candidly, and I'm hoping that we can get there.
BENNETT: I do keep wondering if this is going to be the first domino that falls. I've seen a lot of institutional research out there saying to short Greek bank stocks, because they're probably going to go to zero.
VERSACE: Oh yeah, probably. I mean, just think of the challenges that they're going to have. I can tell you right of the bat, in both my newsletter, The Growth and Dividend Report, and in the fund that I run, The Thematic Growth Portfolio | Fabian Wealth Strategies, when it comes to Greece I'm not involved. I kind of look at these things and I go, 'Ooh, potential pit fall. I'm going to stay to the side and kind of look for other things to do.' You know, like I mentioned earlier, Spain, Italy, that sort of thing for the rebound that's happening in the rest of the Euro zone. But if we do get a run on the banks, or there's fear—I mean, you know what a powerful, powerful catalyst to the downside that can be, because call it where there's smoke there's fire, or something like that; it's the perception that would really hammer the stocks.
BENNETT: Greek banks do have somewhat of a franchise; they could actually recapitalize with the new drachma, after a Grexit. Similar to what happened in Iceland, right?
VERSACE: Think of it this way, right? That was in 2008, 2009 when our banks were—nobody knew what was going to happen. And you saw such huge discounts that if you took a very long, patient view, you could do very well for yourself. That same opportunity exists, but the whole idea of having introduced a new currency, who's going to own their debt, how it's going to settle out; these are some big questions. So it's really going to be, I think, for a mature group of investors. I don't think Joe and Jane bag-of-donuts is going to be, 'Hey, let's go buy some Greek banks,' but there could be opportunity there, no doubt.
BENNETT: Those same people—Joe and Jane Donut—have been bamboozled by the central banks, in encouraging them to be long on equities, when we have very weak economic structure, not just here in the United States, but in Europe. Obviously the situation with Greece is not going to be easy on our markets either.
VERSACE: No, I think you're right on that, but you know, you have to remember that the Fed has kind of wound down any stimulative effects, but if we trace back, the S&P 500 from 2008, 2009, all the way through the last few years, it's been very strong.
BENNETT: There was a study I saw where hedge funds have twice the long exposure they did at the 2008 market peak. And I do think that this Greek default could be the catalyst for a sea change, and not just in the United States equity market, but global equity sentiment. So, to speak again of the millennials, do you have any advice for our young listeners, for those who are actually lucky enough to land a job and have some money and save some money; do you have some advice for them to survive this?
VERSACE: Sure, I do, I do. And if you look at interest rates, they're extremely low, and they're apt to remain low for a good deal longer. I would suggest that they need to get ahead and into the markets and start investing. Now, whether that's through mutual funds, ETFs, individual stock, I think that really depends on their level of understanding, knowledge, sophistication. I do think that at a minimum, they have to start squirreling some capital away. Obviously the sooner they start saving through a 401k, IRA, the better off you're going to be for the long term, which is of course what we're talking about. But I always like to have a little fun with the stock market as well, and I do encourage people to buy some individual securities or individual ETFs, who obviously understand how the market works, so they can kind of figure out how they should be investing, where they should be investing their money. And I even recommend that people with kids do it, today being Father's Day, of course. Talk to your kids, open up their eyes a little bit. Say, 'Look, what are your friends buying? What is popular?' so then they start to look around and pay attention to it. And that's why I think among a lot of younger investors, you tend to see companies like Chipotle, Whole Foods, but also Under Armour, and Nike are in their holdings. Maybe even Go Pro.
BENNETT: For millennials, though, you've talked about the stock market, bonds and stocks, but what about homes? Is the home owner dream kind of dying for them?
VERSACE: You know, it's interesting. I think a lot of them come out of 2007, 2008, 2009, and they see not so much the opportunity and pride in home ownership. I think they see quite the opposite, which is 'Oh my god, the burden. What happens when the next crisis comes along and we get burned again? We might not be able to move because my mortgage is under water,' all these things. But at the same time, too, I also think it's harder for them than it's been for other generations. Obviously we can look at student debt, like we said before, the unemployment rate there, and the jobs that they are getting. But I think the other issue that we've seen over the last few years, due to really a lack of supply, is housing prices have just climbed and climbed and climbed. And candidly, I thought about 18 months ago when inventories were so low, that this would be a fantastic point for the home builders to come on the stream and start adding houses, to bring the prices down and really capture some marketshare. But you know what happened? A lot of the home builders built spec homes—homes for sale but not sold—in the back half of last year, and now they're all taking it on the chin, because they're having to use a lot of incentives, concessions to move that excess inventory. So to me it suggests there's a lack of demand out there.
BENNETT: The knock on millennials is that they're self-absorbed and unaccustomed to hard work, they fear a lot, and they don't work through their fear. Do you find this to be the case, and how does that actually factor into financial planning nowadays? If people are only attuned to the here and now, and they don't look ahead, how do you break them out of that short-sightedness?
VERSACE: Well, I think one of the simplest ways to do it—I do this when I teach up at New Jersey City University in some finance classes—you kind of explain the time value of money, and I think you kind of open their eyes a little bit. I think, 31% of Americans lack any retirement savings, and you start to talk to them about what that picture means, if they retire, maybe when they don't retire, put that whole picture together. So I don't want to sound like I'm using fear to get them going, but I think understanding the opportunities that you can have for freedom, comfort. And again, if you are a fearful individual, making sure that you're feeling a little more comfortable about what you're doing today for later, I think is important. But again, it all begs the question that they either have a job or they have some disposable income after caching several months' worth of expenses in their bank account.
BENNETT: Can you tell everybody where they can subscribe to your free weekly letter?
VERSACE: The best place to find my stuff is at chrisversace.com. You can also follow me on Twitter @_chrisversace.
BENNETT: Chris, thanks so much.
All data sourced through Bloomberg
Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or email@example.com