Many in the media have laid the blame for recent stock market volatility at Greece’s door.

The fact is that, economically at least, what happens to Greece just doesn’t matter much to the rest of the world. Why? According to the World Bank, the total economic output of Greece is less than 2% of the European economy and only 0.6% of the world economy.(1) The economy of the Dallas-Fort Worth metropolitan area is the same size as Greece. Houston’s economy is bigger.(2)

With that perspective, the Greek debt situation doesn’t seem as alarming for U.S. investors as many of the news headlines have made it out to be. A Greek debt default would be no more likely to sink the U.S. economy than a Dallas- or Houston-based default would be to sink Europe.

That said, it would be more serious if a Greek default precipitated defaults in other countries — Spain, Italy, Ireland, Hungary and Portugal being those most often named. The economies of Ireland, Hungary and Portugal are no more significant than Greece, but taken together Spain and Italy make up 20% of Europe’s economy, and 6.8% of the world. A default in Spain and Italy would be much more serious than a default in Greece.

Spain and Italy, however, are far stronger than Greece. Greece is simply a third-world country that, having vastly overspent for years, has no hope of ever repaying its debts. Apparently Greece had to manufacture fraudulent figures even to gain admission into the EU.(3) Spain and Italy, in contrast, are core EU members whose economies are much stronger and more resilient.  Thus, the odds that Spain or Italy will default on their sovereign debt at this time seem remote.

Also bear in mind that even a government default in an economic basket-case like Greece would not mean that all sovereign debt would go unpaid. Recent publications suggest that even with no EU assistance the Greek government could repay all but about a quarter of its debt. Even worst-case, debt strain in Spain and Italy is far less severe.

This is not to deny that there is real investment risk in Europe. Indeed, the European debt situation is likely to result in austerity programs across the continent that will somewhat reduce European economic activity for the next few years. And reduced economic activity in Europe will probably reduce economic activity around the world, simply because the Europeans will be buying fewer products and services. It’s reasonable to expect the market to factor these considerations into stock prices, as it apparently has lately.

But ultimately the question is, what should you do about the European debt situation as an investor? Sell European stocks? Sell all stocks? Sit tight?

If you have a well thought out, well-diversified portfolio, my recommendation is to sit tight. Current stock prices already reflect all the information that is known today. Remember that the markets don’t go down on bad news. They go down when news is worse than expected. Stock market participants already expect a worsening European economy, and stock prices reflect that prospect too. So while markets may go down further this summer, there is no guarantee that they will. In the short term markets are unpredictable. They could turn around at any moment and start back up. If you dumped all your stocks just before a market recovery, where would that leave you?

Remember why you are in the stock market in the first place. The best reason to invest in stocks is for long-term inflation protection. Inflation seems dormant now … but it could pick up at any time. Personally I think that rising inflation will become a significant concern within the next two to three years, fueled by all of the government budget deficits around the world.

And remember why you own European stocks. All the data available indicate stocks worldwide provide good diversification. Stocks in all countries have their good times and bad times, but spreading one’s assets around the world has been shown to increase long-term return while reducing portfolio volatility. That’s a hard combination to beat.

Assuming your allocation to European stocks is part of a sensible plan that continues to reflect your long-term goals, I recommend you hold onto them. Now is not the time to bail.

What do you think about government intervention: in our health care system, in the auto industry, in our economy in general? Whether you feel good, bad or indifferent about it, many clients (and I) have been concerned about the impact it might have on the stock market. Is more government bad for investors?  

Before you decide, I encourage you to invest five minutes to enjoy a fascinating presentation by Dimensional Fund Advisors Vice President Weston Wellington, “Government Intervention and Stock Returns.”

Weston analyzes past returns and data from other countries in which government intervention in the economy has waxed and waned. His conclusion? The evidence shows that more or less socialism has NOT been a major factor in determining stock market returns. It seems there are simply too many other factors with which it competes for it to have a major impact.  

This does not, of course, tell us with any certainty which stocks, sectors or asset classes are going to be the winners or losers in our economy and our country. Government policy-making activities will continue to combine with the other factors that result in stock pricing, which means the future will continue to be a big, fat unknown. In light of the uncertainty, I encourage my clients to continue building and maintaining globally diversified portfolios designed to track their individual goals and risk tolerances — and to continue to vote for whomever they feel will do the best job with all the rest.

 One sometimes hears – with ominous overtones for the United States – that democracies last only two hundred years.  Is this limit on the life of a democracy a fact, or an urban legend?  Though often attributed to British lawyer Alexander Tyler, the origin of the saying is unknown.  History offers little support for it, however.   Advocates of the 200-year limit might point out that Athenian democracy lasted about 180 years, from 500 BC to 322 BC.  Nevertheless, other examples are scarce.  Roman democracy, the other obvious example of a representative democracy from the ancient world, lasted from 509-27 BC, or more than 500 years – far in excess of the supposed limit.   A less well-known ancient example of a democracy of Native Americans also contradicts the limit.  The democracy founded by the Iroquois spanned several hundred years.  British democracy can be traced to the English Bill of Rights (1679), and before that to Magna Carta in 1215 – in either case far more than two hundred years ago.   The American (1776) and French Revolutions (1793), 233 and 216 years ago, gave birth to two democracies more than two hundred years ago…and counting.  Obviously no clear evidence foretells the imminent demise of the American and French democracies, and already their longevity is stretching the supposed 200-year rule to the breaking point. Recent history provides no contradictions to the 200-year rule because of course fewer than two hundred years have elapsed. To illustrate, the Japanese and German democracies, along with a number of other modern democracies, have existed only since World War II b just over 60 years. Thus, not enough time has passed for these democracies to test the 200-year limit. In summary, history offers little evidence to support the contention that democracies must fail after two hundred years. Perhaps this urban legend had its roots in the bald speculations of doomsayers who had already concluded that the U.S. is on the decline, who then noticed that the U.S. is about 200 years old, and who figured that the imagined 200-year "rule" would provide convenient support for their own claims that the demise of the U.S. is closer than most think. Some imagine the 207-year Pax Romana, from 27 BC to 180 AD, was an idyllic period of democracy; however, it began with the accession of emperor Augustus Caesar and ended with the death of emperor Marcus Aurelius, and more resembles a dictatorship than a democracy.

In a seven-minute video, David Booth, the chairman of Dimensional Fund Advisors, explains why inflation makes US Treasury bills riskier for the long-term investor than stocks.

Taxes can encourage people to make spending or investment decisions for tax reasons instead of economic reasons.  Sometimes this is intentional.  To illustrate, the excise tax on cigarettes is partly intended to discourage smoking, and it does have that effect.  But many taxes have unintended economic effects.  For example, while income from an employer is subject to income tax, most employer healthcare benefits are not.  This may encourage employers to give raises in the form of healthcare benefits.  One solution:  tax employer healthcare benefits.  I’m not a big fan of taxes, but this is one that would make sense.

With the increasing national deficit, the possibility of very expensive national healthcare, and the huge expenditures by the Federal Reserve Bank, it’s easy to imagine that the United States economy is inevitably on the decline.  It isn’t that simple, though.  As Peter Zeihan of Stratfor® argues, the U.S. economy is far more stable, durable and flexible than most other global economies – in part due to, of all things, the country’s geography.  The Stratfor writer offers an unusual perspective on long-term economics that
I believe you will find fascinating.

Sure, the stock markets have always come back before, but it’s different this time, right?

Click here for a video offering perspective on the unpredictability of the stock market. 

Labor union membership has fallen from 28% of total employment in 1954, to only 11% today.  Two of the best economic and legal minds today, Professor Gary Becker and Judge Richard Posner, argue that union membership will continue to decline whether or not the Obama administration supports unions.

Based on market history,we must expect the recent high market volatility to continue into 2009, but that doesn't mean that the recent poor returns necessarily will continue.