Problems in Europe right now are serious, especially if you live there and even more so if you work for the government.  Greece has basically defaulted, and there are riots in the streets.  Spain and Portugal could be next.  Global equities markets are selling off.  Is this the “W” all those pessimists have been waiting for?  No one knows for sure.  But one thing we do know is that the world has experienced many defaults before.  The Asian financial crisis in 1998 was serious of course, but we believe a better comparison is the Latin American debt crisis of the early 1980s.   Look at the table above.  Just about every major country in the hemisphere (other than the US and Canada) defaulted on its debt.  What is interesting to note is that the market was up significantly in almost every year of defaults.  Most importantly, the US had significant exposure to these loans, in fact, the 8 largest banks had 263% of their capital lent to Latin American Countries.

Today the situation is different.  As far as we know, no US financial institution has any kind of significant exposure to Greece or any other European country and the US is in a V-shaped recovery.  If the Latin American debt crisis can be our guide, current fears are overblown and the market has (or will) create a great new entry point.  There will probably be some more bad news in the weeks ahead, but these problems will likely blow over as the US economy continues to strengthen.  We remain convinced that another leg down for the economy is unlikely at this juncture.

Sources: MIT, Ibbotson