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The Independent Adviser for Vanguard Investors • July 2015 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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ago. S&P’s broadest Greek stock index
holds fewer than 40 stocks with a total
market capitalization of less than 20
billion euros, compared to 10 trillion
euros for the entire European market.
Greece’s GDP is the size of the Detroit
metro area, while eurozone GDP is
about the size of our own. And the bulk
of Greece’s debt is held by the IMF and
other global entities, not private banks.
Greek stocks represent just 0.1% of the
assets in European Stock Index, up
4.9% this year.
The question is, what lesson will
other peripheral countries like Spain
and Portugal take away from Greece’s
experience? Will Greece inspire more
anti-austerity calls to leave the EU
and the euro? Or will Greece’s ultra-
depressed economy motivate others to
get their debt acts together?
Closer to home, Puerto Rico finally
did what bond experts have been have
been expecting: threatened to default
on its bonds. With a population of only
3.6 million, the commonwealth’s debt
stands at $72 billion—more than every
state except California and New York.
You won’t find much Puerto Rico expo-
sure in Vanguard’s tax-exempt funds—
only 1.0% of High-Yield Tax-Exempt’s
bonds are from the beleaguered island.
Chinese Fireworks
According to records dating to the
7th century, China is credited with hav-
ing invented fireworks, and there were
plenty on display as the skyrocketing
Shanghai and Shenzhen markets hit an
apex in mid-June and began a speedy
return to earth. In Shanghai, the market
peaked (though still well below its 2007
DEFAULT FROM PAGE 1 >
record high) in mid-June, having risen
59.7% for the year and 151.8% over
the preceding 12 months. The People’s
Bank of China, also known as Big
Mama, may have catalyzed the buying
with easy-money policies that gave bro-
kers the option of offering margin loans
to one and all.
But what Big Mama gives, she can
also take away, and a bit of tightening
turned buying into selling. By month’s
end, the Shanghai market had fallen
17.2% in 11 trading days.
Interest in mainland China stocks
has been stirred by their rapid ascent,
but like all bursting bubbles, there may
be more air to escape before the sell-
ing is over. The last time Shanghai’s
market exploded higher in 2007, it rose
502.3% in a little over four years before
plunging 72.0% in just 13 months. Our
portfolios do not currently have expo-
sure to the mainland China market, but
many U.S. investors have been itching
to get a toe in. You and I should contin-
ue to let our active managers determine
where values lie, precisely because
market sentiment can sometimes run
further than prudent analysis would
dictate. Vanguard, which announced it
will be adding these volatile A-shares
to Emerging Markets Index within
the year, may get lucky with its tim-
ing—or not. For more on this, please
turn to page 12.
For all these worldly events, there
was one that struck all of us at June’s
end. You may have missed it, but the
last day of the month was one second
longer than usual this year. Apparently
the planet is slowing down, and we
must add a second every few years.
Historically, these “leap seconds” have
occurred outside of trading hours, but
on June 30, a second was added at 8
p.m. EST prior to Asian markets open-
ing for trading. Like the Y2K worries
in 1999, you shouldn’t give it a second
thought.
What all of these distracting head-
lines overshadowed was the improving
U.S. economy. Yes, the final data on Q1
GDP showed the economy contracting
at a 0.2% rate, but that was such old
news that the markets ignored it. More
meaningfully, the housing market has
found its footing and is bouncing back
from a snow-filled winter. Sales are up,
prices are rising, and there are signs
that consumers are starting to spend
their growing paychecks.
Despite the improving economic
situation, the Federal Reserve pushed a
rate hike off until the Fall. Whether the
Fed raises interest rates in September or
in December isn’t going to be that big
of a deal. Short-term rates of 0.50% or
0.75%, or even 1.00%, are still incred-
ibly accommodative and would’ve been
almost unthinkable before the credit
crisis hit in 2008. For a dive into the
nitty gritty of bonds, start with the story
on page 1. n
Shanghai Has Been
Here Before
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