Austerity
My son is eleven years old, and while he is certainly very helpful around the house he is still what I would term a source of negative cash flow. As such, I was surprised to hear that he was expecting some serious perks on a recent trip to the barber shop.
A few weeks ago he went for a haircut with his uncle to a sports-themed barber shop here in town. They've got some flat screen TVs and there is always a game on...it’s a pretty good gimmick for a barber shop. While they were there his uncle treated my son and his cousin to the barber shop’s “VIP Package”. This is a deal where you not only get your haircut but you get a hot towel on your face while they give you a shoulder massage. As it turns out the kids loved it...and they now expect it.
A few weeks later it was time for another haircut. When my wife told me that my eleven year old was wanting the VIP package at the barber shop I stared blankly at her, then I asked her what that meant. When she explained to me what the VIP Package was (and then to my astonishment re-confirmed that my son really was expecting this treatment), I almost fell out.
My recollection of the barber shop when I was his age was of getting my hair cut by a balding, cigar-smoking old man who I prayed would not lop one of my ears off with his incredibly noisy and painfully sharp shearers. Nowadays kids want/expect a hot towel on their face and a massage. Ha! This was going to be a fun talk. I figured an early reality check would be a lot less painful for him than letting this VIP stuff go on for months before putting the brakes on it. I took a moment to explain to the child that the haircut is on me but if he wants the VIP Package he’ll have to use his personal funds for that. It was the last I heard of the VIP treatment. I assume that after a brief analysis of his statement of cash flows he decided that he’d rather use his allowance money for purposes other than a hot towel on his face. This simply reinforced in my mind that people like free stuff…risk free perks. When you have some skin in the game…the decisions are sometimes made differently.
I’m not the only one dealing with austerity issues now-a-days. Greece has had two votes this week to decide if, and how, they will implement their own austerity measures. To receive financial assistance from their European neighbors Greece needs to reign in some of their financial excesses. Yesterday they agreed that the austerity plans must begin, today they voted on a package of how to start. In other words, yesterday they agreed that people were going to get hammered, today they decided who and in which order the hammering would begin. There are more riots in Greek streets as the “hammerees” voice their displeasure at having their perks taken away. Clearly there will be a lot of friction as people see their standard of living cast in doubt.
The markets
The markets on the other hand like the outcome of the votes. As we’ve discussed in the past, there is a lot of money parked in Treasury bonds as a result of fear over the Greek situation. As investors struggled with the probability of a sovereign default in Europe they drove a “flight to quality” trade that pushed US Treasury yields to recent lows. While the US certainly has its share of fiscal issues we are still a great place to park your cash when there is trouble on the horizon. The last two days have seen a bit of a reversal of that flight-to-quality trade. As investors see solutions being implemented they begin to get more comfortable putting money to work. At some point they become comfortable enough to sell their Treasury holdings (or avoid purchasing more at the auctions) and reinvest in areas that were too scary to touch while a sovereign default was stalking the markets. As a result we’ve seen the 10-year Treasury move up 30 bps in yield since last Friday’s level of 2.88%.
This would normally be a quiet week for the markets as we are rolling into a long holiday weekend at quarter end/month end in the middle of the summer. Contrary to the quiet week that we might expect we have the 10-year Treasury trading up to a 3.18%, the Fed wrapping up QE2, and Greece initiating austerity measures. There is no shortage of factors that might upset the markets.
As we head into the weekend we are seeing that austerity is the new thing. Luckily for me my eleven year old is the rule-following type…there were no riots at my house over the suspension of his barber shop VIP Packages.
If you have any questions or if there is anything I can be doing for you just let me know.
I hope you have a great Fourth of July.
Steve Scaramastro, SVP
800-311-0707
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