So why does Greece matter? To understand this better, we need to go back to the 1980s when the Latin American debt crisis threatened to bring down the five major New York banks as well as other large financial institutions around the world. Conventional wisdom said that "countries don't go broke" and the crushing debts of many Latin American nations were constantly restructured to allow for continued payment of interest in a charade that would soon come to a bad end. Markets knew that countries do "go broke" and default on their debt. Bank stocks reflected this until write-offs, bank recapitalizations and other creative debt-reduction techniques eased the crisis.

Today, several hundred billion dollars of Greek debt are held by European banks. Of greater concern, however, are the even larger amounts of Spanish, Irish and Italian debt held by European, U.S. and Japanese banks. The risk of a debt restructuring and attendant losses for large financial institutions was not welcome news. Substitute the words "Bear Stearns" for Greece and "Lehman Brothers" for Spain and you get the picture. Echoes of rising government debt burdens in the United Kingdom and the United States have only added to market concern.

Let's lay it on the line. As discussed in the market update we issued on April 5, there are a number of imbalances in the world — one which I described under the rubric "there's still too much debt." Here's what we said just over a month ago:

"Greece and its troubles is the canary in the coal mine. Debt markets will not allow fiscal profligacy to continue forever and borrowers like the United States that do not put their fiscal house in order will eventually pay in the form of higher interest rates, a lower exchange rate, or both."

Sovereign indebtedness, mortgage debt, credit card debt and other ways by which we live beyond our means have created a large debt burden that needs to be worked off. This process has already started through budget cuts, foreclosures, credit card write-offs and restructuring. It will continue for some time, but markets are clearly worried that current actions are insufficient. Prices are now adjusting downward to reflect increased risk. The chart below from the Bank Credit Analyst shows the need for continued debt reduction. Bank loans as a percent of GDP are still too high and the U.S. consumers' debt/income ratio is too high as well.

Price matters — the ebb and flow of markets

Prices continuously adjust in financial markets in a never ending attempt to equate risk with reward. Academics have suggested that markets are efficient — meaning all available knowledge is fully reflected in the price of a stock or bond. In the long run this may be true, but markets can be notoriously inefficient in the short run because the primal emotions of greed and fear can drive short-run thinking. Last week's sell-off was in part an overdue correction in stock and bond prices that had moved too far and fast relative to the fundamentals. Below are two ways to think about this correction.

At the height of the crisis, bond prices fell so low that the bond market was literally predicting a depression. Bond yields rose as spreads or the extra compensation paid over "risk free" U.S. Treasury bonds rose to historic highs. The chart below, which I have used in multiple market updates, depicts wide spreads and low bond prices. At the height of pessimism, bond prices were too low and represented an extraordinary opportunity to make money.

Simply put, risk and reward had moved sharply in favor of the investor. Accordingly, bond prices rose and spreads contracted as the market rebalanced risk and reward through a mechanism called price. As prices moved higher despite ample evidence that many risks still existed, a correction in bond prices was long overdue. That correction is happening now and may represent opportunity just as it did a little over a year ago. Money can be made in bad markets and good markets. The key is buying at the right price.

Corporations do not operate in a vacuum. Companies make adjustments based on economic conditions in order to create value for their shareholders. The deep economic downturn has raised serious questions about where and how companies will find revenue growth. In the absence of robust revenue growth, some companies have had to grow earnings through efficiency gains, often under the euphemism of "doing more with less." During the downturn, companies laid off workers (hence our 9.9% unemployment rate), paid down debt and adjusted production for a more sober environment. As a result, many companies actually became stronger and are now generating lots of cash that can be used for everything from dividends to merger and acquisitions activity. The strength and cash-rich nature of big American companies was the subject of a front page Barron's article last week, titled "Stronger than Ever."

This provides what we believe to be another reason to take the recent market downturn in stride. Markets anticipated much of this restructuring in the form of rising stock prices until the recent downturn. A stock market correction does not change the underlying strength of most large companies nor the continued adjustments to a new economic reality. In fact, paying less for companies that can generate free cash flow and higher earnings based on increased efficiency represents a strong opportunity. It is another key example of why price matters in markets.

We continue to believe that we are in a world of single-digit returns for some time to come. As such, mutual fund dividends, bond coupons and stock dividends will all matter greatly in the one to three years to come. Single-digit returns are not necessarily a bad thing, especially since inflation has remained very tame.

Deflation or inflation — the $64,000 question

For over two years, we have been discussing one of the most important and persistent questions facing the U.S. economy. Are we headed toward a bout of high inflation as a result of the Federal Reserve's easy money policies? Conversely, is the excessive amount of debt, high unemployment and low capacity utilization signaling an era of deflation? This is a debate that vexes even the most senior policy makers in the world. Those who say we are headed toward a ruinous bout of inflation point to the rise in the price of gold and inflation in emerging countries like China as evidence. Those concerned about deflation point to last week's headlines that claim inflation had reached a 44-year low.

There is no clear answer to this question, but there is clearly no inflation in sight for the near run. Banks are not lending at previous rates for the reasons stated above, which in turn constrains the growth of the money supply. Couple this with high unemployment and a wide output gap (the gap between the economy's potential to produce and its actual production) and it is hard to conjure up inflation in the near future.

Debt continues to be a ceiling on growth. Consider a consumer who spends 20 cents of every dollar to pay down debt. That is money that might have been spent on goods and services and thus restrains growth in the economy. Governments (including state and local) are no different. As they slash programs and cut workers to balance budgets, growth is again constrained. To understand more about the threat of deflation, read the Economist Paul Krugman's editorial in the New York Times dated Friday, May 21 (Note: If you are a new visitor to the New York Times website, you may need to register to view this article. Registration is free and takes little time).

Conclusion — what does this mean for investors?

The past two weeks' return to high levels of volatility is a reminder that we will continue to feel the effects of the financial crisis and the "Great Recession" for some time to come. In reality, no one should have thought otherwise. The damage inflicted on the economy and the financial system, and the government responses to that damage are not easily wiped away in just one year's time.

It is essential that you continue an ongoing dialogue with your advisor and address each of the four financial cornerstones (Cash and Liabilities, Protection, Investments and Taxes). Approaching your financial picture in this way helps ensure you are addressing all of the key elements to maintain control of your future. A well-diversified portfolio of assets is crucial, but even more important is maintaining a portfolio that has a high level of product diversification. In today's marketplace, only one thing is certain — there is no single financial solution that can address all the risks and opportunities.

For that reason, it is critical you pay attention to the cash and debt in your portfolio, incorporating banking products that allow for smart saving and borrowing. Mixing in insurance products that offer protection against death or disability and annuity products that offer a guaranteed stream of income while in retirement will help ensure a sense of security. Investing wisely, in alignment with your goals and risk tolerance comes next, while managing taxes both for today and for the future by employing strategies ranging from Roth conversion and tax deferral to offsetting AMT (alternative minimum tax), which is the final step in the process. Ultimately, we believe a well-structured, properly diversified set of product solutions remains the best defense against market volatility.