Saturday, September 17, 2011

Unwelcome Weather

Signs are pointing to a bloodbath in the market.  It may (continue to) be a slow burn off, but it's looking rather unfavorable.

First, Greece is about to blow, and although their economy is not all that big, exporters in Europe (mostly Germany) has been dependent upon the 'paper' growth generated by Greek (and the rest of the PIIGS) debt spending, and that's the good news.  The bad news is that European banks have been suffering through a slow run that might turn into a sprint since their banks are levered to the hilt with bad PIIGS debt.  Adding insult on injury, having not learned their lessons before, several American institutions are rumored to have been writing credit default swaps (insurance that's paid out to bondholders if their bonds, such as from Greece, go bad) that they more than likely can't cover.

Just to pile on, it should be pointed out that one of the drivers for AMG going into government bailout ownership was never even fixed: Credit Default Swaps (CDS) do not have to be written up against an asset.  In other words, I can go to Bank of America (as several people are rumored to have done) and get a CDS against a million dollars in Greek bonds without, in fact, even owning any Greek bonds at all.  This means that the total exposure to the financial sector is well in excess of the monetary size that Greece may default on (and that doesn't even take into account the fact that European banks more than likely lent out at least $50 for every $1 of Greek debt that they held).

Into the mix is the fact that there's no money for another round of bailouts and the fact that the developed nations (and a fair portion of the developing nations) are completely broke.  There's no backstop this time to hold up the old order for a few more years; this Tsunami looks like it's going to go right over the wall.  (Plenty of articles out there, but my current sentiment is based on light reading here and here).

(I should point out that what's aggravating is that even with all the cards stacked against it, the U.S. still has a chance to do well; if the two ton hog that is the government would get off of the economy and let it breathe).

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