Confirmation of my thesis

Posted by Ray on June 24, 2010 under Main | Be the First to Comment

From David Rosenberg’s morning musing’s today:

“ In contrast, the Asian FX complex is selling off. Risk assets are not responding to this week’s apparent good news: the Chinese peg announcement (has anyone noticed that yuan forwards are actually …. weakening?)”

Whether this is a real trend or not is unknown, but I fully expect the yuan to appreciate before it really falls anyhow, gotta get Congress off their backs for now. No matter what a strong yuan is not in China’s interests right now and China’s ruling party wants to remain the ruling party so are they going to fear Congress or a billion Chinese storming the Peoples House? You get my point.

To further make my point about the troubles in the EU and in China, moreover how this is a global issue now, Rosenberg went on to say:

“ There are all sorts of news reports in today’s FT discussing how the problem countries in Europe are in such bad shape that their banks are increasingly relying on the ECB for their funding survival. Portuguese banks reportedly doubled their borrowing from the central bank in May as a sign that this is not just a Greek tragedy. We have reached a stage where countries representing 18% of Eurozone GDP is accounting for 68% of the growth in ECB funding. Is that a currency you really want to own?”

What does all of this mean? It means big trouble and the markets are telling us that the problems from around the world are about to wash up on our shores. The irony is it is all coming full circle because we kicked it off with our credit induced sugar coma over a 5 year period which made risky paper seem safe and led foreign banks to buy it. Later everyone found out that safe paper was worth far less than the paper it was printed on and the write downs, globally, were enormous, with more to come. That triggered a collaborative global bailout of the entire financial system, but the ones who funded the bailouts are now in trouble and the recipients of the bailouts were never really in such great shape even after they received hundreds of billions in aid.
While we allowed our banks to extend and pretend, mostly because we have the luxury of printing our own money and we are the reserve currency, foreign banks bought seemingly safe sovereign government debt instead of treasuries, for the obvious reasons. Well, that debt became no good and we are where we are with a potential funding problem across the pond and a healthy exposure to European banks. We had exported our “safe debt” which ended up being toxic to the Europeans and they, more or less, did the same thing to us! Except theirs was disguised as safe government paper instead of CDO’s and CLO’s.

I believe the proper name for such a thing is “circle jerk,” but I am not 100% sure on that. Either way it is definitely heading this way and only a fool would deny that fact. In today’s world it no longer matters if a problem starts 10,000 miles away because everything is handled via the internet in microseconds and exposure can go from nil to billions in the blink of an eye. All this means is that we are exposed and the market knows this. Why else would treasuries be doing what they are doing while gold is rising and stocks are declining, the interesting thing is the stocks declining part is new and all 3 were once going up at one time, how odd. All 3 asset classes could not be right, but 2 out of the 3 asset classes were bearish for stocks so directionally speaking a downward move should not be overly surprising to anyone, but it is, interesting.

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Only $600B to go

Posted by Ray on May 2, 2010 under Main | Read the First Comment

Greece received its bailout today, pending an approval from some EU members which should prove interesting. Do European politicians care about reelection as much as U.S. politicians? If that is the case I suspect the longer term bailout is in question.  Even in Greece itself the bailout is not widely accepted, who would figure that the unions would be opposed to higher retirement ages and lower payments. The current system is kind of insane, 14 annual payments, there are only 12 months, even in Greece, and the minimum retirement age was 53, new proposed retirement age is 67, welcome to the real world.

The primary issue, as I see it, is that we are curing debt with more debt. The EU member countries will have to pay for this bailout through higher debt to GDP ratios and higher taxes. This is why in Germany the bailout is unpopular, as it should be. At the end of the day all they are doing is saving France and other Greek debt holders, they should not be rewarded for speculation, but that is what is happening. As David Rosenberg said, we should all be opposed to bailouts, the madness must end. By allowing failed states or companies to survive when the free market decided otherwise has never worked long-term.

On top of the ridiculous bailout of Greece we now have to worry about the other PIIGS. Are they going to get bailed out? If so the EU and IMF will need another few hundred billion Euro’s. I suspect that Spain and Portugal spreads will widen tonight and tomorrow as the Greek issue is temporarily resolved, but their issues are now at the forefront of concerned world citizens. Bailing out these countries will be a huge mistake as it condones bad behavior. Let them fail or implement an ejection mechanism to the EUM Constitution.

I am sure the markets will be positive tomorrow as the crisis was “averted” and the good times are here again. Although I believe Friday’s selloff was unrelated to the Greek tragedy, but in reality the markets are facing a very overbought situation. Whether you want to believe this or not is your choice, but the markets are not supposed to go up every day or week. In fact, the past 2 months have been very, very abnormal to say the least, but the bulls will disagree, of course, citing some preposterous data point or use a forward looking P/E, which is just dumb I might add. But those of us living in reality know that conditions are not that good and the underlying economic data really does not support a parabolic move in the markets.

However, those in reality will look at the Greek tragedy and say, how can you fix one countries debt load by increasing another countries debt load? It just does not work and eventually we will see defaults. When that will be? I do not know, but soon I am sure. I am also confident that the Greece issue will spread first to Spain and Portugal, then to Italy and finally to France, since no one can bailout all those countries. Where it goes from there, I do not know, but I do know that it will eventually travel around the world as debt crisis usually do. This is why gold is going to go parabolic in the very near future… Got Gold?

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