Sunday, January 17, 2010

In Response to Aggie Capitalist

Aggie Capitalist posted in the comments in the previous post asking about why Greece matters. Texas alone is 4x the size of the entire Greece economy so who cares about Greece?

I believe Greece and Dubai have huge implications. Floatingrate correctly pointed to the pressure it would put on the Euro. On the front page of Bloomberg there is an article entitled Euro Falls to Three Week Low Versus Yen on Greece's Debt Crises. Will the European Union bailout Greece? Would Germans take on that responsibility and risk severe inflation down the road?

How the European Union handles it has huge implications. It won't be the last either. Spain is not far behind Greece. If Greece is a one off issue, it would be one thing. I believe it is a warning sign of something much bigger.

In early 2007 (I think it was March) New Century Financial filed for bankruptcy. The market digested it fairly well but it was the first of the financials to implode and should have sent alarm bells off everywhere.

I believe Greece has the same implications. What I keep coming back to and why I remain unashamadely bearish is that nothing has changed as a result of this downturn. Leverage is higher, solvency is a joke, and valuations in the public market are to high. All that occurred is the soverign nations reached down and picked up the risk from the private sector. They moved it to their balance sheet. This calmed the waters in the interim but corrected nothing. In alot of ways, I believe they made it alot worse because of what an implosion of this risk will eventually mean.

If Greece is the same as New Century Financial, and a warning sign of what is to come 6, 12, 24 months from now, investors ignore it at their own risk. Stress on the Euro, the risk of associated government debt being repriced has huge implications.

So I believe Greece, Latvia, Iceland, Dubai, Spain etc all have huge implications moving forward unlike in years past. We are all coupled much more than we have ever been. Some would argue that the biggest bubble of all time is now the government debt bubble. What happens if government debt gets repriced and the yield on a 10 year Treasury goes from 3.8% to 4.8%?? It would cause massive carnage. I happen to still believe that America is better off than most and problems in the European Union and eventually Japan will drive the dollar up and yields down in the U.S., at least in the interim. That doesn't mean things will be improving. It will continue the long lasting depression.

1 comment:

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