Tuesday, February 9, 2010

Panic Buying on Rumored Greece Debt Solution

Now that there's a rumor that Germany will bail out Greece from its long-term debt problems, it must be not only safe, but profitable, to invest in equities.

This is what substitutes for logic on Wall Street. A country of roughly 11 million, the government of Greece is having serious difficulties financing its debt burden, a fact that has not been lost on EU officials, the European Central Bank, or, your friendly, neighborhood shysters and hooligans in the investment business.

Normally, credit default of an entire nation is serious business. These days, rumors that somebody will issue more debt to "keep them afloat" is supposed to signal that better days lie ahead, not only for the beleaguered nation, but for the entire planet.

Nothing could be further from the truth and those who bought into today's rally were probably well aware of the risks involved with investing in anything at such a precarious economic juncture. Either that, or most investors are really just sheep being led to slaughter.

There's almost no way to put a positive spin on debt restructuring of a country roughly the size and population of New York; its yet another sad chapter in the all-pervasive world-wide debt bomb. Just as they have for the past year, cheery optimists claim that economies will rebound soon and all will be well. Global demand will improve with better economic conditions prevailing globally. Sadly, these prognostications of some recovery, rebound or reflation are little more then idle pipe dreams of crack-smoking Keynesian economists. More sober heads are pointing to Portugal, Italy, Greece and Spain (the PIGS as they are known) as the beginning of the end of not only the Euro as a viable currency, but for a continuation of the debt-leveraging that has led the global economy down the abyss.

Eventually, there must be losses in order to purge all the mal-investments made over the last 10-20 years - though mostly in the last 6 to 8 - and restore correct economic balance to the entire global system. These losses include everything from credit card defaults to mortgage write-downs to underfunded pension funds to failed governments. Everyone, from individuals to banks to governments and their currencies is going to take a hit, some ore severe than others. It's not very easy to do, certainly isn't pretty, but debt default will eventually restore - and much quicker, by the way - economies to reasonable levels of functionality. Until the debts are expunged, paid off, paid down, or otherwise disposed of, there can be no hope for any kind of lasting recovery and economic stability.

That's the part most "modern" economists just don't seem to get. Either that, or they know it and are just lining their cards up properly. My best guess is that the global economy is about 1/3 of the way through a process that began in August of 2007. Although it took awhile (a little over a year) before most people took notice, the de-levering had begun when real estate values began to slip. Then, by 2008, stocks took their hit (and subsequently recovered, but understand that this cyclical rally within a secular bear market has great downside risk later on), and the banks cried and wailed though gobs of taxpayer money, most of which is still owed.

By August of 2010, the world will be 3 years into the abyss and nowhere near the bottom, such bottom being measured as widespread unemployment which will dwarf what is prevalent today, homelessness, fear and, for some, starvation and death. That doomsday scenario is probably another 2-3 years away, possibly longer, depending on how long governments can hold onto whatever small shards of credibility they have before bombing and attacking each other.

Wars are the usual method by which the great powers sort out their financial differences, though these days, cyber-warfare is already well-underway as is various forms of economic ju-jitsu. You think Greece owing debt to Germany is such a good idea? Read up on some financial history prior to great wars and you'll get a little education. The aftermath of wars isn't such a rosy picture either, but we'll be getting to that - if still alive - upon the events.

For now, the best "investments" would be cash, clothing, transportation devices, canned food, arable land and tools of trades. All can be procured relatively cheaply and will serve one well in crisis conditions, for which, I believe, we are headed.

For today, investors thought stocks were hot and Greece wasn't much of a big deal. A few months and years from now, that thinking is likely to be looked back upon as foolish, unfounded optimism.

Dow 10,058.64, +150.25 (1.52%)
NASDAQ 2,150.87, +24.82 (1.17%)
S&P 500 1,070.52, +13.78 (1.30%)
NYSE Composite 6,835.16, +121.29 (1.81%)

Advancing issues finally had a day in which they exceeded decliners by a large margin, 4864-1651. There were 114 new highs as compared to 79 new lows. The divergence is still not great enough - and only one day's data - to conclude anything other than the negative bias remains in place. Volume was approaching the higher range, though despite the overall price gains, not equal to the volume on recent down days. We're likely to trend sideways to lower until a suitable catalyst provokes a movement in another direction. This market condition could persist for quite a long time as governments and media efforts seek to keep panic from occurring though future events may preclude them from doing so.

NYSE Volume 6,145,856,000
NASDAQ Volume 2,242,082,250

Oil, gold, silver and most other commodities improved. Despite today's moves, the overwhelming evidence of a widespread, nearly global deflationary environment continues to spread.

Governments and financial institutions have been proceeding at a snail's pace, putting profits before repair and political careers ahead of practical concerns. The recession isn't over, though some of the worst of it is. This second phase may last 2-4 years from here before true structural reforms - not yet even begun - start to have any affect on economies.

To get an idea of just how hard government and financial institutions and regulators are sitting on their collective hands, here's Larry Summers, White House Director of the National Economic Council and architect of the financial collapse, prattling on for 10 minutes on CNBC this morning, essentially saying nothing. Notice how his lips move but no meaningful words come out.

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