Thursday, September 23, 2010

European Debt Worries Resurface

The Fed must be all smiles today as the dollar stabilized thanks to today's news out of Europe:

"The cost to insure Ireland’s debt climbed to a record, leading a surge in European sovereign credit-default swaps, on concern Anglo Irish Bank Corp. won’t pay back bondholders in full.

Contracts on Ireland jumped 23 basis points to 487 basis points at 12:50 p.m. in London, according to data provider CMA. Swaps on subordinated debt of Anglo Irish, which was nationalized last year, now cost 5 million euros ($6.7 million) in advance and 500,000 euros annually to insure 10 million euros of debt for five years.

 Investors are fleeing Irish bonds on concern bank bailout costs and a shrinking economy will hurt efforts to tame the European Union’s biggest budget deficit. Government guarantees covering some of the subordinated debt sold by the nation’s banks come to an end next week, while Irish Central Bank Governor Patrick Honohan said in June he didn’t know if junior bondholders in Anglo Irish will be “made whole.”

My Take:

Where's Baghdad Bob when you need him:

"There is no need to worry.  Ireland and Greece are fine.  They have plenty of money.  There is no debt crisis!"
I am joking of course but when you really look at the numbers it's hard not to think of this guy anytime you hear any central banker ftrom the west speak about their countries economy.
I had promised on an earlier post that I planned on heading oversees to see if I can find some analysts in finance that are not bought and paid for by Wall St who could give us a more realistic view on what's going on in the world.
I found a couple today:

Both of them nailed it.  What we are witnessing in Europe is unsustainable.  The rise in debt spreads are telling you the real story.  These countries are looking straight down the barrell of a debt restructuring.
Stocks in the US didn't like the Ireland news at all.  This is what sunk the markets in the afternoon.
This all got started when Ireland's GDP for the quarter came in at -1.2% versus the consensus estimate of +.3.  That's a huge miss and the credit traders proceeded to punch Ireland right in the face shortly after these numbers were released.
The global financial boat continues to take on water as leaks continue to spring up everywhere.
I expect to see a debt restructuring in Europe sooner rather then later.  It's becoming obvious that even with severe austerity(which Ireland has), countries cannot dig out from their deficits when they are paying 10% interest rates on their debts.
Paycheck to Paycheck
Let me switch gears quickly here.
I thought this article was particularly disturbing:
"CHICAGO, September 1, 2010 - As the effects of the recession linger on, one place it continues to have a tight grip is on workers’ wallets. Nearly eight-in-ten (77 percent) workers report that they live paycheck to paycheck to make ends meet. Sixty-one percent of workers said that they felt they lived paycheck to paycheck to make ends meet in 2009. Workers went on to say that sometimes they are unable to make ends meet at all, with one-in-five (22 percent) saying they have missed payments on bills in the last year. This is according to a new nationwide survey of more than 4,400 workers by CareerBuilder that was conducted from May 18 to June 3, 2010.

Workers report they have made a variety of changes to their living and spending habits to help get by. When asked what tactics they have used since the start of the recession to make ends meet, workers said the following:

  • Cut back on leisure activities - 54 percent
  • Used coupons or shopped at discount stores - 48 percent
  • Drove less to save on gas - 37 percent
  • Cancelled cable and other subscriptions - 12 percent
  • Used public transportation - 5 percent"

Quick Take:

Recovery summer baby!  You gotta love it!

God help us if we have an inflation crisis. 

Americans could find themselves penniless in a hurry as unemployment continues to rise.  What in the hell are all of these people going to do once their unemployment benefits run out?  They obviously have no savings.

You can be sure of one thing:

Be prepared to hear a lot more about this type of news very soon because the peak unemployment levels were seen about two years ago.  This means the government checks are coming to an end for a hell of a lot of people.

I expect this to be the big news come this fall heading into the elections.  I think we are going to see some election shockers as the masses become desperate as they struggle to survive our depression.

In a strange way the European Debt Crisis actually helps the US in the shorter term.

I say this because the one thing that is holding the dollar together right now is the fact that many other countries are in far worse shape.

As my credit trader friend always tells me:  "Jeff, risk is relative"  meaning that we might be screwed but if someone else is screwed worse than there will be buyers for the place that's the least screwed.

This is a simple investing rule but it's an important one that I consistently have had to remind myself of.  

The Bottom Line

Keep your eyes on what's going on across the pond.  One explosion like an Ireland debt restructuring could trigger a domino effect that could be catastrophic.

A Wall Street friend told me about this today when we discussed Ireland:  He read that saving both of Ireland's two largest banks would cost Ireland about 60% of it's GDP.   They are toast if that's accurate.  It's just a matter of when not if.

Let me end with a quick thought on stocks.

I am not liking how the stock market has behaved the last few days.  Tech looks extremely overvalued.  Apple is closing in on $300.  I see lots of new 52 week highs in this space.

I won't short the Apple juggernaut but I am thinking about taking a short position on tech.  QID is a nice "short" tech  ETF for a short term trading position.

I'll let you know if I pick some up tomorrow.  Futes are looking pretty sluggish.


FRF.Assoc said...

"What in the hell are all of these people going to do once their unemployment benefits run out?"


"I think we are going to see some election shockers..."

Hi Jeff,

I would be willing to bet real money that this issue is not going to go unaddressed before the elections.

It will become a political football with Dems blaming the Repubs if the are not willing to extend benefits and give money in the form of QE directly to the the masses this time, instead of the banks (Big Ben has already set up his cronies pretty well with plenty of compensation & a place to dump their toxic assets).

It has to become a crisis, though, before they can act, as otherwise the tea partiers would make a stink. They'll wait until desperation sets in and play the hero coming to the rescue.

Same song, next verse. |B^)

Thanks for a great blog!

BTW how do you plan to protect yourself as this drama unfolds?

Jeff said...


Interesting take!

I could totally see it playing out like this.

I can still remember when Bush sent everyone $400 a few years ago.

This fall is going to be real interesting for sure.

"BTW how do you plan to protect yourself as this drama unfolds?"

Great question and I have been thinking a lot about it because it seems like we are on the brink of some type of meltdown.

Who knows what it looks like

I don't own a gun so I have been thinking about getting one.

I am starting to stock up on food. I have set aside some hard cash in a safety deposit box so I can be liquid for awhile.

In terms of investing nothing looks safe so I spread it out hoping that some asset classes don't get hurt too badcoming out the other end.

I have some Cash, bonds, gold, silver, money market funds.

I have some shorts too on treasuries and stock as hedges.

I am just preparing in case things get really bad. I hope I don't have to use this stuff.

The world will be a scary place if we are all living off supplies.



FRF.Assoc said...

I don't think it's likely to get to the survivalist level, personally, but it's hard to say. I expect to keep a supply of canned goods that I can use anyway, and some cash.

I've been looking at Moly Corp. (MCP), the only potential supplier of rare earths outside of China, because with the Chinese limitations on export of rare earths, it's very likely that the U.S. government will subsidize development of the California property, partly for national defense purposes.

Jeff said...


I don't think so either.

I don't mean to get tinny when it comes to the survivalist stuff.

I am just setting a few things aside just in case.

I do worry about a banking holiday so I am serious about the cash thing.

MArket seemed to love the capital goods numbers.

Rally on.

CT-Hilltopper said...

Get ready.

I expect the market to do some pretty whacky shit in the next couple of weeks. just before the elections.

I see it starting to top out just like it did in 2007. Be ready to react fast. The same people who never saw it coming the last time are going to be caught flatfooted this tine too. Only this time is going to be really bad.

I really hope I'm wrong, but I have a bad feeling.

Anonymous said...

"I really hope I'm wrong, but I
have a bad feeling."

When is the last time you have had a good feeling? 1986??

Just sayin...

Jeff said...



I think the market could be rellying on the idea that the Republicans will take the house.

This would neutralize Obama and the merket sees balance in DC as a positive.

Decided not to jump out in front of this move today. The market may have some room to run as stocks make new highs.

The persistent euphoria of the bulls is amazing to watch at times.

I have a good video for tonight explaining the bullish price action. Made some sense to me.

You guys can judge for yourselves.