Tuesday, November 16, 2010

Debt Contagion Fears Rattle Wall Street


That's all I have to say about today's tape.  It would be easy to blame this sell off on the Eurozone's debt problems as Ireland's sovereignty hangs by a thread.

I think it's more than that.  I'll be honest:  Things are happening at such at such a lightning pace that it's hard to keep up with it all.  I think the Asian inflation and our muni issues are also putting tremendous pressure on equities.

Take a listen to the brilliant Chris Whalen as he discusses the state funding crisis:

My Take:

Chris nails it.  The only answer here is massive debt restructurings which means haircuts for everyone involved.

If you are a state worker and you have been promised a $60,000 a year pension you are basically going to end up getting screwed.  Start saving money now because you were basically sold a bill of goods when they promised to pay you 80% of your salary for the rest of your life after only 20 years of service.

The math of this insanity never made sense from the beginning and it wasn't sustainable.   It's now time to pay the piper.

State munis continued to sell off hard today(look at the chart in my last post).

Treasuries on the other hand rallied huge as the market cratered:

My question here is why didn't the munis follow treasuries?  Has the bond market started to price in state defaults before a government default.  Perhaps the bond market now believes treasuries will be the "last paper standing" as the Euro PIIGS debt turns into trash?

Don't get me wrong here, although I think the stock market currently has many problems, the European debt crisis is clearly front and center right now.

The way I see it:  Ireland could be 2010's version of "Lehman Brothers".  The Eurozone is already saying that it's "contained".  Yeah OK, heard that one before.

I just finished listening to the Brussell's EU news conference.  Ireland continues to refuse to request aid from the EU although they are being pressured to do so.

I am sure Ireland is hesitant because they know that you basically "sell your soul to the devil" when you take a bailout from the central bankers.  Just ask Greece.

If Ireland refuses the bailout then the debt contagion risks are very serious.  Yields could start blowing out on all of the PIIGS if Ireland says "no thanks" because the governments of these nations would then run out of funding in no time because the majority of their revenues would be needed to service all of their debt as a result of the surging borrowing costs.

The Bottom Line

There simply is not enough money left to cover the debts of the world:

California doesn't have the money, Greece doesn't have the money, Ireland doesn't have it.  Neither does the US, Japan, Italy, Spain, or the UK.  Germany won't have it anymore in the end because they will have to bailout their penniless neighbors.

Everyone is basically broke except for China.

So what you need to do in these situations is to try and figure out who goes broke last because risk is relative.  

The US Dollar is rising because it looks safer than the Euro because it appears Europe will blow before the US.  This should temporarily take care of the Asian inflation problem.

The problem is, in the end, we will all be forced to deal with our insolvencies because there is no free lunch.

The effects of this will be painful and multifaceted:  Massive entitlement reforms, haircuts via debt restructurings, lower standards of living, bank insolvencies, and massive financial losses on everything from pensions to houses.

The stock market will eventually reflect this "new normal" as PIMCO likes to call it.

Don't be fooled folks, the restructuring of all of this is a matter of WHEN not if,  and I don't expect the process to go smoothly.  There will be a lot of social chaos in between as these issues are forced to be dealt with.  Let's just hope wars don't break out when Judgement Day arrives.

Disclosure:  No new postions taken at the time of publications.

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