Greek Chaos!

Scary.....



Edit:


Yikes! Greek government just past the austerity measures and the mob is now growing.

Greek Debt Contagion Worries Rattle Wall Street

Stocks sold off sharply today as worries around the fiscal health of Greece and the rest of the PIIGS finally hit equities in the US.

I must admit that yesterday's bounce surprised me after the sharp selloff in Europe earlier in the day. I guess I shouldn't be shocked: The bulltards are really good at sticking their head in the sands and pretending everything is fine as they buy buy buy.

It usually takes a sledgehammer to the head like we saw in late 2008 in order to finally get the bulls to finally stop hitting the "buy" button. I thought Greece would be a suffucient blow to the skull on Monday, but the message didn't get through until today.

Let's get real here for a second folks: The European soveirgn debt crisis issue is a serious problem for everyone around the world and it is not going away anytime soon.

The US banks alone have $176 billion in exposure to the PIIGS:

"NEW YORK, Feb 9 (Reuters) - U.S. banks have $176 billion in exposure to Greece, Ireland, Portugal and Spain, with risks concentrated among the 10 largest U.S. banks, Barclays Capital said on Tuesday.

The FFIEC data shows that 10 U.S. banks -- Bank of America (BAC.N), Citigroup (C.N), JPMorgan, Wells Fargo (WFC.N), Bank of New York (BK.N), State Street (STT.N), Goldman Sachs (GS.N), Morgan Stanley (MS.N) and the U.S. branches of Deutsche Bank (DBKGn.DE) and HSBC (HSBA.L) -- hold 96 percent of the risk, Barclays said.
The banks have $86 billion in exposure to Ireland, $68 billion to Spain, $18 billion to Greece and $9 billion to Portugal, Barclays said."

My Take:

If the issue was just Greece it could easily be handled. The problem is Wall St is asking "who is next?" versus saying its contained because the debt burden looks just as bad among the other PIIGS countires.

As a result, this is slowly developing into a game of domino's where the risk is if one of them tips over(via default like Greece) the rest go down with them.

As I said last week, the money is not there to save all of the PIIGS without massive money printing which I don't believe the ECB is willing to do.

The Euro then becomes a giant question mark because countries may decide to take things into their own hands by flipping back to their old currencies.

Haven't We Seen this Game Before?

This debt crisis(although different) reminds me a lot of the subrime crisis which eventually almost took down the banking system here in the USA.

Like Greece, our meltdown started with a small area of the global financial system which we called subprime loans. The bankers quickly came out and said that subprime was "contained" just like Greece "supposedly" is right now.

Later on of course we learned that this was a bunch of hogwash when we realized that just about all of the MBS's of mortgage debt that were created during the housing bubble turned out to be basically be worthless.

Of course,you would never know this if you saw it on any banks balance sheet today. Most of this debt is still market at full value thanks to our new "fraudulent" accounting standards.

I think we are about to see the same thing occur in Europe as this crisis no longer stays "contained" and begins to unwind.

Fiscally these two crisis are very different: Fundamentally however, the problem remains the same:

The oligarchs of the world want to live the good life at the expense of the middle/lower class peasants. When a crisis hits, the elite want the peasants to pay for their greedy mistakes via higher taxes and other austerity measures.

The bankers/oligarchs pulled it off over here by creating the TARP and forcing the taxpayer to backstop all of their mistakes.

The same thing is being attempted in Europe as we speak. The ECB and IMF are ready to puke up $146 billion to Greece alone! This is absolutely disgusting in my view.

The retirement age in Greece is 55! What are they smoking over there?

The Bottom Line

It appears the looting will never stop no matter where you are in the world. The bankers in the USA told us that the economic system would blow if we didn't bail them out.

They thanked us by gambling our taxpayer money in the stock market casino where they took enormous risks and made billions in bonuses. The bankers didn't care if they lost because it wasn't their money they were spending: It was ours!

Once they got the game rigged via faulty accounting standards and front running the market via HFT's"high frequency trading", they paid us back our TARP money. Sigh.... The whole thing makes me want to vomit.

I expect too see a similar extortion attempt by the PIIGS and bankers in Europe in coming weeks. Remember, if the PIIGS go down so do the European bankers.

I am sure they will try and threaten the world by saying that the whole financial system will blow if they let someone fail or default.

It won't be so easy this time though because I think the world has wisened up. For instance, there is vehement opposition in Germany to bailing out any of the PIIGS. Making things even more interesting is the fact that the German elections are held in May.

In the meantime, the German politicians vote on the Greek bailout on Friday. All 16 countries involved in the Euro need to approve this bailout via their own forms of Congress. This includes Portugal and Spain which is a joke in and of itself since both countries are broke.

Germany however is the key, and the concern is the Germans are not sure that Greece has the political will to enforce the austerity rules that have been agreed upon by the two countries.

I guess its kinda hard to tell an angry mob of Greeks that they can't retire until age 67 when they used to be able to walk at 55!

There are HUGE protests scheduled later in the week in Greece. If things get outta hand with torches and pitchforks, it might force Germany to second guess their agreement and make the politicians lean towards voting "no" on Friday.

Keep an eye on the developments across the pond. The bond vigilantes started pounding the PIIGS bonds once again today. Spreads are blowing out after a brief 1 day relief rally following the Greek bailout announcement.

The bond market loves to call your bluff and force your hand after you make a play like the ECB did on Friday after announcing the Greek austerity bailout.

The bond traders know that the debt issues run much deeper than just Greece, and they want to know what the ECB is going to do to "save" the other PIIGS. What's scary is I don't think there is an answer to this question because the money isn't there to save all of them.

If they don't get an answer, I believe credit spreads will continue to blowout which means the risk of a sovereign default is very real.

If this default fuse gets lit, all hell could break loose in the markets.

Disclosure: No new positions at the time of publishing.

European Debt Crisis right around the Corner?

I must admit folks that I am in awe of what I see each day in the financial markets. It's also very hard to make any sense of any it when it comes to investing.

Things that would have been considered tinfoil 4 years ago now have become reality. I mean heck: If anyone would have told me three months ago that Goldman Sachs would be accused of fraud I would have laughed in their face.

Yet(minus yesterday's hiccup), the market continues to march higher despite being surrounded by seemingly endless economic landmines that threaten to destroy our financial system.

I mean take your pick: Greece? The consequences of the Goldman Sachs trial on the TBTF banks? Portugal? Spain? Massive unemployment? Housing Collapse? Financial Reform? US National Debt? Derivatives? Inflation(I know they keep telling us there isn't any but just take a look at oil)?

All of these problems have fuses that could potentially take us all down if they get lit. The reason this is the case is because the world is all now interconnected financially. It doesn't matter whether or not the crisis is here or in Europe: If the European banks go down as a result of soveirgn defaults, the USA's banks will be right behind them.

That's why we must focus on the European debt crisis. The ramifications of a Greek debt default would be devastating despite it's small size.

Greece and Portugal alone are a half a trillion dollar problem:

2y Greek bonds hit 20% today which is unbelievably bad. Greece is rapidly becoming an Argentina 2001 on steroids. Spain was also downgraded today and their economy is over $1 trillion. Our banks basically avoided the two bullets above but the big bankers in Europe. This puts us at risk as a result.

For awhile it appeared that Greece would get bailed out and I still lean towards this theory, but I am starting to hedge as I watch the credit spreads blow out on the rest of the PIIGS. Making matters worse if the fact that it is beginning to put pressure on the debt of the other Euro countries.

This is rapidly becoming a situation where if you bail out one PIIG you need to bailout them all. The problem is the money simply isn't there to do it.

What's happened to Euro bond market this week is flat out stunning. The bond vigilantes in the USA must have hopped on a plane and flew over to Europe this week in order to have a little fun.

I don't see how this ends well. The only answer to this crisis IMO is to have the PIIGS leave the Euro and go back to their old currencies where they can then devalue them and inflate out of their fiscal disasters. The results of this would be catastrophic from a social chaos standpoint but I see no other way out.

Housing Collapse Part 2?

I may be early but I think it's unavoidable as we watch the homebuyer tax credit end this Friday.

The only part of the housing market that was really recovering since the bubble burst was the lower end of the market where buyers were taking advantage of the government's gift.

Making matters worse is the fact that these new loans were also done using more horrible lending standards via FHA. I spoke to one of my Wall St friends this week who had an interesting take on this: "FHA will go down just like Fannie/Freddie did because the lending standards haven't really changed".

I totally agree with him. Allowing a buyer with a 620 credit score to buy a house with only 3% down is a recipe for disaster! Why do we continue to make the same mistakes over and over again?????? 20% down with a DTI of 36% is the only way any financial institution should be lending. If housing prices have to collapse as a result so be it. It's the ONLY answer.

Making matters even worse for the housing market is the fact that the TBTF banks are preparing to dump massive amounts of foreclosures into the market. I have read one report where Bank of America is preparing to dump 600,000 foreclosures just by themselves!

I guess they must be getting tired of the millions of squatters who stopped paying their mortgages 2 years ago. The reality here is the banks can't afford to play this game anymore.

They also probably recognize that the economy is getting worse(despite what CNBC tells you), and they may be better off trying to dump them now versus dumping them later as unemployment continues to rise.

The Bottom Line

Hold onto your hats. Stocks and bonds in the USA may do well in the short term as a result of the chaos in Europe. There is a massive "flight to safety" going on over there and we will be the beneficiaries of it. This is also why you saw such a spike in gold this week.

Over the long term I expect the debt crisis to eventually end up over here as well. We are in no better shape than anyone else. However: Risk is relative and the perception by the markets for now is the USA is safer than Europe.

For now I agree. Europe is heading rapidly into a serious debt crisis. It will be interesting to see how it plays out. Be careful if you are short treasuries. Bonds over here should do OK for awhile.

I shifted some more of my portfolio out of treasuries and into cash this week despite my belief that bonds may do well over the next few weeks. I did this because I am afraid that the Euro debt crisis could potentially come over here in a heartbeat if things really start to unravel in Europe.

Be very very careful and keep a close eye on Europe. As for the Goldman debacle, I will get to that another day.

Disclosure: Sold US treasuries and government bonds.