Greek Bond Risk Laughable

As I wrote late last year, risk and reality are disconnected in so many investments today. Among the most laughable and most egregious disconnects today are bond prices/yields of Greek sovereign bonds.

A multi-year chart from Bloomberg illustrates this:


Whereas Greek yields in 2012 rose to 35%, indicating a significant risk to bondholders, today's yield is only 11.31%. Yet all we hear on a daily basis out of Europe is the danger of Greek default and possible exit from the EU, usually referred to as "Grexit".

The markets today in so many securities are totally fake, controlled directly or indirectly by Central Banks. The CB's are putting more fingers in more dykes daily. Similarly, most nations are issuing increasingly fictitious unemployment, economic and fiscal indicators. 

This means that economic observers and investors are increasingly flying blind since most of the data that they could count on in the past to give an idea of what is really going on in the world are completely unreliable/fake today.

Realize this and exercise extreme caution!

Fear in Europe over Greece Default

Europe is fretting over Greece. While the future of the EU and the Euro may indeed be at risk, the bigger concern probably actually relates to the exposure of French and German banks and their governments to a possible Greek default. The citizens of Europe might be even less likely to support what is actually a French/German banking bailout than a Greek bailout if this aspect is highlighted. Take a look at the chart below.

If Greece defaults, then a banking bailout would be almost a certainty. Otherwise, a domino effect would probably take down the world's whole banking system. So the choices are: 1) Bailout Greece (again and again) or 2) Let Greece default and bail out the banks instead. Neither seems to be an attractive option when considering the likely backlash from voters.

Financial Repression

It's not new but Financial Repression is a term seen recently in many articles, even in the mainstream media. It refers to a purposeful and methodical policy approach by government towards solving its deficit/debt problems by massively cheating investors and savers rather than contemplating default. This is accomplished through strong government control and intervention of interest rates and financial institutions. Savers are given close to zero interest in spite of considerable inflation, which is usually purposefully under-reported.

Because the problems are far more severe than in the past and because world markets far more fluid today, I doubt that governments will be able to control markets successfully enough this time around to prevent a bond collapse (higher interest rates) or some other financial crisis. Many have already begun to flock to gold and silver in an attempt to escape controlled markets. However, so far, the U.S. has succeeded in maintaining absurdly low yields on its bills and bonds, perhaps giving more support to some cynics' views that these are certificates of guaranteed confiscation. For a thorough treatment of "financial repression", please see this excellent article by Daniel R. Amerman.

Federal Debt Ceiling and QE3

There is much talk about raising (or not) the U.S. debt ceiling and ending Quantitative Easing Round 2 (QE2). Honestly, I see all this as clumsy posturing. Americans and their leaders do not have the stomachs for living within their means, at least not yet. Obama and Congress are fooling around with $30B cuts, when the deficit is more like $1,400B. The world is awash with U.S. Treasury debt. The Chinese and others are pretty well saturated now. The Federal Reserve will have to continue printing to buy up most of the new bonds and bills issued by the Treasury. Raising the debt ceiling is also a priority for Wall Street - take a look at this. So QE3, in my opinion, is guaranteed. The U.S. will kick the can down the road yet again rather than face a default now.

European Contagion Spreading to more Banks

The debt contagion is spreading rapidly, almost virulently at this time. Here is a good article from Toronto's Globe&Mail newspaper illustrating why bailouts have gotten so much traction with superficially reluctant France and Germany. These two countries hold the lion's share of Portuguese and Spanish debt. Guess whose banks would collapse if Portugal and Spain are allowed to default (or if Ireland and Greece had been allowed to default).

Europe Debt Crisis Cheat Sheet

An excellent chart (courtesy of ZeroHedge) of the European Debt Crisis situation can be found here: European Debt Crisis Cheat Sheet. Read the titles and axis descriptions carefully. A fast glance can be misleading.
A sample:

 

Europe's PowderKeg: The Financial Cracks Deepen Some More

Not at all surprisingly, the financial dismemberment in Europe is continuing unabated. The Spanish situation is  described here. The Belgian and Italian situations are described here. Let's leave Portugal et alteri for another day. Some nations (France, Ireland and Hungary) have taken to absconding with their national pension funds to help relieve short term financial pressures.

Bailouts not the solution to too much debt

Bailouts have now proceeded from the corporate, securities, banking and insurance sectors to the sovereign nation/state and even to regional sovereign blocks (EU). None of this has addressed the basic problem of rising debt. In fact, the bailouts are almost certainly just making things much worse.

We tend to get confused because we think that different rules somehow apply than those with which we are more familiar, such as bringing up our own kids. In the past, if our teenagers got into debt, we would probably have had a little chat with them about the potential dangers of debt. If they ignored our advice and got into debt further and got beyond their ability to service that debt, they might show up on our doorstep and ask for a bailout. Some of us might choose to help out, but only if the kids handed over their credit cards for shredding and agreed to a balanced or surplus budget regime. In other words, they would have to live within their means. At the same time, they would be told that if this happened again they would be on their own.

Now let's compare this with what we are doing in the financial world. We are telling nations that we will bail them out if they tighten up a bit and run smaller deficits (increase their outstanding mortgages at a slower rate). And even that is  a lot of hogwash, coming from the "parent" states who themselves are running deficits. So it's like telling your children not to keep borrowing faster than you are. The only thing temporarily keeping things afloat is that people still have some (misplaced) confidence in the parent states (like the U.S.). When you look at the skyrocketing deficits and growing debts of the U.S., it is sheer lunacy but this is where we have come.

Getting back to the parenting analogy, the big risk of these uncontrolled and spreading bailouts is that the kids are going to take the parents down with them. So instead of a relatively nasty and uncomfortable but small and containable default, we are risking the entire financial structure.

The only solution to too much debt is less debt, not more debt!

Markets Turning Unstable Again

The markets are showing signs of volatility and instability again. Don't pay attention to the American spin about a typo causing the problems. Well before the alleged typo at 2:30PM EST, the Asian and European markets were all over the place, oil was down sharply and gold was up in spite of amazing US dollar strength. The Canadian dollar was down 4 cents before trimming losses to 3 cents for the day. I won't even get into ballooning CDS spreads on European sovereign debt. Oh, and look at the Euro, courtesy of Zerohedge. These are all signs of markets in disarray.

The world's central bankers have a lot of tigers by the tails and things seem to be coming unglued once again. The potential Greek default is only one scene in the show. Massive debt worldwide, private and sovereign, combined with huge leverage, derivatives, bubbles created by artificially cheap money and years of lies and manipulation are slowly backing the banksters and their obliging central banks into a tighter and tighter corner. However, lest you think that they won't find a temporary way out yet again, please remember something I learned many years ago - "A politician up a tree is a very resourceful creature". It applies equally well to central bank governors and especially Wall Street. These folks have managed to put off the day of reckoning many times already. Can they do it again?

Sovereign Default Risk

This chart courtesy of CMA DataVision http://www.cmavision.com/
but excerpted from a BBC News article entitled "Greece crisis: Fears grow that it could spread"

Credit Card holders are dumping debt

Further to yesterday's blog on Debt statistics published by the Federal Reserve, here is more proof that one needs to be careful how to interpret articles that have lots of spin. This article from MarketWatch says that 90% of the reduction in credit card debt is due to credit card holders just walking away (defaulting) not from repaying amounts owing. Read the article here.