Friday, April 23, 2010

Step 2 Complete

The Greece bail out is a three step process.  Step 1 was for the IMF to commit funds, which they did 2 weeks ago.

Step 2 was for Greece to agree to accept a bail out.  They in essence had to surrender to the imperial lords of the IMF.  (Imagine Darth Vader and the Empire flying in and taking over your planet)

This happened a few hours ago when Greece finally surrendered their country. Their bonds exploded yesterday across the board bringing the country to its knees. 

The final step, number 3, is for the Eurozone to approve the bail out.  This is where it gets tricky because of Germany and politics.  Their politicians do not want to appear to be helping another country at the expense of their own citizens.  However, a Greek bankruptcy would trigger massive losses in their banking system (think subprime) and create a contagion effect throughout Greece.

It will be a very tricky and bumpy ride moving forward.  Germany does not want their banks to fail, however, they know they would benefit from European turmoil because it would hurt the value of the Euro currency.  As the currency loses value it benefits their export driven economy.

While the public focuses on the Greek news on television every day, the large investment power players have already moved on.  If you follow the number of notional Credit Default Swaps over the past few weeks, it shows that the major activity has moved away from Greece and is now centered around Portugal, Spain, and even France.

The Credit Default Swaps are insurance contracts that are bought to protect investors against bond failure.  If a country begins to lose credibility the cost to insure it goes up, and the investors who bought CDS contracts early make a fortune.

This is what John Paulson did a few years ago when he was working with Goldman Sacs to bet against subprime.  (The story you are hearing on the news today)

It is laughable that the media is focused on Paulson's bets from 2006, when the same exact event is happening live today, only the hedge funds are attacking European countries.

You can imagine the CDS investors as a bee swarm that move from host to host, attacking.  When they have destroyed their current target they then move on to the next.  After their attack they take their profits and the host country needs an immediate bail out with printed dollars.

The bee swarm is expected to move swiftly through Europe destroying everything in its path before moving on to either the UK or Japan.  Astute investors watching this happen ultimately believe their final target will be the United States.  They will first attack the local municipal (state government) debt, before moving on the the largest target in the wilderness: the US Federal Debt.  They will break they country state by state, weakening it, before taking down the body.

Of course, it is not the bee swarm's fault that countries are failing.  If governments ran a balanced budget their swarms would be unsuccessful.  It is just nature taking its course.  The free market working.

It is incredible to watch it all take place. You will hear nothing about this story from the media.  They are focused on the stock market rising and the Goldman Sacs story from 4 years ago.