Thursday, June 16, 2011

Triggering The Meltdown

The countries of Europe and the global financial system are now tied together like a field of landmines covered with a fine layer of nitroglycerin.  All it is going to take is a small match to like the fireworks.
The most likely trigger appears to be Greece as there is currently no bid in the market for its debt.  The following chart shows the 2 year bond. (You lend Greece X amount of dollars for two years and at the end of that period you get your original investment back plus a monthly interest payment)  The current return on your money for lending to Greece?


Why?  Because investors now believe you will not get your full principle back at the end of the 2 years, and they are pricing in a "haircut."  This means Greece would call you one afternoon to let you know they have defaulted and can no longer make payments on your bond.  If you sent them $100,000 of your hard earned money, you may only get back $20,000 to $30,000 in return.

The rates on a two year Irish bond (12.28% and 2 year Portugal bond (12.44%) are close behind.  If Europe can make it through Greece, these sticks of dynamite lay dormant in the field waiting.

Then there are the atomic bombs: Spain (3.52%) and Italy (3.05%).  Once rates begin to move higher for these two (and they will) it is lights out.

In the meantime, enjoy the last gasp of optimism for both the markets and the economy.  I always appreciate walking through downtown Charlotte and seeing the restaurants and bars filled with happy people.  Everyone has forgotten the 2008 crisis (when restaurants were empty) and now only see a blue sky ahead.

Things are about to get very, very, ugly.  I would recommend reviewing your portfolio and taking a very defensive stance as we move toward the next leg down of the current depression.