Wednesday, October 12, 2011

Debt Consuming Everything

There is so much debt around the world that when you look at the numbers it is like a black hole ready to suck everything into the abyss.  It almost feels as if every layer of the developed western world is insolvent.  The governments, businesses, banks, and citizens have borrowed more than they can possibly pay back.  The first portion of the effect of this insolvency was felt during the credit crisis of 2008.  The second act is playing out before us today.

Center stage is the small government debt of Greece.  It is like a spec of dust on a mountain of toxic waste, but the amount of worry that surrounds it is a shocking glimpse at what lies ahead when we face the real challenges.

Total Greek government debt is $445 billion in size.  This represents over 140% of Greece's GDP meaning they can never pay the debt back without a default or "haircut."  Estimates have that haircut around 60%, which would be a $270 billion loss taken on balance sheets around the world for banks, hedge funds, insurance, and pension funds.

This portion of the debt is not the true problem. It is the CDS market that I discussed in The Real European Crisis Explained.

The goal now of European politicians is to come up with a solution for an orderly Greek default and then to ring fence the contagion to try and keep it from spreading to the next in line: Portugal, Ireland, Italy, Spain.......

I believe that unless the European Central bank is willing to come forth with their own large scale version of quantitative easing (as the United States and the UK have) then the contagion will spread rapidly. 

Their is no political will for it to take place now, but the Greek default is going to rock the markets and banking system around the world.  This will provide the catalyst for the ECB to launch the printing press full speed.

Back here at home, as discussed many times, we face the same government balance sheet issues as Greece only with far more zero's.  However, under our nasty blanket of toxic federal debt, we also have both local and state government insolvency as well as an insolvent banking system.

Harrisburg, PA made the news this week by finally moving forward with their bankruptcy and becoming the first domino to fall.  They will set the stage for bankruptcies to take place in small towns and cities all across the country. 

Our banking system died in the fall of 2008 and is now a walking zombie that is only sucking the life out of the remaining productive economy.  This has been more visual recently with the shares of the Too Big To Fail banks plunging over the past few months.

What comes next?  As always, it is impossible to tell.  The stock market has seen a tremendous rally over the past week and if the former optimism comes back into the market and pushes it higher it will once again be a great shorting opportunity.

The precious metals have again found some footing after the recent waterfall decline, and I believe their greatest value currently lies in the strongest mining shares and silver.

Oil was close to a buying opportunity, as were some of my other favorites such as the Australian dollar, Canadian dollar, and agriculture.  They did not quite get the sell off I was hoping for to reach an attractive entry point. 

It most likely will come.  I believe there is one more deflationary fall ahead, and it will reward those that continue to be patient.

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