Wednesday, November 9, 2011

Italy Debt Crisis: Contagion Spreading

Italian Prime Minister Silvio Berlusconi pledged to step down yesterday after Parliament took a vote to approve austerity measures. (spending cuts)

The was seen by some as the end of Italy's troubles, the country which has now become the spotlight of the global sovereign debt crisis.

I wrote back in January in 2011 Outlook: Sovereign Debt that I felt that the crisis in Europe would spread from Greece to Portugal to Ireland to Spain to Italy.  I then said the crisis would move from Europe to Japan to the UK to the United States.

All I have as a market observer and participant is the ability to see that these nations have taken on too much debt and have no possible way to pay it back.  While endless research reports and books have been put together to show the numbers in detail, that brief summary is all an average investors needs to understand.

Knowing which countries would be affected by the all consuming debt crisis was easy to spot, but the order in which the countries would be affected was impossible to know.  It is like trying to determine weather patterns.  To come back to a recent analogy, imagine that there are 5 homes located on different coastal cities in Florida, and there are 5 other homes that are located in Kansas City.  You are asked to determine which of the 10 are most vulnerable to a hurricane.

The obvious answer is the 5 homes sitting on the coast line.  Then you are asked which home would be damaged first by a hurricane.  This is a much more difficult question because you do not know which way the weather will move next year.

The market is the exact same way.  If someone asked me 12 months ago about the European crisis I would have told them Italy was in trouble.  However, I would have guessed that they would have their "reckoning day" in the bond market after Spain.  The market chose them first and here we are.

Understanding this you can easily extrapolate into the future that Japan, the UK, and the United States will soon be experiencing the same situation.  These are homes sitting right on the beach.  My guess is that Japan will come first and the United States will come last.  Does that mean that I want to own assets in the United States?  Of course not.  The hurricane could just as easily strike here first.

The goal is to put your investments into a home in the center of the country.  A home that is far less likely to get hit by a coastal hurricane.  Why put your money into a country that is bankrupt when in today's world you can just as easily put your investments into a country or currency that is safe?

After a home/country is destroyed by the hurricane/bond market then it will be a tremendous time to purchase investments in that area.  This decade will provide the greatest opportunity since the Great Depression for those that moved themselves out of harms way before the hurricane hit the shores.

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