Keeping you on the right side of the market

Mind unemployed is mind un-enjoyed.
Christian Nevell Bovee,1820-1904, American Author, Lawyer

MZM stands for money of Zero maturity. It is a measurement of the total amount of money that is easily accessible for one to use immediately. MZM measures all the money held in hard currency, checking accounts, savings accounts and money market accounts.

Generally speaking MZM is becoming the more preferred measure of money supply because it provides a better representation of the money readily available for spending and consumption. The first chart illustrates the absolute liquid amount of money in the system.

This chart illustrates just how much money the Federal Reserve has been pumping into the system to stimulate the economy. In contrast, the Feds did not pump much money into the system during the recession of 80’s and perhaps this was a smart move for it enabled the system to heal. They pumped money in the 2001 recession and have gone ballistic during the current great recession.

The above chart shows the year over year rate of change, and interestingly it is declining. Thus even though the Feds left interest rates unchanged it appears, they are stealthily sucking cash out of the system. After growing at an annual rate of roughly 4.5% in 2009, it is now contracting and falling at a rate of 2%.

The era of easy money appears to be coming to an end and perhaps the markets are sensing this: the increased volatility maybe a result of traders reacting to the withdrawal of cash from the system. The chart suggests there is less money for traders (hedge funds, etc) to borrow and if there is less money to borrow it suggests that brokers will soon start charging higher rates.

The market now has to deal with the fact that money could be becoming more expensive to borrow, the economy is stating to sputter, the housing sector is falling apart again, unemployment remains at lofty levels, states are facing huge budget deficits, the potential fall out from the BP oil spill (the derivative part of this could be even worse then Lehman Brothers), etc. Markets hate uncertainty and they certainly have a lot to be uncertain about right now.

Conclusion

No one indicator or tool can predict what the markets will or will not do, however, a confluence of indicators usually provides a very accurate picture in terms of market direction. When we couple MZM with the fact that the Dow has put in 37 new highs on unusually low volume, that in general the Dow sells off on higher volume, housing sector is in still in trouble, unemployment is high, consumer sentiment is dropping, that the majority of the states are experiencing huge budget deficits, etc., the outlook going forward does not look too bright.

We have stated several times over the past few months that the second part of this rally appeared to be suspect and advised traders to use very strong rallies to short the markets. It now appears for all intents and purposes that the Dow might have peaked in April 2010 and that all subsequent rallies will most likely lead to lower highs.

We have stated several times over the past few months that the second part of this rally appeared to be suspect and advised traders to use very strong rallies to short the markets. It now appears for all intents and purposes that the Dow might have peaked in April 2010 and that all subsequent rallies will most likely lead to lower highs.

Traders willing to take on a bit of risk can use strong rallies to open up short positions via put options on some of the big name stocks (JPM, CAT, BAC, WFT, etc.) and or short via ETF’s such as DOG, SSG, SKF, QID, etc. Traders seeking higher leverage can use ETF’s such as FAZ; super leveraged ETF’s should not be held for long periods of time as one can actually lose money on them, even if the market’s trend lower. In order to make money on these funds the markets need to move down rapidly in a short period of time. We will be writing a follow up article on the potential dangers of using super leveraged ETF’s. If used wisely and for short term moves one can still lock in rather large gains using these ETF’s.

Uncertainty and mystery are energies of life. Don’t let them scare you unduly, for they keep boredom at bay and spark creativity.
R. I. Fitzhenry

Disclosure; we have positions in SSG and SKF

The number of homeowners who missed at least one mortgage payment surged to a record in the first quarter of the year, a sign that the foreclosure crisis is far from over.

More than 10 percent of homeowners had missed at least one mortgage payment in the January-March period, the Mortgage Bankers Association said Wednesday. That number was up from 9.5 percent in the fourth quarter of last year and 9.1 percent a year earlier.

More than 4.6 percent of homeowners were in foreclosure, also a record. But that number, which is not adjusted for seasonal factors, was up only slightly from the end of last year.

Stocks slid Wednesday as investors looked past a rising euro and focused on the U.S. economy, including the rising number of foreclosures. The Dow Jones industrial average fell more than 100 points in early trading. Jay Brinkmann, the trade group’s chief economist, said the foreclosure crisis appears to have stabilized. Seasonal adjustments may be exaggerating the change from the previous quarter, he added.

"I don’t see signs now that it’s getting worse, but it’s going to take a while," he said. "A bad situation that’s not getting worse is still bad." Full Story

Another validation of what we have been stating all along. The current housing recovery is all smoke and mirrors. Numbers are being twisted to make it look like the housing sector has put in a bottom, when, in fact it has not. Unemployment is still very high and without a job no one is going to go out and buy a house; worse yet, it is still hard to get approved for a mortgage. Our advice is to avoid the housing sector, unless you get a very very good deal and or are buying farmland. In the years to come high food prices will make farmland a very valuable commodity.

Poverty is the parent of revolution and crime.
Aristotle, BC 384-322, Greek Philosopher

The rich are getting richer, the poor are getting poorer and the middle class is getting screwed. Daniel Hoffman states that the underclass (undeserving poor) now makes up 10% of the US population Full Story This is shocking considering that the US is supposed to be a first world country. If so many people are hurting why are we fighting wars we cannot afford, policing the world and donating money to nations who do not deserve it.

The following data suggests that the situation is only going to get worse. This is by no means a comprehensive list.

Unemployment:

The unemployment rate is officially 9.9%, but everyone knows this figure is just huge fat lie. The true rate is probably in the 18%-20% ranges. Some parts of the country have rates in excess of 25%

The foreclosure factor:

Home sales might be improving, but most of the improvements are a direct result of the 8,000 credit the government offered first time home buyers. In 2009 roughly 3 million homes were foreclosed and www.Realtytrac.com states that the number could increase by as much as 3.5 million in 2010. If we add in strategic foreclosures, the picture will probably look a lot worse.

According to Reuters roughly 40 million Americans are on food stamps

Nearly 40 million Americans received food stamps — the latest in an ever-higher string of record enrolment that dates from December 2008 and the U.S. recession, according to a government update. Full Story

The dept of Agriculture states that 1 in 8 Americans may not be able to eat without government assistance. Let this figure sink in, we are not talking about some third world country, we are talking about the US. This is a clear sign that things are a lot worse than they are being made to look. The undeserving poor could grow in leaps and bounds if the economy suddenly hits a road bump. Europe is already in the midst of a second recession.

According to the most recent census, about 35 million Americans live in poverty

Let’s also consider the fact that some jobs are never coming back. We covered this recently in the following article High unemployment levels here to stay.

Dollar tree, Wal-Mart, Sam’s club and other large warehouse clubs are all booming; a sign that individuals are looking for bargains. Bargain hunting is usually a sign that all is not well.

Catherine Rampell provides additional information on this topic

In December 2008, 22.9 percent of the unemployed had been out of work for at least 27 weeks. A year later, that portion rose to 39.8 percent. That translates to having about 4 percent of the total civilian work force categorized as long-term unemployed.

Here’s a look at how many weeks the average jobless person has been jobless for:

Source: Bureau of Labor Statistics

The average person who was unemployed in December had been out of work for 29.1 weeks. By contrast, when the recession began two years earlier, the average unemployed person had been out of work for 16.5 weeks. Full Story

Conclusion

The underclass or the undeserving poor are growing as a group and many of those that are being pushed into this group are individuals who formerly belonged to the middle class. Given that unemployment is going to remain high for years to come, it appears that this trend will continue for sometime. In many cases this could have been avoided if these individuals had chosen to live 1-2 standards below their means and put the money they saved into good investments. For example, high dividend yielding stocks or invested some of this money in bullion, high quality technology, commodities based stocks, etc. Instead many of these individuals lived a lifestyle that was several levels above what they could afford and now sadly they are paying the price for their lack of foresight. However, it would be wrong to lump everyone into this category. If we are hit with another recession, then the outlook could deteriorate significantly.

We are not concerned with the very poor. They are unthinkable, and only to be approached by the statistician or the poet.
Edward M. Forster, 1879-1970, British Novelist, Essayist

Things turn out best for those who make the best of the way things turn out.
Jack Buck

We have been stating this for a long time and its good to see someone from the banking sector finally echo our sentiments. When an important banker makes a statement one should pay attention especially if it makes sense, as usually they are full of dribble.

For those who speak German, Deutsche Bank CEO Josef Ackermann made the following statement

"Ob Griechenland über die Zeit wirklich in der Lage ist, diese Leistungskraft aufzubringen, das wage ich zu bezweifeln"

For those who do not speak German the excerpt below provides a clear translation of the above statement.

Ackermann, one of Europe’s top bankers who has helped to put together a private-sector bailout package for Greece, questioned the country’s ability to turn itself around, according to excerpts of a transcript for the Maybrit Illner talkshow set to be broadcast on German television ZDF on Thursday evening. Greece has been forced to implement tough austerity measures as a precondition for an international bailout, a move that has sparked widespread protests in the southern European country.

"Whether Greece over this time period is really in a position, to bring up the strength to make this effort, I have my doubts," Ackermann said in the transcript, adding that this requires "unbelievable efforts".

If Greece were to "fall down" this could spread to other countries and lead to "a sort of meltdown," Ackermann told ZDF. Full Story

The EU could pay bond holders part of their debt as  (they are already throwing good money into a deep black hole); bailing out the bond holders is what all this whole story is about. They like and make false claims that they are trying to save Greece, etc.   The next step would be to push Greece out of the EU. Yes it would be painful in the short term, but it would also send out a strong message, that the EU is willing to do what is necessary to defend the Euro. . Over 51% of the  Greek public is completely against the new Austerity measures the government has implemented. This is a clear sign that these measures will not hold. So what sense does it make to give them money when everyone knows that they will come begging for more soon. At this rate, the can is being kicked further down the filed, instead being kicked completely of the field.

The wise man can pick up a grain of sand and envision a whole universe. But the stupid man will just lay down on some seaweed and roll around in it until he’s completely draped in it. Then he’ll stand up and go hey, I’m Vine Man.
Jack Handey

Related Articles

More Euro woes; Wage cuts May 13, 2010

World’s 1st gold ATM; a sign of a top? May 13, 2010

Euro; the Worst is yet to come,  May 12, 2010

Euro shock and awe bailout, more like shock and shake May 10, 2010

Ulterior motive behind Greek Bailout, May 3, 2010

Roast the PIIGs; End the Euro crisis April 30, 2010 

  If you lead the people with correctness, who will dare not be correct?
Confucius,BC 551-479, Chinese Ethical Teacher, Philosopher

Financial markets are showing they have their doubts, with markets in Europe and Asian drifting lower Wednesday after Monday’s initial euphoria over the initial 750 billion euro package announced by European Union officials over the weekend."Is the package big enough?" asked Paul Lambert, the current director of currency and macro strategies at Polar Capital who’s also held roles at Deutsche Asset Management, UBS, Citibank and the Bank of England. "That depends on the success of the debt consolidation in the periphery [and] whether they’re ultimately able to have falling real wages so that they can come back in line with the core."

Much criticism has been lobbed at places such as Greece for high public sector wages, which will now be brought down sharply by the government as part of the agreement for its bailout package. That’s also been one of the key reasons Greeks have taken to the streets over weeks that have turned violent at times. On Wednesday, Spain announced a plan to reduce public wages 5% this year and freeze them in 2011 while suspending a pension hike. The moves come as the government there fears being dragged into a situation similar to Greece’s.

"I’ve observed that if any country in the emerging markets had been offered a loan package like the Greeks were offered before they got the eventual loan package they got, people wouldn’t have been rioting on the streets, they would have been saying thank you," said Lambert at a Morningstar Investment Conference in London.

"The fact they’re rioting on the streets means ultimately there may not be the ability of the Greeks to see a 20% fall in real wages," he said. Full Story=

Yeah we would like to see how long individuals are willing to keep quiet once the government starts to cut their salaries, increase taxes and cut benefits. People used to the good life do not take kindly to such measures, they are going to get rid of the existing government, (Greece is the lead candidate for such a move) and replace it with one that is more sympathetic to their cause. The only way to solve this is by the properly (instead of the miserably program called shock and awe, more like shock and shake) is for the Euro zone to set an example. They need to let one country default; this will send a strong message to the others that if they don’t wake up, a sledge hammer is going to fall right on their heads and snap them out of their coma.

In the short term this is a very painful strategy, but long term this would be very beneficial to the Euro, as it would give it credibility and make it a true front runner as a challenger to the US dollar. Investor will have more faith in a nation that is willing to take strong measures to protect its currency.

Things turn out best for those who make the best of the way things turn out.
Jack Buck

Do not be desirous of having things done quickly. Do not look at small advantages. Desire to have things done quickly prevents their being done thoroughly. Looking at small advantages prevents great affairs from being accomplished.
Confucius,BC 551-479, Chinese Ethical Teacher, Philosopher

Amid fears over the strength of nearly every major currency, Abu Dhabi’s top hotel has come up with a new type of ATM for their most risk-averse guests. The Emirates Palace is giving those staying there the chance to withdraw gold from the world first ever gold dispenser. With gold prices at record highs amid fears that the EU’s rescue package will drive inflation higher, the ATM monitors the daily price of gold and offers small gold bars that weigh up to 10 grams with customized designs.

Giessler’s timing is very good given gold is currently at a record high. Given the price action at the moment your 10 grams could be worth considerably more by the time you check out and could help you pick up the tab at the luxury resort. One night in a three-bedroom suite that could set you back more than $10,000 a night. Full story=

This is a clear sign that Euphoria levels are reaching an extreme level in the Gold camp. The next move for gold could therefore be down instead of up. History has shown that whenever something spectacular is done in a market that is extremely overbought, a top is usually close at hand. The Burj tower is a prime example.

  If the thunder is not loud, the peasant forgets to cross himself.
Russian proverb

I think it is a given that Greece will have to default, everyone knows this, but they are just playing cat and mouse for now. Most Greeks are dead set against the new Austerity measures and they will likely throw this government out of power for the new changes they have instilled. The next government will cater to the people’s needs for fear of receiving the same treatment. Change is not wanted in Greece. The only way to fix this problem is if the nation as a whole understands that they have to go through a painful period of cuts, but as evidenced from the past riots this is not the case. The story below further substantiates our claims.

Greek unions announced on Wednesday that they would stage a 24-hour nationwide strike on May 20, the second major protest against tough austerity measures pledged in exchange for billions of euros in aid. The main public and private sector led a 50,000-strong march a week ago in which hundreds of angry Greeks fought pitched battles with police in the streets of central Athens and three people were killed in a petrol bomb attack on a local bank.

They are due to march in the capital on Wednesday from 6 p.m. (1500 GMT), in a rally which will give indications about the public mood before the big walkout next week. Investors are closely watching public reaction to government wage and pension cuts amid concerns broader unrest could hit Prime Minister George Papandreou’s resolve in pushing them through. New figures published on Wednesday showed Greece’s economy contracted 0.8 percent in the first quarter compared to the last three months of 2009.

The austerity measures, pledged in return for 110 billion euros ($139.7 billion) in emergency aid from the European Union and International Monetary Fund, are expected to keep the economy in recession through 2011."The IMF will not stop thirsting for workers’ blood," said Yannis Panagopoulos, chairman of Greece’s main private sector labor union GSEE. "Its recipes are a disaster and the government must turn them down."

The country’s socialist government on Monday unveiled a draft law to raise the average retirement age and cuts benefits, which further angered unions already opposed to previous steps including public wage cuts and tax hikes. Full story

Adding to the host of problems is the fact that Greece is now officially in a recession. Painful cuts have to be implemented and maintained or Greece will default. Sometimes markets should be allowed to settle matters, intervention only delays the inevitable. Our stance has been that the Euro is going to trade down to the 115 ranges and could possibly trade down to the 110 ranges. The massive 1 trillion Package had no lasting impact on the Euro, after mounting a brief rally, the Euro crumbled and is now on its way to putting in another series of new lows.

Spain’s new austerity measures, too little too late

Prime Minister Jose Luis Rodriguez Zapatero said Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets. "We have to make a singular, exceptional and extraordinary effort to reduce our public deficit and we have to do it when the economy is starting to recover," he told parliament. The announcement came two days after euro zone governments, the European Central Bank and the IMF agreed on a $1 trillion (674 billion pound) rescue package to stabilise the euro in exchange for pledges by highly indebted countries to pare down their deficits. Full story

We think this is action is a little late as Spain had ample time to address these difficult changes, but instead decided to sit on its fat rear and do nothing. The current recommendations are just too little to produce any meaningful change. Unofficially the employment rate is well past 20%, the housing sector has crashed, fiscal debt is roughly 112% of GDP and Rising and estimates put private debt between 160-180% of GDP. Thus unless they put forth some bone crushing changes, the odds are that Spain will be joining the Greeks sooner than later. Furthermore, this 1 trillion euro aid package is more of a band aid than a fix because the nations that are spending beyond their means are still doing so. Nothing has changed other than the day of reckoning.

The enemy of my enemy is my friend.
Arabian Proverb

When you see a worthy person, endeavor to emulate him. When you see an unworthy person, then examine your inner self.
Confucius,BC 551-479, Chinese Ethical Teacher, Philosopher

We all pretty much have felt the effects of inflation in one form or another. However, economists and the central bankers choose to define inflation as an increase in price of goods. This is a very clever way to actually hide what they are doing. If they are able to inflate the money supply but keep the cost of certain goods suppressed, mainly those that the average Joe uses everyday, they have more or less won; the simple reason being that the average person has come to view inflation in terms of rising prices.

One mechanism to keeping the cost of common goods down is through the use of heavy subsidies. This is used everywhere in the farming sectors, Manufacturing and industrial sectors, etc. I will elaborate on this in more detail on a follow up essay as this would a deviation from the topic at hand.

There are some incredibly positive attributes to inflation. As an investor/trader one should be interested in trying to find the best investment that takes advantage of this situation; in other words, the rate of return is several levels higher than the current rate of inflation..

The only problem with inflation is that, for the most part, the poor actually become poorer and the unprepared move down 1-2 ranks. That is why the saying originated the “poor become poorer and the rich get richer” while the middle class gets wiped out.

Since we have greedy slugs at the helm of the banking system, their inflationary tactics are designed to produce unequal benefits. Normally, if one inflates and spreads the money equally there is no net change as the price of goods move in equal percentages to reflect this increase in the money supply. However the central bankers will have none of this. They seek to inflate as much as possible and redistribute as little as possible of the new money they have just created out of thin air. The net result is that if you are unable to see in which direction they are moving, you will simply be left paying the tab. Your purse that was once full is now ¾ full and the prices of goods have moved up unevenly.

This is what is happening now. Manufactured goods are extremely cheap; yet the cost of most commodities has shot up significantly in the past few years. In many cities, the cost of a house is still beyond the reach of many, and this is after the housing crash. Salaries have not kept up with the level of monetary inflation. The only way people are able to buy houses is because of the low artificially controlled interest rates. These fools many a new buyer into taking a debt that he/she really does not have the means to pay of.

However, despite all these negatives the astute investor can make a tremendous killing if they take a little time to look at what is going on. For example, the intelligent investor would have started to notice that prices of houses started to increase rather drastically towards the end of 1999 and early 2000. They would have also noticed that Gold actually broke its Downtrend in 2000. They would have noticed that basic raw materials broke their down trend in Early 2003. They would have also noticed the trend of printing more dollars, if they bothered to read what this new administration was proposing. So the middle class family could have taken a mortgage and bought one house as the price inflated, they could have possibly taken a loan on the existing house say at the end of 2000 or early 2001 and used it to buy a second home. They could have put some of their money into Gold bullion and a little into some gold stocks, many of which are up over several hundred percentage points, some are showing gains in excess of a 1000%. 

Let’s now look at the true full range benefits of Inflation. In this world if you do not spend time educating yourself the price you pay is extremely high. If you thought education was expensive, try ignorance for a lifetime.

Almost every Gold bug is secretly rooting for inflation. Why do I say this? If they are expecting Gold to reach 1300, 1500, 2000, etc they are rooting for inflation. Gold prices are one of the main indicators that there is something seriously wrong with the banking system and that the monetary supply is going out of control. In the later stages, the fear factor will kick in as everyone panics and looks for a way to protect their assets; this will drive the price of precious metals and other commodities to the moon.

Those that have bought real estate are also secretly rooting for inflation, as they want the prices of their property to increase. If you really take the time to think about it inflation is very beneficial to the astute investor. Those that are investing in the stock market are also rooting for inflation. It is the free money policies that push people and business to risk more of their money in the market. Look at the present market, it keeps going higher and higher, but when you price it in Gold or any other strong currency it has done nothing. However, the astute investor could spot that the central crack head bankers were out of control and knew that not only would the price of Gold rise but there would be a rise in the price of general equities to.

These prices increases have more than compensated for the inflationary practices of the central bankers. However the only ones who have benefited from this move are a small group of smart investors (investors who were smart enough to jump out of dollars and into commodities) and the cronies of the central bankers who were privy to this information, long before the Junkies, oops we mean central bankers decided to press the pedal to the metal and push the printing press into overdrive.

When you think about it, life is nothing but one huge market place and in the end someone needs to lose in order for someone else to win. Not everyone can win and not everyone can lose. The sad part is that it takes a lot of someone’s to lose to make one someone wealthy. The net effect is zero. Money is not really lost it simply moves from many pockets to a few large pockets.

When the NASDAQ crashed everyone was made to believe that several trillion dollars of wealth were lost. That was and is a fat huge lie. Those trillions of dollars simply moved out from hundreds of thousands if not millions of pockets into a select few thousand pockets.

It’s a net 0 game. So when people scream about the negatives of inflation. They are doing so because they have not taken the time to educate themselves on the many tools that are available to protect themselves against this insidious disease. This once again brings life to the saying, "An Empty Tin makes the most Noise.”

In spite of the cost of living, it’s still popular.

Kathleen Norris 1880-1966, American Novelist

Do we condone inflation? No we don’t. Do we really think it is something great? No we don’t. However, what one thinks and what one can do become rich are two different things. The central bankers are not going to change; they have been doing this for far too long. . They are masters at this game, one day they will lose, but I might be dead and gone by then. So rather than screaming from the top of my lungs like an empty can about the negatives of inflation, we would rather be a silent and have our eyes on what the central bankers are doing so that we can position ourselves to take advantage of their dirty moves. We will leave the screaming to the “Empty cans”; they seem to have plenty of time on their hands.

In the end, all that really matters is for one to find a way to take care of themselves and their loved ones. And if you take the time to educate yourself than you put yourself into the driver’s seat inside of being locked up in the trunk. Make sure you learn the true definition of inflation, the effects of inflation, how the central bankers operate, and you can use this info to ride on their tail coats and increase your net worth in the process.

The best form of protecting oneself from the evils of inflation is to have a wide exposure to the commodities sector.  One should definitely put some of one’s money into Precious metals (bullion).  Some ETF’s that focus on commodities are SLV, GLD, GDX, MOO, COPX,PALL, CUT, USO, ETC

Next to inflation, majority rule is the most ingenious scheme ever contrived by government. Most people have never dared to question the basic morality or logic in the assumption that the majority should have power over the minority. A majority of the people in the South once believed in black slavery. Did that make it moral? A lynch mob is majority rule stripped of its fancy trappings and its facade of respectability. In a community where homosexuals outnumber heterosexuals, should the majority have the right to outlaw sex between married partners of the opposite sex? In a community where atheists outnumber non- atheists, should the majority have the right to outlaw the practice of religion? … a dictatorship allows only a small number of people to interfere with the rights of others, a democracy makes it possible for great numbers of people to impose their will on others — through the force of government. Is an act of aggression more right if carried out by the majority than by a dictator? Since approximately half the eligible voters vote this means that approximately 75% of the people are ruled by 25% of the people.

Robert J. Ringer, American Writer

Disclaimer; We have positions in Gold, Silver and Palladium bullion.

Imagine for a second that from the day you started to play the markets you never lost; you simply won each and every time no matter what stock you bought or sold; sooner than later winning would become boring, because you would not have anything to compare your wins to. The reason a win feels so good is because you compare it to a point in time when you lost something. Not only do you bask in the new felt emotion (because you remember the pain of losing), but you also feel incredibly great because of the financial windfall from that win. What we are trying to state here is that losing or failing is an important and integral part of winning and success and that without the other life would be drab and dry.

However, what happens over time is that most individuals seem to think that they can do nothing but fail or lose, especially when it comes to the markets (this occurs on a subconscious level, that’s why more individuals lose than win when it comes to the financial markets).

The way to stop this evil process is to immediately understand the purpose of losing and failing. When you lose or fail it means you have done something wrong, you are being given a second chance to evaluate where you might have strayed or erred. Most of us instead just keep doing the same thing that made us experience our first loss, and we hope that sooner or later we will hit the mother load by luck. If we examine the reason we lost or failed, we see exactly what it was that caused us to fall off the tracks, and, even if we don’t succeed on the next attempt, we will at least make sure that we never ever repeat the same mistake again. Through constant analysis of our mistakes, we can finally develop a system or systems that can with patience and persistence help us win in the markets. More importantly it could help us with the most important battle in our lives: the quest to find happiness, which is really nothing other than the quest to find inner peace. Remember this, nothing good ever comes easy; if it did it was not worth it in the first place.

Imagination was given man to compensate for what he is not, and a sense of humor to console him for what he is.
                    ~ Francis Bacon 1561-1626, British Philosopher, Essayist, Statesman

A mere friend will agree with you, but a real friend will argue.
Russian Proverb

Before we discuss this issue lets focus on some facts. Many individuals claim that Greece has to be bailed out to maintain stability in the financial markets. This is a bogus argument, in the short term it might be true, but in the long term it just delays the day of reckoning and makes the situation infinitely worse. You do not help an alcoholic by chastising him and then allowing him free access to booze; it won’t work.

The current debt load is 115% of GDP and by 2011 it will be 150% of GDP. The Greek government has now stated that it will take 2 years more to meet the EU requirements; a great start and a clear sign that they will come begging for more aid down the line.

Greece only has a GDP of roughly 326 billion dollars, much smaller than their Neighbour Turkey, which has a GDP of roughly 830 billion dollars, On a Per capita Basis Greece knocks turkey out with a GDP per capita of roughly $32,000 dollars but so does Greece’s debt. Thus the bailout ($147 billion), alone is equal to roughly 44.5% of Greece’s GDP.

If the Greek economy can deal with and survive this crisis it will be one of the first to recover from a crippling debt ratio of more than 90% of GDP. If interest rates were to continue rising, and they will most likely as their debt has been rated as junk, it could spell the end. The interest rate Greece has to pay to borrow money is now on Par with emerging countries like India and Mexico; it is going to take a lot of work before the rating agencies lift Greece’s rating. This effectively eliminates their ability to borrow money on the commercial markets and almost guarantees that they will be begging for more help a few years down the line.

What should make investors even more sceptical is the fact that they cooked their books so one does not even know what data to trust, things could be infinitely worse than the Greek government is projecting.

Roughly, 80% of this debt is foreign owned and a major portion of this debt is held by German and French citizens. For every 1% rise in interest rates, Greece needs to send an extra 1.2% of GDP abroad to bond holders. Currently, Greece has one of the highest external public debt/GDP ratios in the world. If rates surged to the 9% plus ranges, they would have to send 10.8% of GDP overseas every year. This aid package will last them roughly 3 years and when the old debt has to be rolled over, the new rates will kick in. Latin America in the 1980’s made overseas payments that amounted to 3.5% of GDP and that proved to be a brutal experience to say the least. Germany was also in a very tough position during the 1925-1932 eras, but their Payments make what Greece might have to go through look like child’s play. This trend is simply unsustainable.

So who are they protecting, the answer is simple; the bond holders. Roughly, 80% of this debt is foreign owned and a large portion of this is held by German and French Citizens. Bottom line this rescue package is not for Greece, but it’s a rescue for Greek bond holders worldwide. If Greece were to default tomorrow, it would not disappear, but its debt holders would be seriously hurt. Thus behind all this noise one must understand that the main reason for the bailout is to protect the bondholders; the exact same story unfolded in the US, the only difference being that it was a bailout of the banking industry. As the Germans and French hold a very large percentage of these bonds, it is actually a bailout of Germany and France and not really Greece. They should let Greece’s default but they will not.

Even though Argentina defaulted on its debt, it is still around. Yes it did pay the price initially by being shut out of the global capital markets for years, but it did not vanish and only its foreign debt holders lost.

An IMF study by Eduardo Borensztein and Ugo Panizza counts as many as 257 sovereign defaults between 1824 and 2004. Between 1981 and 1990 alone, there were 74 defaults . In fact, the evidence suggests that the penalties for default are often less severe than those meted out to Argentina. Its experience of being shunned by international capital markets is not typical, for example. At least in recent years defaulters have been able to re-enter markets once debt restructuring is complete. Argentina’s woes stem partly from the fact that it is only now, more than eight years since it defaulted, nearing a final deal with its creditors

That said, markets appear to have short memories. Only the most recent defaults matter and the effects on spreads are short-lived. Messrs Borensztein and Panizza find that credit ratings between 1999 and 2002 were affected only by defaults since 1995. They find that defaults have no significant effect on bond spreads after the second year. This tallies with earlier research by Barry Eichengreen and Richard Portes. Studying bonds issued in the 1920s, they also found that recent defaults resulted in higher spreads but more distant ones had no effect.. Full story

This clearly illustrates that a Greek default would not be the end of the world and could potentially be a positive development over the long run; we stated this in our previous article Full story

It appears that the main reason behind the bailout is to placate the debt holders; these chaps should have known better. After all they did not complain when they were getting paid, now that the house might burn, they start to scream. They knew well in advance that the situation was not sustainable, but yet they continued to purchase Greek debt. When you invest you understand that you are taking on some risk and the higher the yield the more risk you take. Investors that put money into a company that declares bankruptcy are not suddenly bailed out, they have to suck up and bear the losses. The same rules should apply to bond holders.

This concern over Greek debt is a simple ploy to cover up this fact; the same ploy was used by the US government to bail out the banks. If Greece defaults, we doubt the end of the world scenario that many are projecting will come to fruition. It will certainly cause some pain but will not have any lasting impact on the global markets.

The best hedge in the years to come against what appears to be another massive currency crisis will be to place a portion of one’s money in commodities (Oil, Natural gas, Precious metals, base metals, etc.)

ETF traders have a wide range of choice when it comes to taking a position in the commodity’s sector; USO, FCG, GDX, GLD, COPX, PALL, SLV, MOO, CUT, etc.

Bad is never good until worse happens.
Danish proverb

Disclosure: we have no positions in the Stated investments.