A Currencies Comparison.
FXE – Euro
GLD – Gold
FXB – British Pound
FXY – Yen
FXF – Swiss Franc
FXM – Mexican Peso
FXS – Swedish Krona
BZF – Brazilian Real
FXC – Canadian Dollar
FXA – Australian Dollar
All versus the US Dollar.
OK, So What’s This Mean to Me?
Greece has just had their “Sovereign Debt” downgraded to Junk. ( I think that puts them about the same as Romania and below Hungary and Iceland; if CNBC World has it right and I heard it right…)
Furthermore, Portugal was downgraded 2 steps.
Germany is balking at bailing out Greece, and the IMF (International Monetary Fund – the global banker) is posturing for a bailout, but with major strings attached.
This, as they say, is a mess.
First off, it means investing in Greece or Portugal is a really bad idea right now. We’re talking something like 85 Billion Euro (up to 150 Billion over a couple of years) that Greece needs to pay back, and it doesn’t have it. So they want to borrow 45 Billion or so right now, more later. And the folks who have been prudent with their spending are not so sure it ought to be their problem to bail out Greece.
Portugal is not quite as bad off right now, but have a hung parliament and can’t get themselves to take any action.
This could put the entire Euro currency system under more stress and potentially put it into jeopardy. Traditionally, when a sovereign country is hosed from over spending, they bugger their currency by printing more of it. In the Euro system, Greece can’t do that. They MUST either raise taxes or cut spending. In socialist systems, neither of those are politically possible. (Thus the hung parliament in Portugal…) Telling the government employee unions that they get a pay cut usually results in domestic paralysis as they go on strike.
Greece could leave the Euro (a lousy choice) or default on its debt (a worse choice) or just stop functioning (as they have done in the past… with riots et. al.) or a White Knight could come from somewhere with a rescue package and kick the can down the road a year or two (the most positive choice but unlikely unless Germany decides to pony up the money – and the German voter is sounding a bit tired about pick pockets…)
This is, at best, a mess.
Most likely Gold and the Yen will rise, along with the Swiss Franc. Expect the European stock markets in general to show softness for the next couple of weeks.
We will have more of this to come. The Urge to Spend, especially in “Social Democracies”, and especially on “social programs” is unstoppable. It ends in stagnation, social collapses, buggered currencies, revolution, and eventually poverty. In this case, with a shared Euro, Greece can not inflate the currency on its own. But with so many European countries chaffing under the yoke of German Banking Discipline, we might well see a consensus arise to let the Euro slide. Even if the Euro does not eventually slide a lot, the fear of it will cause a sagging of the Euro debt market and Euro stocks. Time to be short Europe and short Euros.
It will be ‘dicey’ for a week or two until we get a better idea what’s happening. Realize that the Euro has already slid from about $1.50 / Euro to the $1.32 / Euro level, so don’t be surprised if there is a bit of jump for a day, then the next stage of decline begins. A $1.20 / Euro level is probably about right, but Europe will be reluctant to let that happen and expect to see central bank interventions. It’s just going to be unstable and unpredictable from time to time.
What does this mean for the USA?
We are headed down the same road. California is already there (as are several other states) with a worse debt position and a larger economy than Greece. The Federal government is spending at a pace that makes Greece and Portugal combined look like nothing. We are spending $Trillions on social programs we can not fund.
Greece spent money it did not have on social programs it could not afford with growth of government and large union pay outs.
The USA is spending money it does not have on social programs is can not afford with growth of government and large union pay outs.
Want to know what the future holds for the USA? Watch Greece. They are only a couple of years ahead of us. Our “sovereign debt”, the US Treasury Bills, Notes, and Bonds can suffer the same fate of a downgrade. We are not immune.
The major difference is that the USA can simply print more money and dilute the value of all outstanding currencies and debt. I expect that is what we will do. Simply inflate away the debt. It takes no vote, requires no one agree, needs no money to be loaned by a reluctant partner, and works without the public noticing for a few years. (It takes about 4 to 6 years for inflation pressures to build up and work their way through to the general price level. More than enough time to blame it on someone else…)
Where to Go?
Asia and the resource countries. Japan, China, South Korea. Perhaps India. On the resource side the Australian Dollar and the Brazilian Real; plus both of their stock markets. Canada and Mexico are worth a look, but coupled to the US markets a bit more than the others. Minor markets with stable economies (New Zealand, Israel, Chile, etc.)
Long China, Australia, Brazil with a Short Euro and European stocks against it ought to be a win. Maybe not in a single day, but over a couple of weeks. There is risk that Germany could bail out Greece and the positions move against you, so have stop loss orders or watch the news and be ready to move fast.
The Ministry of Stupidity Speaks
Also today we had the US Congress grilling Goldman Sachs over their trading of mortgage backed securities. All political theatre to pave the way from some kind of “Finance Reform” bill Real Soon Now. That will leave USA markets unsettled for a while. Avoid them. ( And you just KNOW they will not simply put back the Glass-Steagall act that they stupidly repealed. Hey, just because it worked for a generation or two… and just because we had a financial meltdown after it was repealed… To “put it back” would require admitting they screwed the pooch in the first place. Whatever they do will be far far worse.
When The Ministry of Stupidity Speaks, all you can do is run away. Step away from the table, take your chips and go home. Wait until the dust settles and you know what the new rules will be.
Avoid the US Financial Sector and be reluctant to be in the general US market. Positions have to be twice as promising to make up for the added political risk of “Congress in Session and the Ministry of Stupidity on Parade”…
FWIW, I’m continuing to hold my oil trusts and other high dividend paying resource positions. Defensive. It’s time to be defensive. Even the good markets (long term) can take a dive with this much bad news in the news flow. So watch fast charts for an entry with new chash and don’t just sit in positions that are falling.
You want things with high intrinsic value, stable rules and stable valuations, preferably with some dividends, and the lowest political risk you can find.