Thursday, January 28, 2010

Update/Comments 1/28

Well copper crumbled into the ruins again today, finishing at $3.11, and so I'm now "short" one copper from $3.25 and another from $3.12. This will more than make up for the recent string of losses for sure.

None other than Bill Gross today sounded the alarm on British bonds (called gilts); saying that they are "sitting on nitroglycerine". Thats quite a statement from Bill, who is the CEO of a massive financial firm called PIMCO. He's recognized as a financial genius; when Bill speaks, Wall Street stops sipping their mochas and listens.

The end is nearing in Greece; today a newspaper came out with a story (which the Greeks deny) about serious EU talks to bail out Greece.. shortly to be followed by Portugal and/or Spain. This is going to put Germany front and center.. either a formal bailout or an Euro Central Bank bailout (with printed money, and a strongly lower Euro). My guess.. the German Chancellor Angela Merkl knows very well what her people would think of a formal bailout, therefore I predict it'll be an ECB bailout. Look for interest rates on all EU debt to go up as a result, and here's why: Lets say you loaned France 100,000 Euros a year ago on a five year bond and you expect to get 112,000 Euros back in five years. Problem is, those 112,000 Euros will buy only 3/4 of what they used to, therefore you have in actuality lost money. Bond buyers will thusly factor this into future EU purchases of not only Govt bonds, but all manner of bonds and stocks. Unless... deflation takes hold. Neither is a good scenario. Nouriel Roubini – the economist known as 'Dr Doom' – said Spain is too big to contain. "If Greece goes under that's a problem for the eurozone. If Spain goes under it's a disaster," he said. There is good news on Spain, however.. their national debt is relatively small; they might still be able to borrow a lot of money. But their banks are in abysmal shape. Their unemployment rate is above 20%; youth unemployment is 44%. Ya gotta wonder how much longer the people will peacefully tolerate this one.

Update 1/30: After looking into the Greek mess a tad deeper, it appears likely that the ECB will not be part of the bailout; it will either be a German/French affair or an IMF bailout.. and I see the IMF bailout as more likely. One blogger of note, however, feels that Germany might be willing to do it.. for a political price, namely the naming of a German, Axel Weber, as ECB chief. Either way, the ECB is unlikely to be a part of the answer here. Further, it appears that Bulgaria and a couple of others deeply connected to Greece economically could be affected, though these nations are also small and unlikely to cause any major problem. Portugal and Spain are not in immediate danger, though they might be down the road if the Greek tragedy is midhandled. Next week will be crucial; if CDS's and interest rates on Greek bonds continue drastically northward as they did in January, the bailout plan is going to have to be implemented sooner rather than later. An IMF bailout will impose stiff and unpopular cuts in Greek spending and wages, and this is a nation who's people have no problem with strikes, marches and riots as answers to problems. It also appears that Italy, Portugal and Spain have all instituted austerity measures to curb spending as a result of the problems in Greece; it's an attempt to head off the bond vigilantes.

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