Investorstoday

Wednesday, November 2, 2011

Mid-week Market Commentary – Greece, Europe, and the US

Regarding Greece, that was unexpected. Not sure of what Prime Minister Papandreou is trying to do unless he wants to blow up the system. If this moves Greece closer to an eventual default then it is a long-term positive for the markets. Did anyone really think leveraging the EFSF would work?

Just think about the EFSF in simplistic terms for a moment. The EU is going to force the banks to take a 50% haircut on Greek debt while taking none for themselves, grab some capital, then turn around and ask the same banks to let them borrow against said capital, to buy sovereign debt.

If Greece gets away with this it sets a bad precedent for the rest of the PIIGS which will eventually pull Europe apart.

Then in a strange turn of events that should surprise no one, another financial firm was claimed from bets on European debt. MF Global filed for bankruptcy on Monday morning. Again, this is a positive because we need this to cleanse the problems from the system.

I spoke before about books becoming vanilla and people eschewing the risk trade ahead of a Greek controlled default. The problem with a controlled default is that you do not know where all of the problems lie. You can only model so much and run so many simulations but in the end an unknown problem pops up where you least expect it. The fallout becomes black swan events.

MF Global, Proton Bank, and Dexia are examples of significant problems that have not been effectively priced into the markets.

Meanwhile, in the US the deficit panel is having some problems.

No deal by U.S. deficit panel would be dire: experts

Should we be surprised that with an election in years’ time both political parties will dig in the heels?

Time to finish up with some thoughts regarding the US economy.

Third Quarter 2011: Lessons from the Emergency Room

Third Quarter 2011 Market Commentary

ECRI Recession Watch

Lowering the growth outlook is never a good sign. (pdf)

The Apple article will be delayed until next week while I present an article on the risk premium rising in the face of default risk rearing its ugly head in Greece once again.



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