Thread: US Stocks Plunge, Dow Falls Over 300 Points As Fears Grip Market

March 24, 2012
I've Never Seen a Confluence of Negative Factors Like This
Since August I've been calling for a collapse in Europe. Obviously I'm way early here, largely due to intervention from the ECB. I also underestimated the extent to which leaders would push to hold things together.

After all, Greece had already received bailouts in excess of 150% of its GDP and still posted a GDP loss of 6.8% in 2011. It's hard to believe they'd want to accept more austerity measures and more debt.

Moreover, political tensions between Greece and Germany had reached the point that Greeks were openly comparing German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble as Nazis while the Germans referred to Greece as a "bottomless hole" into which money was being tossed.

Looking back on it, the clear reality was that Germany wanted to force Greece out of the EU but didn't want to do it explicitly: instead they opted to offer Greece aid provided Greece accepted austerity measures so onerous that there was no chance Greece would go for it.

Well, Greece surprised many, including myself, and went for it. And so the EU experiment continues to exist today. However, before the end of this issue I will make it clear precisely why this will not be the case for much longer and why we are on the verge of a systemic collapse in Europe.

For starters, unemployment in Greece as a whole is now over 20%. For Greek youth (aged 15-24) it's over 50%. The country is in nothing short of a Depression.

Indeed, Greece has now experienced five straight years of contraction bringing the total contraction of Greece's GDP to 17%. To provide some historical perspective here, when Argentina collapsed in 2001 its total GDP collapse was 20% and this was accompanied by full-scale defaults as well as systemic collapse and open riots.

With new austerity measures now in place there is little doubt Greece will see a GDP contraction of 20%, if not more. I expect we'll see other "Argentina-esque" developments in the country as well. Put mildly, the Greek issue is not resolved.

The one thing that would change my views here would be if Greece staged a full-scale default. While the political leaders and others view a total default as a nightmare (and it would be for Greek pensions, retirees, and many EU banks), it is only a total default that could possibly solve Greece's debt problems and allow it to return to growth.

Defaults are akin to forest fires; they wipe out all the dead wood and set the stage for a new period of growth. We've just witnessed this in Iceland, which did the following between 2008 and 2011:

1. Had its banks default on $85 billion in debt (the country's GDP is just $13 billion).
2. Jailed the bankers responsible for committing fraud during the bubble.
3. Gave Icelandic citizens debt forgiveness equal to 13% of GD.

Today, just a few years later, Iceland is posting GDP growth of 2.9%: above that of both the EU and the developed world in general. In plain terms, the short-term pain combined with moves that reestablished trust in the financial system (holding those who broke the law accountable) created a solid foundation for Iceland's recovery.

Now, compare this to Greece which has "kicked the can" i.e. put off a default, for two years now, dragging its economy into one of the worst Depressions of the last 20 years, while actually increasing its debt load (this latest bailout added €130 billion in debt in return for €100 billion in debt forgiveness).


Iceland staged a REAL default, and has returned to growth within 2-3 years. Greece and the Eurozone in general have done everything they can to put off a REAL default with miserable results. I'll let the numbers talk for themselves:



The point I'm trying to make here is that defaults can in fact be positive in the sense that they deleverage the system and set a sound foundation for growth. The short-term pain is acute (Iceland saw its economy collapse 6.7% in 2009 when it defaulted). However, a combination of defaulting and debt forgiveness (for households) can restructure an economy enough for it to begin growing again.

However, EU leaders refuse to accept this even though the facts are staring them right in the face. The reason is due to one of my old adages: politics drives Europe, NOT economics.

And thanks to the Second Greek Bailout (not to mention the talk of a potential Third Bailout which has already sprung up), we now know that EU leaders have chosen to go "all in" on the EU experiment.

Put another way, EU leaders will continue on their current path of more bailouts until one of two things happens:

1. The political consequences of maintaining this strategy outweigh the benefits
2. The European bond markets force EU leaders' hands.

I firmly believe that we will see one of these happen in the May-June window of time. We have a confluence of political, fundamental, technical, and monetary factors occurring in that time period make the possibility of a banking Crisis in Europe higher than at any other point in the last three years. Indeed, I've never seen such confluence of factors like this before. And it all makes for a very ugly situation in Europe.


Private Wealth Advisory

Graham Summers
Chief Market Strategist

Originally Posted by Butterfly

Originally Posted by nostromo

Greece did actually default, it is an event, whatever euro politicians say

they called their bonds, which corporate American do all the time when interests rates are too low and their bonds pay too high a coupon

Sovereign debt is usually not callable, so Greece did it retroactively

that's controversial, but not a default

of course some want to call it a default so they can cash in on those CDS and keep those great Greek yield of 20% on their invested money.

No free lunch for anyone,

Butters,

I never said or thought you are stupid. I would go as far as to call you intelligent. You suffer from Euro Forever syndrome though, besides being a bastard

Eurozone created the Greek problem, as it did the Portugal, Ireland, Spain and Italy problems. France is about one of them. Belgium is certainly one of them. You most certainly know the basics of economics as a science. There, more uncompetitive countries can devalue their currency to meet the market. They can not borrow over their limit. Within eurozone it all was available, cheap credit is still here today, as ECB does it Italian way. We call it "Good money after bad money". Of course European Union does not like the market in the first place, out of 27 "commissars" 11 are ex or present communist leaders. How did that happen? Certainly they were not elected. Well, because of people like you bet the wrong horse or did not care or are happy with it in hope for some quango.

baby maker, Iceland is a good example.

Originally Posted by koman

Originally Posted by Butterfly

^ no derivatives, they are like stocks or funds, and most have to pay their "operating income" as dividends, a bit like a preferred stock, so the dividend yield are quite high, about 6.5% per year, and the price appreciation can be another 20% over the next 2 years

you can make bets on inidvidual REITs instead of REITs Indexes ETFs, but they could be risky since you will need to watch constantly their price movement and do you research. Some are leveraged and they have loans with banks and investment funds so again you need to see how this could add to the risk of holding them.

I think the REITs Residential and REITs Commercial Complex are being quite followed these days, so buying the Indexes is a safer bet, each sub-index has less than 10 REITs and I think even Equal Weighted REITs Indexes are available now. Equal Weighted instead of MarketCap weighted indexes will have better performance in the long run because of the rebalancing.

Thank you Butters....clear as Mekong water....
How do you buy an "index"? Are these things cobbled together along the lines of a mutual funds or something? Where/how can you buy into them? Most people would not have the know-how or the resources to research them...at least on an individual basis....but they do seem interesting.

they are cobbled together at places like MF Global and Goldman Sachs. Once interest rates spike, and we are in a new credit cycle,then RIETs will become a reasonable place to put some money for nominal returns.

got gold ?

Originally Posted by Warrior

Originally Posted by baby maker

March 24, 2012
I've Never Seen a Confluence of Negative Factors Like This

Since August I've been calling for a collapse in Europe. Obviously I'm way early here, largely due to intervention from the ECB. I also underestimated the extent to which leaders would push to hold things together.

...


Private Wealth Advisory

Graham Summers
Chief Market Strategist

I like this type of predictions

"Obviously I am way early here, .." Why is that obvious?

"... largely due to intervention from... " Yes, if there were no others who could intervene, you would have been right. In fact, we can all be right if there were no others to intervene.
But now, Mr Summers, you are wrong.

So you missed the "Is the European Central Bank Still Solvent?" seminar in London few days ago?

You should be concerned, as you are from the Netherlands. The Nederlandsche Bank, central bank of the country, is de facto funding Eurozone 150 billion euros through target2 system that was not designed for this (other strong countries, Germany 500 billion, Finland 100 billion, Luxembourg 100 billion - and every, read my lips, every other country in eurozone is a leech). In the end should euro project fail in any part the taxpayers in those 4 countries will pay, like you. Does shutting down hospitals in your country sound right? If only Greece exits euro, you will pay quite a lot, they owe ECB 100 bn, your portion of which you will not see coming back to your central bank. Way to go for european dream...

But of course, 100 billions, 100 baht, you get confused. But let me tell you, we are talking about huge amounts of money. 100 million euros is a a lot. 500 million, 1 billion, 10 billion, put into science, education, research and development, we would have a better world. 100 billion, 500 billion, 1000 billion. Why not suggested 3000 billion for euro bailout, "that should keep euro going for 2 or 3 years" as suggested by some mentally ill person, to which analyst responded "they do not have that money" on Bloomberg.

As every professional trader knows, there is a time when you should just cut your losses, even if you lose very much too much, you will still be alive and there will be another day. Eurozone stop loss point was reached long time a go and now they are going for broke. "Ex" communist commissars of politbyro- eh commission holding the steering wheel hating the market forces and not understanding market economy. Maybe the funding countries should consider their position.

Do not get me started over fundamentals, why europeans (except the countries mentioned above) are by design incompetitive against Asia, US or UK...

Originally Posted by socal

Originally Posted by nostromo

Originally Posted by Warrior

Originally Posted by baby maker

March 24, 2012
I've Never Seen a Confluence of Negative Factors Like This

Since August I've been calling for a collapse in Europe. Obviously I'm way early here, largely due to intervention from the ECB. I also underestimated the extent to which leaders would push to hold things together.

...


Private Wealth Advisory

Graham Summers
Chief Market Strategist

I like this type of predictions

"Obviously I am way early here, .." Why is that obvious?

"... largely due to intervention from... " Yes, if there were no others who could intervene, you would have been right. In fact, we can all be right if there were no others to intervene.
But now, Mr Summers, you are wrong.

So you missed the "Is the European Central Bank Still Solvent?" seminar in London few days ago?

You should be concerned, as you are from the Netherlands. The Nederlandsche Bank, central bank of the country, is de facto funding Eurozone 150 billion euros through target2 system that was not designed for this (other strong countries, Germany 500 billion, Finland 100 billion, Luxembourg 100 billion - and every, read my lips, every other country in eurozone is a leech). In the end should euro project fail in any part the taxpayers in those 4 countries will pay, like you. Does shutting down hospitals in your country sound right? If only Greece exits euro, you will pay quite a lot, they owe ECB 100 bn, your portion of which you will not see coming back to your central bank. Way to go for european dream...

But of course, 100 billions, 100 baht, you get confused. But let me tell you, we are talking about huge amounts of money. 100 million euros is a a lot. 500 million, 1 billion, 10 billion, put into science, education, research and development, we would have a better world. 100 billion, 500 billion, 1000 billion. Why not suggested 3000 billion for euro bailout, "that should keep euro going for 2 or 3 years" as suggested by some mentally ill person, to which analyst responded "they do not have that money" on Bloomberg.

As every professional trader knows, there is a time when you should just cut your losses, even if you lose very much too much, you will still be alive and there will be another day. Eurozone stop loss point was reached long time a go and now they are going for broke. "Ex" communist commissars of politbyro- eh commission holding the steering wheel hating the market forces and not understanding market economy. Maybe the funding countries should consider their position.

Do not get me started over fundamentals, why europeans (except the countries mentioned above) are by design incompetitive against Asia, US or UK...

Anyone who thinks the Eurozone is in worse shape then the US fed or Japan simply hasn't looked at the data. The Eurozone as a whole is a net creditor with no trade deficit. The US is the biggest debtor in the world with a 50 billion per month trade deficit. The US has 50 billion in forex reserves. Thailand has 250 billion. The Eurozone has more gold then any entity in the world. They have over 10,000 tons of gold. The US treasury has 8000 tons. The smallest state in the Eurozone is in the worst financial shape (Greece) The biggest state in the US dollar block is in the worst shape (California)

It is not about what you have, it is about what you can do in future, to produce wealth.

In my opinion, US and Japan are very much more reliable than EU. Built on market economy and trade. EUR was built on political ideals.

As for Cal, it is part of USA, same people same values, not like South Europe would ever be part of Northern Europe.

If you take a look, most of Eurozone countries are in a mess - well, all except the fab four i mentioned, and they are being dragged down by crap other europe. Speaking of who generates europes trade... Lets hear it for 5 hour work week for euros! And eternal funding...

Originally Posted by nostromo

Originally Posted by robuzo

David McWilliams has a new Punk Economics lesson up that I think is relevant to the discussion here:
Punk Economics: Lesson 3 - YouTube

Good points made there and a good vid as well, making it easier for common people to understand what we are talking about. David McWilliams is a clever chap. Actually saw this vid first on zerohedge.com. Should anyone want more...

I think I saw it first either there or Naked Capitalism, another good alternative financial commentary site.