Euro Land is Doomed - Achilles Heel of Globalization

One of the classic landmarks of the Great Depression was the tendency to protect local and national markets from competition. This protectionist behavior resulted in retaliatory actions escalating the issues and resulting in poorer economics for all. The sovereign leaders of Europe are publicly attempting to keep the markets open to free trade, which will facilitate the economies of all and support the struggling peripheral countries. The heads of the 17 Euro nations are working to keep the debt from imploding and destroying the European Union; with each positive announcement, stock markets around the world rise in anticipation of a lasting solution; privately, things may be different.

Relevant tickers: NYSE: DB, NYSE: STD, Nasdaq: ITUB, NYSE: UBS, NYSE: WBK, NYSE: LYG, NYSE: BCS, NYSE: CS, NYSE: AIB, NYSE: BLX, NYSE: NBG, NYSE: RY, NYSE: BFR, NYSE: IRE, NYSE: BMO, NYSE: CM, NYSE: ING, NYSE: C, NYSE: GREK, NYSE: VGK.

The Achilles Heel of Globalization

All entities work first on their own behalf, and then for the benefit of others. As much as a private citizen may want a strong European Union and the benefits of association, the fact remains that all will be pro-active in assuring the survivability of their own market, their own business, and their own personal welfare. The possibility of peripheral nations exiting the European Union and the complications that action would entail will eventually be the end of globalization.

Major manufacturers depend on their suppliers to provide the ingredients for production; an unreliable supplier or a supplier that is perceived to be possibly unreliable will be replaced. The natural tendency is to bring the supporting plants to the home country or use businesses within their own country, thus mitigating any disruptions. The industrial giants of Germany and France and general economics will cause the downfall of their weaker neighbors, unraveling the work of the central governments. Greece, Spain, Portugal, and Italy are at tremendous risk; the global banks, insurance companies, and pension funds that have bought their sovereign debt are at risk, and that jeopardizes the entire Globe. The five top banks in the US have Credit Default Swap (CDS) exposure on an even higher magnitude insuring the debt threatening the financial structure of our economy. Investors cannot assess the risk/reward ratio for existing investments; new investments in plants and equipment that stimulate jobs will be postponed until clarity returns. This hesitancy is natural and will cause a downward spiral in economic activity, ensuring a deep and long European recession; it will have a ripple effect across all borders.

Reduced trade with Europe cannot be beneficial to any of the economic zones of the world. The developing economies around the world owe their prosperity to selling goods to the developed countries. Resource rich countries such as Australia and Canada owe their prosperity to selling raw materials to the developing nations, and the US has plants and suppliers outside of the US - notably in China and the Pacific Rim countries. Everything and everyone is interconnected; if a disruption occurs, look for increased protectionism and tariffs along with rising nationalism. An economic slowdown will bring social unrest in the distressed markets, further compounding the tendency to repatriate factories and suppliers back into the home market and exasperating the situation. Globally, bankers, investors, and manufacturers that have made plans on expansion and continued growth with debt obligations will feel the slowdown first. Revenues will be reduced and will result in cost cutting; then employment reductions, further causing social unrest; then non-payment of loans; and finally in the failure of the project and/or total default. A contraction appears to be unavoidable, but there are prudent preparations to consider.

Income and debt level will be paramount to surviving this coming downturn. The savers of the world have been devastated by the historically low interest rates. Savings accounts, CD’s, Municipal Bonds, and US Treasuries, the haven for the retired and conservative investors, have been eviscerated. Pension funds and insurance companies requiring a yield component have been forced to search for much riskier investments to achieve just marginal returns to service distribution requirements. These conservative vehicles may have assumed much more risk than previously thought. Annuities, pensions, insurance policies may be at risk if there is a sovereign default in Europe, unknown to and far away from Main Street America. These are the vehicles in which the retired and elderly often depend along with Social Security; they may be at grave risk. Income enhancing securities such as MLP’s and high yield investment need to be reviewed and if prudent, positions hedged, reduced, or stop losses instituted. Long-term US Treasuries yield less than 3% currently, but provide a reliable income stream, and as the reserve currency of the world, the dollar should benefit from global disruptions.

The central banks of the world typically react to crisis by injecting liquidity, which will eventually, perhaps in 24-36 months, precipitate inflation, possibly double-digit inflation, which will threaten long-term bonds. The task will be to conserve one’s capital and exit the downturn intact and be able to re-position capital when the bottom has been reached. In a reduced revenue and yield environment, payments must be eliminated or reduced to coincide with reduced income in order to conserve capital. Typically a downturn will last 13-26 months, but this one may be longer.

“Underwater” or non-cash flowing Real Estate investments need to be liquidated, preferably via the “short sale” process. Foreclosure typically should be avoided, as the penalty period for obtaining mortgages is reduced using the short sale. If the timing is perfect, the waiting period could coincide with the downturn, and capital could be re-allocated to properties, as long-term inflation may follow the downturn as the liquidity injected into the economy searches for a home. Strategic real estate opportunities are still available, and more may become available as the downturn unfolds. Strategic properties are typically yielding a passive 5-6% return unleveraged to 8-9% cash on cash, with conservative lending. Currently, strategic real estate is a very favorable investment offering monthly income with the strong potential for revenue growth as well as a huge hedge against any future inflation.

There is a strong possibility of a global recession. A prudent investor needs to be aware and cautious as the traditional sources of income have been eliminated. Long-term treasuries are great in deflation and real estate is great in inflation; both generate the current income needed through a downturn. A combination of both may be advisable, check with your advisor and review the suitability for your portfolio.

Article is relevant to Deutsche Bank (NYSE: DB), Banco Santander (NYSE: STD), ITA (Nasdaq: ITUB), UBS (NYSE: UBS), Westpac Banking (NYSE: WBK), Lloyds Banking Group (NYSE: LYG), Barclays (NYSE: BCS), Credit Suisse (NYSE: CS), Allied Irish Bank (NYSE: AIB), Banco Latinamericano (NYSE: BLX), National Bank of Greece (NYSE: NBG), Royal Bank of Canada (NYSE: RY), BBVA Banco Frances (NYSE: BFR), The Bank of Ireland (NYSE: IRE), Bank of Montreal (NYSE: BMO), Canadian Imperial Bank of Commerce (NYSE: CM), ING Groep (NYSE: ING), Citigroup (NYSE: C), Global X FTSE Greece 20 ETF (NYSE: GREK) and Vanguard European ETF (NYSE: VGK).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

What Greece’s Bond Default Means

The International Swaps & Derivatives Association (ISDA) determined that Greece’s private debt restructuring effectively constituted a credit event, otherwise known as a default. This is not the kind of default that the world’s financiers had feared, though it is neither impotent with regard to repercussions for Greece.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Greece's Bond Default

Greece said some 85.8% of private debt holders of Greek-law bonds and about 20 billion euros of foreign-law debt agreed to take a “hair cut” on their holdings, accepting a promise from Greece for a much smaller payback on their loans. While any number (like 85.8%) should be questioned when it comes from the notorious and now desperate Greek government, we’ll humor them for the sake of global order. Greece enacted a retroactively contracted collective action clause based on the greater than two-thirds count of private debt-holders reportedly agreeing to its proposal. The coerced and clearly unconventional hair-cut was judged by the ISDA to be an effective default on the debt, and it was. This was no surprise, with ratings agencies Moody’s (NYSE: MCO), Standard & Poor’s (NYSE: MHP) and Fitch all effectively cutting Greece’s sovereign debt ratings to default levels over recent weeks.

The decision will trigger $3 billion worth of credit default swaps, with payouts depending on the value of Greek bonds on the open market. Some estimate on the “gray market” that the value of the still questionable private debt to be issued by Greece is worth about $0.21 on the dollar invested, so the holders of the swaps should receive some $0.79 per dollar. In this case, the details are less important than the general action, which effectively validates credit default swaps and projects a new view on the sovereign debt market.

While the securities actions represent a sort of default, they actually support the backing of the troika through the reduction of Greece’s overall debt burden. That said, the new debt Greece has offered its private debt holders remains costly, with an expected yield upward of 20%. That’s because Greece’s already questionable credibility has incurred a seminal change for the worse.

The nation’s crippling austerity is understood by the capital markets to be detrimental to economic growth. I have already written much about my disagreement with Europe’s cure for Greece. It’s like Greece is cutting off its leg rather than setting its broken bone. The reason is so that it can progress today and tomorrow, but the result remains a severely crippled Greece, hampered by its self inflicted injury. That’s not the way I would go about it, and I will answer how I would go about it in the very short-term through a series of reports.

On Friday, the Global X FTSE Greece 20 ETF (NYSE: GREK) gave back some of the gains made since Greece again secured troika support. The iShares S&P Europe 350 Index (NYSE: IEV) did the same. The stock action correctly reflects the uncertainty that remains regarding resolution to this crisis. The shares of the National Bank of Greece (NYSE: NBG) and Deutsche Bank (NYSE: DB) likewise reflected this uncertainty.

So today many are confused as to just what has occurred in Greece. Has it defaulted or not? The answer is yes, it has defaulted technically speaking. However, no, it has not yet failed in its desperate effort to stay afloat. What has happened is that the nation has forced a small number of people to endure some significant pain, those being the private bond holders. Of course, in a complete default scenario, those few wouldn’t do any better. Many believe Greece still will inevitably default on the entirety of its debt or choose a different path post elections, despite the efforts of the troika to ensure payback. If or when Greece does fail due to its (and Europe’s) poorly prescribed blood-letting solution, then I believe the euro-zone should fall apart as well.

The reason for this is of course contagion and something more. The events of last week should not weigh on the sovereign credits of Portugal or any of the other PIIGS beyond any short-term bump. Yet, the euro zone scheme remains a poorly devised half-solution for the region, designed to help it compete in the changing global marketplace. However, only when its national components sacrifice sovereignty will the fiscal union hold for the whole. That scenario will not likely develop, though, due to human attachment to culture, history and tribe. Thus, I say the failure of the euro zone is probable.

Editor's Note: This article should interest investors in National Bank of Greece (NYSE: NBG), Hellenic Telecommunications (NYSE: OTE), Coca-Cola HBC (NYSE: CCH), Teekay Corp. (NYSE: TK), Navios Maritime Holdings (NYSE: NM), Navios Maritime Acquisition (NYSE: NNA), Navios Maritime Partners L.P. (NYSE: NMM), Tsakos Energy Navigation Ltd. (NYSE: TNP), Overseas Shipholding Group (NYSE: OSG), International Shipholding (NYSE: ISH), Excel Maritime Carriers (NYSE: EXM), Safe Bulkers (NYSE: SB), Claymore/Delta Global Shipping ETF (NYSE: SEA), Genco Shipping & Trading (NYSE: GNK), Diana Shipping (NYSE: DSX), Danaos (NYSE: DAC), Tsakos Energy Navigation (NYSE: TNP), Ship Finance Int'l (NYSE: SFL), Nordic American Tanker (NYSE: NAT), Seaspan (NYSE: SSW), General Maritime (NYSE: GMR), DHT Maritime (NYSE: DHT), Brunswick (NYSE: BC), Marine Products Corp. (NYSE: MPX), DryShips (Nasdaq: DRYS), Top Ships (Nasdaq: TOPS), Eagle Bulk Shipping (Nasdaq: EGLE), Sino-Global Shipping (Nasdaq: SINO), Paragon Shipping (Nasdaq: PRGN), K-SEA Transportation Partners (NYSE: KSP), Euroseas (Nasdaq: ESEA), Star Bulk Carriers (Nasdaq: SBLK), Omega Navigation (Nasdaq: ONAV), Knightsbridge Tankers Ltd. (Nasdaq: VLCCF), TBS Int'l (Nasdaq: TBSI), Golar LNG (Nasdaq: GLNG), Claymore/Delta Global Shipping (Nasdaq: XSEAX), American Commercial Lines (Nasdaq: ACLI), Deutsche Bank (NYSE: DB), ITA (Nasdaq: ITUB), Banco Santander (NYSE: STD), Westpac Banking (NYSE: WBK), UBS (NYSE: UBS), Lloyd’s Banking Group (NYSE: LYG), Barclay’s (NYSE: BCS), Credit Suisse (NYSE: CS), Allied Irish Banks (NYSE: AIB), Banco Latinamerican (NYSE: BLX), Bank of America (NYSE: BAC), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), JP Morgan (NYSE: JPM), Morgan Stanley (NYSE: MS), European Equity Fund (NYSE: EEA), Vanguard European Stock Index (Nasdaq: VEURX), Powershares FTSE RAFI Europe (NYSE: PEF), Europe 2001 (NYSE: EKH), S&P Emerging Europe (NYSE: GUR), Ultrashort MSCI Europe (NYSE: EPV), Vanguard Europe Pacific (NYSE: VEA), Wisdomtree Europe SmallCap (NYSE: DFE), Wisdom Tree Europe Total Div (NYSE: DEB), iShares S&P Europe 350 (NYSE: IEV), Morgan Stanley Eastern Europe (NYSE: RNE), DWS Europe Equity A (Nasdaq: SERAX), DWS Europe Equity B (Nasdaq: SERBX), Fidelity Europe (Nasdaq: FEUFX), Fidelity Europe (Nasdaq: FIEUX), ICON Europe A (Nasdaq: IERAX), Pioneer Europe Fund (Nasdaq: PBEUX), ProFunds Europe 30 (Nasdaq: UEPIX), Putnam Europe A (Nasdaq: PEUGX), Rydex Europe 1.25x (Nasdaq: RYAEX).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

On Europe, Can You Hear Me Now?

Over the last several months, I’ve been harping about what the impact of a recession in Europe would be for the U.S. economy and stocks. However, in todays "I’ll believe it when I see it" society, and with a stock market on the rise since early October, investors have been hard to sway. Still, I’m a tough cookie, willing to take the abuse of popular opinion to guide those willing to listen toward the protection of their capital and advanced, wise placement of new money ahead of the herd. So, with regard to Europe, can you hear me now?

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Can You Hear Me Now?

It was just a few days ago when I said the Greek problem was our problem and held steady on my bearish call on the rising European ETFs. Well, Tuesday the EURO STOXX 50 Index dropped 3.4%, and that Vanguard European ETF (NYSE: VGK) that was sticking stubbornly higher last week, dropped 4.1%. The iShares S&P Europe 350 Index (NYSE: IEV) fell 4.0%, and the words of your favorite Greek turned golden. It seems by the movements of the markets that most of you were surprised, but readers of my column sure weren’t. Though, fear not new friends, because there’s more where that came from.

The reason for the latest lashing was prophesied almost word for word in previous articles found along this string. Deteriorating European economic data is increasingly indicating recession is plaguing Europe, coloring in the areas we demarcated for our following friends over the last few months. Meanwhile, the recently reported as resolved Greek issue lingered, like we said it would here. But let’s not lull too long in the lotion of our latest lucid thoughts.

The European Union reported on Tuesday that economic output contracted 0.3% in the fourth quarter of 2011. The important economic region’s weakness was hurt by soft household spending, manufacturing activity and exports. Yet, no economist should be surprised, as the austerity being forced down the throats of Europe’s most indebted nations (better when slowly digested) was bound to choke economic activity during this post financial crisis new age. The secular bear seems set to roar some more now as a result.

Add to the economic woes of the Europeans the threat of Greece missing its deadline to restructure its privately held debt via swap, and you have the recipe for a stock market wake up call. Greece has secured the agreement of some 58% of its private debt-holders to-date to accept a severe change in the terms of their contracts, hinged on a halving of the money owed them. Greece had hoped, somehow, to secure 90% agreement, but of course misjudged as usual. All of the nation’s major banks and probably its pension funds are bowing to government pressure, and over 30 European banks and insurance firms have been successfully coerced to surrender as well. Greece will employ collective action clauses to force the rest into compliance, if it secures adequate approval to change the terms of the agreement. Everything seems to be up in the air still, with the deadline set at 10:00 PM Thursday Athens time.

Some of the institutions which have agreed to participate are Ageas (OTC: AGESY.PK), Allianz SE (OTC: AZSEY.PK), Alpha Bank SA (OTC: ALBKY.PK), Axa SA (OTC: AXAHF.PK), La Banque Postale, Banco Bilbao Vizcaya Argentaria SA (BBVA.MC),BNP Paribas (OTC: BNPQY.PK), CNP Assurances SA (Paris: CNP.PA), Commerzbank AG (OTC: CRZBY.PK), Credit Agricole SA (OTC: CRARY.PK), Credit Foncier, DekaBank Deutsche Girozentrale, Deutsche Bank AG (NYSE: DB), Dexia SA (DEXB.BR), Emporiki Bank of Greece SA, EFG Eurobank (OTC: EGFEY.PK), Generali (ASG.F), Greylock, Groupama SA, HSBC Holdings Plc (NYSE: HBC), ING Bank (NYSE: ING), Intesa Sanpaolo SpA (OTC: ISNPY.PK), KBC Groep NV, Marfin Popular Bank Plc (Athens: MARFB.PK), Metlife Inc. (NYSE: MET), National Bank of Greece (NYSE: NBG), Piraeus Bank SA (Athens: TPEIR.AT), Royal Bank of Scotland Group Plc (NYSE: RBS), Societe Generale SA (OTC: SCGLY.PK) and Unicredit SpA (UCG.MI).

The S&P 500 Index was up Wednesday, but dropped 1.5% Tuesday, with the SPDR S&P 500 ETF (NYSE: SPY) off the same amount. Why would you suppose that is if not for the tragically real economic risk posed by a European recession to the U.S. economy? That said, the latest American data refreshed the thirst of greedy traders seeking reason for rise, with the often off ADP Private Employment Report noting the estimated addition of 216K private sector jobs in February. As Europe starts to rub off on the rest of the world, including the American economy, which ships 20% of exports into the struggling domain, I expect global markets will move lower in more determined fashion. So, I continue to warn against taking satisfaction in the economic data of the day, while not considering what may change in the months ahead. And I haven’t even mentioned the Iran trigger, which weighs heavily over our collective heads.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.