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.

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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.

A Plea for Greece, Europe and Us All

In April 2010 I authored a concerned and prescient plea entitled, Greece News & My Disgust, within which I penned such wisdom as: "The current plan inspired by Greece's big brothers is not feasible. It will only open up black markets, torch the streets of Athens and lead more Greek wealth to leave the country." My prediction did not end there unfortunately, and I hope it is never fulfilled, because I said, "It will only usher in a radical government to replace the current."

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.

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.

A Plea for Greece

The rating agencies are correct about Greece. The nation of my forefathers will default on its debts, despite all the latest efforts of the Greek government and the EU. It’s a shame that a bleak end seems inevitable for Greece, given the great sacrifices of the Greek people. Yet, it’s only inevitable because of the blind, bullheaded nature of thinking leading governments today, including in Greece and across Europe. I’ll be offering several creative ideas for legislators that should be digestible to most of them, yet will likely be ruled out because of their out-of-the-box nature, and due to the hard work that would be involved in implementing them. It’s much easier to sign on to pay and pension cuts, until the people will have no more of it, at which point pain is returned to sender, and perhaps earned due to disconnection and ignorance.

Fitch downgraded Greece last week to a level predicting default and S&P cut the Greek Republic this week to a mark indicating “select default”. The rating agency actions were despite the Greek government’s efforts to reduce the country’s debt burden and to cover its current principal and interest payments via troika payout. Greece took the strides necessary for it to assure it could survive through its latest deadlines, but that will not be enough in the end, because they are also undermining themselves with increasingly deeper austerity. Greece will effectively force its private debt holders to swallow a deep cut in the value of their loans through legislation. That move in itself is indicative of default, but remained an option for the already understood to be unreliable sovereign debtor.

When they naively promised not to issue any new austerity measures last year, government representatives Venizelos and Papademos showed a lack of economic foresight that matched poorly against the technocrat label of the latter. That said, judging by the poor excuses passing for economic plans prevailing across the spectrum of decision makers today, the two have plenty of company in poor judgment. Venizelos simply accepts the prevailing option offered up by the majority of intermingled and politically corrupted economic minds, but Papademos should know better.

Our leaders, globally, look to me increasingly like blind mice traversing through a field of big cats. Yet, I fear an overhaul of them would only usher in more ignorant minds with more dangerous courage. For some sad reason, the European actors in the Greek tragedy were surprised when they bumped into revised lower Greek economic activity which left debt levels short of agreed upon watermarks for aid delivery. In Mid-February, fourth quarter GDP fell short of expectations, cut to a level indicating contraction of 7.0% in Greece, down from 5.0% contraction in Q3.

A surprise to the blind rodents, the decimation of the Greek economy was of course exacerbated by austerity, which was something that I warned my followers would happen from day one. Perhaps the captains on the hollow hill will not overlook my advice planned for publishing over the weeks ahead, through which I will offer a series of lifesaving strategies for Greece, Europe and the global economy. I hope I will at least be able to communicate my ideas well enough for them to reach a few ears that might help make a difference. If not, perhaps I’ll come home to clean house.

Greece will certainly default, because the trajectory plotted by its pilots is flawed. Greek navigators from the famed island of my descent would see that what Europe and Greece have done is negligently plan a path that fails to compensate for all factors. It is as if they have plotted a critical course without compensating for the gremlin wind. Thus, we continue to find ourselves obscenely off-course. Now that Germany and a few other mini-members have promised their constituents that no new aid will be issued to Greece, the destination is determined and it is the bottom of the Mediterranean Sea. Though some see the latest promises as political, and so easily undone when the surprise of unmet fiscal goals and uncovered debt expenses resurface after elections across Europe and Greece this year. If that is the case, like Venizelos, they will open their mouths, shrug their shoulders and pass a new tranche of aid as fires fury at their feet.

Without creative thinking, including the ideas I will present shortly to whoever will listen (including the few important ears attendant to me in Greece and Greek-America) Greece will certainly default. With that, spreads will certainly widen for the Portuguese, Spanish, Italians and probably the rest of the previously considered to be untouchables. So whoever is in political office post elections might do better to reconsider political ploys to remain there, because a burning seat is worse than no seat. At the same time, the abandonment of Greece is not the optimal direction for Europe, and may even work more in favor of Greece when Europe fails anyway.

"What I suggest is to save Greece, but by helping Greece to save itself rather than to starve itself."

What I suggest is to save Greece, but by helping Greece to save itself rather than to starve itself. Since the global market is clearly intertwined, it is in the global interest to put the best minds to work developing creative and immediately value-adding strategies into effect. My first suggestion will be one that will require global consideration and approval. For the sake of the globe, I hope it is seriously considered and employed. Stay tuned…

The Default Disaster Missed by Markets

Unless creative ideas are embraced, Greece, Europe and probably the global economy will disintegrate, for related though separate reasons. Given my lack of confidence today in our global leadership, I would shy far from celebrating the stocks of Greece, Europe and even the United States to a lesser extent, if not the world. The argument is only solidified by the Iran trigger, which I’ll soon have more to say about. So the high flying Global X FTSE Greece 20 ETF (NYSE: GREK), up 13.7% since inception, though down 12% since my recent warning, should move even lower. Likewise, European shares, contaminated by where the EU’s terrible trajectory will take them, are likewise threatened. The iShares S&P Europe 350 Index ETF (NYSE: IEV) is up roughly 11% through February, and slightly higher since my sell call. This is because European investors could initially view the prospect of a Greek exit from the euro-zone as a positive, but I expect they will be wrong. The Vanguard European ETF (NYSE: VGK) is also up roughly 12% year-to-date, and a bit higher since the February 7th based call. Deutsche Bank (NYSE: DB) shares are up roughly 24% year-to-date on, dare I say, on a premature vision for European recovery. Reflecting capital flows and prospective hope, American financials like Citigroup (NYSE: C) shares are also up about 28% this year. Reiterating, I see these latest capital gains at risk, though at varying degrees and on perhaps different timing, based on the above detailed economic reasoning.

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).

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.