Greece Defaults

The S&P500 managed to jump 2.2% after the world breathed a sigh of relief upon learning that the Euro elites had succeeded in kicking the can down the road for another few months.  Volume, unfortunately, did not jump up to match the buying enthusiasm most likely expressed by headline-reading algo’s and fast hedge funds; the average retail investor continues to deem the stock market too risky and continues to pull money OUT of the stock market.  Volatility, as would be expected in an up week, backed off, but not nearly back down the recent lows from April and May.

The economic news flow was light last week.  Although housing starts were better than expected, the much larger existing home sales figure badly disappointed; instead of rising as expected, sales fell almost 1% in June vs May, and they fell almost 9% year-over-year.  Housing inventory also jumped. Initial jobless claims rose more than expected, as has been par for the course over the last three months.  The Philly Fed survey missed expectations, again.  And leading economic indicators met expectations.

Technically,  equities are in another uptrend, driven primarily by relief that Euroland will not be imploding…..yet.  While equities are still oversold—on the daily charts—and showing lots of negative divergences, the relief rally could continue for another few weeks…..assuming no large disruptive events interfere with this bounce.  After the sugar high wears off and more important and immediate fundamental reality (such as the global economic slowdown and the absence of monetary and fiscal stimulus to offset it) sets in, equities will promptly resume their fall and this time without the benefit of cheap tricks to prevent painful financial damage.  This should be the “big one” that many bears have been waiting for, a drop that lops off at least 20% from the S&P.

Meanwhile, it finally happened last week: Greece defaulted.  Even though most media headlines decided not to highlight this fact, a few did speak the truth:

http://www.reuters.com/article/2011/07/22/us-eurozone-idUSTRE76I5X620110722

What’s also satisfying is that this call was made here—definitively—in a blog entry titled “Greece Will Default” back in the first half of 2010.

Why did Fitch declare that Greece is in default?  Simply put, Greek government bondholders will not get the return that was originally promised by the government.  The net present value will be lowered. In short, Greek bondholders will not earn the returns that were originally promised.

More importantly, will the latest Greek bailout be THE solution that finally ends the debt crisis of the PIIGS and ends the threat to the euro itself?  In a word, no.  Not even close.’

Nothing has been fixed.  The root problem of excess debt driven by excess spending (in a currency union that prevents devaluation) has not been solved.

The ONLY thing that’s been gained is more time, a longer fuse, before the ultimate ending—the full default of ALL the PIIGS and the end of the euro as we know it today.

So let’s mark this new and much more broad prediction.  The original (Greece will default) prediction came true, over a year after it was made.  The second prediction is no less likely to come to fruition.

The Rubicon has been crossed.  There is NOTHING that can be done to prevent this final devastating outcome, unless of course, all the nations in the euro zone bind themselves together politically the same way all 50 states in the US have done, which is virtually impossible to occur in time to avoid catastrophe.

To repeat, all the PIIGS will default.  The euro as we know it will end.

We’ll be sure to revisit this entry, even if it takes a year or two, to be able to say, once again:  Told You So.

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