Monday, February 8, 2010

Sucker Bets

The DOW 30 dropped another 100 points today on fears that Greece and some other countries on the periphery of the EU will default on their debts. The countries involved are known as the PIGS (Portugal, Ireland, Greece and Spain) and represent only a small fraction of Europe’s GDP and this hardly seems like a crisis for Wall Street.

The problem is that currency traders are betting a record amount against the Euro or “short selling” it on the futures market on the hopeful anticipation of the Euro tanking against the USD. Hedge funds have by short selling stocks taken down major banks and corporations in the past couple of years and now they have their sights set on a whole continent.

How does this affect the DOW? US corporations aren’t really American with more than half their business spread over the rest of the world and the US economy certainly can’t be counted on to keep them going. The markets are over inflated to begin with, you could replace the assets of these companies for about 60% of what their stock is currently selling for. Put that way, who would buy stock? It is all predicated on the premise that the price of stocks will continue to be bid up by people with more money than brains. Shhh… don’t tell the suckers.

So if there is a major default and Europe has to take a big haircut on the value of quarter of the world’s currency, this will ripple across the planet. China by the way, holds a lot of Euros as does much of the world. The strengthening USD is already causing problems because the Fed prints money like a banana republic and a general feeling of dread is spreading.

Inflation was rearing its ugly head but now deflation is the big fear again. Once defaulting starts it spreads like a flesh eating bacteira. Those corporate assets that you were already paying too much for when you buy stock could drop to a fraction of their current book value. When this has happened many times in the past 130 years, the stock market has dropped to a small fraction of what it had been, usually about 30% of asset value.

In the old days (before Reagan) the stock market was something rich people gambled on. In the twenties the middle class was suckered into the Ponzi scheme and lost big. But that was before 401k’s, all that extra money has been a meal ticket for the financial services “industry”. Now the party’s over, better tighten the belt, time to think about what park you will be sleeping in and what dumpster has the best eats.