Thursday, August 18, 2011

It's Europe, stupid (cont.)


This chart goes a long way to explaining the source of stock market angst in the past several months. The red line is the total return on the S&P 500 index, the green line the total return on the Euro Stoxx index, and the white line the total return on Bloomberg's Euro Banks and Financial Services index. Bottom line, Eurozone banks are getting crushed by fears that their holdings of PIIGS debt will wipe them out should a Greek restructuring prove contagious, and those fears are spreading to all markets around the world. By comparison, the U.S. is holding up far better than most.


Swap spreads confirm that there has been no material deterioration in the health of the U.S. banking system or financial markets, with spreads still at levels that reflect no unusual degree of systemic or counterparty risk. The problems are concentrated in Europe, where counterparty and systemic risk remain quite elevated.

So there are two key and related questions: Will a Greek default/restructuring bring down the Eurozone banking system? Will a collapse of the Eurozone banking system, bring down the U.S. and/or the global economy? Nobody has an answer to those questions, but to judge from market behavior, investors are becoming extremely concerned that a worst case scenario is in the offing.

9 comments:

TradingStrategyLetter - Weekly Summary said...

'The person who goes through problems with a smile on their face has a person in mind to blame.'

Anon

William said...
This comment has been removed by the author.
Dr William J McKibbin said...

In addition to Greece, add the entire southern flank of Europe, Ireland, Belgium, and soon, California -- as an investor, I cannot ignore the cascading scope potential of the economic calamaties before us -- the chances of a global economic turnaround in the next 3-6 months are close to zero at this point -- the risk of economic catastrophe is rising almost daily at this point...

William said...

I think that at some point central banks, including the U. S. FED, should emulate the Hong Kong central bank from 1997 during the Asian currency crisis and announce that they are buying equities since they are so under priced. It was roundly criticized but the Hong Kong bank made a handsome profit.

Why not equities? They have been buying everything else. Give the equity investor some profits too. ;~)

Dr William J McKibbin said...

PS: I still believe that holding high quality dividend and rent-paying equities is the only way to navigate the coming storms -- any gold and silver held in possession should be retained -- however, investors may want to begin taking physical delivery of their significant stock holdings from brokers or custodians now -- regretfully, firms such as Morgan Stanley have already announced that they are no longer offering to deliver physical stock certificates to owners.

Antonio said...

I believe the markets are mostly pricing a collapse of the euro as we know it, a new event not seen before. Edward Hugh has written a visionary article on the situation and possible solutions:

http://www.economonit
or.com/edwardhugh/2011/08/15/going-dutch-one-possible-solution-to-the-euro-debt-crisis/

Scott Grannis said...

Hugh's solution is just a variation on the devaluation option. Devaluation is only a temporary solution to the real underlying problem, which is that social democratic governments have grown too big. Too much income redistribution results in weak economies that can no longer support their debt loads. The only real solution is to cut back on the size of government and grow the economy. I think we are nearing the point where this is inevitable, however "painful." The first country to realize that the path to prosperity lies in the direction of sharply curtailed spending and reduced tax burdens will be the big winner.

Stone Glasgow said...

He seems intelligent but not articulate:



Here he speaks to Obama, who doesn't look happy.

Public Library said...

The Fed provided billions in liquidity to European banks during QEI/II...