Financial topics

[John]

But for the life of me, I cannot figure out how all this is holding together.

I think that you've previously described it very well. The periphery
is collapsing, so the center is using up its resources to hold the
periphery. But as the periphery uses up resources, the center
eventually will not hold.

I think that I and other people were thinking of some kind of
domino situation, where one domino after another would fall.
But now it looks like all the dominoes will stand until
finally the entire domino table is upended.

John

[Trevor]

Second, I thought Greece would default by now and set off the chain reaction. They're hanging on by their fingernails and yet they're still hanging on. I don't expect that to last much longer.

Some very long term cycles were showing me the likelihood that something big would happen near the end of April of this year. I thought several states might default and, it was funny, because I read two small things in the news that sort of corroborated that. One, the politicians were putting plans in place to handle the default of a state government. Two, Meredith Whitney was predicting hundreds of billions in municipal bond defaults in 2011. She had done an exhaustive study on the subject. Yet, nothing happened. So I waited for late April and all I saw happen was the price of silver, oil, stocks, etc., blow off. So I sold all my silver and that was the exact top. But for the life of me, I cannot figure out how all this is holding together.

Well, we can't do much more can-kicking. At this point, Belgium is starting to look like the 6th troubled economy in the Eurozone. If their bond rating, either 2-year or 10-year, go above 5 percent, I'll put them in that category. As for Dec 21, they are 2.57% and 4.34%. I'm keeping track of where Italy, Spain, Ireland, Greece, Portugal, Belgium, and France's bonds are and adding it once a week to see how much trouble they're in. Our 10-year bonds seem to be hovering around 2 percent, give or take a few points.

It makes me thankful for my family to be in relatively good economic condition, all things considering.

[Trevor]

But for the life of me, I cannot figure out how all this is holding together.

I think that you've previously described it very well. The periphery
is collapsing, so the center is using up its resources to hold the
periphery. But as the periphery uses up resources, the center
eventually will not hold.

I think that I and other people were thinking of some kind of
domino situation, where one domino after another would fall.
But now it looks like all the dominoes will stand until
finally the entire domino table is upended.

John

That's quite possible, meaning that this crisis will take a bit longer than previously believed. Greece is a small country, small enough for their neighbors to prop them up in spite of their own economic difficulties. Italy and Spain is a whole different story. There is a certain mark of desperation, though. I think some have figured out that this isn't going to work, but at the same time, they don't know what else they can do, so the bailouts continue.

[Higgenbotham]

http://news.search.yahoo.com/search;_yl ... 2=&iscqry=

Meredith Whitney has been catching a lot of heat for her call this week. I wasn't aware of this.

I had very specific reasons for expecting state and municipal bankruptcies were the most likely event at the end of April 2011.

John, if you carry your idea bit further, Vince may end up having the last laugh. It the can kicking is continued to infinity, then in theory every bond market will be supporting every other bond market. So the final event will be a worldwide bond market collapse of every bond market in the world, all at once. But I don't think that is going to happen because eventually the US is going to figure out they can't do that without those adverse consequences. And once that day comes, that is when the panic is going to hit, I believe.

[John]

> John, if you carry your idea bit further, Vince may end up having
> the last laugh. It the can kicking is continued to infinity, then
> in theory every bond market will be supporting every other bond
> market. So the final event will be a worldwide bond market
> collapse of every bond market in the world, all at once. But I
> don't think that is going to happen because eventually the US is
> going to figure out they can't do that without those adverse
> consequences. And once that day comes, that is when the panic is
> going to hit, I believe.

You know, that's an interesting concept. Suppose that everyone agreed
they would keep on lending money to each other, to prop up each
other's economy. Could that really go on forever? Only in a universe
where pigs fly. Sooner or later someone would balk. That's why every
Ponzi scheme crashes, sooner or later. Would that cause
hyperinflation? Not necessarily, because of the plummeting velocity
of money.

At any rate, the concept of unlimited lending is a non-starter.
Europe's EFSF/ESM bailout fund idea is collapsing, because no one want
wants to lend money to the bailout fund, for fear of defaults. And
with S&P threatening to downgrade France and Germany, the EFSF/ESM
bonds would have to have sky high yields, just like Greek and Italian
bonds.

(Incidentally, Italian 10-year bombs popped up to 7.1% today, before
settling a hair below 7%, so the LTRO gimmick is failing.)

There was an interesting little battle launched a few days ago. An EU
court ruled that non-European airlines have to pay a "carbon tax" for
the entire flight for any flight that passes over Europe. So a flight
from Los Angeles to Frankfurt has to pay a carbon tax for the entire
flight. This tax is supposed to go into effect on January 1. Some
congessmen are furious, and China is threatening a trade war, and
threatening to cancel a large order of Airbuses. We may yet have a
major trade war on our hands, and that would end any pretense of
cooperation.

John

[Trevor]

I still think the row of dominoes theory is possible, but perhaps not a certainty. The latest 2-year bond yields for Greece are over 150 percent and continuing to climb, even if there are some temporary dips. After they default (which I'm expecting within the first 3 months of 2012) the chain will begin. Next on the chopping block will be Portugal, Ireland, and Iceland, and of course, we'll try to keep them from suffering the same fate.

That being said, I wonder why the collapse hasn't happened yet. Most likely because all the money the Eurozone has poured into Greece is helping to keep it up for a little while, but the entire 450B bailout fund would mostly be swallowed up by Greece alone. It likely isn't sufficient to keep the small countries above water, much less Italy or Spain.

What will accelerate this is a trade war between the U.S. and China and there are already a few signs of it manifesting. It seems like we look at all the options, see the stupidest one, and do it.

[John]

> The latest 2-year bond yields for Greece are over 150 percent and
> continuing to climb, even if there are some temporary dips. After
> they default (which I'm expecting within the first 3 months of
> 2012) the chain will begin.

Maybe you're right. Greece will have a 14.5 billion euro bond payment
due in March.

But I just want to say that a lot of people went on the record to say
that the previous 8 billion euro bailout payment would not be made,
and they all turned out to be wrong.

I'm just saying.

John

[Trevor]

If Greece defaults, they will drag down the others. They're using that as a weapon against them, and now Portugal's talking about using default as a weapon. I don't seriously believe that either country is going to make any meaningful cuts. Their bond yields will continue to climb and they may end up reaching 200 percent, hard as that might be to imagine.

[Higgenbotham]

It'll probably go as dominoes, but so close together that they fall pretty much all at once. The longer the can kicking goes on the bigger and faster the pileup should be when somebody finally does balk and the panic hits.

[Trevor]

When the first domino falls, I give it another 2-3 months before the next dominoes fall, and then maybe a couple more months until the big economies start collapsing. At that point, much of the world finds itself in a new depression and WWIII is not far off. I could be wrong about the exact pace of the collapse, especially since I expected Greece to default by now, but I don't see any way around one.