The run on banks in Greece in progress; Euro collapse coming?

What he probably meant was that Greece's economy is relatively small, and if it was just a problem with Greece, it could be easily contained. Italy is the 8th largest economy in the world.

The reason why Greece is important, though, is that these problems are not contained. Greece might have been the first default, and will probably be the first to go from the Euro. And if the rest of Europe was in decent shape, everyone would treat Greece like Argentina when they defaulted. But with so many other countries in such bad debt shape, if Greece votes to leave, there could be panic that sends people running to their banks in the larger countries -- namely Spain and Italy. And if you get those runs on the banks, those banks are in really bad shape and don't have anything near the capital reserves that would be required, which would topple the banking system. Nobody in Spain or Italy wants their money sitting in a bank, when they can withdraw Euros before their countries exit abruptly -- too avoid leaving their money in those banks too long and being issued a relatively worthless currency instead.

The other risk factor is that even though it is the problems with the banks that are more immediate, these are countries that are in way over their heads in debt. That is a sovereign problem. And since they have done nothing in two, three, four years to try to bring that debt down by slashing away at their spending, keeping their heads in the sand has made the problem worse and worse. That is why we are at the point that yields on their 10-year notes are in the 7 percent range. With Italy's current debt load, a 7 percent yield is not viable. They can't afford to even make their interest payments very long at interest rates that high, which means that they will default.

It's not tenable. The bailout money to Spain this weekend was supposed to inspire confidence in their debt, which they hoped would bring yields down. That effect lasted less than a day. Everyone knows they are slapping band-aids on a gushing wound. So yeah, Italy probably is going to go down. In which case, 1) The Euro won't survive in its current form, and 2) The fallout will be felt worldwide.

As with my other posts, its just a matter of how long they can put off the inevitable anymore, and what, if any, kind of convoluted scheme they can come up with to try to make the dissolution seem orderly to try to keep people calm. They may be able to drag this out for months to a year. May be. I think it could happen in a hurry soon, though.

 

If you look at U.S. equity markets on a day-by-day basis, or even an intraday basis, you are never going to good picture of anything.

Right now, you are seeing what is known as headline roulette.

U.S. equities have been flat for the week. But the pattern for the week has been down, up, down, up. Right now, the S&P 500 seems to be in a holding mode. It's finding support at about 1280 and resistance above 1340. It has been that way for a month.

Today, the positive movement is due to the speculation that the Federal Reserve is going to provide more monetary stimulus due to the weak economic data. Whenever there is any kind of speculative frenzy that the Fed is going to step in, equities react -- and overreact.

You are seeing it on an almost minute to minute basis. Yesterday, stocks were all over the place. First the French president called for a bigger ECB role regulating banks. Stocks were up. Then the stories hit (which I linked to) that there was a run on Greek banks in advance of a new drachma as soon as Sunday's election. Stocks dove.

Until there is any real news, you are going to get those kinds of trading moves. Unless you are an actual trader, you shouldn't be paying attention to them, and even if you are a trader, it's an insane way to try to trade.

Nothing sustainable is going to play until there is more real news -- until we get some kind of central bank intervention. Until Sunday when Greece settles its fate. Until Spain or Italy run out of money. Before then -- and this has been true of the last year -- you have had wild moves that have basically followed intraday headlines. It's not worth paying attention to.

 

NoOne, Just found an article that explains why U.S. markets rallied. As I said, they were rallying on bad news. I know that doesn't make sense to non-traders, but the bad news makes people speculate that the Federal Reserve is going to step in and print more money. That boosts equities in the short term. It also creates the kinds of bubbles that the Fed has gotten us into this mess with in the first place. They have gone from a couple of hundred billion on their balance sheet prior to 2008 to close to $3 trillion. And they are printing money as fast as they can run the printing presses, not that it is really "stimulating anything" except creating distorted stock prices that are primed to pop.

http://online.wSportsJournalists.com/article/SB10001424052702303822204577466080086589836.html?mod=WSJ_hp_LEFTWhatsNewsCollection

 

Depends. If you are holding the Euros and the Euro is still in existence next summer, you will be safe. Although it is a safe bet to assume the currency is going to be greatly devalued either way, because even if they do find some crazy way to save the currency they are going to have to print money like crazy (and devalue the currency in the process) in order to try to inflate away some of the massive debt the Eurozone is drooping under.

That Euro might not be good in Italy, if Italy leaves the Eurozone. But if the currency survives, you'll be able to walk into a U.S. bank and exchange it at whatever the exchange rate is at that point.

If it was me? I'd exchange your leftover Euros for dollars when you get home anyway. I'd expect the Euro to decline against the dollar -- at least that is a much more likely scenario than the opposite. And I put more than 50/50 odds that the Euro no longer exists by sometime in 2013. I don't like dollars, but they are certainly safer at the moment than the Euro is.

 

Well, first, the yields rose again today. Spain is trading in the 7 percent range now.

But the common comparison is between the German 10-year note. A year ago, the yield difference was 245 basis points. Right now it is about 545 basis points, or a difference of 5.45 percent.

A year ago, Italy's 10-year spread over Germany was 175 basis points. Today it is about 475 basis points, or 4.75 percent.

Those numbers show the relative risk the way the market prices the bonds, but they don't tell the most important part of the story. The yield on the Spanish bonds may be around 7 percent, but 7 percent is an important number because at that yield, the country won't be able to afford to even keep up with its payments without a sovereign bailout. It's a small matter of time.