Wile E. Coyote kept coming up with more and more elaborate schemes and gimmicks to capture the Roadrunner. Inevitably, these efforts failed and backfired on the coyote in spectacular and most amusing ways. Frequently the misadventures involved the coyote falling great distances into a canyon. In cartoons a character can often "walk on air", apparently carried by momentum, for a time until it looks down and realizes that there is no support. This is followed by a panic take facing the fourth wall before the character plummets to some comic fate from which it has to recover.
We haven't gotten the "panic take" from the markets as they have not realized that they have nothing under them yet. Everybody was excited about the "good" number of layoffs (companies have run out of workers to cut in the short-term) and the pending Greek loan deal. Here is a glance at reality. One-year Greek bonds have fallen so far in price that the yield is 590%.
Thus the brilliant economic minds in the EMU are going to loan Greece enough money to cover them through the March 20 payments in exchange for Greece reducing government expenditures. Suppose you know a person who has a negative net worth. His credit card debt alone is more than he will make in his lifetime. His house it underwater. He used it as an ATM through home equity loans back when he had theoretical equity. He owes ten grand on a $2500 car that he has trashed and failed to maintain. In other words, he owes more money than he can come up with if he sold off everything down to his drawers. Moreover, he has no real skills and works at a minimum wage job, when he bothers to work, at a convenience store.
But a lot of influential people in town have loaned this guy money and are set up to lose that money if he declares bankruptcy, admitting he can't pay. These influential people, including the local banker, meet with our acquaintance and say, "If you will start living within your means, we will give you a loan that will allow you to make the next payment on your loans."
Now you know Greece.
Some say the stock market is being manipulated. Relative to 2008, volume apart from electronic trades is low. Computer algorithms are driving the rise in the equities. A lot of people have left the markets, including bond markets. The investment banks and the governments, working in collusion, are trying to draw us back in. They want us to buy Government Motors, to buy Greek bonds, to buy all the stuff that they are stuck with at the moment. The abyss has been reached. We have gone over the edge. Just don't look down.
Nice analogy Mushroom. Please splain this to me. If a Greek bond is yielding 590% what is exactly happening? Are any being sold? Does one buy one now with the hopes of getting a return of 590%? Is it that one would buy the bond knowing that they probably will not pay it back but there is a tiny chance they might? Like betting on a horse with 50:1 odds?
ReplyDeleteSomething like that -- or playing the lottery. The problem is, I think, that there are no $2 tickets. When I've invested in bonds, there's usually a block that has to be bought. But my only experience with bonds has been through bond funds.
ReplyDeleteIt smells rigged to me. No one is probably buying at this point -- maybe some scavengers. In some cases earlier in the Greek crisis and more recently in debt auctions for Portugal and Spain, the ECB and probably the Fed were buying most if not all of the issued bonds -- effectively printing money. The ECB is creating a lot of euros out of thin air, which is why its continuing strength against the dollar is so counter-intuitive -- unless the currency traders know that Bernanke is printing dollars, too. And that is a possibility.
The rate anticipates a significant forced reduction in the face value of the bonds. Of course, there's a pretty good chance that it will be more of a scalping than a haircut.
The euro zone is therefore looking at modifying the deal negotiated over many months with private creditors under which they would accept a cut of around 70 percent in the real value of their Greek bond holdings. (Emphasis added)
As long as they continue to pay interest, there will be interest, so to speak. For people like, say, Soros, it's a gamble they can afford because they have access to inside information as to when the default will actually hit. Somebody will be left holding the bag, but it won't be the insiders -- most likely.
Thanks Mushroom! With your tutelage this is beginning to make some sense.
ReplyDeleteNow you have me worried. :)
ReplyDeleteDid you get any of that snow?
Yeah, we got 8 inches of wet slop. Most of it was gone by Monday afternoon. We have daffodils blooming and frogs croaking in the wet area... and snow. Slightly odd winter.
ReplyDelete