Category: financial

Italy has now officially gone over the “Oh Shit!” threshold for financing its debt. It can’t roll over its debt obligations when the interest is north of 7%. There are talks of the IMF getting involved which means that the US taxpayers may end up footing some of this before its over. Germany is supposedly looking at drafting language to allow countries to leave the Euro zone. They have gone from wanting to do anything to keep the Euro going to this in the span of a few weeks. Greece was manageable, but Italy is not. If they are able to scramble and eek out some sort of something or other to keep Italy from defaulting, it will totally tap out Europe. What about the other countries teetering on the brink? Spain, Portugal, Ireland. Hell, even France isn’t looking so hot.

It’s looking bad. I hate sounding like a broken record, but it is painful to watch this unfold. There’s no question that Europe’s issues are going to depress everything even if they manage not to drag anyone else down with them. I really worry that the Obama administration, or even the Fed on its own (can they do that?) will jump in and try to bail out Italy. The IMF is a back door way of doing it, but there may need to be much more cash needed than is in the coffers of the IMF. It’s not as though we have any money to send them of course, any aid we send would be in the form of printing vast sums of money, again. At some point, worthless currency will be chasing bad debt. It would have to come to a crashing halt at some point, right?

What needs to happen is what econo-wonks call “deleveraging”. In regular speak, that means writing off and clearing away debt. Clearly, there is far more debt than there is funds to pay for it, so a lot of people that bought those bonds will have lost all that money that they “invested.” Treasury bonds have microscopic yields right now. As James Grant has pointed out, you earn interest in exchange for debt. Right now, treasuries will pay you less than the inflation rate, so you’d be losing money. Money market funds are currently paying a single basis point in interest. That is one one hundredth of a percentage point. As Mr. Grant says, it is “the profitless assumption of risk.” Every place you put your money has risk, if you put it in something that pays you nothing, all you have is risk…

It looks like everything is bound to go down in value during this mess, everyone is going to lose something. Gold is looking like a good way to store your value… probably. I still like my idea, wait for stocks to take a big hit and then get my money out of the money market fund. I’m hoping to jump in at a point where most of the losses have already occurred, but trying to call the bottom of a market is always a fool’s errand. I don’t have a good idea when the best time will be for buying stuff, but I hope I know it when I see it!

Hold on folks, it’s going to get ugly!

Ok, the moment I withdrew the bulk of my portfolio from stocks, the market went on a bull run. Grrr.. That’s the thing about being conservative, you avoid the downside, but you miss the breakouts too.

Still, noting has changed for the better in Europe. There’s still a lot of shuffling of deck chairs over there. It all looks pretty flimsy. Greece is still on the verge of default, and there’s no telling how that is going to affect the rest of Europe, but it won’t be good. Both Italy and France are facing downgrades on their debt. In response, the ECB is about to ban the reports of downgrades… Like I said, I’m still sure of what is going to happen, we’ll see how the next 4 or 5 months play out. I’m still sitting on mostly cash and I think that will be the best position when the events in Europe start to unfold.

From Megan McArdle’s blog:

“In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone’s mind: “If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008…. What we don’t know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems.”

Sounds pretty dire. The good news is that it is two to three weeks away. If you’re going to have a banking crisis, it’s best to have it in slow motion. I’ve been worried about this for a while and it struck me the other day, this is an ideal investment situation. There’s no reason to go down with the ship. I liquidated the vast majority of my holdings in my 401k and am now mostly in cash. I closed out my stocks with a small profit. Now I’ll wait until things implode and buy when stocks are cheap. Foolproof, right?

Welllllll, there’s one little problem. My cash is actually held in a money market fund. Those are usually considered the safest types of accounts and are treated just like cash. The potential problem is that if the credit default swaps (essentially insurance against going bankrupt), are what the above paragraph was taking about, that’s the counter party risk that can bring down the banking system. If a CDS needs to be redeemed, money sitting in money market funds will be a likely place to get the money necessary to pay out the claims. Oh, and my 401k isn’t FDIC insured, so if the money market goes away, so does all of my retirement.

So what to do? I really don’t feel like losing a lot of money like I did the last time the stock market melted down. I was overseas and out of touch in 2008, this is unfolding slowly enough that I feel like I should be able to avoid it. My plan is to act quickly once things look bad. I hope to buy as soon as things tank.

Of course if we’re all lucky, this won’t happen. I won’t be in any worse of a situation. I do want to be prepared if things come to a head though. Hang on to your hats folks, this could get rough. Oh, and stay away from bank stocks:)

Yesterday, yields on treasuries jumped from 3.51% to 3.78%. That hasn’t happened since 1980. What happened? Well, the big news is that the Chinese didn’t show up. So they didn’t buy any of our debt. Neither did pension funds or insurance companies. Uh oh. This could be bad. If what we have to pay to service our debt goes up too much, we will be in much worse shape than before. Our interest payments will eat up more and more of our budget. Here’s to hoping that we can keep those prices down…

Wow wee, that was a rough couple of days. I’m sure there’s going to be more panic selling the rest of this week too. The strange thing is that the downgrade doesn’t seem to have hurt treasuries, people seem to be flocking to them as a safe haven even though those are the things that are no supposedly less safe. Weird.

We’re also waiting for Europe to finally fall over under its own weight. Of the countries in the eurozone, only Germany looks OK. Now Italy, France, and Belgium are drawing attention along with the usual suspects of Ireland, Greece, Spain, and Portugal. Of course American banks are covering the European banks…

This latest market crash makes me glad I’m not in mutual funds. When the market tanks, so do the funds. The problem is that there isn’t a good way to know if your fund is going to rebound, if they have chosen poorly, or how they will rebalance their portfolio. All of my retirement is in individual stocks. We always hear that is more risky than mutual funds. Maybe it is under normal situations, you never know when a seemingly healthy company can go south. But when the market tanks, it is far easier to make decisions on what to let go, what to keep, and what to buy. I did unload a few stocks when it was clear that things were going to go down. My portfolio has dropped in value of course, but I know that what I have kept is going to be OK. It is reassuring to look at my stocks and know why I have invested in them instead of gnashing my teeth over what idiots the fund managers are. I’m the only idiot running my account and I’m glad for it right now.