Greece and Portugal Downgrade

on 04 27, 2010

I had to write a quick note that the market is slightly reacting to downgrades to Greece and Portugal’s sovereign debt.  This has been on the forefront of our radar for over 3 months.  That is like downgrading the mortgage back securities after the bubble.   If the rating agencies are ever in front of a collapse then maybe we would have something to thank them for.  They continue to push the Wall Street mantra that we live in a bullish society.  Analysts are always bullish and anytime an analyst puts up a neutral rating on a stock it should be sold immediately.  That just means the stock is overbought and the analyst is too scared to label it a sell.

I have been saying that Greece is a ticking time bomb for over 3 months.  There have been reported back up plans from Germany and the IMF, but none of them seem to materialize into anything that can keep the bond yields from running out of control.  The higher theyields, the more Greece has to pay to manage their debt.  Once it gets to a certain point then there is a risk of default, because they just can’t afford it. But they can afford 10% Pension plans and governement health care. If a default happens then the the Euro is cooked.  It will become the domino effect for all other countries at risk.  If the bond holders can continue to drive up the sovereign debt yields of Portugal, Ireland, and Spain, then we will see a major market meltdown.

We have continually warned of the Euro US Dollar relationship and how Greece and the other PIIGS (Portugal, Ireland, Italy, Spain) will drive the Euro lower and the Dollar higher.  This should cause a lower oil price.  If things do work out for the PIIGS then the Dollar will fall and Oil will spike again.

The UK and the US are in the same boat as the pigs, but they are free to issue their own debt and currency at will.  The ability to produce your own currency has allowed the US to dig its own grave.  We have spent our grandchildren’s futures away with our overspending.  Another major factor to watch is the Ten year Yield on the US notes. This has flirted with 4% and seems to be the short term resistance point.  If yields are driven up in the ten year then the US will have its own collapse to deal with.  Bonds will force higher interest rates out of the Federal Reserve and our cost of borrowing as a country, much like Greece, will go out of control.  It is a little know fact that the Treasury and Fed have made sure that there is always enough demand for the bond auctions even if they have to buy it themselves.  The problem with this, at some point people are going to realize that there is not enough money in the world to continually buy the bond auctions that the US pushes out.

So to summarize, don’t be fooled by the later to the party downgrades.  They are just for show.  Watch the yields on Portugal, Ireland, Italy and Spain.  If these start to get out of hand, then USD is going higher, oil is going lower.  If the US Ten Year yield spike above 4% again, then protect yourself, because the end cheap money for banks and US is over.  Mortgage rates will go higher, banks will have higher foreclosures rates and worse debt on their books.  Take a peek at this week “Week Ahead” because I go into how the government has allowed the banks to defraud the US investor.  Stay protected.

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