Beyond Sovereign Debt

Put together a union of strong countries like Germany and weak countries like Greece and what will happen?  Will the weak countries learn from the strong ones and become fiscally responsible?  Or will they expect the strong countries to support them and drag them down in the process?

The later appears to be the case in Europe, where sovereign debt contagion has spread from Greece, Italy, Spain, Portugal and Ireland to threaten the European banking system.

Many European governments have spent recklessly and even attempts to keep the crisis from spreading are being met with wide resistance.  Once a government entitlement is given, it is difficult to take it away. read more

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Europanic Spreading

Stocks surged recently when a new plan for dealing with Europe’s sovereign debt was announced.  Then they came crashing back down when it became clear that the plan was more style than substance.

The continental crisis is much deeper than initially advertised, and the future of the euro, the European Union and Europe’s banking system is being threatened.  Likewise, though, when someone sneezes in Greece, America catches a cold.  American banks have more than $1.2 trillion in loan exposure through German and French banks, which is one reason why the sovereign-debt crisis has affected U.S. markets. read more

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No Recovery For Most Investors

Two factors make reaching the 10,000 milestone for the Dow what Dorsey Wright calls “the quintessential Pyrrhic victory” for many investors around the world.

First, bond funds attracted net deposits of $209.1 billion in the first eight months of 2009, while stock funds drew just $15.2 billion.  For every new dollar moving into equities, $14 was moving into bonds.

This shows that investors who lost money in the collapse of 2008 were moving what was left to the perceived safety of bonds, just as the market bottom materialized.  This is not unusual. read more

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