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Reading The Dow Jones Industrial Average In Greek

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Thanks Kevin!

The U S financial markets had one hell of a roller coaster ride today. In the short duration of less than one hour the Dow Jones Industrial average plunged 1,000 points and then recovered by approximately 600 hundred points to finish the day down 347 points. There is quite a lot of guessing about what set off the panic selling, including rumors of fat fingered electronic traders that accidentally made a "comma error", such as giving the command to execute a trade in billions instead of millions. But hours before and after the massive trade swings in the market the videos of riots in Greece were all over the cable outlets.

Greece, because of its very familiar looking fiscal insanity, must institute austerity measures (a euphemism for cutting government spending) that its citizens find unacceptable. For weeks it has been the considered opinion of the financial media that the fate of Greece was in the hands of the European Union, and particularly Germany, whose banks held the most Greek debt and subsequently the greatest risk of loss. Today, however, with the scenes of riots in the streets the public perception of Greece's problems has changed and many traders on Wall Street point to this public rebellion as the first of what may become many EU member repudiations of debt owed to foreign countries.

The massive selloff, which began shortly after 2 p.m. ET, amplified concerns about the spreading European debt crisis as the approval of austerity measures by the Greek Parliament sparked renewed rioting in Athens.

"There is simply a growing recognition that Greece has got to default," banking analyst Dick Bove told CNBC.com. "The riots in the streets showed the decision to repay the debt was not going to be made by the people in Germany, France and Switzerland--it's going to be made by people in Greece and they're not going to repay it."

There also is a growing sense that any collapse of Greece could trigger a wave of defaults across Europe and even the world.

"We've seen a crisis start in a country--Greece--become regional, impact the whole of the Euro zone and is on the verge of truly going global," El-Erian, CEO of the world's biggest bond fund, told CNBC shortly before the selloff began.

As one U S analyst commented: "Is the market now seeing Greece and Europe as the canary in the coal mine for us? We all know we have budget and deficit issues." But even if this panic was the result of one idiot trader hitting the wrong key on his Bloomberg machine, it illustrates the high wire act that international finance has become. The fundamental problem with Greece is that the country has been run by politicians that promulgated a fiscal policy akin to "kicking the can down the road". When the party stopped on the day they could no longer sell their debt to EU banks they hit the panic button. Investors are understandably concerned that Greece is just the first of several EU nations (Portugal, Ireland, Italy and Spain) that will either fail or become nothing less than wards of other European countries. Anyone who has read history knows that, among the possible consequences of conditions such as this are wars and asymmetrical conflict.

And if that's not enough bad news for you to get your head around consider that in these United States there is no small amount of animosity on the issue of fiscally responsible and fiscally irresponsible states in our own union. It's sort of like the EU conflict as a preview. Just as Germans are looking hard at bailing out Greece, why should we be surprised if any Texan, for example, takes a dim view of sending their own tax receipts to bail out California (which they are doing, among other wealth transfer mechanisms, via the unlimited unemployment insurance subsidy)? Ironically, Greece, the other PIIGS and the EU may provide the template for the solution to the United State's own fiscal irresponsibility.

Upadate: During the sell off today there were several references to Lehman Brothers by the talking heads. The tacit point of these comparisons, in short, is that EU banks may be encountering trouble rolling over the debt that funds their daily operations. Readers should remember that it was the inability to roll over short term funding vehicles like commercial paper that sounded the death rattle for Bear Stearns and Lehman Brothers.


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Comments (6)

Gold is looking better by t... (Below threshold)
Tsar Nicholas II:

Gold is looking better by the day.


Lead is looking better by t... (Below threshold)
Baron Von Ottomatic:

Lead is looking better by the day, IYKWIMAITYD.

Don't forget brass, Baron.<... (Below threshold)

Don't forget brass, Baron.

I don't the the US is in an... (Below threshold)
James H:

I don't the the US is in any danger of breaking up over California's debt. We've had 200 years to build a common political identity, after all, while the Eurozone's a four-decade slow-going political and economic effort.

That said, I think Washington and Sacramento need to watch Greece and take notes. Our spending's projected to keep rising as we implore our government to promise us the moon, but we're not willing to accept the medicine (higher taxes) that go with those promises.

Something's gotta give.

They are sellin off before ... (Below threshold)
914:

They are sellin off before Barry gets hold of their economy!

The Dow being up 61.2 perce... (Below threshold)
David Dzidzikashvili:

The Dow being up 61.2 percent during the past year tells us how effective the Federal Reserve has been at supporting markets, not how successful the recovery has been. The patient (economy) is still on life support. Take that away and we are completely screwed. When interest rates start to go up the true health of the economy will be uncovered. We need to develop better indicators not the same old formulas that are subject to government manipulation. But this won't be happen until the government will have no other choice. This can lead to Economic Collapse Phase 3 (we are already in Phase 2).

What are the logical outcomes? Unfortunately the outcomes, even the best case scenario looks pretty bad. Take just all facts, hard statistical and economic data, and start looking at the trends, formulas and factors such as unemployment rates, foreclosures, US economic productivity & output, etc...

From what I can see right now, and just relying on data - the first 6 months of 2010 (January through June 2010), Americans continue to live in the "unreality"...the period between July and October is when the financial fireworks will begin. It will become impossible for he government to hide unpleasant economic data & news and the reality check will cause economic tsunami. The Fed will act unilaterally for its own survival irrespective of any political implications... Great Depression will start to look like a church picnic. Whoever has a stable job now, at this moment, might not enjoy the stability in the 3rd and 4th quarters of 2010. In this case, it's logical to say that the FDIC will collapse during the second half of 2010. Additionally, to make things even worse, I think there is a more than 75% probability that bond market will crash, especially municipal, sometime towards the final months of 2010. These events should have taken already place in the last months of 2009, but they were delayed, only due to the government's cash injection and bailouts. The bailouts did not address the root of the problem and in general the systemic issues have been overlooked at, because the government does not want to talk about negative events, in the world of politics, the politicians tend stress their attention on positive developments for PR needs and purposes. But ignorance will have extremely negative consequences... Add to that more than $10 Trillion US debt and record deficits... Logical question - what will happen after this?

After this, the US government will ONLY have TWO options, bad option and even worse one. You judge which is bad and which is even worse.

Option one: Inflate Dollar, devalue it. This is a pretty bad option, since inflation has never proven to be a viable solution. What will happen to the savings of millions of middle class Americans, who've worked all their lives to save money and retire, what will happen to 401Ks, social security? All gone...and done.

Option two: Default! Yes, the US government basically filing national Chapter 7 bankruptcy for USA and telling Chinese and other creditors - Sorry, we're SOL, we're bankrupt, the debt is unrealistically high and we're defaulting on all our financial obligations. This will send irrecoverable shockwave through world markets and this will be the end of Capitalism as we know it (technically we've already done it). But this will give a fresh start to the United States, a new currency system will be created and new social/economic/political system will be in place, a mix of socialism-more regulations-some free market (under many regulations)-and raise of Mercantilist economic policies. We need to rebuild manufacturing and re-start whole American polit-economic system (after we hit Reset button). This is not a good option either, but in these scenarios there will never be a truly viable solution.




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