Sunday, August 7, 2011

Tel Aviv Stocks Plunge; Market Wipeout On Monday?

From Arutz Sheva:

Prices on the Tel Aviv Stock Exchange plunged on Sunday, the first Israeli trading day after Standard and Poor's announced that it had lowered the United States' credit rating. The Tel Aviv composite index went under the 1,000 mark for the first time in years, closing at 962.16, down 7.31.

So the first market to trade since the downgrade and Euro news opens limit down triggering circuit breakers. Also the EU and G20 are conducting high level meetings as they try to prevent a full blown panic tomorrow. Asia opens at 2:00 pm eastern so stay tuned. If I had to take a guess stocks will sell off tomorrow but with great volatility as there has already been a 11% drop. The issue with the downgrade is not so much default risk on Uncle Gorilla paper but rather the risk of unintended consequences (collateral requirements for AAA paper holdings) leading to selling of Treasuries and other assets. But for now the bond market has completely ignored any threat of a downgrade as 10 year paper yields a pathetic 2.4 percent LOL. It's possible that we may even see sub 2 percent on the 10 year!

By far the biggest risk is out of Europe as Germany is balking at the cost of bailout out Italy. Europe is undergoing a sovereign debt and banking crisis right now and it remains to be seen if the Eurocrats will be able to get a handle on the situation. Italy's 2.5 trillion debt pile is held by Italian, German, Spanish and French banks so if this paper goes bad will it sink numerous banks which will lead to other bank failures. Lehman 2.0 Euro zone style. For those that like historical comparisons please read about the Austrian Creditanstalt bank collapse which deepened the recession in 1931 pushing the world into further depression. Creditanstalt caused a myriad of failures in the U.S. leading to money supply destruction (lost deposits) and hyper-deflation.

One big difference between the 30's and today is the digital fiat currency that is the reserve currency as opposed to gold. Thus, the federal reserve is not restrained by any barbaric relic such as gold and can create as much money at will. The Bernank fears a drop in money supply and so is fighting America's old demon deflation while Germany fights it's old demon of hyperinflation. Wow the irony! Personally I say we have mass liquidations of debts and claims. Debt that cant be repaid shouldn't be repaid. Creditors lose and debtors gain. It takes two to tango and the creditors became even more greedy than the borrowers they were lending to (besides who makes all the money anyways its Albert Lord not the TTT).

Will update as the markets open. Bank of America has gotten the shit kicked it out of it with a 17% loss in the last two days. At some point it would be a good buy for a swing trade. Will be watching that TBTF zombie BAC closely this week.

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