06/16/11 Laguna Beach, California – The Dow Jones Industrial Average tumbled 179 points yesterday – continuing a weeks-long trend of dismal performance. The Dow still clings to a slim gain for the year, but the NASDAQ has slipped into the red. Curiously, the XAU Index of gold stocks has also slipped into the red, even though gold, itself, is up nearly 10% on the year.
So why did stocks tumble on Wall Street yesterday?
The most likely answer is “just because.” But that does not sound very intelligent. So, for fear of looking foolish to you, dear reader, we will hazard a foolish guess about what caused yesterday’s selloff… We blame the Greeks.
They spend too much, save too little, promise social benefits they can’t afford and refuse to cut spending to levels that would make a legitimate difference. Thankfully, we don’t have problems like that here in the States! But even if, someday, fate were to frown on us and we found ourselves racking up trillion-dollar deficits every year – I know it sounds crazy – we would have a printing press to rescue us. The Greeks do not.
The Greeks have handouts. But handouts are like a mule – they can carry a load for a while, but they are infertile. They can’t produce the capitalistic offspring that would help cure insolvency over the long-term.
Therefore, it is becoming increasingly apparent – especially to bond investors – that the Greek government will default in some way, shape or form. The chart below is already out of date. When The Daily Reckoning art department produced this beauty yesterday afternoon, the Greek 2-year bond was yielding a hefty 28.03%. But as of this writing, the 2-year yield has jumped to 29.69%.
The yields on Greek government bond are soaring along the entire yield curve, as many bond prices are tumbling to less than fifty cents on the dollar (on the euro, actually). Greece’s ruinous financial condition has not escaped the attention of stock investors either. The Athens Composite Index hit a new 14-year low today. Clearly, the “default trade” is on.
In a small bit of poetic irony, Pandora Media launched its IPO yesterday – the same day that all the world seemed to agree that Greece’s financial condition is hopeless.
Pandora, as most readers may be aware, is the company that enables folks to customize virtual radio stations around a particular artist or genre of music. But Pandora was a mythological Greek female before she became a virtual radio station. It was she who had the sinister little box that released a multitude of evils into the world. But do you remember the virtue that remained trapped inside the box? It was Hope…
And hope is still trapped on the Hellenic Peninsula. It might finally spring lose from Pandora’s box after the Greek government defaults and resumes printing drachma.
Eric Fry
for The Daily Reckoning
Eric Fry
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research — institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
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blame the greeks? nonsense. blame the bond investors. no loans, no problem.
Are bonds really “investments”?
But otherwise, yeah, lets blame the people buying this crap debt. Hopefully it isn’t being purchased by the folks holding my 401K money.
But it probably is.
Blame It On the Greeks?
Why? They aren’t the ones who purchased the bonds.
“Blame it on the Greeks? Why? They aren’t the ones who purchased the bonds.”
neither are the germans. oh merkel ….
“Are bonds really ‘investments’?”
from an infestor’s point of view they sure are. money is money and infestors don’t care if it comes from work or speculation or greek taxes or german taxes or bernanke’s printing press, just so long as they get it. but yeah, for the sake of those who wind up paying, a distinction should be made between money used to buy productivity improvement and money used to buy taxes.
“But it probably is.”
count on it. “oooooh, 24%”