Blame It On the Greeks

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 The chart below is already out of date.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%.

Yield on 2-Year Greek Government Bonds

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

The Daily Reckoning