Observing the Spread of the Sovereign Debt Crisis

Do you have some protection, Fellow Reckoner? An escape plan? A little hideaway in some tropical clime? Some shiny stuff under the mattress?

Good. Remember: When it comes to the theater of global economic collapses, it is gold that buys the best seats in the house. Of course, you could always just watch the show from a deserted beach somewhere, lazing in a hammock with a long book and a broad smile.

Whatever your perspective, this show promises to be a box office hit. News out of Europe tells us the continent is coming apart at the seams. What the modern economists told us was contained to Greece has spread to Ireland…and is beginning to infect Portugal and Spain, too. The disease, as we all know, is debt. And the continents peripheral limbs are gangrenous with the stuff.

Despite the euro-meddlers’ plan to extend 200 billion euros ($260 billion) in emergency lifelines to Greece and Ireland – countries, mind you, that couldn’t pay their debts in the first place – the specter of continental collapse has only come into sharper focus.

Markets across Europe continued to sink yesterday. The euro – temporary lifeline for some, eventual anchor for all – yesterday traded near an 11-week low against the dollar. Meddlers, being meddlers, say they have the situation under control. But the bond traders are not buying it. Yields on Spanish debt ballooned yesterday, reaching above 5.55% from just 5.21% the previous day. Italian yields rose too and credit default swaps on Irish, Portuguese, Spanish and Italian debt all jumped to new records.

Even supposedly “stronger” nations are feeling the pinch. Word is that Belgium and even Germany are not immune.

“In recent days, investors have been selling the debt of Germany, whose economy remains relatively robust, because of worries it will bear much of the burden of the ever-higher costs of bailing out weaker countries,” reports The New York Times.

“While German bonds recovered by the end of Tuesday, the cost to an investor for insuring against an unlikely German default also rose, signaling growing nervousness.”

Just how deep is this crisis, investors want to know?

“If a clod be washed away by the sea, Europe is the less,” mused the English poet, John Donne, in (the meditations that would become) his famous “For Whom the Bell Tolls.” And if the tides of debt were to wash away the whole continent? Well, Donne didn’t say. We’ll have to wait and see. Shouldn’t be long now…

Back on the other side of the pond, Americans who are worried they might be left out of the impending crisis needn’t feel jilted. That bell tolls for thee too! According to the latest data, the much-ballyhooed “recovery” in US housing – thanks mostly to Federal bribes and paper-mâché loans – seems to be faltering.

“We’re getting the clearest view yet that a double-dip in housing is under way,” writes Dave Gonigam in our sister publication, The 5-Minute Forecast. “The Case-Shiller Home Price Index fell in September at double the pace the Street was expecting.

“This is important,” Dave observes, “because we now have data completely unsullied by the homebuyer tax credit. Buyers had until June 30 to close…and Case-Shiller is a three-month moving average.”

So what are we to do, Fellow Reckoner? To where do we flee? Everywhere we look the tides are rising. The banks are eroding. Ireland-sized clods have already washed away in the sea. California-sized clods look set to follow. Do you buy farmland and retreat inland, to more fertile ground? Or do you stake a claim under a palm tree somewhere and hope the coconuts last?

The last time the whole world was in this kind of financial funk, back in 2008, we were trekking along a forgotten coastal stretch of Viet Nam. In the seaside town of Nha Trang, about 8 hours bus ride north of Saigon, we came across a few fellow refugees. Mostly they were ex-bankers from The City of London who suddenly had a whole lot of spare time on their hands. We met a dozen or so of them, all riding out the storm under the shelter of $20 per night accommodation and $2 poolside cocktails.

“Beats paying five quid for a pint back home,” one chap told us. “An the weather ain’t half bad either.”

We half expected to see a similar crowd here in Mexico, seeking a cheaper safe-haven where their eroding dollars can still buy a taco lunch and a nice view. The place is not empty…but neither is it jam-packed. Maybe folks haven’t heard the news yet. Maybe they don’t care.

Joel Bowman
for The Daily Reckoning