Cheap-o Greek Bailout Is Not Calming Markets

Bruised and bloodied bears must have felt a rare sense of exhilaration yesterday as trading on the NYSE drew to a close. That, and a twinge of anxiety about whether U.S. stocks could actually fall for two days running. Some traders evidently decided not to bet on it, and so short-covering drove the best rally of the day in the final half-hour.  After all, who would have had the guts to take a short position overnight in a market that has been on a wilding spree for 14 months?  Some short-covering is bound to occur at the tail end of any day on which the Dow has fallen more than 200 points, as it did yesterday. But the fact there wasn’t more of it, and that the lows penetrated some key supports identified in yesterday’s commentary, suggests there is more selling to come.  Bear in mind that Tuesday is a dangerous time of the week for an all-day selloff to occur, since it leaves three days for the selling to mutate into panic.

The ostensible reason for yesterday’s decline, which saw the Dow down nearly 300 points at its lows, was news of fresh trouble in euroland. But decide for yourself whether this is really news:  “Global markets tumbled as investors questioned the viability of plans to bail out Greece and fretted about knock-on effects in other nations.” That’s how the Wall Street Journal saw it, but the story is getting to be so “dog-bites-man” that its impact on the markets is probably overrated at this point. Make no mistake, an historical day of reckoning awaits euroland and its politically fraught currency when Greece’s fatal debt disease is suddenly discovered to infect all of Europe. But for the moment, we can only stifle a yawn when we read on one day about how such and such sum of money has been advanced Greece; and on the next, about how this sum is feared to be inadequate.

A Global Blood Supply

As we already know from the U.S. real estate/bank meltdown, it takes a good trillion dollars or so of supposed bailing out to delude the masses into thinking, if but for a brief moment, that the “system” has been “saved.” Since everyone understands that Greece’s financial problems are not Greece’s alone, and that Spain and the other PIGS are next, it is absolutely dumbfounding that the rescuers have tried to conjure up a bailout of Athens on-the-cheap. Could they have learned nothing from watching Bear Stearns’ difficulties metastasize until they almost took down the entire U.S. banking system?  Some might say this is comparing apples to oranges and that the problems of banks are different from those of sovereign entities.  We see the two entities as not merely joined at the hip, but as sharing the same heart, brain and blood supply. Too big too fail no longer means big banks, but rather the entire global financial system.  Fallout from a Greek bankruptcy will be felt initially in Brussels, Frankfurt, Paris and London, but eventually – though perhaps not long afterward — in Topeka, Auckland, and Cape Town.  Will you be ready if, say, your bank were to limit daily withdrawals to $200? That might be as good as it gets when the dominoes start to fall.

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