Sovereign Crisis

We’ve been watching the sovereign debt risk for many months, so the Greek tragedy is not entirely shocking. What anybody who’s doubted has to admit, though, is that the time to have prepared for trouble was a lot more recent than last year or even the beginning of this year. The correction didn’t happen nearly as quickly as the evidence suggested it would. It sure is happening now, however.

The real story is far bigger than Greece and the next patched-together bailout. The problem with modern finance is that it’s built on debt. From individuals who can’t understand the follies of credit cards all the way up to governments that jimmy-rig budgets and lose sight of the big picture slide into penury for the small picture personal benefit of pay-offs and bribes.

We see this across the globe. Far bigger fish than Greece lie in wait: Japan, the UK, and, sorry to say, the US. America is safer than the rest because its currency is the world’s reserve one at the moment, and that coupled with a printing press offers up all kinds of can-kicking opportunities, as in kick this can of worms down the road for another bought-off, clueless administration to deal with.

Here’s how the pessimist’s line of thinking goes: If you think Lehman was bad, wait until Greece fully explodes. If you think Greece will be bad, wait until its problems spread across all of Europe. If you think a Eurozone blow-up will be bad, wait until it’s followed by the UK. If you think that’s bad, wait until the UK is followed by Japan. If you think Japan is bad, wait until the US blows up and the entire global financial system is left bereft of a sound currency. Truth is, it’s bereft of that now because no major currency is backed by anything real. We live in a debt-based, fiat world of financial fiction where the rules are rewritten with the stroke of a political pen held not really by the politician but rather by his corporate backers.

This is what financial analysis has become, and why I think traditional asset classes need to play a smaller and smaller part in individual financial planning. When profits, business plans, and other traditional areas of analysis take a backseat to gaming the next fiat bubble inflation and bursting point, a new plan is needed for the family. Your retirement and the education of your children should not be held hostage to the bad deeds of elected puppets and their corrupt masters.

I’m still researching individual companies and finding usable theses for committing capital, but each time we have a buy target it needs to tempered by waiting for another shoe to drop on the macro scene, the next leg down from the funny money brigade, the hard-to-call bursting point of the next blown bubble. Frankly, this environment stinks and there’s no sign of it letting up.

Despite the chest thumping and bragging from the trading crowd, that approach to markets is not suitable for most people, certainly not for part-timers looking to fund big life moments in the future. Yet, the more beyond sane the fiat debt economy goes, the less traditional analysis works and the more everybody needs to become a trader, in it for the moment, the end of the next blip up or blip down based on a news flow of manipulated figures.

I’ve said, somewhat under my breath, that big financial crises and resets often end in physical violence. We’re seeing signs of that, and it could get a lot bigger before this is over. Human folly will never manage wildly inflatable and deflatable assets wisely, which is why currencies need to be tied to hard assets that can’t be gamed because there is a physical limit to their quantity.

You know why that’s not going to happen? Because it would dramatically limit ephemeral bank profits, and bankers pay politicians. Simple as that. Why would banks want ephemeral profits based on nothing and subject to vanishment as we’ve seen in the past few years? Because the gang in charge at the moment gets their bonuses from what’s happening now, regardless of what effect it will have on the future of the firm, much less the economy.

Meanwhile, as the financial chemists work up another half-shaken temporary measure, the violence is beginning. Look at the streets of Greece.

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