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« The Investor Edge from Europe | Main | Weighing the Week Ahead: Any Help from the European Summit? »

May 16, 2012


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Angel Martin

Jeff, this article by Ray Dalio is where my thinking is on the outcome for Greece and the rest of the periphery countries.

Right now, the Troika is forcing Greece into what Dalio calls an "ugly deflationary deleveraging". At some point, unless there is a dramatic change at the ECB, Greece is going to crash out of the euro and likely into a depreciating drachma and an "ugly inflationary deleveraging".

The only way Greece and the rest of the periphery stay in the eurozone is if there is enough eurozone inflation to get their nominal gdp growth above their interest costs.

It may happen but i doubt it.

I think that because of weak leadership in europe they are going to delay and delay and delay on printing to balance the deflationary forces until it is too late. My guess is when, in desperation, they finally do it, the euro will be in such crisis and have so little credibility that their attempts to reflate turn into a currency collapse and they will go straight to "ugly inflationary deleveraging".

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IMHO, where your analysis goes wrong is in believing current equity prices reflect the worst case/Doomsday scenario. I agree with your view on the end point for Europe but also believe lower equity prices go along with that view


Not sure why people said this is a reasonable analysis. This post analyses nothing. It simply poses some possible outcomes but says little about their probabilities and even less about the causes behind them.

Even the author admits he is just guessing.

This issue exists because the Greeks voted for Syriza. Since they did, Tsipras has claimed they will throw out austerity altogether and the Troika will still keep on paying.

So will the troika pay up? No... or if they do they are foolish. I think the IMF will balk at the ECB and EU won't foot the bill without the IMF.



Your analysis is sensible and reasonable. I suspect things may ultimately turn out just you expected. But consider this: people won't compromise willingly. They will be forced or scared into compromise just like what happened in US 2008. From this perspect, the stock market could get a lot worse before getting better. I think if we are to panic, better panic now.


Octavio! I am delighted to see that you are still reading. Anyone with an MIT PhD will eventually see the error in casting me as a polar opposite of that other guy!

One difference is that his viewpoint never changes, regardless of the evidence. Mine does, as you will see.

BTW, I don't think that current prices reflect doomsday and I never said that.

Current prices reflect an excessively high probability of a 2008-style systemic collapse due to Europe. When it is obvious that this is off the table, we'll have a snap-back, short-covering rally.

It will not take us back to the starting point, but it will be meaningful and create a fresh start.

Keep reading.



Scott -- The possible alternatives are expanding rapidly, although you do not seem them in the mainstream media.

You have the right idea with TARP, but it may involve direct lending from the ESM. This might include lending to banks or bank authority for the ESM.

I also think that some kind of deposit insurance might be announced.

This would stop the bank run story, leaving us only to worry about slower growth.

Thanks for joining in, and the kind words.


Octavio Richetta

Here is your "Chicken Little" again, a former prof. like yourself. IMHO, where your analysis goes wrong is in believing current equity prices reflect the worst case/Doomsday scenario. I agree with your view on the end point for Europe but also believe lower equity prices go along with that view.


Excellent and level analysis of the European situation. As always Jeff you have a clear view on the world.

One question - how about a TARP plan for Greece and Spain?

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