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« Weighing the Week Ahead: Time to Reconsider the Upside for Stocks? | Main | Weighing the Week Ahead: Time for a Turn in Housing? »

February 14, 2012


Angel Martin

Jeff - the definition of insolvency i am working with is "When an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due."

Given the definition of insolvency, I don't think it is rhetorical to argue that Greece is insolvent, it's just a matter of fact.

My assumption (i could be wrong!) is that the rest of the periphery will eventually go the way of Greece, and that the funding requirements of the rest of the PIIGS will be too large to be accommodated without direct ECB monetization.

as you say, we shall see... :)



Thanks, TK. I watch CNBC in a muted form and with TIVO. I can scroll back to see something that looks promising.

They started running the subject heads in response to widespread muting:)



Angel -- I suggest that when discussing solvency you focus on banks. The decisions over the last six months have greatly reduced the chances of a bank failure or a systemic failure.

Deciding that a country is "insolvent" seems to smack more of rhetoric than analysis. For many of us it seems normal for a country to appear to be insolvent during a recession.

There is a world view that demands an instant solution to debt, but I do not find it to be a constructive contributor to the discussion about Europe.

Eventually we will have a patchwork of programs and economic growth. I believe that Europe will grow out of the problems, because in the aggregate, the economic strength is there.

We shall see....


Angel Martin

Mike, interesting exchange.

My take on the bond market is that in North America we are in a post war disinflation/deflation like the 1920's. That is why I think that record low bond yields may not move up even if real yields rise when/if economic growth finally accelerates.

On solvency vs liquidity, I'm betting on currency collapses so if a country is "solvent" only when nominal gdp is being supported by hyperinflation, the currency is going to collapse regardless...

I agree that the eurozone will end in a hyperinflation. The euro is very vulnerable to a collapse in confidence in the currency that the MMT school has identified as so critical in hyperinflation episodes.

I think Japan and the UK are also vulnerable to the same outcome. A collapse in the euro could spread by contagion to the UK and Japan. This posting from FT alphaville showed how this happened to a mild extent in post-weimar france.

Any such outcome would likely spike the price of gold in $US, even if there is no US inflation.

I'd like to think that the example of a hyperinflationary collapse in other major industrialized economies would shock Washington DC into changing its ways, but I wouldn't bet on it :)

Mike C


I'm not that negative on U.S. Treasuries either. I'm of the school of thought largely persuaded by Cullen Roche over at that essentially the Fed has control over long-term rates via their control over short-term rates. Really, the 1940s are proof the Fed can pin rates if they want to. That doesn't mean though that real yields are attractive. Real yields are negative and getting even more negative. I believe over the next few years real interest rates will get even more negative as CPI ticks higher, and the Fed stubbornly sticks to ZIRP. This should provide the fuel for the final blowoff of the gold bull market which I still see going to 3000-5000 before its over.

When it comes to sovereign debt, isn't the question of solvency versus liquidity really a false distinction. It comes down to whether at the end point central banks will monetize debt. In the case of Greece, the ECB wasn't going to print euros to save them. Maybe it will different when it is Italy? I don't know.

I'm pretty sure in the U.S. the endgame is monetization of the debt, but we'll see. Assuming it plays out that way, I am very bullish on hard assets over the next several years. You can print as much paper as you want, but you cannot print gold and oil. Currently long oil futures.

Angel Martin

Mike, thanks for the link, i really like that article, although i am not as negative as the author on US treasurys.

For me the important issue in europe is: are they in a solvency crisis or a liquidity crisis?

If it is only a liquidity crisis, then the improvement in credit spreads and risk measures represents real progress.

If it is a solvency crisis, then the deterioration in the macro-fundamentals of all periphery countries is more important.

Mike C


You might find Robert Rodriguez's compelling:

He discusses Europe and the euro, and the global sovereign debt issue.

It times like now when I remember that what looks right in the short-term will probably be horribly wrong in the long-term. One only has to go back to 1998-2000 or 2006-2007 to see that.

For now, the trend of the market is obviously up. My sense is the "Greek solution" and Europe issues "off the table" are similar to the "subprime is contained". We probably have months to maybe a year of smooth sailing until the realization hits that really nothing has been solved. Rodriguez calls it the "Investor Delay Recogntion Period". Most people are stuck in it.


Rich- If you have the expertise to find the right sources, work will pay.

I am mostly discussing people who want to read a general macro blog and make a decision.

Your point is well taken.


Angel Martin

Jeff, good article, I don't believe in the "labour theory of value" when it comes to investing, or anything else for that matter...

I looked back at your article in Nov, and also at my comments. Your article was bang on in terms of what would happen and what china would do.

However, i may be "stuck on stupid" :)
but my thinking is still the same- i believe the PIIGs are in a solvency crisis, not a liquidity crisis. For financial sustainability I think they all need haircuts rather than new funding sources to lend them more.

Given that, I don't think china can help.

I'm feeling a lot better about my positioning on the euro given that the sentiment on europe is moving towards your thinking.

if a euro crash is going to occur, market sentiment on the eurozone has to improve to the point where most market players can extrapolate a non-disaster outcome. (of course this is a necessary but not sufficient condition!)

There is no way that a euro crash could occur with the kind of negative eurozone sentiment we had a couple of months ago.



Reading blogs is not investment work.

Reading 10-k's, trade journals, and talking to companies a LOT is investment work. And it may not pay immediately, but if you develop enough of an interest in an area to be able to discern whether a business has a chance to do well then you will make money, and you will do so because of your own hard-won knowledge. Work pays!


One word: Distraction.


One of the best things I've done to boost my investment success is to turn off a great deal of the noise or at least filter it better. I don't listen to CNBC anymore, limit blogs and commentary from "experts", especially those touting a book or "premium service." Some may be worthwhile, but I personally haven't found any.

The other thing I've done is to read Jeff's blog religiously, along with any other source/article he recommends.

Both these changes have helped me make better decisions and have made a big difference in investment performance.

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