Tuesday, May 25, 2010

World Markets Catch PIIGS Flu Virus

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) markets are now all trading in bear territory. The selling that began there is now spreading around the globe in a financial contagion reminiscent of a number of previous financial crises and market crashes. Major Asian markets were down around 3% last night and the large European markets are lower by similar amounts today. U.S. futures dropped over 2% lower before the opening bell.

Market contagion is a not a new problem. A collapse of the weakest link in the global financial system can bring everything down if there are excesses in the system. This was seen in 1997 with the Asian financial crisis that began in Thailand and which soon engulfed all of East and South Asia. U.S. markets then had a 10.1% drop on October 27th and 28th of that year. A sharp bear market in U.S. stocks followed in August 2008. At the time, the U.S. economy and the global economy were in excellent shape. Today, the contagion that started in Greece and then infected the rest of Europe is occurring during a period when the world financial system is extremely troubled and still suffering from the damage inflicted by the U.S. centric Credit Crisis.

The latest round of selling in Europe is taking place as EU leaders are warning that European governments need to institute major economic reforms to promote growth or their economies will stagnate (stagnate apparently is synonymous with sinking into the sea). How they managed to figure out that it isn't possible for a government to continually spend a lot more money than it takes in is a mystery. Perhaps someone woke them from their naps and gave them an Economics 101 textbook. Hopefully, they will share this important insight with the U.S. and Japan.

EU leaders essentially ignored the Greek debt crisis for six months until the damage had become formidable and global. Only after the U.S. markets had their 9.9% plunge on May 6th did they come up with their almost $1 trillion euro rescue plan.  This amount was more than the U.S. TARP bailout in the fall of 2008. The positive effects from it lasted only a few days and stocks turned down once again. It looks like a trillion dollar bailout just isn't what it used to be. A much larger amount appears to now be needed than was the case only two years ago during the Credit Crisis.

The current handling of the problems with the euro by the EU shows the approach world leaders have taken to the deep and serious problems the financial system is facing. First you ignore the problem, then you try to manage it by public relations instead of taking the difficult decisions, and once a collapse is under way throw unlimited amounts of freshly printed money at it. While PIIGS flu is spreading throughout the markets, it looks like mad cow disease already infected central banks and elected officials of major countries long ago.

Disclosure: No positions.

Daryl Montgomery Organizer,
New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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