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Waiting on the European 'Surprise'

Last month, we compared the investment herd to the buffalo that were stampeded over the cliffs of the Great Plains by Native American hunters.

Buffalo don't meander over cliffs. Neither does the stock market. The stampede is on and investors won't see that the ground has given way until it's too late.


Greece

Every time we hear that Greece has been bailed out and that it has 'bought more time', we just pull up a chart of the 1 year Greek Bond (chart below).

Greece Govt Bond 1 Year Yield

As you can see, the yield of the 1 year Greek Bond is greater than 900%. So despite the hope and hype surrounding the Greek debt situation, the market is telling us that the crisis has continued to worsen (and at a quicker pace!).

In order to get its €130bn international bail-out package agreed to in February, Greece was forced to give the European Central Bank preferential treatment bonds at the expense of private bondholders. Ninety-five percent of these private bondholders must volunteer to take a 70% loss on their bonds by March 12th; otherwise Greece will face an imminent default according to S&P. More likely, if the hedge funds that hold the Greek bonds refuse, credit default swaps would be triggered (insurance bets that brought down AIG). Greece has also already been downgraded by S&P to 'selective default' on February 27th and to 'default' by Moody's on March 2nd. Perhaps, the authorities will get it right over the next few days. But they can't make people keep their money in the weak European banks.

In January's How European Failures Affect U.S. Investors, we stated that we expect credit downgrades to "deliver the coup de grace" on the "weak and leveraged banks of Europe." This would "spark the contagion." The European banks will have to hurry and fail if they are going to get ahead of the country of Greece. Fortunately, their depositors (especially in Ireland and Italy) have increased the speed at which they are pulling out their bank deposits (chart below). Perhaps, they might just make it.

Euroland Periphery Real M1 Deposits

 


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