Nov 07 Greece, Debt and Things That Don't Make Sense

Sometimes things just don't make sense (especially in the short term). For example ..

-- Young people start smoking cigarettes even though the statistics are perfectly clear that doing so is addictive, shortens your life, exposes you to horrible diseases ... and smells bad.

-- Some people would prefer to pay full price for college, cars and other things rather than learn ways by which they can get the same thing for less and have money left over for something else like their future (this is BTW what a real financial planner helps clients with).

-- The stock market goes up even though Europe is in a tailspin, the U.S. economy is on it's way into a recession and global government spending is out of control.

The kind of lies we are willing to tell ourselves in order to make this all work is astounding. Of course, I'm sure I do the same thing in different ways (we're all human). For me, optimism, the entreprenuerial spirit and expressing my individuality (I always have to create my own system - I can't follow anybody else's) has limited my results in many ways, especially in access to short-term financial windfalls.

While I'm certainly not seeing it (other than my limited circle of financial planning clients) it would sure seem reasonable to me that more people would actually be making the effort to shore up their financial picture and brace for the upcoming economic storm rather than partying on Wall Street and exposing their life-long savings to the vagaries of a stock market gone crazy.

Here is just one data point to consider from John Hussman's weekly post on economics and markets. John is a really sharp guy and his research is always spot on. He is one of my "must reads" every Monday morning. Here is the first paragraph of this week's post:

A quick note on Greece - as of Friday, the yield on 1-year Greek debt has soared to 212%, up from 144% a week ago, just after the grand "solution" to the crisis was announced. Over the past week, the price of 1-year Greek debt has plunged by 20%, to 38.4 (bid 35.81, ask 40.97 to be exact). Which begs the question - if everyone has agreed that Greek debt will only be written down by 50%, why is the 1-year note trading at just 38% of face value, with longer maturities trading below 30% of face? This sort of incongruence isn't inspiring.

We solved all the world's problems last week with the latest cleanup of the Greek Debt issue - or did we?

Holders of Greek debt will take a "voluntary" haircut of 50% of their investment - but the market already knows the real losses will be closer to 90% (not a typo - that's 90% in losses). We've jiggered the rules so that this doesn't have to be called a default (even though getting back 50 cents on the dollar in any other loan situation would be considered a default). We won't ask the people of Greece if this is something they want to do. Oh yes, and we'll fund future safety nets for other sovereign debt issues (like Italy, Portugal, Ireland and Spain) by borrowing more money we don't have using collateral that doesn't exist and will be fabricated out of thin air.

And the stock market has been rallying the past three weeks because all of these "solutions" are perfect!

All I can say is, "Wake up folks!"

If I'm right, there is a huge storm coming our way. This will rival the financial crisis of 2008 and could easily exceed it. Hopefully you can be one of the smart ones who starts preparing for it. If I'm wrong, there is really no downside to being prepared anyway.

John