Feeling N-N-N-Nervous Yet?

Finally- after all these months- markets are waking up to the potential systemic problems and recovery roadblocks that have been plain to see ( and totally ignored) since sometime last year.

Once the whole market starts talking about these things and reacting to them it is, usually, time to be going long, as there will be a swing in sentiment causing an overreaction in market pricing. The time for that contra trade is not here yet, but the first signs that we could head that way are appearing.

Why is it that it is only now that the Germans have decided to be awkward that the market as a whole has decided to consider a serious chance of Greek default? CDS has given it a 50% chance of happening within 5 yrs since the New Year. The current CDS price of (about) 1700) puts the chances as high as 75%. Greek 3yr bonds are sneaking up on a 30% yield and the 10yrs is nearing 18%. The clues, dear readers, have been out there for a while. In truth, anybody who gave it any amount of thought realised that just lending Greece a lot of money at a rate it couldn’t afford and then insisting it was a good boy in future and saved more, was never a strategy that was going to succeed. A radical rethink is needed and there may have to be some pain for all- hopefully in a way that precludes a default scenario being declared with all the knock on effects involved. Nobody, however, is now going to believe that another tranche of loans will make the problem magically disappear- a dose of realism and a coherent long term strategy statement is needed. Maybe they could try establishing a fund (bottomless) guaranteeing liquidity to their banking system and funding from the EU governments? It worked for the Fed in 2008. If Greece goes, who is going to lend a penny to Portugal and Ireland at the next maturity? This one could still run and run...

To look on the bright side, however. With a dose of honesty and forethought European problems are still containable and growing inflation will reduce debt burdens over time. We are not going to get years of prosperity and strong growth anytime soon, but another recession is not yet certain- recoveries do have blips. The USA will sort out the debt ceiling issue and before any default scenarios happen. Andy Murray might yet win Wimbledon (and the Greeks might avoid default and- oh look! there goes another flying pig! ... sorry)... then again, I suppose Nadal, Federer and Djokovic could all get injured? Westwood or Donald could win the US Open and , indeed, THE Open this year and get the monkey off their backs and England could beat India at the cricket. In the USA, The Mets could win the World series- no, let’s not get too silly... but many cheering things could happen. Who knows, maybe Obama could decide not to stand for re-election? Although I think there’s more chance of the Mets coming through...

In short- now everybody else is getting nervous, I am becoming disposed to look on the bright side- if only because I sense the chance for a massive I TOLD YOU SO article sometime soon... Have a good Thursday. Buy short fixed income in good names on spread weakness... after all if they aren’t going bust, then you make money and they pay you back one day.- avoid equities until a deeper correction has happened