Greece or Goldman? Which is the problem? Neither....

To begin, I would like to thank those readers of this blog for giving me words of encouragement over time and it has been a pleasure to write whatever thoughts I have in my mind for the benefit of all of you.

Over the past week, the market has moving sideways with 2 notable sell offs in the US market. The most talked about topic was the downgrading of the problem children of the Euro Zone. I guess my readers will know that I have always said that it was not something to be fooled by. Over and over, I have said that the global financial crisis in 2007 is definitely not the same as what is happening now. It is understandable that investors are worried about the possibility of a contagion effect from the sovereign risks from these countries.

Lets see what can possibly happen. Lets just say that Greece, Spain and Portugal all go into default...that is really the worse possible case scenario (I do not think it will ever be possible), what is going to happen? The Euro Zone banks which are holding these sovereign debts will all be hit and that could cause another confidence crisis in Europe. Will it be global? I seriously doubt it. Why? Because European bonds have never been the "in thing" for Asian investors. For the Americans, they tend to buy into their own treasuries and even if they go for European bonds, they would go for the leaders like Germany, UK and France, rather than Greece or Portugal or even Spain. Thus I believe that it will be confined in Europe.

Eventually, if the Euro Zone leaders feel threatened by these countries running into default risks, they have two options. They will either bail them out with financial packages or they could force them out of the Euro Zone. Which is better? I am not in the position to say because I am not a politician. But personally, I would prefer that they force them out of the Euro Zone because they were not supposed to be there in the first place. These countries fiscally were not up to the mark to be in the Euro Zone but yet they were admitted in. Bailing them out is not a long term solution and it may lead to moral hazard issues in the future.

If they push them out, the Euro Zone will only consist of only the fiscally stronger nations (except Italy, which is my only worry), this would spell a stronger Euro in the future. By expelling them, it will be a serve as a warning to the other Euro members to shape up their fiscal balances to fit into the Euro Zone. Having only one currency under so many different governments is already difficult, can you imagine with differing balance sheet strengths, what kind of risks would that bring to the Euro's well being?

One more reason to why I think that the Greece affair is not a big deal. When Greece got downgraded, their sovereign debt yield rose to 9.9% which is still a far cry to the 20% yield on US high yield bonds in 2008. Does that tell you anything? It just states that the fear is still a long way from what happened in 2007-2008.

I do not want to get too technical and it is not my style. Keeping it as simple as possible is the best way to analyse and understand things. In conclusion to this Euro debacle, I believe strongly that the fears are overblown and once again who should we blame? You got that right.....THE MEDIA.

This week, we did see two major sell offs in the US markets, but I would attribute those sell offs to the Goldman Sachs saga. While they were grilling the Goldman execs for 12 straight hours, the market was tumbling, but on the same day, Greece's sovereign ratings were cut to junk status. So the media got confused and thought it was the Greece issue that created the sell off. Why do I think that media got it wrong? Cos yesterday, the market sold off again, but this time, it was due to Goldman getting downgraded to a sell and falling more than 10%, the market tumbled another 150 plus points. Thus you can see it is the Goldman issue that is hurting the markets.

I do agree, that the Goldman saga could lead to a bigger crisis because of the fact that they are the most influential investment bank in the world. Whatever they touch turns to gold, whatever they short turns to shit. Imagine if they lose their clients and money starts flowing out from their management, that would mean the asset classes they are heavily involved in will drop like a rock from the top of Marina Sands. Now, that would really be hell. So forget about Greece and focus on the real player.....Goldman Sachs.

I would like to state here that in my personal opinion, Goldman Sachs is not going to fail. It is just a momentary glitch. I would buy the stock (US$148) if I had the spare cash now but I am just too heavily invested in everything else.

Ok have a good sunday ahead for all.

Best,

SVI