Does Greece in 2010 Foreshadow a Financial 2012?

Good Evening: U.S. stocks closed higher once again on Wednesday, though with quite a bit less zest than they displayed yesterday. Though they are still reflected in racy news stories, anxious editorials, and cautionary market letters, worries about Greece have receded for the time being. Investors, it seems, wish to focus on things like corporate earnings while leaders in both Greece and the EU wrestle to find a mutually acceptable way forward.

Perhaps it’s appropriate that the nation that gave birth to the Olympic Games should have its financial issues fade into the background during the winter edition of the ancient Olympiad. The fortnight of competition in Vancouver may not bring Greece any closer to stability, but the Games will be more pleasant to watch if the political wrangling takes a back seat for a while. Soon enough will Greece know its fate; it’s unfortunate that more than a decade of budgetary comedy will likely lead to the tragedy of fiscal stringency. How long will the U.S. and U.K. be able to avoid a similar comeuppance?

This morning’s economic data (housing starts, industrial production, capacity utilization, etc.) was mixed and a non factor. Deere’s frisky earnings report, however, did lend a bullish backdrop as the opening bell rang in New York. But after opening 0.2% to 0.4% higher, the major averages spent the rest of the day in a narrow range. Not even the release of the minutes from last month’s FOMC meeting could jostle Mr. Market from his slumber today. Oh, the Fed did once again talk about getting tough some day, but few market participants took the words as a sign of clear and present danger. The indexes went out just about where they opened, with gains ranging from the Dow’s 0.4% to the Russell’s 0.6%. Treasurys were weak, and yields rose between 3 and 7 basis points. The dollar was firm all day before it closed 1% higher, but the greenback’s levitation didn’t much affect commodity prices. The precious metals slipped, but the CRB index fell a mere 0.3% on Wednesday.

During the Christmas holidays, my youngest son prevailed upon me to take him to see the movie, “2012”. This escapist disaster movie didn’t threaten to enter my personal top ten list, but I did find two aspects of the movie interesting. The violent shifts in the earth’s crust depicted in the movie and the resulting super-tsunamis that washed up on shores across the globe were an interesting metaphor for the huge tide of debt sloshing around the world here in 2010. I also found it fascinating that the writers of the screenplay decided that salvation for John Cusack and the rest of humanity lay in long range planning — and some vital assistance by the Chinese.

I don’t want to push this comparison too far, but avoiding a financial version of 2012 will be difficult for many governments during the next couple of years. The focus may be on Greece for the moment, but Iceland and Ireland preceded them in the debt wringer months ago. Spain, Portugal, and Italy are also lined up for the same treatment, but how many investors really believe such a fate could one day befall Great Britain, or even the United States? Given the latest news on international capital flows, it doesn’t look like Uncle Sam can count on China to keep supporting its debt habit (see below). Japan has stepped into the breach by upping its Treasury purchases in recent months, but Japan has huge and growing budgetary problems of its own to contend with as its society ages and saves less. It seems only a matter of time before the U.S. must start facing the same painful realities facing Greece and the others right now.

The final two articles you see below reach similar conclusions, though they each tackle the problem from slightly different perspectives. Niall Ferguson’s “A Greek crisis is coming to America” depicts the daunting fiscal challenges looming for both the U.S. and U.K. For Mr. Ferguson, there is “no such thing as a Keynesian free lunch.” To him, deficits do matter, and for the U.S. to continue on its present course is sheer folly.

“We’re All Austrians Now”, by Paul Brodsky and Lee Quaintance of QB Partners, examines the same issues with a perspective more sensitive to the impacts of monetary policy and the investment implications of our financial woes. One of the authors’ keenest insights is that investors should rank asset classes from “least risky” to “most risky” not only in nominal terms, but in real terms as well. Since the authors believe our political system is poorly equipped to administer the medicine of liquidation and debt deflation, they see monetary inflation and currency debasement as the ultimate outcome. They even prescribe their own “cure” for the problem, one for which any holder of precious metals and their related equities will have sympathy.

Since there is no way I can do either piece justice in these paragraphs, please read them for yourselves. You may not agree with every word, but you will find yourself thinking these issues will require the type of leadership, responsibility, and shared sacrifice that have been increasingly hard to find in Washington D.C. during the post-WWII era. You will also find yourself wondering where you’ve heard warnings like these before. And then you’ll remember how many thoughtful individuals (Jim Grant, Bill Fleckenstein, Barry Ritholtz, and Jeremy Grantham leap to mind, but there are others) offered warnings about the dangers of crazy mortgage lending during the housing bubble. Like the authors below, many of these same folks now see some variety of a funding crisis washing up on these shores some day soon. Suddenly, 2012 doesn’t seem all that far off, does it?

— Jack McHugh

Stocks, Dollar Advance on Economy Outlook as Treasuries Decline
International Demand for U.S. Financial Assets Slowed
In Ireland’s deep budget cuts, an omen for a heavily indebted United States?
Moody’s Says U.K., U.S. Aaa Ratings Relatively Weaker
A Greek crisis is coming to America
We Are All Austrians Now

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