Three Little PIIGS

I want to put the PIIGS into perspective. Right now, they are the excuse for the collapse in the global stock markets. I think the reaction is a little overblown, to say the least.

Here are the GDP Numbers for the current culprits. I compare them to the GDP of States with similar GDP numbers (IMF Database for 2006) -

Spain $1,439 billion GDP, less than California
Greece $314 billion GDP, comparable to Washington
Portugal $223 billion GDP, comparable to Missouri

Combined, these three economies are not much bigger than California. So ask yourself, would the US bail out California or risk it splitting off from the Union and having the US Dollar crash? There is no way that Europe does not bail out these countries. They have too much to lose.

The markets are forcing the leaders of the Euro to blink. The rest of Europe will end up eating all of the crappy debt from these countries and be forced to buy the bonds off of the balance sheets of European Banks like Barclays. The looting of the Taxpayer continues. No doubt Bill Gross is trying to figure out how he can get in on this action…

Did you see how the Fed is already talking about extending the Mortgage Purchase program? There will either be another round of Mortgage purchases to prop up bond prices, to keep Interest Rates low, thus propping up Real Estate prices, or there will be a new program to refinance Commercial Mortgages. Or both (most likely).

They simply cannot allow Real Estate prices to fall. That will explode the balance sheets of banks and lead to another full blown panic – better to steal $1 trillion from our kids, than to permanently unemploy and bankrupt their parents.

So I am looking for the markets to price in another round of monetization – some similar to what just occurred in Dubai and some on par with the massive Mortgage Purchase programs of the NY Fed.

Once the European stuff clears up, I would expect the Euro to recover and another round of the Dollar Carry Trade to commence. It will probably be a violent re-leveraging even, so you had better be on your toes over the next few weeks if you went to heavy cash like I did.