We have already seen numerous occasions over the past few years where this has been the case and will continue to see them given current developments. These are just some of the instances where the unintended consequences of our actions already have or will very soon come to dominate the path we end up on:

Greece Bailout

The Greece bailout – a situation where we have yet to witness the unintended consequences, but will for sure in the near future. Greece was able to convince the larger Euro nations and the IMF to provide them with a bailout package to help it through its immediate needs while making lofty promises of improvement intended to pacify those looking for some sort of justification for the bailout. What are the unintended consequences here? The moral hazard that comes with such bailouts is undeniable. When the Euro zone went out of its way to bail out Greece, even though its own constitution disallowed exactly such bailouts, it gave a precedent to all those peripheral countries that are in a similar fiscal situation as Greece. Why would Portugal and Spain now back away from asking the larger European countries for aid? If Greece, then why not us? We have not seen the unintended consequences of the Greece bailout yet, but we will. Portugal has already been downgraded by S&P and Spain is quite likely in the crosshairs as well. If both these countries go cap in hand to the ECB again, there’ll be little that they can do to deny them.

Flash Crash

When high-frequency traders first came about, they were seen as market players that will help improve the liquidity of the market and bring in spreads and transaction costs, and that did happen. The high-frequency trading model became so successful that today about 70% of the volume on the NYSE comes from such firms. But the flash crash of May 6^th showed us the unintended consequences of this change in market structure. When the market confusion and panic set in, most HFT firms backed out of the market to understand what’s going on. But when 70% of the market liquidity suddenly disappears, you are left with a gaping hole that resulted in trades getting executed at inexplicably low prices. The market on May 6^th, contrary to popular belief right after the crash, behaved just as it was supposed to. There was no big malfunction or technical glitch that caused what happened. It was the unintended consequences of the change in our market structure that lead to the flash crash.

Circuit Breakers

This is a case where I believe we were actually spared the unintended consequences. The circuit breakers did not get triggered on May 6^th because the market did not drop enough for the circuit breakers to be activated. But think about this – if the market had indeed dropped the required percentage and trading was halted, what would have happened? The market would have shutdown for the day at a level that would have been 10% below the day’s open. Meaning, investors would not have had the chance to see the huge, sharp rebound following the flash crash that restored some sort of normality. Everyone would have gone home thinking that there is some very solid fundamental reason behind the 10% drop and that they should stay out of the market, which would not have helped the situation when the market opened the next day. As it turned out, the circuit breakers did not get triggered and investors got to see the rebound and realized that what they had seen was only a temporary drop and there was no imminent economic collapse.

Ultimately, you have to ask when all these and other unintended consequences will end? They will only when policymakers realize that their actions are not implemented in the real world in a bubble that affects only the areas for which they were intended.

Disclosure: Long market

Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. None of the material above and elsewhere on Young & Invested is intended to endorse or promote any company or its products. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

With an aid package finally being confirmed for Greece, the first dose of moral hazard has been confirmed and the Greek government can look forward to some breathing room now that they don’t have to rely entirely on the market to roll-over the short-term debt that’s coming due. It is still looking to continue with its roadshow in the US in an attempt to get investors for its US$ bond issue, however several Greek officials have already downplayed how much they are hoping to raise. Initial estimates indicated that the Greek government hoped to raise up to $10 billion but now that PIMCO has expressed their disinterest, many other investors are likely to follow their lead and sit out this auction. In response, the Greek officials indicated that they’ll probably only be able to raise $1-4 billion from the issue or they might even scrap the entire issue all together. If the issuers themselves have so little confidence in their own bonds, it’s hard to expect the markets to do any better.

The loan package proposed by the EU will only be given to Greece once it “asks for it”, which is really more a question of when and not if. Greek officials probably felt comfortable coming out in the open with their expectations of the US$ bond issue only because they knew they have a fall-back option in the form of the aid package. The package includes $40 billion in loans that are slated for the first year with the possibility of more loans in the years after that. The loans will be issued at slightly below market rates but will not be very highly subsidised because the EU itself needs to avoid breaking its own rule which states that none of the member countries can be “bailed out” in times of stress. Of course, Greece is indeed being bailed out but only because the definition of “bailout” is malleable enough to allow the passage of this loan package.

The intention of the “no bailout” rule was definitely in line with the notion of free markets and the risk-takers having to bear the consequences of their actions. But clearly when you’re IN the heat of the situation, no one wants to be responsible for the consequences of a failed state that results from a fiscal collapse – thoughts of moral hazard and setting a precedent for future bailouts become a secondary concern. And we saw the consequence of inviting such moral hazard almost immediately after the loan package was announced, as a Greek official said that Greece will likely need loans amounting closer to $80 billion to help it ride out the storm. No one should be surprised. The first bailout is hardly ever the last – what did we see with AIG? Or GM? Or Fannie and Freddie Mac? All of them have had repeated bailouts as the need for money grows exponentially once someone is willing to open up the tap.

With the Greek government providing lofty assurances of deficit reduction and debt controls to the EU and IMF, while its own citizens are completely against the notion of any reform that will reduce their welfare, its quite likely Greece is set for a rough and slow climb out of the hole it has dug for itself. And I have little doubt that this first package is only the beginning. Aside from Greece, you also have Portugal and Spain next in line – why should they be denied of handouts if the money is being doled out to other EU members. All they’ll need to do is duplicate – make strong, even if empty, assurances of future improvements in their fiscal situation, guarantees of debt reduction and of course claims of strong economic growth just beneath the surface.

Disclosure: Long market

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Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. None of the material above and elsewhere on Young & Invested is intended to endorse or promote any company or its products. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

With the number of opinions being expressed on major companies like Research in Motion and Apple, it can get awfully overwhelming to try and understand from a high level what the situation is. This has especially been the case with RIM in the last few days when they released so called “mixed results” – which basically means that they disappointed the street, but not really.

It’s fairly easy to identify the things people agree on – RIM has a solid balance sheet, no debt, $2.9 billion in cash, strong growth in revenues (up 18% yoy, though still not enough for Wall Street), shrinking gross margins (now at 45.7%) and reductions in average selling prices (currently $311/unit). A brief look at any analyst report will give you that information. However, there is less certainty on other more contentious issues – as I see it, there are two big issues in the balance, and the one that comes to dominate in the next few years will determine where RIM goes from here.

Issue (Negative): Competitive pressure in retail consumer space

80% of RIM’s revenues still come from new device shipments, meaning that it still very dependent on new sales growth, as opposed to revenues from post-sale services, which make up only 16% of revenues. It’s this sales growth that many analysts feel will be compromised by the additional competitive pressures that BlackBerrys are facing in the retail marketplace from Apple’s iPhones and other Samsung and Motorola smartphones that operate on Google’s Android platform. RIM’s competitors are deemed to be better at providing a better user experience as the focus shifts away from smartphones providing just email access (where BlackBerry dominates) to a more complete experience including applications, browsing and connectivity (where BlackBerry loses out). As an analyst from Sandford Bernstein put it – RIM can expect “margin pressure as BlackBerry gets more and more into a mass-market role with vanishing product differentiation and eroding brand premium.”

So in the mass-market RIM’s products are expected to lose market share to its new rivals especially as the focus of the user experience shifts.

Issue (Positive): The enterprise market and love from carriers

It is well-established that RIM is a market leader in the enterprise space thanks to its superior security capabilities that are necessary in an environment which is less cost sensitive but also more functionally demanding. The enterprise market loves the BlackBerry for its superior email handling capabilities which are more important to that space than other “toppings” like applications and browsing. While the security features of other smartphones are likely improving, the BlackBerry still holds its own there. Its leadership in the enterprise space is the trump card that RIM holds and is using to enter new emerging markets. RIM is currently dependent on the North American market but the real growth lies elsewhere as smartphone penetration levels start to taper off in North America. With ongoing expansion efforts in China and Indonesia, you could start to see new engines of growth for RIM and this might have been reflected in the company’s higher than expected guidance for subsequent quarters.

Another area that is frequently overlooked is the relationship that RIM has with its carriers. RIM provides a lot more value to carriers than just being a handset provider. This point was well made in a feature in the Canadian Business magazine. RIM actually operates data-processing centres which look at all the information sent via BlackBerrys, in the process removing potential threats and providing a level of security that is hard to match. At the same time, the system also helps carriers manage its traffic and uses compression technologies which allow more information to be carried over the same network from the carrier – the importance of this value-add cannot be underestimated when usage is becoming increasingly data intensive and clogging most networks. One more plus point that ties carriers to RIM is the carrier’s need to differentiate its product offerings from other competitors. It’s hard for them to do that with the Apple’s iPhone which is the same across all providers since there is only one model. But with the BlackBerry, RIM actually provides each carrier with something unique through its different models and hence caters to their needs. With the carriers doing a lot of the marketing for the handsets, this relationship counts for a lot.

Watching how the cookie crumbles

Ultimately, RIM’s prospects depend on which of these issues end up being more important down the road. The big question is whether RIM’s dominance in the enterprise market, combined with its strong carrier relationships and emerging market growth is enough to outweigh or offset the market share it might lose in the North American retail space to competitive pressures from other smartphone providers.

Disclosure: Long RIMM

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Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

If you pick up any finance textbook, it’ll tell you that international diversification is good. International diversification is good because the returns on stocks in different stock markets, in different regions, are supposed to be un-correlated, hence falling markets in one region can be offset by growth in other regions. The key phrase in that sentence is supposed to be. A brief look at the chart below illustrates why:

Click on the chart to enlarge

I compiled monthly returns data on the major indices from 11 different countries around the world for the past decade, going back to Jan 2000. Next, I calculated the correlation between the S&P500 and each of the foreign indices for a rolling 2-year period, starting in Jan 2002 and that is what is plotted on the chart above.

Having seen the chart above, anyone who hears someone extolling the diversification benefits of investing abroad, should be asking “What benefits?”. Yes, investing in emerging markets will likely give you exposure to stronger growth stories – that is not my argument. But the claim that investing in a variety of regions reduces your portfolio risk is no longer as valid today as it was before 2008. If you were holding a core portfolio invested in US stocks and decided to “diversify” into any of these 11 regional stock markets, a correlation with the S&P500 that hovers around 0.8-0.9 is more likely going to result in a concentration of risk, instead of diversification.

In fact, this phenomenon has been recognized by economists and researchers who point out that in times of market stress, correlations break down and go to 1. That is what we see happening in the chart in Oct 2008 as the correlations quite literally “collide”. However, the qualifier “in times of market stress” should be questioned. The past year for stock markets has been one of prosperity and phenomenal growth – nothing that could remotely be labelled as stressful. Despite that global stock market correlations have not declined after that spike in 2008, as would have been expected. Does this imply that global stock markets have now become permanently linked, with correlations flat-lining around 0.85 as seen from the chart? It might be time to re-write those finance textbooks.

Disclosure: Long Market

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Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

When finance professionals learn about investing in the emerging markets, they are taught to look out for certain key statistics that can provide indications of whether those markets are suitable candidates for investment.

Some of the main indicators looked at include the country’s:

1. Budget Deficit to GDP: A general guideline is that ratios greater than 4% indicate substantial credit risk.
2. Debt to GDP: Debt levels exceeding 50% of GDP signal that the country may be over-levered and may cause currency devaluations.
3. Current Account to GDP: Again, anything above a deficit more than 4% of GDP is seen as problematic.
4. Expected GDP Growth: Given an emerging markets’ added risk, investors should expect a growth rate of at least 4% as compensation.

The above indicators are supposed to be helpful in identifying the emerging markets to invest in and those to stay away from. However, if we look at these figures for some major emerging markets today and include the United States (nearly always used as the “benchmark” developed economy) as a comparison, it paints an interesting picture.

The figures may not be 100% accurate, but the implications are clear. If all the countries in this table were considered emerging markets, the United States would be the “emerging market” that most investors would choose NOT to invest in. So much for being a “benchmark” for comparison!

Which brings us to the question lingering in many investor’s minds – have developed markets and economies lost their “superiority” over the developing economies, permanently? In other words, when financial advisors look to invest a retiree’s portfolio, they would traditionally place the segment of the portfolio that they can take more risk with in emerging markets. But today, has the more risky option changed from the developing markets to the developed markets like the US and Britain?

Disclosure: Long Market

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Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

It has been a long time coming, but investors need to start seeing that the C$ belongs at parity to the US$, if not even higher. The C$ first breached parity in late 2007 when it became stronger than the US$ and in subsequent weeks literally skyrocketed to 1.0722 as speculators in the C$-US$ trade came to play. In 2007, the rise was probably premature and happened too quickly to suggest any stability at those levels. Since then, the C$ has dropped to 0.776 in March 2009, in the depths of the crisis, but has continued a steady and measured rise back up to around 0.96, where it stands today.

From a technical point of view, the C$’s upward trend is very strong, given the number of small corrections that it has had along the way, unlike the surge upwards in late 2007 which was clearly unsustainable. Every new high has been higher and every new low has been higher still. There are also numerous fundamental factors that call for a higher C$.

Strong Financial Sector

In many investor’s view, that the C$ will continue its rise to parity and beyond is a given because in 2009, the Canadian economy has proven itself to be one of the most resilient in the face of economic challenges. To use the most popular quote about Canada in 2009, “Canada was one of the few countries that did not have to bailout its banks”. Whether or not that’s entirely accurate is debatable but it’s been clear that Canada’s financial sector fared better than most and so did its companies.

Resource Powerhouse

Aside from that, the fact that Canada provides a huge amount of resources to the world also acts in its favour. There is no shortage of demand for commodities like oil, timber, potash etc, all of which are so essential to the needs of the growing developing world and as long as that is the case, there will continue to be demand for the C$.

Capitalist Economy

As Dennis Gartman likes to say very often, capital moves to where it’s treated well. And at the moment, that place is not the United States. With Obama cracking down on financial institutions as if they have committed treason by attempting to make profits, investors are looking to move their money to more “free market” regimes. To imagine several years ago that capital would be flowing out of the US because markets are not “free” enough would have been unimaginable, but such is the situation now. Yes, the amount of exposure taken on by banks needed to be reigned in, yes the systemic risk they pose needs to be controlled, but not by killing the appetite for profit making! In comparison, Canada now looks like the more open and “capitalist” economy and so that’s where capital flows.

Risks to Parity

There are two main short-to-medium term risks that I see which might lead to a reversal of the C$ strength.

1. Flight to Safety: In 2008, the C$ collapsed vs the US$ due to the panic in the markets. The VIX shot up to all time highs and money flowed into safe havens in US$ treasuries from essentially all other markets. If a similar situation arises as a result of the debt crisis currently unfolding in the European Union, then we could be in for another ride down. If Greece’s situation is not contained effectively and contagion leads to similar debt problems in Portugal and Spain, then all bets are off.
2. Canadian housing bubble: In another complete contrast to the US economy, the Canadian housing market now appears to be in a bubble, with the average home in Toronto, Canada’s largest city, selling in January for 19% more than last year. In reply, Canadian banks responded in a most un-American way, and urged the government to cool down the market by imposing tighter mortgage rules even though they would benefit from rising prices. That should be a positive indication, but if despite this the Canadian real estate market undergoes a collapse, then the C$ could also suffer heavily.

Disclosure: Long Market

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Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

Kid Dynamite is the man behind the popular blog “Kid Dynamite’s World” – http://fridayinvegas.blogspot.com/. Kid Dynamite spent 8 years as a trader at a major Wall Street investment bank. From June 1999 through April 2005 he specialized in portfolio trading, and from May 2005 through November 2007 he was the head trader for an internal hedge fund on the buy side of the same firm. Kid Dynamite managed a multi-billion dollar merger arbitrage portfolio, and continued to implement portfolio trading related strategies as well.

1. How did your blog transform into one discussing and evaluating financial markets?

I quit my job about 5 months before Bear Stearns blew up.  Once I was free of the shackles of the corporation, I could write much more freely about financial markets without fear of enduring negative consequences if my employer had found out about my blog.  You are probably aware that big companies are very wary of having the views of employees misinterpreted as the views of the company, and thus they usually don’t look kindly on opinionated writing.

2. What kind of economic/market issues do you like to address in your writings?

What bugs me most is when journalists try to write about trading or mechanics of trading that they simply don’t understand.  They invariably get it wrong, and that “wrong-ness” usually spreads.  I found that for a while most of what I was writing was simply correcting factual errors that people have in their understanding of things like high frequency trading, program trading (my background), flash trading, etc. Lately, too, the biggest problem is the pervasive populism that has taken over even the mainstream media.  It skews the facts, and the reader sentiment just spreads ignorantly like a snowball.  At the same time, it fails to address the real issues, and ensures that they will not be addressed.

3. Do you think the current debt situation in developed economies is bigger than most other problems capitalist countries have faced before?

Yes.  I happen to think that we’ve reached the end of a massive multi-decade cycle of debt accumulation, and that debt must be reduced.  This is true on an individual/household level, corporate level, municipality level and national level.  It shocks me when economists predict recoveries based on, literally, a HANDFUL of data points, which by themselves would be statistically insignificant.  Add to that the fact that the inputs are vastly different now, and it shocks me that people quote past recessions, past stock market rallies, past periods of unemployment, etc.

4. Do you believe the unintended consequences of government action are getting bigger than the problems which government action was meant to solve?

Well, I believe you can’t cure a leverage problem with more leverage – so in that sense, yes.  The cliff gets pushed back, but also becomes taller with each intervention.  The problem is that there is no solution – politically, we just aren’t willing to make the difficult decisions.  Without making this a political issue, this for me is the most disappointing factor about Obama’s actions thus far.  It’s not that McCain would have done better – it’s that Obama, upon entering office, had so much support and the American people had such faith in him.  Combine that with his eloquence and leadership skills, and it’s possible he actually COULD have made the hard choices and talked the public through the aftermath.  Very few Presidents even have that potential – but I think he did, and he missed his chance.  So now, we continue to extend and pretend, delay and pray, and there is no solution.

5. Have economies just resigned to moving from bubble to bubble in different asset classes? Is there a solution to this cycle?

Right on cue – I think I just answered that question above!

6. Do you think the bailout strategies being contemplated in the Euro zone will work any better than the ones that were utilized by the US government?

I am not qualified to comment intelligently on the Eurozone.

7. Is the debt situation just something we are worried about in a downturn and something that’ll be much easier to control in once economic growth returns?

You are assuming that economic growth returns!  Growth will certainly resume someday, but I think that anyone who expects the kind of housing market performance we saw in the last 10 years anytime soon is delusional.  That housing bubble really affected all other aspects of our economic growth and juiced it way beyond normal levels. I mention housing because I think it was a huge part of the bubble in America – people spent paper profits on their homes, accruing debts in the process. MEW – mortgage equity withdrawal!!! It fuelled everything.  As long as we don’t have a downturn, you don’t have to worry about this debt – you just refinance it – MAGIC!  Of course, that MUST end at some point.

8. How has your past experience helped you get a better grasp of issues that hit the headlines and are often blown out of proportion or at other times understated? Any examples?

Well, everyday journalists misinterpret financial stories.  Some do it out of ignorance, some do it to appeal to what they know are their readers’ views.   I addressed this above when I mentioned populism.  The Goldman Sachs – Greece story is a recent excellent example.  Der Spiegel broke the story (http://www.spiegel.de/international/europe/0,1518,676634,00.html) of how GS helped Greece structure a currency swap.  This swap was a bit unusual because it was done at non-market rates so that Greece immediately got a big payment upfront from GS.  Of course, that payment needs to be paid back at some point, and we’re now seeing the consequences.  Anyway, everyone loves to hate Goldman, and this is actually a pretty interesting story, because this  swap allowed Greece to fool European regulators and may have been a key factor in its inclusion in the European Union’s formation!   So far so good – but then the NY Times picks up the story several days later (http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp=&pagewanted=all) and gets sidetracked with:

“In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.”

That’s pure garbage – Greece selling assets to pay down debt has absolutely NOTHING to do with hiding their financial situation via a non-market rate currency swap designed to deceive European regulators and gain entrance into the E.U..  It happens to be a shortsighted, doomed to fail way to fix budget problems (since they are selling income producing assets) – but it’s a total red herring to include it in a discussion of spurious financial dealings.  Of course, the readers don’t get this point (surprisingly, since it’s not a complex one) and just rail on the “Goldman Sachs is the root of all evil” train.  GS may be evil, but the way to illustrate it is with the off-market rate currency swap it structured for Greece, not the sale of assets it arranged for Greece.  Kudos to Felix Salmon for taking an unpopular view and doing an excellent job summing up the facts in his piece: http://blogs.reuters.com/felix-salmon/2010/02/16/the-greek-derivatives-arent-goldmans-fault/

9. What do you see becoming the big surprise for market investors and observers in 2010?

I have no idea where the stock market is going short term, (read this, though, for my imparted wisdom: http://fridayinvegas.blogspot.com/2009/12/kds-year-in-review-part-1-isaac-newton.html),  but I would be shocked if we didn’t have a major selloff sometime in the next few years.  That sounds vague, but one thing I’m learning over and over again is an oft repeated cliché:  The markets can stay irrational longer than you can stay solvent.  It’s a slight twist on that – governments can extend and delay problems longer than we think – it may take 18 months, 5 years, or even 10 years, but I would be very surprised if we don’t see SPX 800 again. I am still waiting for the mainstream press to pick up the pending disaster in underfunded pension plans, and in the numerous major US municipalities which are bankrupt.

10. What are some of the other blogs you read for insights into new developments?

Calculated Risk – for not-too-opinionated, very educated, and very accurate interpretations of economic data points.  Barry Ritholtz – for more opinionated and less censored interpretations of the same.  David Merkel’s Aleph Blog, Paul Kedrosky’s Infectious Greed,  Tyler Cowen’s Marginal Revolution, Michael Panzner’s Financial Armageddon, for focused and always insightful pieces.  I think Felix Salmon has become one of the better mainstream writers – he is a journalist, but he gets the facts straight, doesn’t manipulate them, and accurately explains unpopular views in an attempt to educate, not to generate hype and hysteria.  Mike “MISH” Shedlock has also done a good job repeatedly focusing on the municipal debt problems we are facing – which no one seems to be talking about.

And so, as expected by most, the major Western European economies are talking about what they can do to resolve Greece’s fiscal problems. Contagion has already caused anxiety to spread to the fiscally “un-sound” European nations. Specifically, the PIGS – Portugal, Ireland, Greece and Spain. PIGS is an acronym that was first used by in 2008 by journalists to refer to Portugal, Italy, Greece and Spain. All these 4 economies suffer from similar problems such as fiscal indiscipline, current account deficits, and high unemployment. However, in Pat Buchanan’s view, Ireland deserved a spot in this demeaning group more than Italy did which apparently has a stronger balance sheet that its counterparts.

Contagion

This contagion has already caused the sovereign CDS spreads of these countries to rise with investors fearing that Greece is the just the first in a line of dominos that could fall across the EU. Greece has seen its yields on government debt sky-rocketing, with its latest 5-year bond issue having a coupon of 6.1%, as investors demand more compensation for the risk they are taking by purchasing those bonds. Very soon, the other countries in the PIGS acronym could see their own yields being elevated. The higher interest costs will be of help to any of these governments as it may start a vicious cycle of rising costs and an increasing inability to service the debt burden.

However, many are of the opinion that France and Germany will not let the Greece go down because that could be the first step on the path leading to dissolution of the European Union itself. Seen in fast forward, the scenario plays out something like this. Greece is not bailed out, and due to its inability to manage its debts, it defaults. Contagion leads to fear spreading through other weak economies and they start to experience higher interests costs and pressure, which could lead to more defaults. Those countries that have defaulted will likely have little incentive to continue being a part of the EU, with Brussels imposing constraints on what kind of monetary and fiscal policies those nations can utilize.

Why not me?

To avoid even starting down that path, Greece will be bailed out, but the question is what are the un-intended consequences? Once Greece is pulled up out of the hole with the help of French and German money, the other PIGS countries will have all the right to ask, why not me? The moral hazard that accompanies such action is very often glossed over in crisis situations that demand current situations be addressed immediately before deteriorating further.

But the real problem arises when the un-intendend consequences of those actions start becoming bigger than the problems those actions were supposed to solve in the first place.

Disclosure: Long Market

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Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

Note: See important disclaimers below article.

Another month, another year, another attempt at a correction and another inevitable bounce. The chart below highlights the sentiments carried by many investors.

All the believers of the mantra that “Nothing ever goes up in a straight line”, have been forced to challenge their beliefs when every attempt at a correction in July, August and September gave way to higher highs and higher lows. Every time the market attempted a correction the blogosphere will be awash with claims of the baseless rally finally ending.

And so here we stand again, in the middle of the most recent bounce from a seemingly major correction when the markets fell for close to 6% in the span of two weeks from Jan 20-29. Is this time any different than every other attempt? Sure, there seem to be more solid, fundamental reasons this time for a proper correction – Obama is attempting to regulate the banking sector into submission, sovereign debt problems around the world occupy the headlines, existing and new home sales came in lower than expectations. But so what? Is this time really any different?  The believers of the above-mentioned mantra, the value investors, the Buffett followers, all gain hope at every market inflexion point that maybe this time the valuations will finally come closer to fundamentals. But as they wait by the sidelines for new lows to buy in, the market bounces and just keeps on going in a straight line.

The winners in the past 9 months have very much been the people who have believe that the market has little to do with fundamentals and will continue to remain disconnected from them. The winners have been those that have used different barometers from traditional fundamentalists in assessing the markets. But will that logic continue to hold weight into the future? Most likely only till the real big correction is upon us. But wait, can that even happen? Have investors already forgotten what it feels like to be in falling market?

For their sake, I hope not, because this time it might be different.

Disclosure: Long stocks, for now.

Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.

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With those goals in mind, we’d like to share you our vision for Young & Invested and where we hope to be by the time 2011 rolls in. And as in any tightly knit community, we invite your thoughts and feedback on our ideas and especially your suggestions on how we can further engage YOU!

Here’s what you can expect this year:

• NEW: Blogger interviews – Very soon, we’ll be starting featured interviews of prominent financial bloggers to bring you opinions from the best names out there. Keep a look out for that!
• NEW: “Investment Guru” interviews – We’ll be bringing to you interviews from people managing the real dollars. Sharing the tremendous experience and knowledge of these industry leaders will be invaluable.
• MORE: Continued expansion of our contributor base as we search for curious and inquisitive minds looking to put themselves on the map. We love bringing new perspectives such as these to our community. We invite people with a deep interest in finance and investing to contribute, just contact us!
• MORE: You will see more guest posts by invited bloggers/investors/financial experts on topics of their specialty.
• MORE: Continued analysis of financial markets and the economy through insightful and often contrarian articles such as this and this. These have proven to be especially popular, so expect more.

Thank you very much for your support. Cheers to a spectacular 2010!

Your Y&I Team – Dan, Alex & Shishir

From the new generation, for the new generation

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