Wednesday, February 15, 2012

European Weakness Is Extremely Obvious

Today's market decline got a few headlines as "worst of 2012 so far" and other appropriate names.  I wonder when we'll see more severe declines.  Consider Moody's downgrade review for a large number of European financial institutions.  Greece's private sector creditors really do exist, they really do have balance sheets subject to the Basel regime, and they really will be impaired when Greece executes a debt write-off.  Eurocrats know this and are floating policy reform trial balloons as a stalking horse for kicking insolvent countries out of the eurozone.  

China seems to prefer keeping the large European common market together for a while longer to avoid the headache of having to reprice its exports in multiple currencies.  That may be why China is offering some vendor finance to the European Union's bailout project.  Note the careful diplomatic wording of China's communique.  They support the "principle of holding assets of EU sovereign debt," which avoids a pledge to buy more immediately and leaves them wiggle room to sell some of their current holdings so long as they maintain some minimal level.  I think China's rationale has less to do with managing foreign exchange risk and more to do with securing more favorable trade terms that will keep its export engines humming.  

Those investors who can't see the clear and present danger to their portfolios posed by this state of affairs can't be helped.  I've been sounding the alarm about overvaluation in equities for a long time now.  I may not have to sound it much longer if the alarm becomes a real conflagration.