Time to dust off the credit crisis playbook!

 

Football teams that use the same playbook year after year are virtually guaranteed to lose. Their opponents figure out what their game plan is, they adapt to it, and they shut them down.

Yet for some reason, politicians around the world are using the same plays to combat the SOVEREIGN credit crisis they used a few years ago to combat the PRIVATE credit crisis. Worse, they’re expecting different results — the definition of insanity!

So what does this mean for investors like you? How can you navigate your way down the global economic “field,” and avoid getting sacked?

Read on …

Sovereign Debt Crisis Intensifying Despite
Europe’s “Can-Kicking” Play in Greece!

Virtually everyone in the fixed-income markets knows this simple fact: Greece can’t afford the debt it’s been saddled with. Default is inevitable, and banks around Europe — including the European Central Bank — will likely take multi-billion dollar losses. You need look no further than the market for Greek bonds, where the country’s 2-year note yield just surged past 30 percent (it’s 0.36 percent here in the U.S.)!

But the politicians and policymakers in Europe are deathly afraid of precipitating another “Lehman-like” crisis. They’re also trying to protect the rich French and German bankers who they coddle up to from taking losses.

So rather than do what’s right, and give Greece debt relief, they’re trying to kick the can down the road. They forced Greek Prime Minister George Papandreou to hold a confidence vote this week, a vote that’s designed to lay the groundwork for next week’s referendum on even more aggressive austerity measures.

Greek citizens, not rich bankers, will bear the pain.

Average Greek citizens will be asked to shoulder the burden of $112 billion in budget cuts, state asset sales, and higher taxes just so fat-cat bankers in Paris and Frankfurt don’t have to lose money on their high-risk loans and bond purchases. Talk about a Greek tragedy!

Naturally, the markets breathed a sigh of relief. We saw the biggest Nasdaq rally since last fall on Tuesday when it became clear the confidence vote was a fait accompli. And we saw the euro regain some lost ground against the dollar.

It’s possible we’ll get a little more of a bounce if Greece votes in favor of more austerity measures next week. That’s because it should cause the International Monetary Fund and European Union to release another 12 billion euros in aid so Greece can cover July obligations.

But here’s the thing: The FIRST bailout did nothing to cure the underlying problem — that Greece owes too much money to too many creditors, given its growth and tax revenue outlook. The country has been mired in recession for three years, and unemployment has surged to 15.9 percent.

All it did was kick the can down the road, and not very far either! Greece’s borrowing costs temporarily relaxed last summer. Yet as I noted earlier, they eventually resumed their upward march and just hit a record high!

Why in heck would a SECOND bailout — following the same playbook — do anything more? My answer: It won’t! After the short-term bounce, Greece will resume its march down the field toward default, with all the attendant consequences for global markets.

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So Where Are We in This March Down
the Field toward the End Zone?

Meanwhile, borrowing costs have continued to march steadily higher in the rest of the “PIIGS” countries. A year ago, Spain was paying 2.1 percent to borrow money for two years. Now, it’s paying 3.4 percent. Portugal’s 2-year note yields have more than quadrupled to 13.2 percent from 3 percent, while Ireland’s yields have almost quintupled to 12.6 percent from 2.6 percent. Or stated another way, the sovereign debt crisis isn’t relaxing. It’s intensifying!

So let’s dust off that old playbook from the 2007-2009 private credit crisis. My analysis suggests the Greek crisis isn’t the same as Lehman’s meltdown. It’s more like when New Century Financial imploded in early 2007.

New Century’s collapse became the first of many.

New Century wasn’t the biggest subprime lender out there, but it wasn’t a tiny bucket shop either. It’s collapse sent ripples through the capital markets, yet they were able to recover for a little while.

Then later that year, mega-lender American Home Mortgage tumbled into the abyss. Bear Stearns blew up a few months later … in March 2008 … followed by Fannie Mae, Freddie Mac, Countrywide, and Wachovia. The crisis didn’t come to a final, cathartic end until the biggest whales of all — Lehman Brothers and AIG — imploded.

If I’m right, and Greece is just like New Century, we’re only in the first quarter of this sovereign debt crisis game. I believe that even bigger hits are coming — think Portugal (American Home Mortgage?), Belgium (Wachovia?), Ireland (Bear Stearns?), and eventually Italy (Lehman Brothers) and Spain (AIG).

So I recommend “playing” the markets just like I recommended during the private credit crisis …

First, take profits off the table first to pare down your stock exposure.

Second, establish hedge positions to protect against a longer-term bear market phase.

Third, get more aggressive with inverse ETFs on sharp, short-covering rallies. Then take those profits off the table when the next swoon strikes, because a mini-bailout will inevitably follow. That, in turn, will lead to the next short-term rally — and next inverse ETF opportunity.

This is the game plan I’m following in my Safe Money’s Crisis Trader service, and I’d love to have you on board. You can join for less than $2.75 a day by clicking here or calling 800-393-1706.

Overall, I wish I could be more optimistic, and tell you a healthy, long-term economic recovery was underway. I wish I could say that a healthy, long-term, wealth-building bull market was coming.

But I just can’t …

Unless and until government policymakers stop kicking the can down the road, and stop playing from the same worthless playbook they used a few years ago, you have to take matters into your own hands!

Until next time,

Mike

http://www.moneyandmarkets.com/time-to-dust-off-the-credit-crisis-playbook-45448