Has North America protected itself from Europe ?

[Wallace]

2012 seems to be off to a promising start in North America. Stock markets are up... But will it continue? Molten Lava continue to erupt from the economies of Europe, where Greece is faced with.... can it be another crisis, well, ummmm yes... due again in March, followed by an Italian crisis...and Portugal not far behind and .... it just goes on and on, like an eternally-re-running Monty Python sketch. Greece, Portugal and Italy may have beautiful plumage - I had a wonderful holiday in Sicily last year - but the economy would definitely be on the crap-encrusted floor of the dead parrot's cage if it had not been nailed to the perch.

North America has had two years to extricate itself from this mess. Has it done so?

Have Canadian companies freed themselves from European assets that are at risk and constructed some sort of firewall around the European cataclysm to come?

Or are we in for another "sell in May and Go Away" year?

Crusty the Clown
(No, I'm kidding)
It's only me ... Wallace.

[j831robert]

I chose option 1 having little faith in any politicians anywhere to put the needs of their country ahead of their own electability and certainly in our own land no Churchill or Thatcher in sight (although our current government has both the time and the means to get us back on track if they so chose to forego popularity and opted for leadership). I've stated elsewhere - pity our children and grandchildren.

[kcowan]

Can anyone else see the bulge under the rug? Keep pushing it until it hits the wall...

[patriot1]

I think there's a missing poll question. I don't think that either Canada or the US has that much exposure to Europe. The major risks to both countries going forward are internal, e.g. a pending RE bust in Canada comparable to that of the US. In the case of Canada there's also a risk of a commodities bust originating in China.

However I have no doubt at all that politicians both in the US and Canada are setting up Europe as a scapegoat for their mismanagement of their own countries' internal economic issues. I think that is the real goal of Harper's recent finger-wagging.

[Shakespeare]

I don't think that either Canada or the US has that much exposure to Europe

Except a financial crisis in Europe could wind up triggering a liquidity crisis in North America as nobody knows anybody else's exposure and the banks stop lending - which could then trigger the real estate crash....

(Just to cheer everybody up. )

[Wallace]

Only one positive vote out of 20? A contrarian's dream!

[ghariton]

I have no idea. Which is why I believe in diversifying across regions as well as industries.

Based on disclosures (which don't tell the whole story), Canadian financial institutions have a limited exposure to Europe. But they have a large exposure to U.S. institutions, who in turn have a rather large exposure to Europe. Dominos, anyone?

FWIW half my play money is in L.M.Ericsson right now. One of the more volatile rides I've had...

George

[ThomTheAnalyst]

Markets may have already priced in all the direct financial risk... but I'm not sure it has fully reflected how bad it might be here in Canada. We have a jobs problem just like the U.S. and the EU (ex-Germany). Most of the gains in the unemployment rate, since the recession, have come from people dropping out. (For those interested, pretty charts here: http://www.thomtheanalyst.com/2012/02/good-news-bad-news-employment-situation.html)

[flywaysuzy]

Who bought/is buying all those Greek/Italian/Spanish bonds anyway? The only way to find out who holds the cards, is to watch who cries loudest after the first chaotic default. I don't know. .

[newguy]

Who bought/is buying all those Greek/Italian/Spanish bonds anyway? The only way to find out who holds the cards, is to watch who cries loudest after the first chaotic default. I don't know. .

http://www.ritholtz.com/blog/2012/01/li ... -qe-world/

newguy

[ghariton]

Who bought/is buying all those Greek/Italian/Spanish bonds anyway? The only way to find out who holds the cards, is to watch who cries loudest after the first chaotic default. I don't know. .

As newguy points out, central banks have bought a lot of them, in an attempt to prop them up. Another group is vulture funds: Buy these bonds at ten cents on the dollar, then hold out for the full face amount. Refuse to sign on to any restructuring. Make life legally miserable for the issuer. If there are not too many of you, the issuer may buy you out just to get rid of the trouble you are causing. (Works best when the bonds do not contain any collective action clauses, specifyong that a super-majority of bond holders can reach an agreement binding on all bondholders. I believe that the Greek government bonds do not.)

George

[patriot1]

But sovereign debtors can simply legislate their own terms of default.

[newguy]

Another group is vulture funds: Buy these bonds at ten cents on the dollar, then hold out for the full face amount.

I dunno about the other countries like Italy where I suspect you're right but...

It is a conclusion reflected in the conspicuous absence of one big group of hedge fund managers from the talks to date – the distressed debt specialists, more unkindly known as vulture funds, that might ordinarily have piled into Greece’s highly discounted bonds, which trade for a fraction of their par value.

newguy

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[Jaunty]

The Economist raises concerns about Portugal's financial health and its bonds: The next special case? Renewed optimism about the euro zone has passed Portugal by http://www.economist.com/node/21546056

[tidal]

I don't know if North America "has" protected itself from Europe, but I am dubious that we have any ability to do so or to even know if we did so.

Global finance and trade is so interconnected and complex that it for all intents and purposes impossible to predict or understand how an initial perturbation will propogate through the system. Academic research suggests that such systems are prone to non-linearities and emergent properties that are not apparent when you consider the component parts.

A single high-voltage power line comes in contact with overgrown trees, and within minutes 100 power plants in the North American northeast are offline and ~ 50 million people are without power. We heard over and over about how the sub-prime market in the U.S. was a contained problem, and then BANG - Google shares are collapsing by 70%, and years after the fact the global economies - in the West anyway - are still struggling in its aftermath.

This is a good lecture by Thomas-Homer Dixon on the general topic. (By the way, is there an FWF member (not me) caught on camera in the audience there?)

[ghariton]

But sovereign debtors can simply legislate their own terms of default.

Depends which law governs. In the Greek case, current bonds are governed by Greek law, it's true. But the suugestion is to replace them by bonds governed by English law.

Of course, Greece could still default, even if its bonds are governed by English law. But then a creditor could take action in an English court, and seize all Greek government assets in that jurisdiction. Other jurisdictions would recognize the English judgment and allow the creditor to seize Greek government assets in those jurisdictions as well.

George

[Wallace]

Who bought/is buying all those Greek/Italian/Spanish bonds anyway? The only way to find out who holds the cards, is to watch who cries loudest after the first chaotic default. I don't know. .

http://www.ritholtz.com/blog/2012/01/li ... -qe-world/

newguy

Newguy, thanks for a fascinating link, showing the expansion of the balance sheets of the central banks over the past 5-10 years.

When I saw this graph - a combination of the eight central banks - I thought that the graph looked familiar.



It did look familiar. Here's where I had seen it before:



This would indicate to me that gold is money! It might be better discussed under the gold thread, but I wanted to post it here first to make sure that you saw it, newguy.

[flywaysuzy]

Eurocentralbank is probably biggest holder for sure, but when the news shows Greek citizens rioting in the streets the headliner is just ' revolt against pension and wage cutbacks'. What isn't mentioned as often is the objection Greek citizens have to devaluing their personal bond holdings by 50, or now 70 %. That seems like the undue hardship icing on the cake to me. Do any of these reform packages consider the smaller, local savers? If these guys are taking a hit on their wages and pensions that would seem to be enough...

[AltaRed]

Eurocentralbank is probably biggest holder for sure, but when the news shows Greek citizens rioting in the streets the headliner is just ' revolt against pension and wage cutbacks'. What isn't mentioned as often is the objection Greek citizens have to devaluing their personal bond holdings by 50, or now 70 %. That seems like the undue hardship icing on the cake to me. Do any of these reform packages consider the smaller, local savers? If these guys are taking a hit on their wages and pensions that would seem to be enough...

Perhaps, but one could argue that is the risk of putting all eggs in one basket. Just like no one should hold (any or much of) the stock of the company they work for in the event that employer becomes a Black Swan, the same might be argued about sovereign nations.

[flywaysuzy]

That's great if you are a tech-savy investor with easy access to world markets and investment accounts, but what about the elderly investor in smaller centers? Think about elderly Canadians who only hold CSBs as their savings vehicle...not hard to imagine Greek elders with a similar portfolio.

[kcowan]

Does this imply that we should diversify outside Canada (because of Harper)?

[Shakespeare]

Black swans happen. I hold 10% of my portfolio in VT as a hedge against something happening in Canada; arguably it should be more but I don't want more foreign equities. ZHY is a possibility.
BMO High Yield US Corporate Bond Hedged to CAD Index ETF - Fixed Income - BMO Exchange Traded Funds (ETFs)

[kcowan]

Yes I also hold euro and emerging market funds but that has not worked well..

[newguy]

Think about elderly Canadians who only hold CSBs as their savings vehicle...not hard to imagine Greek elders with a similar portfolio.

The situations are not comparable. Greece has a problem with funding it's debt because it has no control over the currency it uses. While our gov't can run into debt problems, they can't default on their Canadian dollar obligations...well they can by choice like the US keeps threatening to do.

newguy

add: they would lose money through inflation (as we do now) but that's much less than losing almost everything.

[ghariton]

That's great if you are a tech-savy investor with easy access to world markets and investment accounts, but what about the elderly investor in smaller centers? Think about elderly Canadians who only hold CSBs as their savings vehicle...not hard to imagine Greek elders with a similar portfolio.

My understanding is that, in countries like Greece, even the naive know better than to place much trust in their government. Granted, those on state pensions have no choice. But I would bet that almost everyone with any savings (a declining percentage these days) will have diversified.

As for Canadians, I suppose that some hold CSBs, but I can't imagine that it is a significant number (On the other hand, my eldest son, who refuses to learn anything about personal finance, leaves his money in a savings account. Lucky that there's not much of it...)

George