June 16, 2011

Short-term: 1 green, 1 yellow, 1 red
Intermediate-term: 4 red
Composite: Bearish

A bit of a disconnect. The short-term indicators are close to an oversold condition (and possible technical support levels too) – but intermediate term indicators are deteriorating further. Given the overall news – and especially the complete absence of liquidity in the market – it will take a headline news event to create a bounce.

Something like “IMF and ECB agree on Greece debt package. Greece agrees to pretend it will pay the debt back. Banks agree to pretend that their balance sheets are solid. Everyone agrees that now is a great buying opportunity. Everyone wins. Sunny days are forecast.”

Interestingly, I cannot find the actual price of a Greek sovereign bond. All the news items are about the cost of a Greek credit default swap (currently 2189 basis points – 21.9% of the principal value of a 5 yr bond). But CDS’s are purely leveraged side-bets made by the peanut gallery of banks and other finance insiders — who have already proven that they get to keep all CDS profits while passing on all CDS losses to taxpayers.

As long as the price of an actual Greek sovereign bond remains completely hidden behind a wall of fraudulent and opaque accounting, then the Greek people themselves are unable to decide whether the costs of sovereign default (inability for their govt to run deficits for years, dropping out of the euro, etc) outweigh the benefits (reduction of the debt principal and future tax payments). In theory, and historically, there is another cost of sovereign default to foreign creditors — and that is war – as those creditors may try to forcibly take what is owed to them. But denying that information to the Greek people themselves means that the Greek government has already allied with foreign banks against its own people and the Greek people are no longer sovereign. Their government is no longer responsible to them.

While the particulars of what is happening in Europe are unique to their disastrous euro experiment; some of the core sovereignty issue applies to the US and other governments as well. Governments are increasingly going to become allied to the global multilateral institutions themselves and any practical notion of “government is by the consent of the governed – by a social contract” will simply vanish. And I seriously don’t think it will be challenged. We are far more addicted to the globalized mess of pottage than to the freedom/responsibility of self-governance.

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