Germany is playing a dangerous game...

 

Nero – Something in common with European leaders?

Market Roundup Dow +93.33 to 17,776.91 S&P +12.58 to 2,081.34 NASDAQ +5.52 to 4,997.46 10-YR Yield -0.047 to 2.231% Gold -$0.19 to $1,154.20 Oil +$0.63 to $53.16

Forget Nero. It’s the modern European heads of state who are fiddling while markets burn!
Instead of the fabled Roman emperor, we had German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble … Dutch Finance Minister Jeroen Dijsselbloem … Greek Prime Minister Alexis Tsipras … and the rest of them playing a tune while investors fled overnight and this morning.

Too harsh? I don’t think so. At a key, last-ditch summit today in Brussels, Greece’s new finance minister didn’t even have a written plan to share with his European counterparts. He reportedly said something along the lines of: “Not to worry, we’ll get back at ya’ tomorrow!”
Meanwhile, Schauble and Merkel stuck to Germany’s line that the whole mess was in Greece’s court, saying there’s “no basis for negotiations” yet. Representatives from Finland and Slovakia said they were neither willing to write off Greek debt, nor confident a deal could be reached.
Still others in the European brain trust couldn’t even agree whether the crisis will come to a head! Some said a day or two, when Greek banks will run out of money. Others said it could drag on until the 20th of the month, when Greece owes 3.5 billion euros to the European Central Bank.
Trained to expect this kind of last-minute nonsense, investors were largely sanguine up until a couple of days ago. But that calm started to turn into something worse the louder the fiddling sounds got.
In early trading, the S&P 500 knifed through its 200-day moving average for the first time since October. The Dow Transports dropped to a fresh nine-month low. Select foreign ETFs and shares, as well as commodity-linked equities, got hit even harder amid China fears layered on top of the European mess.

Then just as things looked the bleakest, the market went from burning to churning – rallying sharply off the lows. At one point, it was the biggest reversal in the Dow in almost four years.

So what am I doing in light of this chaos? Continuing the process of raising more cash, which I started a few weeks ago. I’m also pivoting even more strongly toward investments that offer yield protection and/or that are ridiculously dirt-cheap already.
Those steps seem prudent to me in light of rising market risks and volatility, and I recommend you do something similar in your own portfolio. Then stay tuned.
If the fiddling in Europe gets even worse, and the yellow warning flags I’m seeing start flapping more aggressively, I may recommend even more radical action. That could include strategies I haven’t really used in years, because the steady market uptrend and countless policymaker interventions made them ineffective.

“The calm started to turn into something worse the louder the fiddling sounds got.”

Now, let me know what you’re thinking. Are the modern-day Neros in Europe going to screw this process up even worse? Or do you think we really will get some kind of last-minute deal?
What are your thoughts on the state of the markets here? Are we finally staring a bigger decline in the face? Or is this just the latest minor speed bump, one we’ll get over quickly?
Here’s the link to the Money and Markets website. Let me hear what you have to say, before the volatility gets even worse.

Our Readers Speak

Greece. China. The Women’s World Cup. Lots of global developments and events are grabbing your attention, and for good reason.
Reader Billy cited many of the problems overseas, suggesting they point to very turbulent times dead ahead. His views: “It looks like the perfect storm is about to get going as we see major problems with Greece and by extension, the European sovereign debt crisis, the Ukraine crisis, the massive Chinese real estate bubble and now a major correction in their capital markets.
“That’s not to mention the South Seas geopolitical crisis, the Middle East etc., etc., etc. All roads point to a massive debt bubble (AKA Bond Bubble) that seems ready to burst as well.”
Reader Donald L. pointed out that Greece’s mess is just the latest in a long line of crises brought about by foolish government policies. His take:
“I thought after the Argentina crisis fifteen years ago, the 25-year ongoing crisis in Zimbabwe, the near-death experience in Iceland, and now Greece, that Keynes would finally be buried and the world would learn a lesson about income, expenditure and fiat currency. But always, ‘This time it’s different.’ What again was Einstein’s definition of insanity?”
And Reader Thomas offered this view of Greece’s referendum: “We need to ask if the ‘No’ vote was an expression of defiance, or an illustration of stupidity? Perhaps both! Most Greeks did not really even know what exactly they were voting for.
“Brussels will teach the social construct called the EU and eurozone countries that ‘The man with the gold makes the rules.’ That law is still as valid today as it was from the beginning of commerce.”
Meanwhile, on a happier note, Reader Dave G. weighed in from Canada with this message on the soccer final:
“I’m here on Vancouver Island, not far from where the Women’s World Cup was played at BC Place. I just want to say that the USA team was fantastic! I watched most of the games in the tournament, and was very happy with the level of play throughout. But the level of refereeing needs some serious work. Wish FIFA would adopt/upgrade rules to permit some video review!”
Thanks for weighing in. We are definitely seeing more signs of turbulence around the world, Billy, and that could presage some difficult times ahead. We’ll have to see if markets hold or fold around these critical levels, then adjust as necessary for the back half of 2015.
With regards to Europe, Germany is playing a dangerous game by betting that contagion can be “well contained” even if Greece gets the boot from the euro currency. That was the gambit by Bernanke & Co. almost a decade ago in the U.S. mortgage market – and the economy crashed because he got it wrong. Stay tuned!

Source:
Mike Larson
Moneyandmarkets