Monday, November 21, 2011

Social Mood Undercurrents

Even as the three month long reprieve period continues to run its course, we continue to see more and more undercurrents of bearish social mood underneath the surface, ready to erupt to the surface with the advent of Minor wave 3 down in January 2012.

The European debt crisis is still a concern even as it remains in remission (just barely, it is so fragile that it could give out at any time), yet there is evidence that the contagion is starting to spread all the way to the core of the European Union. There have been a number of developments in the last several days:

1 -- Interest rates on Spanish, Italian, Greek, Portuguese, and even French bonds continue to rise, making it more expensive to borrow. The effect, of course, is to make the existing debt a heavier burden to bear as the interest payments on the debt continue to rise. As taxpayer money continues to dry up in the coming months and years, a default is just a matter of time. The most likely scenario is for one or more of the PIIGS to default on their debt as we approach the center of Minor wave 3 down in March / April 2012. Greece is already perilously close to default.

2 -- The sovereign debt crisis has already taken a toll on governments in the European Union. The latest development is a massive wave of voter anger effectively removing the Socialist party from power in Spain and bringing conservatives into power by a substantial margin. This unfolded quickly on the heels of a government upheaval in Italy and Greece in which technocrats gained power. In addition, Greece is now facing the same type of strife and discord as the United States as partisan gridlock has put the country on the verge of a virtual government shutdown.

3 -- France is now facing the threat of a credit rating downgrade as Moody's has downgraded the outlook on the country's credit rating due to rising interest rates. This development is a very strong indication that the debt contagion is spreading to the core of the European Union. France is one of the last of the larger nations on the planet to still have a AAA credit rating.

4 -- The 2008 parallel continues to play out in the United States. On the heels of the collapse of MF Global and the bankruptcy of Jefferson County, Alabama, the city of Detroit, Michigan is on the verge of running out of cash, with bankruptcy to likely follow during the center of Minor wave 3 down. Another recent development is the US Postal Service bleeding cash at a rapid clip with default in the near future. The US Postal Service will almost certainly be in need of a bailout during the center of Minor wave 3 down.

We are about halfway through Minor wave 2 up with the "Santa-Claus rally" poised to start in early December 2011. Even as the reprieve period continues to run its course, undercurrents of bearish social mood simmer underneath the surface with financial fault lines in both Europe and the United States ready to go critical.

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