Move aside, carbon tax. World stock markets are in a spin as fearful markets worry about sovereign debt contagion, the focus being on spiking Italian bond yields.
Same story, different country — too much debt, politicians governing only for the next election, and a country collectively living way above its means.
Italian riots next? Unlikely, but I wouldn't completely count it out.
And what about the U.S? They are arguably the worst of the lot. If it weren't for the fact that the U.S. dollar is the world's reserve currency, they'd already be bust, joining Greece, Portugal and Ireland in the financial doghouse.
Whilst Rome burns…
The U.S. is fiddling whilst Rome literally burns. The world's biggest economy must raise the $14.3 trillion federal debt ceiling before the government exhausts its borrowing authority on August 2nd, or else, risk defaulting on its debt.
Or perhaps China could bail them out? Fat chance of that happening, of course, but in the meantime, U.S. politicians will play their silly games, trying to use the deadline to get their name in lights and/or to keep their special interest groups happy.
And you thought Australian politics was bad?
The end result will be more of the same – the U.S., Italy and others living above their means, and the debt problem being kicked down the same old road, again and again.
Old problem
The Italian problem is not new. What is new is the apparent loss of confidence in Italy, and in particular, the Italian banks.
It's all too fresh in our minds what can happen to the global financial system when markets lose confidence in the banks. You only have to look back to late 2008 and early 2009 to see the stock market devastation in action. Scary times, indeed.
Investors are understandably shooting first, asking questions later. In the U.S., on Monday the S&P 500 dropped 1.8%, its biggest two-day drop since March. Here in Australia, the S&P/ASX 200 is trading close to the 4,500 level, just a hop skip and a jump from a technical correction.
Fear and opportunity
Fear and uncertainty does that to markets. But is it justified?
The Financial Times suggests not…
"Bears worry about Italy's banks – but there is little evidence of an impending crisis in a nation that did not have a property bubble. Investors' most reasonable fear is of their own irrationality."
Fear alone creates opportunities for brave investors to buy shares of good companies on the cheap.
Such opportunities don't come along very often, and when they do, they have hair on them, requiring conviction, bravery, and the willingness to accept short-term paper losses.
Are we there yet? Probably not. This bout of fear likely has a little further to run.
Again, according to the FT, Monday saw "…the biggest flight to safety in the history of the Eurozone, as measured by German bond yields. The 10-year Bund yield plummeted as panic about Italy spread across the periphery. Investors shifting their money into Bunds pushed the yield down by the biggest percentage move since before 1999."
Even the U.S. dollar strengthened, with Paul Mackel of HSBC Holdings saying on Bloomberg it's "still the reserve currency of the world and will be for some time to come." We presume "some time to come" gets us past August 2nd. The Aussie dollar now trades at $1.065, and possibly headed lower.
Parity by Christmas, anyone?
A second chance
From a valuation perspective, U.S. stocks are trading near the levels reached in the month after markets bottomed in March 2009.
If we could turn back time, I'm sure we'd all love to have loaded up on stocks at March 2009 valuations.
We may get a second chance sooner than any of us might have thought. It could be investing nirvana.
