This is Madness. No! This is Sparta!

Reports out of Greece continue to be very troubling, with both the Greek people continuing to protest the austerity budget cuts, compounded with the Financial Times and every other market commentator pointing out that this bailout wont help.  And it’s probably true.  It doesn’t seem like the market has reacted positively to the Greek bailout prospects, although the US numbers today may have subdued bears temporarily.  Further, the prospects of Portugal, Spain, and probably the other PIIGS are not positive either, with CDS rising to new highs.

I think that should a sovereign nation default, although it would not be quite the same as the credit crisis that began several years ago in terms of the market impact, I think the consequences could be substantially more damning.

What I think the major lesson of the credit crisis was is that most of what we trade is synthetic.  It is manufactured by banks for the purposes of speculation, and quite often there is little substance behind it.  If the systemic is lost (which I suspect a great deal of it was), a phenomenon known as disengagement would occur, and people would literally stop trading.  We saw a little bit of this as liquidity dried up, but I think in the long run, we will see fewer people trading synthetic securities.  Maybe not the people who are currently trading, and are too far invested to change now, but the people just getting ready to enter the market- they will see that equities, CDS, derivatives don’t really have substance.

What people thought may have had substance is now being called in question as well.  If there was anything that had value, it was the faith in governments that they would pay back their debt.  Even outside of the US, there was always a general feeling amongst investors that most sovereign debt was without major default risk, and serves as a baseline as a “risk free” rate of return.  I think that opinion is thoroughly disregarded, as people are waking up the fact that even sovereign debt carries risk, especially in countries that have nationalized institutions.

So where does that leave us? The value of derivatives are suspect, as is the debt of sovereign nations.  Where is the true store of value?  I believe that people will eventually realize that the only true store of value will be hard assets, commodities.  Fiat currencies, debt, and equity all are just pieces of paper with no tangible value.

Typically, gold has always been seen as the commodity store of value.  I think China has shown that this is a paradigm that is going to change.  China stockpiled oil, copper, and other base metals- the industrial, usable commodities, not only for growth but as a reserve.  They know fiat currencies and sovereign debt are worthless, but things you can use, and that are not being replenished, are going to be where the value is for years to come.

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