The Contagion Effect

We've seen this before. A group that thought a crisis in one sector would never have an impact on their sector. But a crisis in one place can seep to another. It's called "contagion," and we are seeing it today in Greece, spreading to Portugal, Ireland, Italy and, of course, Spain.

Wall Street jeered when it looked like Greece would fall into default and knocked out of the Eurozone in the middle of civil unrest. Then, Wall Street cheered when the Eurozone agreed with the IMF to provide $1 trillion to bail them out. Wall Street likes bail outs...doesn't it?

The market dropped precipitously in October 2008 when it looked like the government was not going to bail out the big banks. Then, it picked up when it saw $700 billion in taxpayer money going to the big banks.

The moral of this story (in George H.W. speak): bail outs--good, no bail outs--bad.

So, the market is doing well again after a sudden drop off last week.

Let me pause now for a moment to discuss that 1,000 point drop, which I believe was Asian money taken out suddenly since the Japan's Nikkei and China's Mizhuo had significant drops the night before. However, was it more than that? I view two possibilities:

One, that a computer glitch messed up Government Sachs' flow of funds from the Fed, which showed what the market would actually look like all things being even. In a moment, it was fixed and back to its usual "smoke and mirrors" market reflection. Or, someone with some ethics tried to show the public what is really going on in a stock market with price and earnings completely out-of-whack. That's one possibility.

Here's the other--a much more terrifying possibility. China had enough of U.S. debt that will never be paid. Japan still remembers how WWII ended. Perhaps at that moment, someone in Asia knew something we didn't know. That a bomb was about to head this way and, at that moment, markets collapsed. Perhaps, there was a very real possibility that an Asian country was going to send a missile/bomb to the U.S. because that country knew they would not receive their loan payments and it was collection time.

True, the latter is a far-fetched scenario, but may become a realistic one in the near future.

Let's get back, however, to the contagion effect.

In Summer 2007, the residential mortgage-backed securities market shut down. Liquidity, for the most part, stopped and made it nearly impossible from potential borrowers to receive home loans. On the commercial real estate side, things were different. Fundamentals were good--rents and values continued to hold up. However, like residential, commercial mortgage-backed securities started to freeze up. Why? Because investors are not stupid. They realized a collapse in residential would eventually move to commercial real estate.

Analysts thought CMBS spreads were out-of-whack because of "headlines." No. Headlines do not affect investors--at least not good investors who do their homework. Just because a headline emphasizes increasing delinquencies does not mean the market is falling apart. Good investors read through the headlines, just like they are doing today when headlines say a "recovery continues."

Now, commercial real estate represents the results from residential real estate's collapse--a contagion effect that spread because of the natural connection between residential real estate and commercial. The connection is: homeowner is house poor, spends less (retail hit), meaning less inventory (industrial hit) meaning less worker necessary for business (office hit), less spending money (hotels hit) and--in the case of many youngsters, moving back home (apartments/condos hit). Without liquidity, commercial construction was hit.

So, why does this have anything to do with Greece? Simple. Greece received $1 trillion from bankrupt European countries and the IMF. Yippeee for Greece. But what about the PIIS leaning further downward from insolvency. When they need to be bailed out, it's France, Germany and the UK to the rescue...with the little funds IMF can use.

European insolvency leads only to one more land mass with any money--the U.S. But, the U.S. is already insolvent. Schools, hospitals and other public facilities are closing down, laying off workers due to state and local budget deficits. The federal government deficit is just plain scary. We're almost in as bad shape as Greece from a debt perspective with one exception--we are the United States of America. We are the standard. We are the most developed country in the world. We don't fall like Iceland or Greece or any of those other countries--right?

Well, truth is, we have no manufacturing force--it's all been outsourced; we have no oil--except the barrels floating in the water right now; we have no other energy outlets like windmill or solar power; and, our people have no energy. So many layoffs depleted resources, making current workers exhausted and burned out.

This needs to turn around--and now. We cannot afford to have a burned-out wasteland country with a few large banks standing tall like Donald Trump towers in Atlantic City. THIS BEHAVIOR MUST CHANGE. It is time for a new philosophy for people and corporations.

Live and function within your means. Begin with ideas and create. Live for the sake of living, not for the sake of the dollar. Do what you enjoy, accept responsibility for decisions and do what this country does best--compete. Try to win within the rules but, if you lose, do it with dignity.

In other words, let's get some pride back in the USA.

Otherwise, there will not be much to be proud of...other than more economic uncertainty and, perhaps, hate-filled riots like the ones we currently see in Greece.