Will the PIGS Die or Fly

I just could not resist the PIGS reference, although its admittedly getting a bit overused. Anyone following the global events that dominated the market sentiment and action over the past two weeks, know that PIGS refer to Portugal, Ireland, Greece and Spain. Yes, these four little piggies showed a complete lack of fiscal responsibility and got themselves in a big mess. The fear of either a massive bailout or some type of technical default by one of the piggies, especially Greece, has dominated the headlines and put a lot of pressure on the euro. Conversely, it gave a boost to the USD, a typical knee jerk reaction to USD as a safe haven currency. Yup, the world still wats our dollars when the shit hits the fan, despite its obvious longer term issues. The inverse relationship between the US equities and the USD has played out as well, as has been the case now for almost a year. While historically, this relationship is not always inverse, and actually, has a positive correlation, it has become a very predictable trade to short the market into the dollar strength. There are several reasons for this: 1) Commodities, especially oil and gold, which have assumed market leadership over the past few months, have a negative correlation with the dollar, so when commodities get hit, so does the market. 2)Carry trade - as we continue to maintain near zero interest rates, investors continue to borrow dollars and invest them outside of US, converting them to euros, pounds, aussie dollars, yen, etc.

I believe, that sometime in the next few quarter, this relationship will loosen up, as the interest rates start slow, but inevitable march higher, especially as we start seeing more signs of economic recovery in US.


As far as the PIGS are concerned - they will not die. Just like the financial crisis in Iceland, Ireland, Dubai World, and before that, Russian debt crisis, it will go away.

The PIGS may not fly again for a long time, but as long as some type of aid solution is found and it does not became a contagion, this European crisis will fade. The Germans, ECB, and IMF will find a way. After all, who do you think holds most of the Greek paper? I bet that German banks will take a nice hit if the Greek paper becomes worthless..and then it would require a German bank bailout. So no worries, be happy!
Countries don't go bankrupt.

At the same time, the market, as it always does, will find something else to worry about. Again, I see it as a healthy way for the market to adjust to new risks and avoid complacency we saw before the meltdown of 2008 started.