Sunday, February 7, 2010

The Story of the Three, no Four Little PIGS

As children we heard the story of the three little pigs and the big bad wolf. The wolf came after the pigs who knew they needed protection from him. The first pig built his house out of straw and the second built his home out of sticks. The wolf came and huffed and puffed and blew both of their houses down. The third pig built his house out of bricks and no matter how hard the wolf huffed and puffed he couldn’t blow the house down.

Recently Wall Street, who likes acronyms almost as much as Washington, came up with a new one; PIGS. The letters in the acronym stand for the countries of Portugal, Ireland, Greece and Spain. Some of you may have heard of the BRIC countries; Brazil, Russia, India and China referred to as major economic and investment opportunity countries while the PIGS are places to avoid financially. I find a great irony that during a time when the world is concerned about H1N1, the Swine Flu, we are also worried about the PIGS countries.

In our little story of the Four Little PIGS, who plays the part of the Big Bad Wolf? Perhaps the Big Bad Wolf is the enormous amount of debt the world has taken on to prevent another global depression. A very short time ago, early December 09 in fact, everybody was talking about the weakness of the dollar and the strength of the euro. At the time the exchange rate of dollars to euros was 1.512. The world was in recovery and the talk was to replace the US Dollar as the global reserve currency. During that time I wrote a Blog opining that when the world gets in trouble there is only one place that people want to have their money and that is the US Dollar.

One of the PIGS, Greece, had a problem paying its bills and the S&P threatened to downgrade the credit quality rating of its debt. The result was a huge reversal in the dollar against the euro. S&P started to look at the rest of he PIGS as well as the UK and the US and said that unless these countries got their debt under control S&P might have to downgrade all of these countries.

Now we find the euro at 1.3651 and only seven tenths of a cent to break a major support level for the euro. The stock markets around the world have seen a significant sell off including all the BRIC countries. We are at a critical juncture of deciding to stop the expansion of debt and we must ask ourselves do we want to take the wind out of the Big Bad Wolf? Then all the BRICs in the world can’t stop the most significant economic downturn since the Great Depression. My guess is that the world will turn only if the United States starts taking the wind out of the Wolf by becoming more responsible about managing its debt.

Dan Perkins

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