It Is Far Too Quiet

Scanning the headlines today and looking at the results in markets leads me to one conclusion - it is much too quiet.

Let's consider some facts:

- Greece is in massive trouble, it's sovereign debt, at well over 100% of GDP, is unserviceable, and there are no restructuring fixes that can possibly work. Soon rolling over existing debt may prove impossible.

From Reuters:
Government officials, who have ruled out an outright Greek debt restructuring, said Greece is looking for a new extension of maturities of its bailout loans as well as a lower interest rate. They also want the European rescue fund (EFSF) to buy Greek bonds.

Tuesday's auction, needed to roll over about a billion in expiring T-bills, comes a day after Standard & Poors cut Greece's rating further into junk territory. It is expected to cost Greece more than the 4.80 percent interest it paid last time and to be covered mainly by local investors.

- German banks hold massive amounts of Greek, Portuguese, Irish, and Spanish debt. In total, something north of 300 Billion Euros. For some perspective consider that Germany's last budget deficit was about 100 Billion Euros.

- Germany "is" the Euro. If the German economy does well and exports remain strong, the Euro does well. If the German economy were to falter, due to a huge bailout of the over-levered German banking sector, the Euro would not fare well. The US dollar should fare well should the Euro tank over sovereign debt fallout in Europe. This will be bearish for most commodities.

- Deleveraging is showing up in the commodities (and hence the derivatives) market. Note that the CME has hiked silver and crude oil margins requirements in the past two weeks. While this initially resulted in a sizable drop in silver prices, silver is steadily recovering as stocks for physical delivery are tight.

- The S&P is having quite some difficultly overcoming the 78.6% Fibo level. I suspect that this level will hold.

Something has to give soon. I have no timeline on this, only a suspicion, that the August-September season could produce the next big downturn. By then the bond market should have a better understanding of the depth of the sovereign debt crisis in Europe as one country after another requests a bailout.