by Bill Bonner

Whammo!

Is our 'Crash Alert' flag still flying? It is? Great.

The Dow got whacked hard last week. It was down a few hundred points. And then, somehow, the computer programs triggered the sell signal from hell. It lost another 500 points in just a few minutes.

Then, the computers must have reconsidered. They went into buy mode.

All very strange...

Was it just a mistake? Something weird? Was it a genuine panic...and a phony bounce? Or a phony panic and a genuine bounce? The story last night was that the sell-off was a mistake...that someone hit the wrong button and added a zero. We don't believe it. Traders must add zeros by mistake all the time. This is the first time it triggered a 998-point drop. As for the recovery, it's suspicious too...maybe some kind of automatic reaction - perhaps from 'buy the dip' program trading, maybe from the mysterious "plunge protection" machinery of the US government.

We don't know. But what this tells us is what we've been telling you: this is a dangerous market. It is no place for widows, orphans, nuns, priests, republicans, democrats, window-washers, bungee jumpers...

..it's a good market for gamblers. And if you were long the VIX yesterday, you made a killing.

Everyone else got killed.

But it was fun for us. You see, you start out life full of expectations and confidence. Then, you become more cautious. Then, you become more realistic. And then, you become discouraged and hopeless. Finally, after you've given up all hope of ever making the world a better place, you become amused by it; you realize that there's no reason to change it. It's funny enough the way it is.

That's the way we felt yesterday, watching the market go wild in the afternoon.

"Hey, Dad...you seem to be enjoying this," said Jules. "But you must be losing money along with everyone else."

"Maybe...but it's worth it."

We don't own US stocks. But we have some from emerging market shares. They went down with everything else. And we wouldn't be surprised if they went down a lot more.

Why?

..Because China is going to blow up. It's on a 'treadmill to hell,' says short-seller Jim Chanos.

..Because the US economy is not really recovering. The latest numbers show retail spending sinking again. Bankruptcies are rising. Housing and unemployment remain in the dumps...

..Because the US stock market has been in a decline - in real terms - since January 2000. This move to the downside won't really end until stocks are cheap again.

..Because there's more bad new coming from Europe too...keep reading...

Money Morning Presents

Say You Want a Revolution?

"People of Europe: Rise Up," says their banner.

Greek communists are usually a reliable bastion of error and darkness. Their ideas are appalling. Their proposals are absurd. The only thing they are not wrong about is their opinion of the ruling classes - whom they regard as morons.

But this time it's different. Leftist mobs, now throwing missiles at policemen in Athens, have the high ground. They just need to work on their aim.

The latest dollop of financial grease was announced two weeks ago. At a cost of 110 billion euros, Europe will pretend to protect Greece from its creditors and the Hellenes will pretend to put their financial affairs in order. Instead, the Greek affair will slide into a larger crisis. As we explained last week, all of modern macro-finance can be understood as an attempt to push problems into the future and onto people who were not to blame for causing them. Now we see the formula at work in Europe.

Greeks borrowed money they couldn't reasonably expect to pay back. Foreign bankers - largely French and German - hoped to earn outsized yields by taking a risk on Greek debt. A just ruler would let them all collapse, and give them the boot on the way down. Instead, the knaves enjoyed their loot. And, under the terms of the bailout, the fools are supposed to get their money after all; it will be squeezed out of taxpayers all over Europe.

The plans of the ruling classes are not merely unjust. They are unworkable. Over the next three years, Greece will add $50 billion in deficits, stabilizing the debt at 150% of GDP. It will also need to come up with $70 billion to pay off debt that matures over the next two years. That is more than the amount offered in the bailout. Which means, Greece will have to borrow more money as early as next year, probably triggering another crisis. Plus, there are the other weak sisters and spendthrift brothers in the European family. Bailing them all out could cost as much as 1 trillion euros.

But the real problem is much deeper. It is philosophical as well as mathematical. Too much debt, like too much dying, is not a transitional state. It's a final state. And once the soul has left the body, there is no point in trying to keep the husk alive. Similarly, when a debt cannot be repaid, there's no use pretending. When you cannot keep up with the interest on a debt, it is added to the principle. The debt grows, becoming evermore unmanageable. It's better to admit the error as soon as possible and start organizing the details of your financial funeral.

At present, the Greeks owe an amount about equal to 120% of GDP. Thanks to the bailout, it is scheduled to go up. The plan on the table stops the debt growth only after it has increased by another 30% of GDP.

There is the problem right there. Today, the poor Greeks stagger. What is going to happen when they have an even heavier load? The meddlers hallucinate that they'll get up, smash a plate and dance a mazurka. They even imagine that lenders - who required as much as 18% yield on 2-year notes when Zorba was still on his feet - will ask for only a fraction of that after his back has been broken.

Let us make believe that this were possible. Say, Greece is able to borrow in the future at just 8% interest. At 150% of GDP, this puts the annual cost of interest (assuming all the debt were at 8%) at about 12% of GDP. In other words, 1 out of every 8 euros of output would have to be put to the task of paying the carrying cost of accumulated debt. Greece only collects about 5% of GDP in income tax revenues - not even half of what is needed to pay the interest. It's supposed to collect another 4% in taxes. Already, as much as 30% of the Greek economy has gone 'black' to escape taxation; imagine how crowded it gets underground when taxpayers realize that every penny they pay in income tax is used to protect foreign bankers from their foolish speculations. And imagine what happens when, instead of adding 10% to GDP by borrowing, the Greeks subtract 10% to pay back the debt.

Last week, schools, airports, hospitals and other services in Greece were shut down. A riot drew blood. Fifty-one percent of the Greeks said they will not go along with the austerity program. The others will turn against it once they see how it works. They were used to having their cake and eating it too. Now, they will neither have it nor eat it.

Rise up, ye Greeks! You have nothing to lose but the chains of debt! This is what revolutions are for.

Bill Bonner,
for Money Morning

Turning to the markets...

The JSE all share index grew a colossal 4.32% yesterday. The gold mining index slipped 2.2%. Resources rocketed 4.81%. Banks and financials shot up 5.56% and 4.7% respectively. Industrials gained a huge 3.64% and the platinum mining index rocketed 7.08%.

London's FTSE100 shot up 5.16%. The Dow Jones grew a colossal 3.9% and the Nasdaq gained a huge 4.81%.

Tokyo's Nikkei closed down 1.13%. Hong Kong's Hang Seng lost 2.04%.

Brent crude is currently trading at $79.76 per barrel.

Spot gold's trading at $1,205.99 and platinum was last quoted at $1,678.00.

And here's how the rand is performing against the major currencies:
R/$ 7.55
R/₤ 11.18
R/€ 9.59