Sovereign Debt

In the past, it was simply unthinkable for a large country to default on its debt, or to lose its AAA rating. So far, there have been many downgrades: Italy to Aa2, Greece to A1, Iceland to Baa1, Belgium to Aa1, Portugal to Aa2, entirely too many to mention in Eastern Europe, among many many others.

What's worse, however, is that Moody’s issued a new measure to differentiate among the AAA-rated government debt, dividing them into 3 categories: resilient, resistant and vulnerable. This has occurred as bailouts worldwide stretch the balance sheets of foreign governments, just as they have stretched the balance sheet here at home.

It inevitably makes one wonder what isn't at risk. Do we have to ask ourselves if a major trading partner, due to misguided bets by investment banks and the like, are no longer investment-grade? It's no surprise that gold has a persistent bid and acts more like a currency than a commodity. I tend to like oil a bit better myself, as I understand the economic need for it (if and when the global economy turns around). So far, however, oil has suffered from a short-term supply glut as a result of the global Depression.

Other Potential Casualties

In an effort to keep this piece reasonable in length, I cannot possibly detail all the areas which concern me. But make no mistake: The losses listed below may be just as large as those discussed above.

Insurance Companies: We saw the surfeit of risky paper in this industry with the bailout of AIG (AIG). While that came from a counterparty-risk perspective, I have also reviewed the investment portfolios of Hartford (HIG), Prudential (PRU) and Metropolitan (MET). All I can say is: They own a lot of garbage, and this concerns me.

Auto Manufacturers: This area, to me, is not a question of if, but when, they'll fall into bankruptcy. Think of the ripple effects on mortgages and delinquencies - my guess is that it will happen soon.

Money Market Funds: This area may be of greatest concern to me. Though these funds are regarded as safe, many have had to be boosted up -- State Street (STT), SunTrust (STI), and Legg Mason (LM), for example -- while others have “broken the buck." Still more have a sort of gate around them, whereby withdrawals are forbidden.

Municipal Bonds - California comes to mind, since they declared themselves in a “state of financial emergency." Other states and municipalities concern me as their investment portfolios are littered with much of the same esoteric garbage as hedge funds.

Junk Bonds - we're already beginning to see defaults, but I fear this is just the beginning. The market is supposedly discounting a 15-17% default rate which would be unprecedented. My guess is this assumption is too low as well as for most, the financing window is closed (yes, I know a handful of deals have gotten done of late as yield-starved investors buy whatever has yield).

Credit Card Debt - Delinquency rates have only one way to go in my book and that's up. And all of the asset backed securities tied to these receivables are at risk as well.

HELOC’s (Home Equity LOC) - same here, more problems ahead.

I'm sure that there are many other problems that exist that I've forgotten to mention, but I wanted to touch on what I feel this means for the markets (Treasuries, equities and credit) before I close.