Correlation

History has shown us that when investors get scared they think in a "risk on" / "risk off" mentality - regardless of the asset class.  These knee-jerk reactions cause an unprecedented amount of correlation in the market.  The following chart does a nice job of showing how fear contributes to the overall correlation of stocks in the S&P 500 dating back to 1986.

More recently, you can see peaks in correlation around the Great Recession, fear of a double dip recession, uncertainty surrounding the Eurozone's debt calamity, and the possibility of global contagion.

Source:

www.ritholtz.com

Who actually owns the most US debt?

It has become a common occurrence to hear that the Chinese are the biggest holders of US debt... but that is simply not true. In fact, there are many different pieces of the pie, and China accounts for 9.5%. While this is nearly 1 out of every 10 dollars of US debt, it does not constitute a majority by any means.

American individuals, institutions, and Social Security are by far the biggest owners of US debt, accounting for approximately 60% of our Government's debt.

This chart from Political Calculations is a great depiction of the scenario:


              Political Calculations

TED Spread

The TED Spread is a common reference for determining the amount of stress banks are having raising short-term cash. Specifically, it is the difference between three-month Eurodollar contracts (represented by LIBOR) and three-month Treasury Bill yields.

Historically, it has been a good indicator of perceived credit risk in the overall economy because T-Bills are generally thought to be risk-free offerings and LIBOR measures the credit risk of lending to commercial banks. The difference is a premium for taking on additional risk.

Currently, the TED Spread sits at a new 52 week high of 56.82. Banks aren't lending to each other for a reason: they don't like the odds of repayment.

This can have serious consequences for a global economy trying to emerge from stagnation, and an even bigger impact for those countries trying to avoid a recession.


TED Spread Chart via Bloomberg:
Dec. 14, 2011


Sources:
Bloomberg.com
Bankrate.com

European Fear Factor

Debt problems in Europe have overwhelmed the news recently. Specifically, the rest of the world is very concerned that Portugal, Ireland, Italy, Greece and Spain will not be able to pay back their current debts. As a result, no one will lend them new money unless they are handsomely rewarded for taking on increased risk. That being the case, new bond auctions from these countries have had to offer bonds with very high yields in order to entice lenders. This graph from Bloomberg is a nice illustration of that point:

 

With Greece being at the forefront of this mess, this graph from Reuters demonstrates which countries stand to lose the most if Greece defaults on their obligations. One thing is clear, a Greek default would resonate throughout Europe and the rest of the world.

Sources: 

Bloomberg

Reuters

Trouble in the Euro-zone

This is a great illustration from Mint showing Euro-zone public debt as a percentage of GDP. You can easily see why the PIIGS are in trouble.