Thursday, September 30, 2010

Eurozone Fiscal Problems Turn Violent

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Mass protests against austerity erupted througout the eurozone this week and in some cases turned violent.  Spain had its credit rating downgraded. Some yield spreads on peripheral countries bonds are reaching crisis levels again. Somehow though, the euro managed to rise on all of this negative news.

The left-wing union sponsored protests took place in Spain, Ireland, Greece, Portugal, Slovenia, and Brussels, where an estimated 100,000 people marched on EU headquarters. Spain had its first nationwide strike in eight years and rioters clashed with police who fired rubber bullets into the crowd. Most flights into and out of the country were canceled. Greece already had slowdowns during the past two weeks, but this time the Athens metro was shut down and doctors went on strike. Supermarkets are seeing food shortages there. The Irish parliament was blocked by protesters as a symbolic gesture of closing down the government.

Spain had its credit rating downgraded by Moody's from triple A to Aa1. All the other major rating agencies had already previously downgraded Spanish debt. In Ireland, the government announced that the bailout of the Anglo Irish bank could push the Irish debt to GDP ratio to 32%. EU guidelines call for this number to be 3% or below. Ireland says it will go to the bond market to raise the money. The yield spread between Irish and German government bonds rose sharply on Monday, hitting a record high. Irish and Portuguese yield spreads had already hit record highs on September 7th, when Greek yield spreads were the largest in four months.

Currency markets reacted to the financial chaos and political instability of the eurozone by bidding up the euro and selling down the safe haven U.S. dollar. This sounds totally and completely absurd because it is. No trader in their right mind would buy a currency with the problems of the eurozone. It is more than reasonable to assume the currency purchases came from the government run Euro-TARP bailout fund. While the eurozone member states are telling their respective populations that they are taking away the free lunch they have been serving all these years, they are making it clear that they are still willing to provide a free lunch to the currency markets. Of course, one day the bill for that 'free lunch' will arrive too and when it does the currency markets will turn violent and ugly as well.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

There is no intention to endorse the purchase or sale of any security.


UK investment said...

Really useful blog.Good work keeping this updated! Thanks a lot!

FRF.Assoc said...

I second UK investment's sentiment. Great article.

Clear, lucid, and insightful. So much in the markets and the economy is being manipulated now, that the logic of fundamental analysis is no longer working.

I notice that the same logic is out of whack in the U.S. as well. Hedge fund heavy weight David Tepper and another top money manager speaking on Fox, I can't recall his name at the moment, both were saying the same thing - everything is already priced into the market. They seem to believe that, somehow, the economy is getting ready to take off, either on it's own, or from QE2.

The market can rise on QE2, undoubtedly, and the FED can manufacture another artificial GDP number, and everyone that is employed in the financial sector, can believe that the market is going to follow the same script that it's followed for the last three decades, without ever looking at why those economic expansions occurred and whether the resulting bubbles were going to lead to long term "healthy" sustainable growth, or just another bubble. I don't think that most of those who have benefitted from the last two bubbles really give a macaroon whether the economy is healthy, or it just another bubble and it's off to the races again. Why should they? The FED, the regulators and the government as given them a put in the form of "too big to fail" anyway.

If you look at the conditions that fueled the last two bubbles, which the "ruling" economists seem to mistake for real, healthy, economic growth, they are ever-worsening conditions for the consumer that's powering the economy in its present form.

Real wages haven't increased during the last 3 decades, but, instead, women have entered the work force, increasing family incomes, if they were not single parents, and staying off welfare, barely sometimes, if they were.

Consumers stopped saving, spent their savings and went ever deeper into debt, often because of excessively low interest rates, buying more house than they could afford, only to find themselves upside down later.

Jobs were lost to offshoring and illegal immigration, and the quality of the jobs that remained were much lower.

Cheap goods flooded the U.S. increasing the national debt from the increasing trade deficit. Although these lower priced goods did help keep the inflation down, the debt incurred negated any real benefit.

From the people that I know that are out of work, that have children and are one step away from being homeless, I find it hard to believe that the above factors produced a "healthy" economy, one with improved wages and working conditons for the consumer. The same consumer that Wall Street is counting on to start spending again as soon as they can "deleverage, and rebuild their balance sheets".

The problems are structural and the solutions will have to be structural as well.

But just as in the Great Depression, those who have benefitted the most from the excesses of the last two bubbles aren't likely to face the real challenge of rebuilding a healthy economy as long as they believe that they can "stimulate" economic activity to their own benefit.

It will likely take a drop to all the way to the bottom, capitulation, and possibly a currency devaluation before they wake up to the fact that the answer lies in "recapitalizing", and re-establishing the middle class, which is the driving force in any healthy economy, instead of focusing the very banks that caused the liquidity collapse.

Apostille New York said...

Great article

Com Press Release said...

Not Bad.