EU Summit Implies Massive Money Printing on the Way

 

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.

Perhaps the EU is finally realizing that a debt crisis can't be solved by issuing more debt. The proposals emanating from their recent summit in Brussels will require massive money printing instead, especially if the EU doesn't wind up issuing eurobonds.

While EU leaders didn't state that they were going to start running the printing presses at full speed, it is the only way they can produce sufficient funds to actually implement their new policy initiatives. They may not be willing to do so however. Until there is an actual big increase in money printing, there is no reason to believe that the EU will implement any of the proposed fixes for its financial problems.

All the ideas that came out of the summit have been bandied about before. Some, such as direct recapitalization of banks (described as a "breakthrough"), had already been announced before (perhaps it should have been called a re-breakthrough). This was done in response to the EU's disastrous bailout of Spanish banks that went through the Spanish government causing significant downgrades to its credit rating and thereby raising its borrowing cost significantly. A joint banking supervisory board is now going to be added though. This seems sort of late in the game, considering the teetering insolvency of many EU banks.

As a summit attendee stated, lending money directly to banks means the loans won't have to be put on a government's books. He should have followed up with, "at least not immediately". The way Ireland got into serious trouble and required its first EU bailout was that its banking system failed and the debt had to be assumed by the government. The IMF now says it will need another major bailout soon. As long as the EU is willing to commit unlimited bank bailout funding this will not happen in other EU countries.

One new approach that did come out of the summit was a relaxation of conditions for receiving bailouts. This was not described as applying to all bailouts however. Only countries that are "well-behaving" will not have stringent conditions applied to them when they ask for a handout. This of course begs the question of why a "well-behaving" country would need a bailout in the first place. While this is an attempt to treat Spain and Italy better than Greece, Portugal and Ireland, it will not work in practice. All the previous bailout countries will demand that they be allowed to spend more money and run bigger budget deficits. Since they can't raise funds in the bond market, the EU will have to increase the amount of their bailouts. This will require a continual stream of additional payments from the EU. Where will the money come from?

The short answer is sharing debt through jointly issued Eurobonds. Not that this can happen in the near future. First a report on its feasibility will be issued in October. Then all the EU countries will have to agree to it. Whether Germany will be willing to do so remains to be seen (Angela Merkel supposedly said that this would take place over her dead body). Even if this eventually happens, and 2013 would be the earliest that it would, can bonds that mix subprime borrowers and prime borrowers be successful?  The history of this is not encouraging. This is what created the housing bubble and led to a massive financial system collapse in 2008. The issuing of eurobonds means the entire EU could default as a single entity as opposed to just the weaker members. That doesn't exactly sound like an improvement over the current state of affairs.

One interesting note from the summit was the declaration from Italian premier Mario Monti that Italy did not intend to apply for a bailout. Greek and Spanish leaders said the same thing just before their countries applied for a bailout. As the French say, "the more things change, the more they remain the same". Perhaps the EU should adopt this as their new motto. At least it sounds better than "bailouts are us".

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Europe Wrap Up Going Into the Greek Elections

 

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.

As Greeks go to the polls in a pivotal election, trouble is escalating all over the EU.
Spain is rapidly becoming the new trouble spot, with Italy not far behind. Ireland's debt problems have resurfaced and tiny Cyprus needs a bailout. Markets are confident though that the same people who have failed to solve the problem so far with their various money-printing schemes will now be successful solving it with new spinning straw into gold approaches.

Interest rates in Spain and Italy continue to climb and in the case of Spain remain at destabilizing levels. The 10-year bond has gone over 7% in Spain and 6% in Italy. When rates stay above 6%, it creates the danger of a downward financial spiral because of the heavy debt burden of the countries involved. Things would be no different in the United States.

Spain has suffered a number of credit downgrades recently. This week, Egan-Jones downgraded Spain's sovereign debt to CCC+,  a rating lower than Uganda's. Moody's cut Spain to Baa3, one notch above junk. Fitch had previously cut its rating for Spain to two notches above investment grade. Moody's further warned that it could cut Spain's rating to junk within three months. The downgrades are a direct result of the ECB bank rescue plan. Technically, this is structured as a loan to the Spanish government, so it increased the country's indebtedness significantly. A lower credit rating of course means higher borrowing costs. So the EU's plan to rescue Spain's banking system has wound up damaging the ability of the Spanish government to fund itself. Genius, pure genius.

A recently released IMF report was fairly hopeful about Spain's prospects however. It cited Ireland as a bigger worry. The IMF is urging the EU to help Ireland refinance its bank debt and consider taking equity stakes in Irish banks. Otherwise, it thinks Ireland will need a second bailout. While the average person might consider option one to be a bailout as well, the IMF obviously has a very narrow operational view of the word bailout.

The Spanish bank bailout itself has become an issue in the Greek elections. The leader of Syriza has pointed out that it came with no harsh conditions, but Greece is suffering terribly because of the austerity imposed on it. If Syriza wins on Sunday, it should thank the EU leadership for handing it the election. What is actually going on in the voters' minds is hard to discern. Polls cannot be published in Greece within two weeks of an election. There have been independent polls leaked to the press outside the country that show either anti-bailout Syriza or pro-bailout New Democracy ahead. There seems to be a steady stream of propaganda as well indicating how much the Greek people love the euro.

The G20 meets on Monday in Mexico and one of the major items on the agenda will be how much additional money should be printed now. The markets rallied strongly much of the week on just such "hopes". Not that this has stopped the crisis from continually getting worse so far and there is no reason to believe that it will. Apparently, while money may die, fantasy never does.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Spain Bank Rescue — Bailout Déjà Vu

 

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.

After weeks of Spanish officials denying that Spain needed a bailout, eurozone finance ministers agreed on Saturday to up to $125 billion rescue of Spanish banks. Spain is now the fourth member of the EU to seek assistance since Europe's debt crisis began in late 2009.

The precise amount of the bailout won't be determined until June 21st when two consultants finish their assessment of the capital needs of Spanish banks. The IMF is not involved in providing funds (at least not yet), but will help monitor Spanish banks. The rescue money will be funneled into Spain's "Fund for Orderly Bank Restructuring". Aid will supposedly be directed at the 30% of banks with the greatest exposure to property loans. Bankia, which was recently nationalized, would certainly be at the top of this list. After claiming to be profitable, it had to admit to massive losses.  If Bankia was lying about its numbers, what about other Spanish banks?

Apparently, there are few strings attached to this initial bailout. There are no plans to restructure the Spanish economy to make it functional, nor even to stop Spanish banks from lending to builders of empty houses that no one ever buys or lives in (there is already a huge glut of empty houses in the country left over from the building boom in the mid-2000s, but this hasn't stopped the building of more). With the unemployment rate approaching 25% and a large percentage of Spanish homeowners underwater in their mortgages, neither an easy, nor swift solution to Spain's banking mess is possible.

EU and world leaders praised the latest of their bailouts to the sky. The "everything is great and we've solved the problem" litany should sound familiar. After all, the same thing was heard before, during and after the first Greek bailout, the second Greek bailout, and the various schemes to write
down Greece's debt. Even prior to the first Greek bailout, EU officials stated in March 2010, "We recognize that the Greek authorities have taken ambitious and decisive action which should allow Greece to regain the full confidence of the markets. The consolidation measures taken by Greece are an important contribution to enhancing fiscal sustainability and market confidence". It was all downhill from there. Now, they are optimistic about Spain.

Spanish officials, the ones that claimed over and over again that there was no need for a bailout, are just as optimistic. The Spanish Economy Minister claimed that the requested funds would amply cover any need. He continued by insisting that "this has nothing to do with a rescue". It seems that reality perception needs a bailout in Spain as well.

As usual, the EU has done nothing to solve its escalating monetary crisis except to throw money at it. All the problems that led to the crisis are still there and will continue to drain money from the financial system so one bailout after another will be needed. Greece, Portugal and Ireland all got additional funds after their first bailouts. Spain will need another rescue as well. Italy will be next in line. Lessons from the Greek bailout indicate that at first the stock market is euphoric and then when reality sets in later on, there is a big selloff.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Expect Market Volatility Because of Europe

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.

This week was a good one for stocks. The Dow was up almost 300 points on Wednesday and markets in Europe had powerful rallies as well. The action was technical in nature, being an oversold bounce. The problems in Europe that have been weighing on the market haven't gone away and more selling will follow.

The major indices in the U.S. — the Dow Industrials, the S&P 500, the Nasdaq and the Russell 2000 — all hit and even fell below their 200-day moving averages on Monday after many days of selling. A bounce from this level should be expected. It is a common place traders view as a support level where they should start buying. After such a bounce, they usually start selling when prices get near the 50-day moving average.

Problems in Europe haven't gone away. There is still an emerging credit crisis taking place there and it is only a matter of time before it boils over into global markets. Greece has its next election on June 17th and the anti-bailout parties are likely to gain further strength. Unemployment is 21.9% there and the GDP shrank 6.5% in the first quarter after falling 7.5% last year. Greece is in its fifth year of recession and there is no respite in sight. If it leaves the euro, it would be a major blow to German and French banks and the stability of the entire eurozone.

Spain is now potentially an even bigger problem. Its unemployment rate is 24.4% and its banking system is in serious trouble. Bankia, which was formed in 2010 by the merger of seven regional banks, claimed it had a 300 million euro profit in 2011, but it turned out that it actually had a 3 billion euro loss. Now the results of other Spanish banks are being questioned. Money is leaving Spain and on Tuesday the Treasury Minister stated that "at current rates, financial markets are off limits to Spain". The 10-year bond auction went well on the 7th however with Spain paying a yield of 6.06% (rates were as high as 6.65% in late May). It is quite obvious that the ECB was behind the buying in one way or the other. The IMF has said that Spanish banks need an immediate cash injection of $50 billion.

Some bailout of Spanish banks should be expected soon. While the market may rally on this news, don't assume that it will keep things stable for too long. Spain, which had the worst real estate bubble in the world,  is still building empty houses and the debt for these non-productive assets is still piling up in its banks. Like Greece, Spain needs to restructure its economy. Bailouts will only work if this is done and so far there hasn't been any movement in this direction. Consequently, investors should expect the markets will start to increasingly trade like they did during the last Credit Crisis in 2008.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

U.S. Employment — The Spring of Discontent

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.

According to the BLS, the U.S. economy created only 69,000 jobs in May 2012. The previous two months were revised down, March from 154,000 to 143,000, and the April from 115,000 to 77,000. Although the U.S. economy is not creating enough jobs for new entrants into the labor force, the BLS claimed the unemployment rate was only 8.2%.

Early in the year, the mainstream media was filled with reports of the recovering job market and a U.S. economy on the upswing. The average reported monthly job gain was 226,000 a month in the first quarter — a healthy amount if it were true. There was more than enough reason to believe it was not true however. The jobs numbers are seasonally adjusted and the winter was unusually warm meaning the usual large layoffs in industries like construction didn't take place. Nevertheless, the BLS adjusted its figures as if they had.

If the better figures in the winter were created by seasonal adjustments and not a better economy, then the spring figures should consequently be weak. This is exactly what has happened. The telltale sign can be found in the May Construction employment number — down by 28,000 last month when it should have been strong.

Almost all the job gains came from only two sources last month, Health Care and Social Services (33,000)  and Transportation and Warehousing (36,000). Health Care is the only category that consistently added jobs during the Great Recession. If the BLS numbers are projected out to the distant future, almost every American in the labor force will eventually be employed in this field.

As usual, comparisons with five years ago indicate that the U.S. economy is still in serious trouble. There were almost 3.7 million less people employed last month than in May 2007. At the same time, the over-16 noninstitutional population has increased by nearly 11.5 million or around 192,000 per month. Yet, the BLS claims that the U.S. labor force has grown by a little over 2.2 million or approximately 37,000 a month. There is a major disconnect between those numbers and it indicates that a lot more Americans are unemployed than the BLS headline number indicates.


Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.