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.

Remerging EU Debt Crisis in Spain Will Damage Stocks

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.

The yield on Spanish 10-year government debt was as high as 6.16% on Monday. Credit default swaps on Spanish debt hit a record even though the peak yield on the 10-year was 6.70% on November 25, 2011. After a big selloff on Friday, stocks were rallying on Monday despite the new emerging crisis in Europe.

The 6% yield level is watched closely because when rates went over that level in Greece, the Greek debt crisis emerged. Spanish 10-year yields were over 6% three times last year. Prior to last November they reached 6.32% on July 8, 2011 and 6.28% on August 4, 2011. The ECB (European Central Bank) has intervened directly in bond markets under its Securities Market Program (SMP) to hold down interest rates in the peripheral countries. At least one Spanish official has called for a renewal of these efforts.

The ECB also established the European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM). Massive money-pumping operations have also been conducted through the two LTROs (Long-Term Refinancing Operations), one for $645 billion and a second for $713 billion.  The massive liquidity coming out of Europe has led to the recent global market rally. This will be just one of its unintended consequences. Later on we will be experiencing a large uptick in consumer price inflation as another.

While the inflation caused by the ECB is likely to last, the lower interest rates aren't. Spain has now broken above the 6% line in the sand four times. Portugal has never even gotten down to that level. Its 10-year governments were yielding 12.7% on Monday. So far they have peaked at 17.4% on January 30th. Italian 10-year governments have also yielded over 7% last November and this January, but were driven back down to below 5%. They are now rising rapidly again and heading toward 6%.

European stock markets were damaged significantly on Friday and the U.S. markets to a lesser degree. Despite the ongoing bad news markets across the pond were rallying today. And why shouldn't they. Another bailout (and another bailout and another bailout and another bailout and even another bailout) is expected. So far, even with the massive amounts of printed money thrown at the bond markets in the peripheral countries, the debt problems keep emerging . And now the global stock market rally looks like it is beginning to fray around the edges.


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.

More Numbers that Just Don't Add Up

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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More U.S. government statistics were out today. Income is up, spending is up and savings are up - all in the midst of the worse recession since the 1930s. It must be something in the water that makes this possible. Actually, it's more likely something is up in the little known government office for the adjustment of statistics to make them look better. There was a significant rally in the markets yesterday and it also had a peculiar look to it.

The mystery of rising incomes in the midst of a severe recession is explained by one-time stimulus checks mailed out last month by the federal government. Because of these income was up 1.4% on the month. But even without them the government claims incomes was up 0.2% for the month. Yes, unemployment is soaring, workers hours are being cut, business is declining and yet people are making more money. If this is what happens in recession, think of how well America could do if there was a depression! Real disposable income (income after taxes and inflation) is supposed to have been up 1.6% last month as well. Americans aren't spending all this new found loot however, spending was only up 0.3%. The savings rate climbed to 6.9%. As recently as April 2008 it was zero. Increased savings are a sign of lack of confidence in the economy. Why, I can't imagine. Clearly as the U.S. economy gets worse, people make more money.

The Commerce Department also released the PCE deflator today. This is the number to used as the inflation rate when they calculate the GDP. The lower the number the higher the GDP figure. The core PCE came in at 0.1% for the year. So there is NO inflation (I really have to find out where these people shop). Bonds rallied on this great news and the yield on the 10-year fell to 3.51%. If it drops down to the 3.00 level its probably a great shorting opportunity.

All asset classes seemed to have rallied yesterday, which is unusual. Even more unusual the Dow, Nasdaq and SP500 all went up the same percentage. I am not sure that I have ever seen this happen before, although it must have. Volume on the Nasdaq was slightly below average. Volume on the Dow was anemic. The Dow reclaimed its 50-day average, but stopped at the 200-day. It is trading between the two today.

NEXT: Watch the Dollar Itself and Not Media Coverage

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Monthly Employment Report and the Market's Reaction

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The monthly Employment Report was released this morning and according to the U.S. government payrolls dropped by 345,000. While this number would have been considered highly negative before the recession began, it was the lowest since last September and this was the fourth decrease in as many months. While job losses were less than expected, the headline unemployment rate came in above expectations at 9.4%. It was up from 8.9% last month. A more realistic number, which takes into account discouraged workers, indicates that the unemployment rate was actually 16.4%.

While you should look at U.S. government employment statistics with a jaundiced eye, the current report does seem to indicate that a sea change has taken place. For the first time since the Credit Crisis began, job losses for the previous two months were revised downward instead of upward. The March numbers originally came in at 699,000, but are now 652,000 and April was 539,000 and is now 504,000. It looks like job losses peaked in January at 741,000. This was the most since 1949. This was also the first report in a long time where government jobs didn't supposedly increase. According to the report, education, health care, and leisure and hospitality added jobs in May.

U.S. stock futures immediately went up after the report was released and bonds fell with interest rates on the 10-year rising 18 basis points (a basis point is a hundredth of a percent). Oil shot above 70, getting at least as high as 70.32, but then lost its gains (70 is an important resistance point). The U.S. dollar went down and so did gold and silver (they should have moved in opposite directions).

At this point it looks like the worse declines of the recession, already the longest in post war history, are over. This doesn't mean that the recession is over, just that things are getting worse at a slower rate. When the jobs numbers start to actually show increases in employment month after month, that is how you will know the recession has finally ended - and that looks like it is still many months away.

NEXT: The U.S. Dollar, Gold, and Oil

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.