Central Banks Sucker the Market

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.

Three major central banks met on August 1st and 2nd and none of them took any decisive action. Markets in the U.S. and Europe have been rallying since late June on expected policy easing they've been promised by reports in the mainstream media. So far, empty talk is all the central banks have delivered.

Traders had high expectations for the Fed's monthly meeting on July 31st and August 1st. A week previously, news hit the wires (only a few moments before Apple's disastrous earnings were announced) that the Fed was definitely going to do some easing at this week's meeting. The source was the Wall Street Journal and they followed up with a front page article the next day. And what did the Fed do?  Nothing, zilch, nada. So much for the Wall Street Journal being a reliable source of investing information.

For the previous meeting in June, Goldman Sachs claimed the Fed was going to be doing quantitative easing (or maybe some other form of easing, but you would have to have read the entire coverage to find that out). What happened when QE wasn't forthcoming? The market hypsters came out of the woodwork with assurances that QE3 would be announced at the July/August meeting. Now that that hasn't happened either, we are hearing "just wait until September". You might as well wait for Godot. The only way the Fed will be doing QE before the election is if the financial crisis in the Europe gets out of hand. This will not stimulate the economy, but prevent a total collapse of the stock market (not a drop, but a total collapse).

The Bank of England and the ECB also met today. No rate changes from either of them (unlike the U.S. and Japan both have rates slightly above zero and they could lower them). The Bank of England is already doing QE2 and has been doing so since the fall of 2011. The UK is in a recession and QE has not stopped its economic decline.

Mario Draghi, the ECB chair and one of the biggest windbags to ever run a central bank, held a press conference after his meeting. He said that the ECB would undertake "outright" open market operations and would be using non-standard policy measures. Bonds rallied on the news. Unfortunately, only minutes later, Draghi was forced to backtrack on his boisterous pronouncements. He admitted that he was only providing "guidance" of what was going to occur in the future and details wouldn't be available for weeks. Draghi continued that even if the ECB was ready to act now, it would not have the grounds to do so. Someone should give that man a bagpipe.

How long the markets will continue to fall for promises of stimulus that never comes remains to be seen. Whatever happens, there is no reason be confident that things will be getting better. If the Fed could fix the U.S. economy, it would already have done so. If the ECB could solve Europe's debt crisis, it also would have already done so. Doing more of the same is not going to work, so it's not worth waiting for cental bank action as is. Eventually, the markets will figure this out.

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.

The EU May Have Reached Its Bailout Limit

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.

Today, yields on Spanish 10-year sovereigns tested their yearly high yield of 7.28%, while Italian rates reached 6.16%. This was after funds for the Spanish bank bailout were approved by the EU, although the money won't be going directly to the banks. Earlier in the week, the IMF admitted that  the only solution to Europe's debt woes was to run the printing presses at full speed.

The situation in Spain is ugly and getting worse. Unemployment is almost 25% there and the country is in a recession. The Spanish economy is dependent on public spending and building empty houses that no one buys. The government has recently announced severe spending cuts and higher taxes, both of which will lower future growth. Yet, until today Spain was forecasting GDP growth of 0.2% for next year. It now thinks that GDP will decline by 0.5% in 2013. This is not just an optimistic scenario; it's a Harry Potter fantasy scenario. As is the case with Greece, Spanish economic and financial numbers cannot be trusted. Greece in the early stages of its bailout also produced optimistic projections of how easily and quickly everything would be fixed. Instead, its financial problems escalated out of control.  The same outcome should be expected in Spain.

Bailed-out Bankia is a good example of the how reliable the books are for Spanish banks. Bankia claimed to have earned a €300 million in profits in 2011, but in late May revised that to a €3 billion loss. Now Spain is in line for a €100 billion bailout from the EU, although it has claimed that it needs less. Based on how Bankia did its accounting, Spanish banks are likely to need more, maybe ten times more than that amount. This does not include money for bailing out the bankrupt Spanish government.  

Originally, the EU planned on providing the bank bailout money (structured as a long-term loan) directly  to Spain, who would in turn distribute it internally. When this caused Spain's sovereign debt rating to be downgraded, creating greater fiscal problems for the struggling government, the EU then decided to route the loan directly to the banks. Yesterday, the German parliament refused to go along. They were only willing to approve a loan directly to the Spain itself. It wasn't easy to get even that passed. Twenty-two members of Angela Merkel's coalition voted against it. The leader of the Free-Democrats described the bailout as "a bottomless pit". It doesn't look like German legislators have an appetite for any further bailouts and this is bad news for Spain and Italy as well.  

The IMF has an idea of what to do instead, but its solution could hardly be described as constructive. In a report issued on Wednesday, the organization essentially advised the EU to engage in every type of money printing possible, do a lot of it, and to start doing it immediately. The ECB has already expanded its balance sheet by more than the U.S. has and it hasn't solved the EU's problems so far. Massive money printing as suggested by the IMF would debase the euro significantly. So, in order to save the currency union, the currency it issues must be destroyed. Somehow, there seems to be a logic flaw in this line of reasoning (sort of like, a debt crisis can be solved by incurring more debt).

The bailout news today was disastrous for Spain and Italy. The Spanish IBEX index was down 5.79% dislocations  — a mini-crash and the worst drop in the two years. The Italian market was down 4.4%. The euro hit a new yearly low. The ETF FXE traded down to 120.78. This is below its bottom during the Credit Crisis, but still above the 2010 low made when the debt crisis first appeared. As the situation continues to unravel, more selling should be expected.


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 Continues Its Slide Toward the Precipice

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 Finnish finance minister has said all eurozone countries are making contingency plans in case the currency union breaks up. With debt downgrades, bond market anomalies, troubled bailouts, and austerity packages with their associated riots becoming the new EU norm, their worries are obviously justified.

Last night, Moody's downgraded Italy's government bond rating two notches from A3 to Baa2. This is just above junk status. Moreover, the outlook is negative with further downgrades possible in the near future.  So what happened in the Italian government bond auction this morning?  Did buyers  demand higher interest rates to buy Italy's increasingly risky debt as basic economic principles would predict? No they didn't. Italy sold €3.5 billion of three-year bonds at an average yield of 4.65%, much less than the 5.3% it had to pay last month.  How is this possible? Apparently Italian banks couldn't resist an urge to grossly overpay for their governments newly issued debt. The ECB was most certainly backing them up behind the scenes. If this is how Italian banks do business, can we assume that they're solvent?

There is little need to pose that question for Spanish banks. Recent data indicate that they borrowed €365 billion in June from the ECB — a record amount. This compares to €325billion in May. These numbers indicate that Spanish banks have been closed out of the interbank lending market (a good indication of insolvency). The highly troubled Spanish banking sector, which has €3 trillion in debt on its books, will be receiving an immediate infusion of €30 billion in bailout funds from the EU and another €45 billion in November. This represents 2.5% of its total debt and that amount is supposed to fix the problem. The actual funds needed will be many times that. It is impossible to say exactly how much because the financial numbers for Spanish banks are not reliable.

Spain seems to be following Greece's descent into a self-reinforcing economic collapse. This week Prime Minister Rajoy announced further budget cuts of €65 billion over the next two years.  VAT was raised from 18% to 21%. Almost a quarter of the Spanish work force is unemployed, even worse than Greece's 22.5%. Spain though seems to be making a more serious effort at fiscal austerity than Greece. According to reports in the German daily Rheinische Post, the troika on its latest visit found that the Greek government failed to implement 210 of the 300 budget savings requirements it had agreed to in exchange for its bailout money.

While interest rates are pushing against unsustainable levels in Spain and Italy, they have gone to theoretically impossibly low levels in northern Europe. Negative interest rates first appeared in government debt in Denmark and the Netherlands last December. Then Germany paid negative rates on some of its short-term bonds starting in January. This week, France sold six-month Treasuries at a yield of -0.03% and two-year bonds at -0.001%. Below zero yields are a sign of severe market stress.

The euro this week has traded below 1.22 to the U.S. dollar, but is slightly higher today. Investors should watch the 1.20 level. If the euro breaks and stays below this area of support, it could drop to parity with the dollar. The major central banks would intervene to prevent this though, so the ride down wouldn't be smooth.

Stock markets reacted bullishly in late June and early July to the news of further bailouts in the EU. Most traders didn't ask where the money would come from, nor if the plans were even legally possible. They may not be. The German constitutional court will be ruling whether or not Angela Merkel's promises to participate in the ESM (European Stability Mechanism) can go forward.  Even if they rule favorably, there is little actual money committed to the ESM. More money printing (and the ECB has already done quite a bit) is the only option left to fund the various bailout schemes to save the euro. Of course, it's logically absurd that a fiat currency could be saved by producing excess amounts of it. The same is true for trying to solve a debt crisis by taking on more debt.  But hope reigns eternal in the land of euro make believe.

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.

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.

Dollar Clears Resistance as Euro Falls Below Support

 

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 the U.S. trade-weighted dollar (DXY) breaks out from a four month consolidation pattern, the euro (FXE) is falling below major support. The movements of these currencies have important implications for the rest of the market.

The dollar has been stuck trading roughly between 79 and 82 since January. There is strong chart resistance at these levels both from recent times and two decades ago. In the last couple of years, the dollar made a double top at just under 82 in late 2010 and early 2011. In the late 1980s and early 1990s the dollar made a triple bottom at three different points in this year's trading range. The dollar finally broke above 82 on May 23rd. While there is minor resistance just under 84, major resistance is from 88 to 89 — the highs during the Credit Crisis in late 2008 and early 2009 and in mid-2010 during the first phase of the Greek debt crisis. It should be assumed the dollar will get to that level again (and possibly higher). How long it takes to do so is still an open question.

As is almost always the case, the euro is moving opposite to the dollar. The euro has strong support at and just above 125. It made a double bottom at this level while the dollar was peaking during the Credit Crisis. Recently in January, it made another low at this level. There was a clear break below on May 24th. Next stop for the euro is the low around 119 established in June 2010 when the dollar was just above 88. If the euro breaks this support, it will try to head toward parity with the dollar. The powers that be will of course do everything possible to try to prevent this.

The commodity markets are heavily influenced by the dollar/euro price actions. All commodities are priced in dollars, so a rising dollar will lower commodity prices all else being equal. Oil (USO) and gold (GLD, IAU) are generally at the forefront of this price dampening. This is one reason spot gold was down 30% during the Credit Crisis, despite its safe-haven status. WTI Oil dropped almost 80% at the same time. Stocks of the commodity producers usually fall even more than the commodity itself. Multinational stocks in general are also negatively impacted by a rising dollar because their earnings are mostly made in other currencies.

Since large moves in major currencies are destabilizing, central bankers are always concerned when they happen. They will continue to do everything possible to prop up the euro, although the currency union cannot continue to exist in its current incarnation. There is a long history of governments trying to prop up weakened currencies however and while devaluations can be delayed, they can't be avoided altogether.  

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.

Market Selloff Might Pause Despite EU Debt Crisis

 

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 markets should soon find support on their current selloff, but this will only be temporary.  Europe's debt problems, which are at the epicenter of the current financial crisis, are not going to go away, they are only going to get worse until some realistic solution is found.

Stocks in Europe have been selling off for days and so have the euro and gold and silver. Only on Thursday did the U.S. markets start to drop significantly. Gold (GLD) and silver (SLV) managed to rally off deeply oversold conditions after reaching chart support around their lows from late last year. Even the euro (FXE) was trying to rally after getting close to its low from January. The major U.S. market indices are all approaching their 200-day moving averages (the Russell 2000 has already reached it). Some bounce should be expected at or just above those levels. Any upward movement should be considered to be a just a relief rally for now.

Once again the debt crisis in Europe has reared its ugly head. Greece is going to have new elections in June and an anti-bailout party is expected to win. Its credit rating was downgraded to CCC by Fitch on Thursday. An exit from the euro is now being seriously discussed in the halls of European power. At the same time, interest rates are rising in Spain and Italy to the levels where the Greek problem initially began.

Spanish 10-year government yields were as high as 6.38% this morning. The same Italian interest rates had reached just above 6.00% yesterday. Italy's rates were over 7.00% from last November to early January and Spain's were close to that level in November. The ECB then began a massive effort funded with money printing to drive them back down. It worked for a while, but as soon as the printing presses are paused, the market takes right back over.

The more serious problem is with the European banking system itself. Moody's downgraded 16 Spanish banks Thursday night and Spain had to partially nationalize Bankia last week. There was a run on Bankia Thursday and massive amounts of funds have been withdrawn from the entire Greek banking system. Contagion spreading to the major banks in the rest of the EU is a real danger. The LTRO (Long-Term Refinancing Operation) programs of the ECB have encouraged them to load up on the government debt of the failing peripheral countries. Many of the banks that did so were barely solvent as is.

More bailout programs from the central banks should be expected, but they aren't likely to work either. The real problems are with the non-functional economies. Spain is still building empty houses that no one buys and the Spanish banks are funding this activity.  Adding more debt to the problem is only going to make matters worse. Printing money to pay for that debt takes the problem to an even higher level. It all has to give at some point and it looks like the new few months will be one of crisis. 

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 Debt Problems in 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.

While stocks weakened in the U.S. on Thursday because of disappointing economic data, they were down in Europe on the resurfacing of the debt crisis issues.

The head of sovereign ratings at S&P, Moritz Kraemer, speaking at an event at the London School of Economics said that another restructuring of Greek debt is likely, with the bailout partners such as the IMF having to take a hit the next time around. Speaking at the same event, the IMF mission chief to Greece acknowledged it would take at least a decade to fix Greece's finances. His prediction may be optimistic considering the situation in Greece is volatile and its economy is in free fall. 

Greece is of course not the only problem child in the eurozone. Portugal, Ireland, Spain and Italy also need some sort of fix. The Eurozone has attempted to put together a firewall to prevent these countries from collapsing into the same debt crisis that engulfed Greece. There are now plans to extend the ceiling of the rescue aid package to 940 billion euros ($1.25 trillion). This money is used to buy up bonds from the debt-challenged countries in order to keep their interest rates down.

The funds do not solve the underlying problem however — all of these countries are living beyond their means and until they drastically cut their expenses they will require a continual stream of rescue money. German central banker, Jens Weidmann, recognized as such when he stated, “Just like the ‘Tower of Babel,’ the ‘Wall of Money’ will never reach heaven. If we continue to make it higher and higher, we will, in fact, run into more worldly constraints".

The program has been effective in the short term however. Portuguese 10-year bond yields were at 17.39% on January 30th, but were trading at 11.52% on March 29th (still too high for Portugal to remain afloat in the long term). Italian 10-year bonds had a yearly high yield of 7.46%, but traded at 5.29% today and Spanish 10-years were as high as 6.72%, but recently went for 5.47%. The eurozone's goal is to keep these rates below 6% — the level at which Greece got into trouble.

The rescue funds should run out by 2013 and more money will have to be added to the mix. Whether or not this will be the point when additional money is not forthcoming remains to be seen, but there will be such a point. The amount of assistance Ben Bernanke is willing to provide may impact the timing. As reported by Zero Hedge, the  U.S. Fed already holds some European sovereign debt. It could easily buy more. Once again, the end will be the same unless you believe that a debt crisis can be solved by taking on more debt or by printing more and more money. At least some of the more responsible authorities are beginning to admit that this isn't possible.

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.

Greece Interrupted — Bond Swap is Not the End

 

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.

Greece is set to swap its privately-held government bonds today for new ones that will represent a three-quarters loss of the original investment. The deal will allow the country to receive 130 billion euros in funds from its second bailout. Like the money from the first bailout, those funds will eventually run out however.   

The Greek bond swap is the biggest debt writedown in history. Over 85% of  private investors (essentially banks, the deal does not include bonds held by the IMF or ECB) holding 117 billion euros ($234 billion) agreed to the "voluntary" exchange. The CEO of one major European bank described the transaction as about as voluntary as a confession during the Spanish Inquisition. The loss to bondholders is twofold consisting of a reduction in face value of 53.5% and then lower interest payments stretched over a longer period of time. All in all, private bondholders are taking an approximately 74% hit (assuming of course there isn't another writedown or Greece doesn't renounce its debt completely in the future).

Credit rating agency Moody's decided to call a spade a spade and declared Greece to be in default. Moody's line of reasoning in stating the obvious is that it considers a loss greater than 70% to be a "distressed exchange" (that's putting it mildly) and is therefore indicative of a default.  The matter is not merely academic, since there is a significant amount of credit default swaps (bond insurance) outstanding on Greek debt. On Friday, a committee of the International Swaps and Derivatives Association —  the regulatory authority on credit default swaps — ruled that the Greek debt restructuring was a credit event, and this will trigger payouts. How much CDS holders will receive remains to be seen.

Commentary from the EU political leadership on the swap deal was more mixed than after the first Greek bailout (statements back then were upbeat and generally confident that the problem had been solved and Greece was on its way to recovery). French president Sarkozy stated, "Today the problem is solved. A page in the financial crisis is turning." Christine Lagarde, head of the IMF said, "The real risk of a crisis, of an acute crisis, has been, for the moment, removed." German officials were far more cautious however. The French may be correct as long as their words are taken literally. The problem is indeed solved for today. That doesn't mean it is solved for tomorrow.

It is actually highly unlikely that the situation in Greece will be turning around any time soon because of the massive reduction in its debt load from the bond swap. If Greece had a functioning economy, there would be hope. However Greece's economy is heavily dependent on government spending and in exchange for bailout money the IMF and ECB have demanded severe cuts in Greece's budget deficits. Greece is now entering its fifth year of recession, after GDP contracted by 7.5% in 2011. Investment fell by 21% last year after sliding 15% in 2010.  For Greece to continue to operate at all, continued bailout money will be needed. Greece has effectively gone from a welfare state to a state on welfare.

Not surprisingly, some analysts are sounding a note of caution. Predictions are that the financial bleeding in Greece will show up once again later this year. Problems may arise even sooner depending on when the next election takes place (now supposedly in May) and how much power the fringe parties gain. The bond market doesn't seem hopeful either. One year Greek government bond yields were last at 1143%.  Such yields represent collapse, not solvency.

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.

Behind the Market Drop and Why it Could Get Much Worse

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 a sharp rise since last October, the market looks like it is set up for one of its usual spring downturns. Without continued liquidity injections from the major central banks, it won't be able to break through the wall of resistance it's currently facing, nor will there be much support to hold it up.

As has been the case for months, trouble in Greece is currently roiling international markets. The bond swap deal reached as part of the latest bailout settlement isn't going well. With a March 8th deadline looming, Bloomberg is reporting that private investors holding around 20% of Greek government debt have so far agreed to participate. The Greek government has set a threshold of 75% for the deal to go through. While the mainstream media has consistently cheer leaded the success of every bailout deal, the market has never been convinced. Yields on one-year Greek government bonds have been on a strong upward trajectory since last summer and were over 1000% today.

The eurozone debt crisis has resulted in a great deal of liquidity being poured into the market by the Europeans. The  ECB pumped approximately half a trillion euros via LTROs (long-term refinancing operations) last fall. The rise in global stock markets can be traced from this event. At the same time, the Bank of England was on its second round of quantitative easing and examination of the U.S. Federal Reserve balance sheet shows what looks like the beginning of QE3. The monetary base in the United States was also moving straight up the chart last fall and earlier this year. No matter where you looked, liquidity was flowing into the system. Since stock markets respond immediately to extra liquidity, a powerful global rise in markets took place.

The problem with liquidity-driven markets is that if the liquidity dries up, they can wither like a plant that has been denied water. The constant supply of liquidity always has to slow down because eventually the liquidity will flow into the mainstream economy and turn into ugly inflation. The big liquidity pump that started last fall seems to be falling to slow trickle lately and markets are quite vulnerable once this happens. A failure of the Greek bailout deal (and government bond yields indicate that the market expects this to happen), would cause a massive negative liquidity event that would be on the scale of the Lehman default in 2008. It might even be worse.

At the same time liquidity issues are impacting the market, stock prices are stuck at resistance and the technical indicators are deteriorating. The S&P 500 is at its high that it reached earlier in 2011. The Dow Industrials are also at last year's resistance. Only the Nasdaq has managed to break through because of a small number of stocks like Apple Computer (AAPL) -- which is clearly exhibiting bubble-like action.


Recent news indicates deteriorating economies outside the United States. The economy within the U.S. is only being held up by massive government spending with budget deficits of $1.3 trillion last years and projected to be $1.3 trillion again for 2012. This is all borrowed or newly printed money. How big would the U.S. GDP be without these continual massive injections of government pseudo-cash?  Inflation is also clearly showing up in the ISM Manufacturing and Non-Manufacturing (Services) reports. The Prices component is the highest one for both. Prices for services (80% of the U.S. economy) have been rising for 31 months in a row and are listed as accelerating in February.


Stocks usually have a selloff in March or April. This year they are especially vulnerable. There will almost certainly be some type of drop. How big remains to be seen. The possibility for major selling should be kept in mind by investors.

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.

Greek Deal is Another "Fiscal Solvency in Our Time"

 

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.

Once again Greece has avoided a messy default and once again its creditors have had to take a greater loss on their loans and once again standards had to be abandoned to make the deal go through. And once again, we're not done yet.

Realistically, Greece is actually undergoing a messy default; it's just doing it in slow motion. When creditors are not fully paid, there is a default. The original default terms for creditors last summer were for a 21% loss for private bondholders (read banks). This percent has been raised more than once and with the latest round of negotiations, it will be above 70% according to Jean Lemierre, who co-headed the talks for the IIF (Institute of International Finance). The ECB and national central banks in the eurozone have agreed to "forgo profits on their holdings" (presumably this means the interest payments on Greek government bonds -- something which also indicates default).The eurozone countries will reduce the interest on Greece's first package of bailout loans to 1.5% over market rates from the previous 2% to 3%. This is the first time the ECB and other eurozone central banks have agreed to take a hit on their own holdings.

What prompted the further concessions to Greece was an attempt to get its 2020 projected debt to GDP ratio down to 120%. Without them, the ratio would have been 129% even under the bailout troika's (EU, ECB and IMF) most optimistic scenario (for the non-political reader, this means the complete fantasy scenario). Projections during the first bailout deal proved too good to be true and it should be presumed that these are as well.

There are still a lot of approvals needed to ensure that the current deal goes forward. If it does, every Greek man , woman and child will have received the equivalent of $29,000 from bailout payments. Greece holds elections in April and support for the anti-bailout parties is increasing. Whether or not it will be enough to derail the bailout deal remains to be seen.

Greek one-year government bond yields reached a high of 682% today according to Bloomberg.  To say that the market is not giving the bailout deal a vote of confidence would be an understatement. Last summer, they were around 40% and have been rising continually since then. While euro-politicians are once again claiming the problem is solved, the market indicates that Greece is imploding.

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.

EU Debt Crisis Spreads Worldwide

 

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 the situation in Greece deteriorates further, Moody's announced today that it intended to downgrade 114 European financial institutions and 17 global banks. Hopes that China will buy up   EU sovereign debt to help prop up the faltering eurozone may wind up costing the U.S. more than it does China. 

The hostility between Greece and the EU/IMF/ECB bailout troika is palpable. Nevertheless, there are claims that a deal should be reached by Monday. Whether the severe budget cuts demanded will actually be implemented is another story. Greece's GDP is shrinking 7% this year and additional budget cuts will only make the situation worse. Athens is already riot torn and elections in April (assuming a democratic government still exists) are not likely to produce a government favorable to the bailout terms. The market remains increasingly skeptical of Greece's near-term future with one-year government bond yields reaching 528% today.

While all attention is focused on Greece, the European debt crisis permeates the continent. Banks have lent too much money to not just Greece, but to Portugal, Spain, Italy and Eastern European countries as well. There is a still a hangover of pre-Credit Crisis debt that wasn't resolved in 2008, but merely papered over with newly printed money. Moody's just announced it was planning on downgrading 114 European financial entities including 7 in Germany, 9 in Great Britain, 10 in France and over 20 each in Spain and Italy. Global banks Nomura and Bank of America are in line for a one-notch downgrade, while Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC Holdings and Goldman Sachs could have their ratings lowered two notches. UBS, Credit Suisse and Morgan Stanley could be reduced three notches.

China with its vast foreign reserve holdings has been considered the potential savior of the eurozone. If this does occur, it won't be only China that is paying however; the U.S. will be sacrificing as well. China has previously announced it wants to diversify its reserve holdings. Since a disproportionate amount of these are in U.S. treasuries, the obvious implication is that it will be funding less U.S. debt as it funds more EU debt. The most recent figures for November 2011 indicate that China decreased its U.S. debt security holdings by almost 3%.

The EU debt crisis is likely to be us for some time to come. The situation with Greece is not stable and at some point it will have to leave the eurozone. Attention will increasingly focus to the other debt-ridden countries and the weak banking system. Just as the crisis spread from Greece throughout Europe, it will then spread from Europe to the rest of the world. We are already seeing this happen.

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.

Will Greek Bailout Deal Falter Now or Later?

 

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 Greek bailout deal is once again falling apart. Whether or not it is patched together another time, the end will inevitably be an ugly default.

On Thursday, news sources around the world were trumpeting that the EU and Greece had come to terms that would allow Greece to receive a 130 billion euro bailout payment that would prevent the country from defaulting by March. But late in the day, EU finance ministers made additional demands on Greece. They wanted another 325 million euros in budget cuts, that the Greek parliament pass the cuts and that a written guarantee that the cuts will be still be implemented after the April elections. On one hand these demands are not surprising since the Greeks have been less than honest about their budget numbers in the past. On the other however, they are surprising because this could be the straw that breaks the camel's back.

Greece is in its fifth year of recession and its economy seems to be in an unrelenting downward spiral. This is happening because just like the United States, Japan and a number of other nations, the economy is dependent on government spending made possible by huge budget deficits. Each time Greece has been forced to cut its budget deficit, the economy has shrunk some more. Additional cuts will only cause additional contraction. Although they receive little coverage by the U.S. media, riots have become common place in Greece (there is currently a 48-hour strike). Democracy might itself be threatened there. Greece does have a history of military dictatorship, with a military junta running the country between 1967 and 1974.

Lately, the country is becoming increasingly politically unstable. The far-right LAOS party, which is part of the governing coalition, has refused to support the new terms of the bailout. Its members resigned the coalition today. Even more disturbing, Reuters has reported that the Federation of Greek Police has issued the following statement to Greek officials: "Since you are continuing this destructive policy, we warn you that you cannot make us fight against our brothers. We refuse to stand against our parents, our brothers, our children or any citizen who protests and demands a change of policy. We warn you that as legal representatives of Greek policemen, we will issue arrest warrants for a series of legal violations ... such as blackmail, covertly abolishing or eroding democracy and national sovereignty."

Even if things are patched up once again and the next bailout payment is made, there will still be another one after that and even more to follow.  Greece is like the family that is only one paycheck away from homelessness, except one welfare check away from homelessness would be a more apt analogy. Eventually, something will give and this will have a major impact on the world financial system.

The real crisis in Europe is not Greece in and of itself, it is the stability of the banks in France and Germany that have lent money to Greece (and Italy, Spain and Portugal). These banks are in precarious shape and a Greek default will have similar consequences to Lehman's collapse in the fall of 2008. Expect the central bankers of the world to unleash a tsunami of money-printing liquidity into the system to stabilize it just as they did in 2008. They will be quicker this time around, so the collapse should be briefer. 

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.

The EU Has Fallen Into a Liquidity Trap and It Can't Get Up

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.

While the EU is still reeling from S&P's downgrade of the sovereign debt of nine of its members on January 13th and the latest talks to keep Greece afloat have hit a wall, there is an even bigger problem with the effectiveness of its stimulus programs -- the money is just not finding its way into the economy.

Global markets were jubilant in December when the ECB (European Central Bank) pumped 490 billion euros of three-year loans into the EU banking system. These funds were used by eurozone banks to buy high-risk government debt from the struggling peripheral countries. This indeed caused a temporary decline in interest rates, especially for Spain and Italy. Money from this program and other EU stimulus measures is stuck in the banking system however and it is doing little to keep the EU from sinking into a deep recession. As of Monday January 16th, the ECB had 493 billion euros on overnight deposit -- more than the entire December stimulus package.

Large amounts of funds on deposit at any central bank are an indication of a crisis in the banking system. Before the current EU debt crisis, eurozone banks usually kept only around 100 million euros on deposit at the ECB. Even during the height of the 2008 Credit Crisis, EU banks kept only around 33% of money lent out by the ECB on deposit. The percent now is over 70% (the ECB has lent out 664 billion euros in total) meaning things are in much worse shape in the EU than they were after Lehman Brothers collapsed. When money is trapped in the banking system, the economy suffers and extra stimulus measures don't help to revive it. EU money-printing measures meant to rescue its profligate debt-ridden members aren't likely to help its economy, which in turn will result in a self-feeding cycle of more and more debt (as happened in Japan during the last two decades) or more and more money printing (as has been taking place in the U.S. since the 2008 Credit Crisis). Like the U.S., the EU has run out of borrowing power, so debt without money printing is no longer an option.

Weaker economies mean more downgrades from the ratings agencies can be expected. On Friday, both France and Austria lost their coveted triple A ratings from S&P. They were downgraded a notch as was Malta, Slovakia and Slovenia. Italy, Spain, Portugal and Cyprus were downgraded two notches. Italy is now rated BBB+. The only countries in the eurozone that still have triple A ratings are Germany, the Netherlands, Luxembourg, and Finland. S&P put the later three on negative outlook for a possible future downgrade however. The EFSF bailout fund itself may also be downgraded.

The current debt crisis that is now impacting the entire eurozone started in Greece in late 2009. The problems there have yet to be fixed despite numerous mainstream media reports to the contrary in the last two years. Greece is now on financial life support. Any missed bailout payment from the EU will send it immediately into default. Talks have broken down once again, but as before will once again be resuming shortly. The market has never been convinced that any of the proposed Greek bailouts will work.  On Monday, Greek one-year government bond yields hit a high of 416% and 10-year yields a high of 35%. These rates have continued to rise after each bailout proposal. Greece has to make substantial bond payments this March.

The EU's debt crisis is not getting resolved because it is no more possible to solve a debt crisis with more debt than it is to sober up a drunk by giving him more alcohol. Yet, every mainstream news article has comments from well-placed sources that are hopeful that some resolution will be coming to the EU's problems soon. Rarely is it mentioned they have been hopeful -- and wrong -- for the last two years as the situation has increasingly deteriorated. Nor is it mentioned that the Japanese with similar problems in their financial system have now been hopeful for twenty years that their economy will fix itself. Wishful thinking doesn't fix markets, nor do plans involving spining straw into gold -- no matter what central bankers and their toadies claim.

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.

The Risks to the Global Financial System in 2012

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 2012 begins, markets are rallying as they did at the beginning of 2011 -- a year when the S&P 500 closed flat after many huge moves up and down. The problems in Europe that rattled markets in 2011 have not been resolved and new problems are or will be emerging in China and Japan. At the very least, investors should expect another rocky ride in the upcoming year.

The debt crisis in the EU is far from over. It is simply being momentarily contained by another short-term solution that will hold things together for a while until the crisis erupts again. The mid-December LTRO (long term purchase operations) announced by the ECB excited the markets as any money-printing scheme would. This new "solution" to the debt crisis is essentially an attempt to handle a problem of too much debt with more debt. Already close-to-insolvent EU banks are able to hold fewer assets for collateral in exchange for cheap funding from the ECB, which can in turn be used to buy questionable sovereign debt from the PIIGS. While this will keep Italy, Spain, Portugal and Ireland financially afloat for a longer period of time, it may collapse troubled EU banks sooner (the real epicenter of the debt crisis). 

Half way across the globe, problems are emerging in China. It is estimated that there are between 10 and 65 million empty housing units in the country that investors have purchased with the hope of selling at higher prices. There are in fact entire "ghost districts" there that are filled with new buildings and no residents. Prices have become so high that by last spring the typical Beijing resident would have to have worked 36 years to pay for an average-priced home. The pressure appears to be coming off though with new home prices dropping 35% in November. Beijing builders still have 22 months of unsold inventory and Shanghai builders 21 months. In the peripheral areas, existing home sales have plummeted -- down 50% year on year in Shenzhen, 57% in Tianjin, and 79% in Changsha. Investors should take note that the Chinese real estate bubble is far worse than the U.S. one that brought the global financial system to its knees at the end of 2008.

Twenty years ago, Japan had a massive real estate bubble and it is possible that prices have finally bottomed there, but that doesn't mean that they are ready to go up. Japan has had two decades of economic stagnation (and is heading toward a third, if it is lucky) because of the collapse of its real estate and stock market bubbles. Massive borrowing by the government has prevented the situation from getting worse. The debt to GDP ratio in Japan is now estimated to be 229% (well above the just over 100% in the U.S.).  More people are leaving the workforce there than entering it and this bodes ill for tax receipts. The aging population is using up its savings instead of adding to them. This is a potentially serious problem because the massive debt the Japanese government has incurred has been funded mostly internally by the savings of the Japanese people. A lot of old debt has to be rolled over in 2012 and additional debt is still being incurred. Where the money will come from is not clear.

None of the problems that could strain the global financial system originated in 2011. They have been building up for years and even decades. The first major blow up was the Credit Crisis in 2008. In every case, that problem was "solved" by more debt and money printing. This approach has of course only postponed the inevitable since taking on more debt only creates a bigger debt problem down the road and you can't create something of value out of thin air by printing money (although you will ultimately create a lot of inflation). The markets have already spent most of 2011 in an unstable state. It looks like continuing and even bigger crises await investors in 2012.
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