Alan's Finance Blog

European Union Agreement: Good or Bad for the Dow Industrials?

By Elliott Wave International

Did European Union leaders make the sovereign debt crisis “go away” last week?

Not even close. What they did agree on is tougher budget rules:

“…17 countries of the euro zone…agreed to run only minimal budget deficits in the future and allowed the European Court of Justice the right to strike down national laws that don’t enforce such discipline properly…”
Wall Street Journal, (12/9)

Will the EU agreement prove bullish or bearish for world stock markets, including the Dow Industrials?

Let’s put it this way: The evidence suggests that government intervention in the economy does not alter the dominant trend of financial markets.

For example: Look at the DJIA chart and try to identify when the U.S. government bailed out Fannie Mae, Freddie Mac, and other financial institutions.

“[The chart below] shows that in fact these actions took place in the early portion of the biggest stock market decline in 76 years. These actions did not push stock prices back up. The market finally bottomed months later, at a time when nothing along these lines happened.

“It is no good to claim that these actions had results eventually. By that reasoning, any future turn in the stock market would prove the contention.”
Elliott Wave Theorist, March 2010

If anything, the face value of this chart argues that economic government intervention makes stocks go down.

There is simply no “cause and effect” relationship between government actions and stock market trends.

The stock market’s price pattern is governed by the Wave Principle:

“Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life.

“….The market’s progression unfolds in waves. Waves are patterns of directional movement.”
Elliott Wave Principle, (p. 21)

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Ron Paul – Beware the Coming Bailouts of Europe

The economic establishment in this country has come to the conclusion that it is not a matter of “if” the United States must intervene in the bailout of the euro, but simply a question of “when” and “how”. Newspaper articles and editorials are full of assertions that the breakup of the euro would result in a worldwide depression, and that economic assistance to Europe is the only way to stave off this calamity. These assertions are yet again more scare-mongering, just as we witnessed during the depths of the 2008 financial crisis. After just a decade of the euro, people have forgotten that Europe functioned for centuries without a common currency.

The real cause of economic depression is loose monetary policy: the creation of money and credit out of thin air and the monetization of government debt by a central bank. This inflationary monetary policy is the cause of every boom and bust, yet it is precisely what political and economic elites both in Europe and the United States are prescribing as a resolution for the present crisis. The drastic next step being discussed is a multi-trillion dollar bailout of Europe by the European Central Bank, aided by the IMF and the Federal Reserve.

The euro was built on an unstable foundation. Its creators attempted to establish a dollar-like currency for Europe, while forgetting that it took nearly two centuries for the dollar to devolve from a defined unit of silver to a completely unbacked fiat currency note. The euro had no such history and from the outset was a purely fiat system, thus it is not surprising to followers of Austrian economics that it barely survived a decade and is now completely collapsing. Europe’s economic depression is the result of the euro’s very structure, a fiat money system that allowed member governments to spend themselves into oblivion and expect that someone else would pick up the tab.

A bailout of European banks by the European Central Bank and the Federal Reserve will exacerbate the crisis rather than alleviate it. What is needed is for bad debts to be liquidated. Banks that invested in sovereign debt need to take their losses rather than socializing those losses and prolonging the process of adjusting their balance sheets to reflect reality. If this was done, the correction would be painful, but quick, like tearing off a large band-aid, but this is necessary to get back on solid economic footing.  Until the correction takes place there can be no recovery. Bailing out profligate European governments will only ensure that no correction will take place.

A multi-trillion dollar European aid package cannot be undertaken by Europe alone, and will require IMF and Federal Reserve involvement. The Federal Reserve already has pumped trillions of dollars into the US economy with nothing to show for it. Just considering Fed involvement in Europe is ludicrous. The US economy is in horrible shape precisely because of too much government debt and too much money creation and the European economy is destined to flounder for the same reasons. We have an unsustainable amount of debt here at home; it is hardly fair to US taxpayers to take on Europe’s debt as well. That will only ensure an accelerated erosion of the dollar and a lower standard of living for all Americans.

Ron Paul – US Congressman

The Light Bulb Moment for the Eurozone

EWI’s free EU debt report sheds some light on what’s in store

By Elliott Wave International

How many European bankers does it take to change a light bulb? That’s a joke in search of an answer, but EWI’s European analyst Brian Whitmer explained five months ago that the “light bulb moment” was coming — that’s the time when most people would clearly recognize the severity of the European debt crisis. He offered this spot-on analysis back in July 2011, before the larger world came to know recently how bad things really are in the eurozone.

This chart shows how markets in Greece, Ireland and Portugal have behaved over the past five years, including the bailouts. Whitmer says that the turmoil in Greece is due mostly to both social mood and Greek markets having plummeted for more than a year and a half, while the larger EU stock markets have levitated. Once they turn down, he forecasts that what you saw in Greece will be replayed in the eurozone.

To help his subscribers see the light and get the full picture, he compared EU member nations under financial scrutiny to those that are usually viewed as being safe — and showed that they weren’t as safe as most people thought.

Specifically, Whitmer warned that the debt per person in Greece looked eerily similar to the debt per person in highly regarded countries, such as Germany and France — and even to non-eurozone countries, such as the United Kingdom.

In 2010, Britain proposed a five-year, 25% budget reduction that affects nearly every area of the government. While it sounds like a drastic measure, it has played out differently during the past year. According to member of European Parliament Daniel Hannan, statistics show that not only is government spending and borrowing significantly higher than this time last year, but taxes, too, are way up. Whitmer notes that the budget cuts rely heavily on the future and lack near-term bite.

Why has the worst of Europe’s violence taken place on the streets of Athens rather than London? Athenians did not suddenly grow more violent in 2011. What has changed since 2007 is their stock market. Whitmer’s words of advice: “…should your country’s stock market begin to look like Greece’s, watch out. Trouble will be on the way.”

*****

European Financial Forecast Editor Brian Whitmer has covered Europe’s debt crisis since March 2010 — and his forecasts kept subscribers ahead of the downward spiral every step of the way. Read more of his analysis in our free report, “The European Debt Crisis and Your Investments.”

View your free report.

Free Report The European Debt Crisis and Your Investments Continue reading more articles like this one by Brian Whitmer in our European Debt Crisis report. This free report offers commentary from February 2010 through November 2011 that will help you to better understand what could be in store in the coming months and years. Download your free report now.

European Debt Crisis Threatens the Dollar

The global economic situation is becoming more dire every day.  Approximately half of all US banks have significant exposure to the debt crisis in Europe.  Much more dangerous for the US taxpayer is the dollar’s status as reserve currency for the world, and the US Federal Reserve’s status as the lender of last resort.  As we’ve learned in recent disclosures, this has not only benefitted companies like AIG, the auto industry and various US banks, but multiple foreign central banks as they have run into trouble.  Nothing has been solved, however, by offering up the productivity of Americans as a sacrificial lamb.  Greece is set to be the first domino to fall in the string of European economies at risk.  Rather than learning from Greece’s terrible example of an over-consuming public sector and drowning private sector, what is more likely from our politicians is an eventual bailout of European investors.

The US has a relatively small exposure to overwhelmed Greek banks, but much larger economies in Europe are set to follow and that will have serious implications for US banks.  Greece is technically small enough to bail out.  Italy is not.  Germany is not.  France is not.  It is estimated that US banks have over a trillion dollars tied up in at-risk German and French banks.  Because the urge to paper over the debt with more credit is so strong, the collapse of the Euro is imminent.  Will the Fed be held responsible if the Euro brings the US dollar down with it?

The most disingenuous aspect of the narrative about the European sovereign debt crisis is that entire economies will collapse if more resources are not bilked from productive people around the world.  This is untrue.  Tough times are coming for the banks, to be sure, but free people always find a way back to prosperity if the politicians leave them alone.  Communities within Greece are coming together and forming barter systems because they know the Euro is becoming unstable.  Greeks are learning how to engage in commerce with each other, without the use of fiat currency controlled by central banks.  In other words, they are rediscovering what money really is, and they are trading with each other in ways that cannot be controlled, manipulated, squandered, inflated away and generally ruined by corrupt bankers and the politicians that enable them.  Farmers will still grow food, mechanics will still fix cars, people will still make things and exchange them with each other.  No banker, no politician can stop that by destroying one medium of exchange.  People will find or create another medium of exchange.

Unfortunately when politicians try to monopolize currency with legal tender laws, the people find it harder and harder to survive the inflation and taxation to which they are subjected.  Bankers should take their dreaded haircut rather than making innocent people pay for their mistakes.   The losses should be limited and liquidated, rather than perpetuated and rewarded.  This is the only way we can recover.

Government debt is often considered rock solid because it is backed by a government’s ability to forcibly extract interest payments out of the public.  The public is increasingly unwilling to be bilked to make bankers whole.  The riots and the violence in Greece should tell us something about the sustainability of this system.

If we continue to bail out banks and bankers so they can continue to lose money, if we cavalierly put this burden on the taxpayer, it is all too predictable what will happen here.

Ron Paul

Is Germany Eyeing the Exit?

German leaders talk about “more Europe”…but are they just buying time…?

THIS IS just an idea – but perhaps Germany is only pretending to want more European integration.

The rhetoric is real enough. German chancellor Angela Merkel told her party conference this week that the solution to the Eurozone crisis is “more Europe”. At the same conference, finance minister Wolfgang Schaeuble said Europe needs “to build the political union that we didn’t manage to achieve in the 1990s.”

“That means fiscal union,” he made crystal clear.

Schaeuble is echoing the words of Juergen Stark at a conference earlier this month:

“We need bold steps toward a fiscal union,” said Stark – who resigned as European Central Bank in September over its decision to buy government bonds.

“We need to go beyond and create a financial union. In one word, the crisis has clearly shown us that we need ‘more Europe.’”

This is heady stuff – especially when you consider that Merkel has said commonly-issued ‘Eurobonds’ are “not a sensible idea”. How to interpret Germany’s lurch towards such integrationist rhetoric?

One way is to take it at face value. An alternative interpretation is that Germany is simply buying time.

Let’s take the face value interpretation first. Germany is terrified of the idea of the European Central Bank monetizing sovereign debt. Though it is forbidden from buying government bonds directly – by Article 123 of the Lisbon Treaty and elsewhere – this hasn’t stopped it buying Greek, Portuguese, Irish, Italian and Spanish bonds on the open market, in the hope of forcing down their yields. This hasn’t really worked, so the next logical step is to ignore the rules and buy the debt direct.

Advocates of such a move say it is the only way to credibly stop the rot, since the ECB has ‘unlimited funds’ (what they actually mean is it can put the debt it buys on its balance sheet and create the Euros to pay for it). Anything less than this will be an open invitation to speculative bond market attacks.

Germany doesn’t like this idea – understandably, given the Weimar hyperinflation still casts its long shadow. In truth, neither does Germany like the idea of throwing its fiscal lot in with the rest of Europe. But it has come to realize that it faces a choice – fiscal integration or debt monetization. It has chosen the former.

This, at least, is the face value interpretation of Germany’s position. But might there be another explanation?

The Eurozone is in serious danger of breaking up. Everybody knows that. What some may not realize is just how close that moment could be.

Take a look at the following chart:

French-German 10-Year Yield Spread (last five years)

Source: Bloomberg

The chart shows the difference between the yields on French 10-Year government bonds versus their German equivalent – known as the spread over bunds. This spread hit a Euro-era high on Wednesday of 193 basis points (1.93 percentage points).

As you can see, this spread has risen sharply in the last month or so. This is what it looks like when a currency union starts to break apart. Bonds issued by the Eurozone’s two largest countries are yielding very different returns.

It is clear the market no longer considers French government debt risk-free – despite its AAA rating (if you ignore Standard &Poor’s somewhat Freudian accidental downgrade last week). This makes sense, especially when you consider how heavily exposed French banks are to Italy.

What is less obvious – at least, less obvious to many who are buying gold – is why German government debt is seen as such a safe haven. Yes, it offers a short-term bolt hole. Germany holds the Eurozone’s checkbook, and it isn’t going to let itself go under ahead of any other member.

And yes, many institutional investors are limited in what they can hold, and bunds do represent a AAA-rated, Euro-denominated, highly liquid asset.

But surely, sooner or later, Germany will be on the hook for all this? One way to understand the ‘contagion’ aspect of the Eurozone crisis is to think of a vast swarm of capital losses – most incurred years ago, during the boom – looking for someone to take the hit. German leaders must have noticed that these losses are heading their way.

Unless…

Unless there’s an alternative interpretation for Germany’s integrationist stance. Maybe – behind all the rhetoric about “more Europe” and “fiscal union” – maybe Germany is quietly preparing to leave the Euro.

This may seem an odd idea – especially when you consider how much Germany’s export sector has benefited from the Euro (something that Beijing-based economist Michael Pettis does an excellent job of demonstrating in his latest blog).

Germany leaving the Euro would create a great big mess – economically, legally and politically. But a great big mess looks unavoidable at this point.

A German decision to unilaterally abandon the single currency must now at least be considered a possibility. Going back to the Deutsche Mark would be difficult – and would almost certainly hit Germany’s export model as the currency appreciated. But domestic and international politics may make it impossible to save the Euro – and Germany’s leaders may already have realized this.

Schaeuble said this week he would like to see a change to the Lisbon Treaty by the end of 2012, to enable greater fiscal integration. Some European Union members – most notably Britain – are opposed.

Fine, says Schaeuble.

“In that case, we would ask them not to stop the 17 of us [in the Euro] from proceeding.”

A European ‘inner core’ has long been a desire of French president Nicolas Sarkozy. Now, it would appear, he has Germany’s backing. But it may be a feint – a ploy to buy time before a dash to the exit.

Ben Traynor

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

BOE, ECB Put Pressure on Fed; Four Ways to Profit!

Mike Larson

The list of opponents to the Federal Reserve’s “easy money forever” policy is growing longer.

In the U.K. … we learned that the Bank of England is tilting more to the hawkish side. Policymaker Spencer Dale joined colleague Martin Weale in actually voting for a 25 basis point hike in the BOE’s main policy rate, currently 0.5 percent. The more aggressive Andrew Sentance went even further, pushing for a 50 basis point hike.

While five members of the bank’s policy-setting committee voted for no change … carrying the day … the future direction of U.K. rates looks all but certain. And no wonder! U.K. consumer prices are rising at a 4 percent year-over-year rate.

Trichet’s comments raised speculation that the ECB may be eyeing a move on interest rates.

In continental Europe … the European Central Bank is positioning for a change in policy too! ECB member Yves Mersch warned that his colleagues will “have to rebalance our monetary policy stance” soon with the economy picking up and inflation topping the bank’s target.

President Jean-Claude Trichet also reiterated his resolve to combat inflation. And again, I’ll say “no wonder!” Inflation in the euro zone climbed to 2.4 percent in January, above the bank’s 2 percent target.

In other emerging and developed markets worldwide, the rate-hiking trend I first discussed months ago is accelerating. In just the past several days, Sweden raised its benchmark rate for the fifth time in seven months to 1.5 percent … Chile hiked rates again to 3.5 percent … Israel boosted up by 25 basis points to 2.5 percent … while Vietnam jacked rates up for the second time in a week to 12 percent.

As Fed Zigs While Foreign Bankers Zag,
Consequences and Opportunities Pile Up

Yet here in the U.S., it seems like nothing much has changed. The “doves” still have the upper hand, with Chicago Fed president Charles Evans signaling this week in an interview with the Financial Times that he’s in the Ben Bernanke camp. Specifically, he said “policy ought to remain accommodative for really quite a while, even a while after conditions start to improve.”

There’s a reason I keep harping on these interest rate trends. They have serious consequences for all kinds of investments, from commodities to currencies to bonds …

First, the shift toward tighter monetary policy that’s already underway in emerging markets — and about to get underway in the U.K. and Europe — will likely flatten the yield curve. Or in plain English, shorter-term rates should climb more quickly than long-term rates as investors price in the likelihood of central bank rate hikes. That’s why the iPath U.S. Treasury Flattener Exchange Traded Note (FLAT) I highlighted a while ago is perking up.

Second, the increasing divergence between the views of U.S. policymakers and foreign ones should hurt the value of the dollar. That makes foreign currencies and debt securities more attractive. So do the relatively more attractive interest rates available overseas. That’s why I prefer emerging market bonds and funds that own short-term overseas debt securities, like the Federated Prudent DollarBear Fund (FPGCX), over U.S. Treasuries.

You can expect gold and silver prices to rise as inflation concerns mount.

Third, monetary metals such as gold and silver should continue to perform well. I say that because even with rates rising overseas, they’re well below published rates of inflation. That means “real” rates, or those adjusted for inflation are negative — historically a bullish signal for commodities. Consider the U.K. example, where you have a real rate of MINUS 3.5 percent (the 0.5 percent policy rate minus the 4 percent YOY increase in consumer prices)!

Fourth, if you’re looking for more specific investment ideas and recommendations, consider subscribing to my Safe Money Report. What I’ve outlined here is just a few pages from my playbook … and I think 26 cents per day is a small price to pay for the rest!

Until next time,

Mike

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money, Interest Rates Profits and LEAPS Options Alert. He is often quoted by the New York Sun, Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

A Sound & Credible Currency

As a currency, the Euro doesn’t have to do much to equal its peers…

“SILVER HITS new all-time highs in Euro” proclaimed Zero Hedge on Monday.

Regular readers of the blog site won’t choke to know it was wrong, this time by only one third. Mistaking (and showing) a chart of month-end prices for a chart of daily silver prices, Zero Hedge’s pseudonymous host, Tyler Durden, missed the true Euro-equivalent spike to €32.80 per ounce of 18 January 1980 – hit in what was then the Deutsche Mark the very same day that silver priced in Dollars also hit its all-time high to date…some 44% above this week’s top.

Still, the point is near-enough made. Because silver, like gold, isn’t just about the Dollar, even though its latest surge coincides with the latest plunge in the US currency. Instead, silver has also caught a strong and growing bid over the last 5 years against the Dollar’s upstart challenger too. And since the Euro debt crisis really got started 12 months ago, the silver price has scarcely looked back…rising 108% from the start of 2010.

“The Euro as a currency is not in crisis. The single currency is sound and credible,” said European Central Bank president Jean-Claude Trichet in an interview with Paris newspaper L’Espresso earlier this month. Which, a little like Zero Hedge, is both premature and misleading. Because the Euro “as a currency” doesn’t have to achieve very much to retain the same credibility as its modern-day competitors.

Against the older monetary measures of gold and silver, on the other hand, the Euro looks just as weak as the other three “big four” reserve currencies – the Dollar, Sterling and Yen.

Adrian Ash

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The “Snowball” Scenario Sinks Sovereigns

A blockbuster draft report from the European Commission saw the light of day recently, thanks to some reporting from Bloomberg. It highlights an incredibly dangerous Catch-22 facing many sovereign nations — the “Snowball Scenario.”

Let me give you an example how this works …

Suppose country A’s economy goes into the tank. The government responds by borrowing boatloads of money and spending like mad on stimulus packages.

The markets allow it to go on for a while. But then investors start to get antsy about all the debt being added to the government’s balance sheet. So they start dumping its bonds, driving prices lower and rates higher. That, in turn, forces the country to implement austerity measures to get its debt and deficit under control.

The problem?

Those moves send the economy BACK into the crapper! Government spending has to rise yet again to pay for things like unemployment insurance, new stimulus packages, and so on … at the same time tax revenues fall. That drives debts and deficits even higher.

The end game in this snowball scenario? A sovereign default!

And that’s not just a theory. In fact …

Snowballs Are Already Rolling Downhill in
Spain, Greece, and Portugal

Spain is trying to slash its budget deficit from 11.2 percent to 9.3 percent in 2010 and 6 percent in 2011. Portugal wants to cut its deficit from 9.4 percent to 7.3 percent this year and 4.6 percent next year. They plan to do so by some combination of pension freezes, wage cuts, new taxes, and other measures.

But the European Commission, which is the executive arm of the European Union, says that probably won’t be enough. Its conclusion?

“While the newly announced measures are significant and the targets imply impressive budgetary consolidation, more measures are needed to meet those targets.”

The EU has told Spain and Portugal to get their budgets back in shape.

In plain English, the message is “Get even tougher! Crack down more! Slash spending! Raise taxes!”

But as the Commission admits, the governments it is counseling face “low GDP growth, poor competitiveness, stable or declining prices and wages and high real interest rates.” So it’s virtually impossible to avoid a “snowball effect on the government debt.”

Stay Cautious!
Stay Safe!

Bond traders aren’t dumb. They can see this coming from a mile away. Yields on Spanish 2-year notes shot up recently, then eased a bit. But now they’re rallying yet again — hitting a new cycle high just this week.

Spanish borrowing costs have skyrocketed from 1.51 percent in March to 3.29 percent, the highest in 17 months! It now costs more on a relative basis for Spain to borrow than it does the euro-area’s main economy, Germany. And it’s the highest that the 10-year Spanish/German yield spread has been since 1999 — when the euro currency debuted.

Portugal is seeing costs rise, too. It’s paying 5.58 percent to borrow money for 10 years, up from 4.15 percent back in April.

Reports are surfacing that Spain may need a 250 billion euro ($307 billion) credit line from the International Monetary Fund, the European Union, and possibly the U.S. Treasury.

Naturally, policymakers are denying that anything is in the works. But what do you expect them to do? These guys said the same thing about Greece, claiming it wasn’t at risk of defaulting. Then they pushed through a $135 billion bailout!

Use market rallies as selling opportunities.

In short, this sovereign debt crisis is playing out just like the private credit market crisis did before. It comes in waves — with periodic sharp drops triggered by some event, then some kind of bailout that makes everybody breathe a temporary sigh of relief, and finally yet another plunge as another hole appears in the dike.

My advice?

Don’t get suckered in by the short-term rallies. This sovereign debt crisis is nowhere near over, and that means you have to stay cautious and safe in your investments.

Consider using inverse ETFs to hedge risk, keeping positions small, and dumping stocks into sharp rallies if you’re lucky enough to get them.

Until next time,

Mike

Euro; the Worst Is Yet To Come

By: Sol Palha, Tactical Investor

If the thunder is not loud, the peasant forgets to cross himself.
Russian proverb

I think it is a given that Greece will have to default, everyone knows this, but they are just playing cat and mouse for now. Most Greeks are dead set against the new Austerity measures and they will likely throw this government out of power for the new changes they have instilled. The next government will cater to the people’s needs for fear of receiving the same treatment. Change is not wanted in Greece. The only way to fix this problem is if the nation as a whole understands that they have to go through a painful period of cuts, but as evidenced from the past riots this is not the case. The story below further substantiates our claims.

Greek unions announced on Wednesday that they would stage a 24-hour nationwide strike on May 20, the second major protest against tough austerity measures pledged in exchange for billions of euros in aid. The main public and private sector led a 50,000-strong march a week ago in which hundreds of angry Greeks fought pitched battles with police in the streets of central Athens and three people were killed in a petrol bomb attack on a local bank.

They are due to march in the capital on Wednesday from 6 p.m. (1500 GMT), in a rally which will give indications about the public mood before the big walkout next week. Investors are closely watching public reaction to government wage and pension cuts amid concerns broader unrest could hit Prime Minister George Papandreou’s resolve in pushing them through. New figures published on Wednesday showed Greece’s economy contracted 0.8 percent in the first quarter compared to the last three months of 2009.

The austerity measures, pledged in return for 110 billion euros ($139.7 billion) in emergency aid from the European Union and International Monetary Fund, are expected to keep the economy in recession through 2011.”The IMF will not stop thirsting for workers’ blood,” said Yannis Panagopoulos, chairman of Greece’s main private sector labor union GSEE. “Its recipes are a disaster and the government must turn them down.”

The country’s socialist government on Monday unveiled a draft law to raise the average retirement age and cuts benefits, which further angered unions already opposed to previous steps including public wage cuts and tax hikes. Full story

Adding to the host of problems is the fact that Greece is now officially in a recession. Painful cuts have to be implemented and maintained or Greece will default. Sometimes markets should be allowed to settle matters, intervention only delays the inevitable. Our stance has been that the Euro is going to trade down to the 115 ranges and could possibly trade down to the 110 ranges. The massive 1 trillion Package had no lasting impact on the Euro, after mounting a brief rally, the Euro crumbled and is now on its way to putting in another series of new lows.

Spain’s new austerity measures, too little too late

Prime Minister Jose Luis Rodriguez Zapatero said Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets. “We have to make a singular, exceptional and extraordinary effort to reduce our public deficit and we have to do it when the economy is starting to recover,” he told parliament. The announcement came two days after euro zone governments, the European Central Bank and the IMF agreed on a $1 trillion (674 billion pound) rescue package to stabilise the euro in exchange for pledges by highly indebted countries to pare down their deficits. Full story

We think this is action is a little late as Spain had ample time to address these difficult changes, but instead decided to sit on its fat rear and do nothing. The current recommendations are just too little to produce any meaningful change. Unofficially the employment rate is well past 20%, the housing sector has crashed, fiscal debt is roughly 112% of GDP and Rising and estimates put private debt between 160-180% of GDP. Thus unless they put forth some bone crushing changes, the odds are that Spain will be joining the Greeks sooner than later. Furthermore, this 1 trillion euro aid package is more of a band aid than a fix because the nations that are spending beyond their means are still doing so. Nothing has changed other than the day of reckoning.

Financial markets are showing they have their doubts, with markets in Europe and Asian drifting lower Wednesday after Monday’s initial euphoria over the initial 750 billion euro package announced by European Union officials over the weekend.”Is the package big enough?” asked Paul Lambert, the current director of currency and macro strategies at Polar Capital who’s also held roles at Deutsche Asset Management, UBS, Citibank and the Bank of England. “That depends on the success of the debt consolidation in the periphery [and] whether they’re ultimately able to have falling real wages so that they can come back in line with the core.”

Much criticism has been lobbed at places such as Greece for high public sector wages, which will now be brought down sharply by the government as part of the agreement for its bailout package. That’s also been one of the key reasons Greeks have taken to the streets over weeks that have turned violent at times. On Wednesday, Spain announced a plan to reduce public wages 5% this year and freeze them in 2011 while suspending a pension hike. The moves come as the government there fears being dragged into a situation similar to Greece’s.

“I’ve observed that if any country in the emerging markets had been offered a loan package like the Greeks were offered before they got the eventual loan package they got, people wouldn’t have been rioting on the streets, they would have been saying thank you,” said Lambert at a Morningstar Investment Conference in London.

“The fact they’re rioting on the streets means ultimately there may not be the ability of the Greeks to see a 20% fall in real wages,” he said. Full Story

Yeah we would like to see how long individuals are willing to keep quiet once the government starts to cut their salaries, increase taxes and cut benefits. People used to the good life do not take kindly to such measures, they are going to get rid of the existing government, (Greece is the lead candidate for such a move) and replace it with one that is more sympathetic to their cause. The only way to solve this is by the properly (instead of the miserably program called shock and awe, more like shock and shake) is for the Euro zone to set an example. They need to let one country default; this will send a strong message to the others that if they don’t wake up, a sledge hammer is going to fall right on their heads and snap them out of their coma.

In the short term this is a very painful strategy, but long term this would be very beneficial to the Euro, as it would give it credibility and make it a true front runner as a challenger to the US dollar. Investor will have more faith in a nation that is willing to take strong measures to protect its currency.  While these brain surgeons run around trying to figure out what is the best approach, make sure you have some of your money parked in Bullion (Gold, Silver, Palladium and or Platinum). In troubled times the best hedge way to protect oneself is via precious metals.

The enemy of my enemy is my friend.
Arabian Proverb

Europe WANTS a Lower Euro

The euro is in devaluation mode … in a sharp 17 percent decline against the dollar over the past five months. And I’ve written extensively on why, and why it still has further to go.

Now I believe a covert policy decision has been made by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union (Emu) to survive.

Of course, each individual country within the Emu doesn’t have the luxury of devaluing their currency when times are tough. They’re locked into a monetary union of sixteen countries. And monetary and currency policy decisions are made by the ECB.

That puts countries like Portugal, Ireland, Italy, Greece and Spain (the PIIGS) at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity.

The Emu will do whatever is necessary to save the floundering euro.

But now, it’s becoming evident that the Emu as a whole is prepared to take such drastic measures to keep the euro intact!

I think we’ll find that the ECB will aggressively reverse course on exiting from the emergency monetary policies they put in place to deal with the financial crisis of 2008 … returning to emergency mode, and in a big way. They’ll likely be forced to openly buy up the government debt of the weak economies to keep them breathing — i.e. print money, and a lot of it.

The plan requires that Germany, the core of the euro, participate in serving the interests of the lowest common denominator in Europe: The PIIGS. Of course, they’ve already done so by agreeing to provide bailout funds to Greece. But the next moves in the playbook will likely drag Germany headlong into it.

Germany: Swimming with the Fishes

Germany is the biggest, most robust country in the euro zone. It was among the first major economies to emerge from recession. Its economy is expected to grow by 1.5 percent this year, and 1.8 percent next year. So things are going relatively well for the Germans following the harsh recession.

Why, then, would Germany agree to be dragged down by the weak and expose themselves to potential inflation problems in the process? Why not just hit the eject button and remove themselves from the euro?

Here in a nutshell lies the problem: Germany has a lot to lose if other euro countries end up in shambles. It’s exposed on two fronts …

First, Germany is on the hook for $668 billion in PIIGS sovereign debt. Not to mention the fresh $30 billion they’ve agreed to give Greece.

A default, or worse, a string of defaults would be disastrous for German banks and European banks in general. European banks bought about half of the general government bond market last year.

And second, if these countries continue their downward spiral, Germany’s intra-Europe exports (10 percent of total exports) promise to dwindle with it.

So what does Germany gain from sacrificing for the weak?

For one, it averts the problems mentioned above. And two, it will enjoy a much weaker euro in the near future, thus providing a nice kicker for its exports outside of continental Europe.

ECB Already Taking the Plunge

ECB President Trichet would not discuss the euro’s value in his recent press conference.

Europe, the IMF and the ECB demonstrated this week that it’s ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece. And perhaps in a bigger move, the ECB is now accepting Greek junk bonds for collateral — jeopardizing the credibility and independence of the central bank.

As I was watching the ECB press conference following its monetary policy meeting this week, central bank President Jean-Claude Trichet looked flustered and measured his words very carefully. And two things gave me a sense that they had a plan, which included a much weaker currency:

1. He adamantly said a Greek default is “out of the question.”
2. And a biggie … he ignored all questions about the value of the euro, despite its slippery slide!

The Swiss National Bank must have sensed something, too. This week it chose to back away from buying euros as an intervention tactic to curtail the strength of the Swiss franc. Perhaps, the SNB knows that gobbling up euros at current prices is a recipe for losing money.

In sum, financial crises and sovereign debt crises typically go hand in hand. As do sovereign debt crises and currency devaluations. So be prepared to see a continued decline in the euro and other global currencies … and more capital flowing into the U.S. dollar in search of a safe haven.

Regards,

Bryan