Search results matching tags 'Greece' and 'EU'

Greece Poised to Default & Exit the Euro

GaryHalbert — Tue, 22 May 2012 21:19:00 GMT

IN THIS ISSUE:

1. Overview – Greece Default Risk Accelerating

2. Is An Orderly Default by Greece Possible?

3. Greece’s Upcoming Elections Look Grim

4. G-8 Summit Members Ambush Germany’s Merkel

5. Webinar With Yacktman Capital Group on Thursday

Overview – Greece Default Risk Accelerating

I have maintained all along that the European Central Bank’s loans of apprx. one trillion euros to banks in financially troubled nations in January was only a measure of kicking the can down the road. Like many other analysts, I predicted that another potentially larger crisis would be coming in the not-so-distant future.

The not-so-distant future, many of us worried, would be May 6 when Greece was to hold its parliamentary elections. As many feared, the citizens of Greece ousted those leaders who had agreed to unpopular austerity measures in return for bailout loans from the European Central Bank and the IMF, and voted in candidates that promised to roll back the austerity plans.

The problem is, none of the candidates received a majority of the vote, so a second election will be held on June 17. It is widely expected that the anti-austerity candidates will prevail and Greece will have a left-leaning Prime Minister and top leaders in the Parliament after the elections.

If you keep up with the news even occasionally, you know that there are now widespread predictions that Greece will: 1) default on its debt sometime after the upcoming elections on June 17; 2) withdraw as a member of the European Union; and 3) drop the euro as its currency and replace it with its former currency, drachmas.

We’ve all heard horror stories about the global financial crisis that could unfold if tiny Greece defaults on its debts later this year. There are genuine fears that if Greece defaults, that leaves the door open to similar defaults by Portugal, Ireland and possibly even Spain. Some fear, in this nightmare scenario, that even Italy could default (although I doubt it).

Similar fears of a Greek default and the scenario described above weighed heavily on the global stock markets last summer. This eventually led to the ECB bailout loans of €1 trillion in January. Now the equity markets are again under pressure.

Will the ECB pony up even more taxpayer money for Greece this time around? Most agree that this will be decided largely by Germany. And speaking of Germany, it is reported that President Obama went out of his way to have a private meeting with Germany’s Chancellor Angela Merkel at the G-8 summit over the weekend in Chicago about this very issue (more below).

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Is An Orderly Default by Greece Possible?

Without Merkel’s consent, the ECB is unlikely to make any more loans to Greece, and Greece is literally broke. Bank runs are underway as this is written. If the Greek elections go as expected on June 17, Greece could officially default as early as this summer (unless Merkel has a change of heart).

There is no shortage of predictions on how badly a Greek default would roil the financial and investment markets around the world. Some feel it would surpass the financial crisis of 2008. Last week, however, one well-known analyst, Nouriel Roubini, suggested a detailed plan for Greece to default and exit the euro without causing chaos around the world.

Roubini is a professor of economics at New York University and co-founder of RGE Monitor, an economic consulting firm. Roubini is best known for his predictions that the US housing market was going to collapse and spark a severe recession. Those calls led to his nickname, “Dr. Doom.” But not anymore.

Roubini admits that his plan involves lots of risks and would have to be managed very carefully. Here is the plan Roubini outlined on Friday.

QUOTE:
The Greek euro tragedy is reaching its final act: it is clear that either this year or next, Greece is highly likely to default on its debt and leave the eurozone…

Greece is stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression. The only way to stop it is to begin an orderly default and departure, co-ordinated and financed by the European Central Bank, the European Union, and the International Monetary Fund (the troika), that minimises collateral damage to Greece and the rest of the eurozone.

Greece's recent financing package, overseen by the troika, gave the country much less debt relief than it needed. But, even with significantly more public-debt relief, Greece could not return to growth without rapidly restoring competitiveness. And, without a return to growth, its debt burden will remain unsustainable. But all of the options that might restore competitiveness require real currency depreciation.

The first option, a sharp weakening of the euro, is unlikely, as Germany is strong and the ECB is not aggressively easing monetary policy. A rapid reduction in unit labour costs, through structural reforms that increased productivity growth in excess of wages, is just as unlikely. It took Germany 10 years to restore its competitiveness this way; Greece cannot remain in a depression for a decade. Likewise, a rapid deflation in prices and wages, known as an "internal devaluation", would lead to five years of ever-deepening depression.

If none of those options is feasible, the only path left is to leave the eurozone. A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.

Of course, the process would be traumatic – and not just for Greece. The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece's government, banks, and companies would surge. Yet these problems can be overcome. Argentina did so in 2001, when it "pesofied" its dollar debts. The United States did something similar in 1933, when it depreciated the dollar by 69% and abandoned the gold standard. A similar "drachmatisation" of euro debts would be necessary and unavoidable.

Losses that eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalised. Avoiding a post-exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits.

The European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) should carry out the necessary recapitalisation of the Greek banks via direct capital injections. European taxpayers would in effect take over the Greek banking system, but this would be partial compensation for the losses imposed on creditors by drachmatisation.

Greece would also have to restructure and reduce its public debt again. The troika's claims on Greece need not be reduced in face value, but their maturity would have to be lengthened by another decade, and the interest on it reduced. Further haircuts on private claims would also be needed, starting with a moratorium on interest payments.

Some argue that Greece's real GDP would be much lower in an exit scenario than it would be during the hard slog of deflation. But that is logically flawed: even with deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs. More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade-long depression. And trade losses imposed on the eurozone by the drachma depreciation would be modest, given that Greece accounts for only 2% of eurozone GDP.

Reintroducing the drachma risks exchange-rate depreciation in excess of what is necessary to restore competitiveness, which would be inflationary and impose greater losses on drachmatised external debts. To minimise that risk, the troika reserves currently devoted to the Greek bailout should be used to limit exchange-rate overshooting; capital controls would help, too.

Those who claim that contagion from a Greek exit would drag others into the crisis are also in denial. Other peripheral countries already have Greek-style problems of debt sustainability and eroded competitiveness. Portugal, for example, may eventually have to restructure its debt and quit the euro. Illiquid but potentially solvent economies, such as Italy and Spain, will need support from Europe regardless of whether Greece exits; indeed, without such liquidity support, a self-fulfilling run on Italian and Spanish public debt is likely.

The substantial new official resources of the IMF and ESM – and ECB liquidity – could then be used to ringfence these countries, and banks elsewhere in the eurozone's troubled periphery. Regardless of what Greece does, eurozone banks now need to be rapidly recapitalised, which requires a new EU-wide programme of direct capital injections.

The experience of Iceland and many emerging markets over the past 20 years shows that nominal depreciation and orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness, and growth. As in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained.

Like a doomed marriage, it is better to have rules for the inevitable divorce that make separation less costly to both sides. Make no mistake: an orderly euro exit by Greece implies significant economic pain. But watching the slow, disorderly implosion of the Greek economy and society would be much worse.
END QUOTE

The problem I see with the scenario Roubini proposes is that it requires the coordination of the European Central Bank, the European Union member states and the International Monetary Fund – the “Troika” – and a LOT of their money. It would also have to be signed onto by Germany, and the German people are opposed to any additional bailouts.

Now I’m not saying that Roubini is wrong. He may be correct that it will take such a costly and coordinated effort to usher Greece out of the euro with the least amount of collateral damage (ie – financial crisis). But how different, really, is Roubini’s plan from just another large bailout?

Then there is the question of just how much more the ECB can expand its balance sheet. As of the end of February, the ECB’s balance sheet stood at a record €3.02 trillion ($3.96 trillion). At $3.96 trillion, the ECB’s balance sheet is larger than the entire German economy ($3.28 trillion). The ECB’s $3.96 trillion compares to our own Fed’s balance sheet at $2.9 trillion. These numbers are simply staggering!

Greece’s Upcoming Elections Look Grim

Turning back to Greece, polls now indicate that the Left Coalition, “Syriza,” will sweep the elections on June 17. Their campaign promise is to renegotiate the loan terms that have been painfully negotiated with the eurozone lords and the IMF, and demand more bailouts. Yet they also want to roll back many of the austerity measures implemented by previous leaders to qualify for these very same loans. Apparently, they believe the eurozone lords and the IMF will blink. We’ll see.

In the interim, money is gushing out of Greek banks and being converted to the hard currency of choice in other countries. You don’t hear too much about this because you don’t have to stand in line at a bank to get your money these days. You can open a new account(s) at the bank of your choice in another country and simply wire the money out of the bank you are fleeing.

At the end of the day, no one knows what will happen next with Greece. All eyes will be on the June 17 elections, even though it is pretty well assumed that the Syriza party will win. What these new leaders will do remains to be seen, and this uncertainty will, in my opinion, keep a lid on global equity markets. Or worse, it could send them sharply lower, depending on what happens.

G-8 Summit Members Ambush Germany’s Merkel

The latest meeting of the Group of Eight (US, Britain, Canada, Japan, Germany, France, Italy and Russia) was held in Chicago last weekend. It is now clear that President Obama orchestrated a pre-summit strategy among the members to pressure Germany’s Chancellor Andrea Merkel to agree to back off on the austerity demands on European countries including Portugal, Ireland, Italy, Greece and Spain (the so-called PIIGS).

Instead, Obama called on the G-8 leaders to implement new stimulus spending in an effort to jump-start economic growth and create jobs. After all, these same policies have worked so well here in the US (tongue in cheek) that the Europeans should do the same. But from all accounts, Chancellor Merkel held her ground.

As a result, Obama insisted on a private meeting with Merkel on Saturday evening after the summit had adjourned for more arm-twisting. There is no way to know what the two leaders actually said, but it appears clear that Obama didn’t get his wish. Merkel said after the meeting that she would not object to more measures to spur economic growth, but she also insisted that austerity measures aimed at balancing budgets must continue.

One wonders if Merkel reminded Obama that his economic plans have added $5 trillion to our national debt since he took office, the US unemployment rate remains above 8% and the economic recovery is tepid at best. Not exactly a prescription for pulling Europe out of recession!

The point I think that Obama and other sympathetic leaders fail to realize is that Merkel is simply following the statutes of Germany’s Constitution. She does not have unlimited power to print money to bail out the struggling nations of the European Union. As noted above, the German people are steadfastly against more bailout loans, especially to Greece. I applaud Merkel’s refusal to agree to Obama’s demands.

Webinar With Yacktman Capital Group on Thursday

We will be hosting a live webinar featuring Yacktman Capital Group this Thursday at 1:00 p.m. Eastern Time. Yacktman is the latest money manager to be added to our recommended list. Brian Yacktman will make a brief presentation on how the firm’s successful “value-investing” strategy works, and then we’ll open the webinar up for questions from the audience members.

Our webinars are always informative, and this one will be no different. To listen in on Thursday’s live webinar – which is FREE as always – you simply need to register in advance. CLICK HERE to register.

I feel that the biggest question that will be answered in our webinar is why you should consider investing in Yacktman’s value strategy now, even with so much uncertainty in the market. Many investors are adopting a “keep your powder dry” strategy, staying on the sidelines or – even worse – in taxable bond funds awaiting a resolution in Europe and the results of the presidential election.

There are two problems with that strategy. First, if you wait until after the Greek crisis is resolved, you’ll probably be too late. If you are in cash, it won’t get hit if the market tanks, but it also won’t participate in any upward move. If you’re in bonds, at least you’ll have a chance to make some money if the stock market moves down, but what if there’s a rally? Bonds could get hammered.

The second problem with the wait-and-see attitude is that it doesn’t recognize that there are often times that the market often discounts the prices of stocks below their intrinsic values without regard to the overall market environment. I see Yacktman as being a potential solution for any of the following situations:

Investors who are managing their own money and getting hit by market swings prompted by outside news events. Yacktman’s value strategy looks at the underlying business, not technical indicators or other trading tools being hawked on TV commercials;
Investors who have money invested in index mutual funds using an asset allocation approach. If you are tired of your portfolio spiking up and down on every little piece of news about the economy, the Eurozone, etc., then you may be better served by a strategy that seeks value beyond what the indexes can provide;
Investors on the sidelines with money in money markets, CDs or stuffed in the mattress. You need to be positioned to quickly take advantage opportunities in the market. By the time some investors can get money transferred out of cash, the opportunity may be gone; and
Investors who are loaded up on bonds. I have often noted how mutual fund statistics are showing that investors are bailing out of stock funds and herding into bond funds. This can be a recipe for disaster if the stock market improves or when interest rates start to rise.

If you fit any of the above categories, then I urge you to attend the upcoming Yacktman webinar. All it will cost is your time, and you may learn about a strategy that could be a valuable asset in your overall portfolio.

To participate in the live webinar on Thursday at 1:00 p.m. Eastern Time, simply CLICK HERE to register.

If you are unable to join us live, we will have a recorded version of the Yacktman webinar on our website www.halbertwealth.com a few days after the live event that you can view at your convenience.

Wishing you profits in these uncertain times,

Gary D. Halbert

Papandreou Steps Down.

ChuckButler — Mon, 07 Nov 2011 16:03:14 GMT

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In This Issue.

* EU leaders go where they haven't gone before.

* Greece forms a new Government.

* SNB threatens to weaken franc again.

* Italy & Berlusconi back in the news.

And, Now, Today's Pfennig For Your Thoughts!

Papandreou Steps Down.

Good day. And a Marvelous Monday to you. A rainy Monday for us here in St. Louis. Rainy days and Mondays do get me down, as I'm a sunshine kind of guy! And when you add rain to a Monday, well. It starts the week off on a soggy foot. But, to make it better, Eric Clapton's song, Let It Rain, is playing on the I-Pod!

It's raining on the Eurozone leaders again this morning too. To get you caught up, let me go back to what happened since I signed off on Friday morning. First of all Greek Prime Minister (PM) Papandreou, did receive a positive Confidence Vote from his Parliament, regarding the Eurozone Grand Plan. But there was a caveat to the vote. It was approved only on the understanding that Papandreou would step down, and that a new government would be formed to take them into the next election on February 19, 2012.

This new government was formed over the weekend, which was a combination of the two existing parties, to for a Unity Party. This was done to give the markets confidence about Greek carrying out the measures of the Grand Plan. And at first, the markets took the bait, and the euro rallied. But, then someone with a brain borrowed from the Wizard of Oz, realized that what the Eurozone leaders had done, when they pushed Papandreou to cancel the referendum that he had proposed for the Greeks to vote on the Grand Plan.

Now remember, the Grand Plan was not just the carrying out of the austerity measures for Greece. The main caveat of the "plan" was that Greek debt holders would take a 50% haircut, which means "loss", and the derivatives people are still trying to decide whether or not that constitutes a "default".

So. getting back to the Eurozone leaders and their pushing Papandreou to cancel the referendum. I was reading last night, and there are a lot of comments out there, but the ones that make the most sense is that the Eurozone has gone someplace that they should never have gone. Remember now, that German Chancellor Merkel, and French President Sarkozy, told Papandreou that if the Greeks voted No on the referendum that they were voting to leave the euro. Knowing that his countrymen would vote no. He cancelled the referendum.

I liken the whole situation to what we saw here last summer. Remember when we had all the saber rattling about the debt ceiling. It was the first that some of us had hear of the voting program that was called the "nuclear option". Well.. I think Merkel and Sarkozy, threw the nuclear option at Greece. and that's probably not what the markets wanted to hear.

Of course they didn't like the idea of Greece voting, and they sure didn't like the idea that there now exists a "nuclear option" that Eurozone leaders can throw at a country. A financial institution also used a phrase that I've used for 15 years, saying that "Eurozone leaders have "Opened Pandora's Box" of unintended consequences. So much for the all for one, eh? Does this mean that the Eurozone / euro experiment is doing a Wicked Witch and "melting away"? Not sure we can make that call just yet, folks. The euro is still holding its head above water. But, like I've said for a couple of years now. The euro gets its strength from the fact that it is the offset currency to the dollar. I'll come back to that thought in a minute, but first, this is running through my mind, so we have to go here!

Here. is that to point out the idea of the euro getting its strength from the fact that it is the offset currency to the dollar, is an economic data print this morning. Eurozone Retail Sales for September fell -.7% VS August. The consensus forecast was for a fall of -.1%... And year-on-year Eurozone Retail Sales have fallen -1.5%... But, still the euro remains stronger than the U.S. dollar.

Not to say that one Retail Sales report would make the euro crash to parity, but the point is that even a weak report like this, and this isn't the only one we've seen from the Eurozone lately, would be enough to push the euro much weaker.

The goings on in Greece have pretty much brought the euro from 1.50 to 1.37. And if you want to see the euro crash to parity, the rest will have to come from the dollar strengthening.

This weekend, I saw a graph, that tells it all, folks. It was a graph that showed one big circle that represented U.S. debt. and then all these smaller circles that represented the Greece and other Eurozone countries' debt. Needless to say that the U.S. debt was larger than all of these smaller circles. Much larger! So. when people ask "with all these problems in the Eurozone, how does the euro remain stronger than the dollar"? Now, you have an answer for them!

Ok. On Friday, the Jobs Jamboree left the U.S. wondering about its so-called economic recovery. for, if the economy was truly recovering, the economy would generate more than 80,000 net new jobs. And from the BLS I see that they added 102,000 jobs via the Birth / Death model. So, in reality, job creation in October was negative! I read a story over the weekend from a writer and analyst, who claims that the employment problem in the U.S. is over. What? What tea leaves are you looking at? I can't believe someone would say something like that. But, I'll keep my eye on him, to see how many times he says that again as we go forward.

The key item for the currencies today is a Parliamentary Budget Cote in Italy that PM Berlusconi, presented. There are people in the streets calling for the removal of Berlusconi. I have to tell you something here folks. back in the 90's I used to write about the scandals, and exploits of Berlusconi, and how he hurt the Italian lira. here we are late in 2011, and now he's hurting the euro. some things never change.

The Treasury buyers and holder's trip on Mr. Toad's Wild Ride continues, with the 10-year Treasury rallying once again, to 2.02%... (for a second there I typed 20.2%, now that takes me back when I first began trading short term instruments like T-Bills, commercial paper, and Bankers Acceptances)

I don't get it with Treasuries. Yes, it's debt from the largest economy in the world, but it's also debt that continues to grow, and grow, and grow.

Speaking of growing debt. We're now 1-week into November, and the clock is ticking on the Super Debt Committee, even if they got an extra hour this past weekend, their time to come up with $1.2 Trillion of debt cuts is ticking away. They have until Thanksgiving. If they don't present their plan by then, $1.2 Trillion of discretionary spending cuts will automatically go through. That was all agreed on last summer.

I've talked about this before, and threw out there for those who like to plan ahead, the thought that the Committee fails, and then Congress doesn't go through with the $1.2 Trillion of discretionary spending cuts. Moodys and Fitch will be very interested should the U.S. fail to carry through on their spending cuts. And do you really think that with the economy teetering, unemployment still soaring, and an election year about to start, that they will go ahead with $1.2 Trillion in cuts? I doubt it seriously, folks. What do you think? Do you think there is political will to do this? What happened to the last debt commission's suggestions to cut the debt? That's right. they were ignored!

So. the currencies get pulled one way one day, and another way the next day. And Gold gets thrown into that back and forth pulling. Gold is up about $10 this morning, and with the uncertainty in the Eurozone going on, Gold should be up. and probably up more than $10, but with the CFTC admitting that there are outside influences on Gold & Silver's price, but either not having the intestinal fortitude to do something about it, of not having the guns big enough to do something about it. Either way, nothing's being done.

In Switzerland, the Swiss National Bank (SNB) made some noise over the weekend about standing ready to take further measures to weaken the franc if economic or deflationary developments made it necessary. SNB Chairman Hilderbrand, went on to say that, "the franc was still highly valued against the euro and that he expected it to weaken further from here. Then add to those comments the fact that Swiss inflation printed at -.1% year on year. (here are those "deflationary developments").

We all forget the pain. yes. even SNB Chairman Hilderbrand, has forgotten the pain of the SNB's previous interventions. But yet, he stands prepared to lose more. I have an idea for the SNB and the Bank of Japan (BOJ) as long as we're talking about intervening. You say that you're intervening because your exporters are losing money. Hey! How about you not intervene, and take the money you DIDN'T lose and give to the exporters that say they are losing money. That way, instead of you both losing money, because the intervention never works in the long run, you can both hold your heads up high! HAHAHAHAHAHAHAHA!

The data cupboard here in the U.S. will get down to business Thursday when the Trade deficit for October prints, along with the Monthly Budget deficit. I just MAY BE about the only person that keeps track of these two anymore, as the markets and most consumers have become Comfortably Numb with the deficit numbers.

Then there was this. The whole letter today could have been a Then There Was This, eh? So. here I'll just make mention of the loss this past weekend of Andy Rooney. Former St. Louis Cardinals' Pitcher, Bob Forsch, also died. I watched my only no-hitter with Bob Forsch on the mound in the 80's. And it doesn't look good for Joe Frazier, the former boxing champ. when I saw that this weekend, I just kept hearing Howard Cosell, saying" down goes Frazier". sad stuff.

To recap. The situation in Greece gets even more confusing, as Papandreou steps down, and a new government is proposed. Did Eurozone leaders come up with their own "nuclear option"? Currencies are drifting today. no real direction. And the Jobs Jamboree was disappointing once again, with real net job creation a negative on the month.

Currencies today 11/7/11. American Style: A$ 1.0335, kiwi .7955, C$ .9830, euro 1.3755, sterling 1.6050, Swiss $1.1150, . European Style: rand 7.9715, krone 5.63, SEK 6.61, forint 223, zloty 3.1725, koruna 18.1720, RUB 30.59, yen 78.05, sing 1.2705, HKD 7.7705, INR 49.10, China 6.3505, pesos 13.51, BRL 1.7545, dollar index 77.04, Oil $94.48, 10-year 2.02%, Silver $34.55, and Gold. $1,775.30

There are conflicting reports this morning, this just came across, that Berlusconi has resigned. I doubt that has happened, he may be forced out, but not quit.

That's it for today. Thanks to all again, who have been keeping me encouraged. I feel much better today, still can't talk without pain, but the muscle spasms in my jaw have slowed down. My jaw is still swollen, but the lip is better. We had a very nice birthday dinner for Rachel last night (Andrew's lovely wife). All the kids and grandkids were at the table together. So, Happy Birthday Rachel! I watched my beloved Missouri Tigers lose Saturday night. UGH! And Alex finished 16th in backstroke, but has knocked about 10 seconds off his backstroke time this year, and his freestyle time, so he's on track to be a good swimmer. My friends, Jason and Erika are coming for a visit today, so that's fun! And with that, I'll get this out the door and hope that you have a Marvelous Monday!

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837

Details of Greek aid package boosts the euro...

ChuckButler — Mon, 12 Apr 2010 13:39:17 GMT

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In This Issue..

* Details of Greek aid package boosts the euro...
* Officially the US recession is still not over...
* Commodity currencies take a breather...
* Polish zloty holds steady after tragedy...

And Now... Today's Pfennig!

Details of Greek aid package boosts the euro...

Good day, and welcome to another week. It is a holiday here in St. Louis, as it is the home opener for Cardinal nation. Looks like the fans will have an absolutely perfect day for the celebration, with sunny skies and temps in the upper 70's. Opening day truly is a local holiday, and a big number of workers will be calling in sick in order to go downtown to enjoy the festivities. Let's hope the Cardinals can bring the home crowd a winner!

The EU gave the euro a big boost over the weekend as they announced the details of a $61 billion aid package for Greece. The announcement of the details calmed the markets and sent the euro shooting up close to $1.37 for the first time since mid March. The plan was hammered out back on March 25th, but details of how the aid package would be structured were not revealed, causing many to question it. Now that the details have been revealed, traders reversed some of their short positions and the euro has recovered.

But Greece has still not asked to use any of the loan package which has been offered by the EU. The Greek Prime Minister called the agreement a 'loaded gun on the table' which he hoped would halt the rise in borrowing costs for Greece. "Our goal is, and we believe we can, to continue to borrow smoothly from the markets," Financial Minister George Papaconstantinou told reporters yesterday. "The Greek government hasn't asked for this mechanism to be activated, even though it is already immediately available." For now, the 'loaded gun' on the table seems to have sent the short sellers heading for the door, which is exactly what the EU wanted to accomplish. In an ideal world, just the existence of the aid package will allow Greece to refinance their debt a slightly better yields than what the markets were demanding over the past month, and will buy them enough time to implement their austerity plans. Now the burden has shifted to the Greek government; it will be up to them to get the spending cuts passed and bring down their deficits.

The euro's advance sent the dollar index down by the most in over a month with currencies closely associated with the European continent performing the best. The Euro and Danish Krone were the best performers, climbing over .7% vs. the greenback. The Swiss franc also gained over .5%, and the Swedish krona, British Pound, and Norwegian krone gained over .33% vs. the US$. The commodity currencies, which had been outperforming all others lately, took a break and slid a bit vs. the US$ as oil moved lower.

The only data released on Friday here in the US was wholesale inventories, which increased a bit more than expected. Inventories at US wholesalers in February increased by .6% following a .1% increase the month previous, a number which was revised up from the original estimate which showed a .2% drop for January. Sales advanced .8%, causing wholesalers to begin restocking shelves after a record reduction in stockpiles last year. The tight inventories should help give the US economy a bit of momentum once it starts pulling out of the recession; as companies will have to boost production as demand picks up. The rebuilding of inventories were reported to have accounted for two-thirds of 4th quarters 5.6% pace of economic growth here in the US. Inventories contributed 3.8% to the GDP from October through December, the most in 22 years.

But in order for companies to continue this inventory rebuilding, they will want to see further proof of the recovery. The committee of economists who are charged with determining the official turning points in the nation's business cycles isn't yet convinced that we have seen the end of the latest recession. The committee is expected to announce today that it cannot yet declare an end to the recession that began in December 2007. Despite recent data which show some improvements in employment and income, the committee still worries that the US economy could double-dip back into recession. The uncertainty for the US recovery will continue to weigh on the dollar, and keep investors guessing with regard to interest increases by the FOMC. I don't see the Fed raising rates here in the US until sometime next year, and currencies of those countries which are further along in their interest rate cycles will outperform the greenback in 2010.

The Brazilian real is certainly one of those currencies. The real has not done much vs. the US$ this year, after posting the best performance of any currency in 2009. The Brazilian government has been selling their currency and buying dollars in order to cool the appreciation of the real, and this intervention has worked thus far. But as Chuck always says, you can only swim against the tide of the markets for a short while. And the central bank of Brazil just doesn't have the deep pockets it takes to stage a long term battle against the currency markets. As the global economy recovers, higher commodity prices and interest rate differentials will move many investors toward the Brazilian real, which could come back to be one of the best performers again in 2010.

Two other commodity based currencies were down a bit over the weekend. Both the Australian dollar and Canadian dollar have been strong performers, with the loonie hitting parity with the US$ and the Aussie dollar creeping within spitting distance of the $1 mark. Data released in both countries caused both currencies to back off of their recent gains vs. the US dollar. The Canadian dollar fell from parity after a report showed Canada's employment failed to increase as much as economists had predicted. The report showed a 17,900 job gain in March after the Canadian economy added 20,900 jobs the month previous. Canada's unemployment rate held at 8.2%, high but still trending lower. Bank of Canada Governor Mark Carney signaled last month that he is open to raising the benchmark overnight interest rate from a record low as soon as June 1. An interest rate move by the BOC should push the loonie back through parity with the US$.

The Australian dollar fell after a report showed the housing market is weakening. The number of loans granted to build or buy houses and apartments in Australia dropped 1.8% from January according to a report released earlier today. This was almost double the number expected by economists, and showed the housing sector is cooling. But this isn't necessarily a bad thing, and is in fact what Central Bank Governor Glenn Stevens wanted to see. He has been aggressive with interest rate moves in order to make sure a housing bubble doesn't inflate in the land down under. While the data caused a pullback by the Australian currency, I think the cooling of the housing market is a long term positive for the Australian economy and look for any pullback by the Aussie dollar as a good opportunity to add to positions.

The Polish zloty held reasonably steady after the tragic plane crash over the weekend which killed Poland's president and central bank chief. The zloty declined immediately following the news of the wreck, but then erased earlier declines and actually saw a bit of an increase in early European trading. The Polish economy has held up well during the global financial crisis, and state-asset sales have helped fund the budget deficit. The zloty is up slightly on the year vs. the US$, with a .48% YTD return. The loss of the President, central bank Governor, and several leaders of the opposition and military is a major tragedy, and will probably weigh on the zloty in the coming months, limiting any currency appreciation.

Staying in the region, the Russian ruble gained to its strongest level against the dollar in more than four months as the Greek bailout helped stabilize recovery prospects. With oil prices moving above $85 again, the Russian ruble has been able to post over a 3.5% gain vs. the US$ in 2010. The higher ruble will help investors who purchased our popular BRIC MarketSafe CDs. Speaking of MarketSafe CDs, expect a big announcement this week regarding our newest MarketSafe offering! I can't give you details, but it will be based on the price of metals. Again, don't call the desk, as we don't have information to give you, but stay tuned to the Pfennig and you will be one of the first to find out about out latest offering.

Currencies today 4/12/10: American Style: A$ .9273, kiwi .7126, C$ .9933, euro 1.3591, sterling 1.5426, Swiss .9429, European Style: rand 7.2394, krone 5.8846, SEK 7.169, forint 195.34, zloty 2.8478, koruna 18.5488, RUB 29.00, yen 93.58, sing 1.3916, HKD 7.7585, INR 44.5038, China 6.8257, pesos 12.2005, BRL 1.764, dollar index 80.566, Oil $84.84, 10-year 3.89%, Silver $18.485, and Gold... $1,164.90

That's it for today... We are celebrating opening day here in the office with a special 'ballpark lunch' of dogs and brauts, and everyone is wearing their Cardinal red. We had an absolutely gorgeous weekend, and it was packed full of activities. Both Christine Peplow and I ran in the GO St. Louis marathon, I ran the half marathon and Christine participated in a relay team which ran the full marathon. We both did better than our goal times, so yahoo for us!! We have a visitor on the desk this week, welcome to Mike Harrel who is joining us from Jacksonville to learn more about the currency and metals markets. That will do it for today, hope everyone has a Marvelous Monday. GO CARDINALS!!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Has Germany just killed the dream of a European superstate?

JohnMauldin — Mon, 22 Mar 2010 19:26:00 GMT

While the US was focused on the health care drama over the weekend, over across the pond events are rapidly deteriorating in euro land. For this week's Outside the Box I offer two columns, one from the Financial Times and another from the London Telegraph. Both describe the problems that the eurozone faces. It is not pretty.

I was sent this note from a Steve Stough who translated this from a German TV news show' It is a nice set-up for the two short columns.

I was reading an interview with Germany's most-quoted economist and then, all of a sudden, his face pops up on a TV show (a panel discussion on Germany's version of Fox Business News) at the same time, so I paid close attention. Hans-Werner Sinn's remarks are apparently listened to as closely as are the Federal Reserve Chairman's remarks in the US. He said:

The Greek drama will have a 'frightful' ('schreklich') ending no matter which course of action is taken. The objective is to avoid having a Greek default trigger another banking crisis across the EU.
The EU member states are too financially fragile to take on any flaky Greek debt. The actual Greek deficit is running at 16% of GDP, not 12% as previously reported. Greece is in a deepening retraction, not a recovery, as previously claimed. [Germany's social security, welfare, unemployment, and health care entitlement programs are all running cash-negative or soon will be, but that is another subject entirely. Angela Merkel has a committee established to work on tax reform, meaning tax rate reductions - Steve].
There are three bad alternatives. He recommends #3 (effectively, default):
1. A Franco-German bailout. Dr. Sinn believes this is impractical and the worst of the three alternatives because the amounts required for an effective bailout are so large that it would trigger a jump in yields on French and German sovereign debt which would result in a Euro-wide financial crisis. In addition, Angela Merkel said 'no,' and so did Guido Westerwelle (her coalition partner and foreign minister).
2. IMF loans. Dr. Sinn believes that this would accelerate the Greek economic contraction with a dramatic deflation of wages and prices, which could lead to civil war, revolution and a political destabilization of the area.
3. Exit the Euro zone, revive the Drachma, re-denominate the sovereign bonds in Drachma, let the Drachma collapse, and rebuild after the collapse, largely on tourist remittances Assuming a small amount of domestic (internal) default, this would be the least-painful to the Greek populace, but German banks and investors would lose approximately $38 Bn in bond investments +/- what can be recovered after the Greek economy recovers. Eventually, Greece would be allowed to re-join the EU.
Formation of an EU monetary fund is out of the question, he believes, because it requires treaty modifications that might take many years to pass.
As an aside, he said that if German tax rates are not lowered, that Germany will slide back into recession.

Steve Stough

As a quick aside, I know I said two weeks ago that I would do an assessment of the affect of taxes on the US economy. I decided to hold off until we can see what the health care taxes rally look like, rather than guessing. I will get to it, as I am quite curious as to the total level of the tax increases.

Now, to this week's OTB.

John Mauldin, Editor
Outside the Box

Has Germany just killed the dream of a European superstate?

By Ambrose Evans-Pritchard from the Telegraph

German Chancellor Angela Merkel has little hope of selling a bail-out of Greece to German voters

German and Dutch leaders have concluded in the nick of time that they cannot defy the will of their sovereign parliaments by propping up a country that lied about its deficits, or risk court defeats by breaching the no-bail-out clause in Article 125 of the EU Treaties.

Chancellor Angela Merkel has halted at the Rubicon. So has Dutch premier Jan Peter Balkenende, as well he might in charge of a broken government facing elections in a country where far-right leader Geert Wilders is the second political force, and where the Tweede Kamer has categorically blocked loans for Greece.

The failure of EU leaders to cobble together a plausible bail-out - if that is what occurs at this week's Brussels summit - is a 'game-changer' in market parlance. Eurogroup chair Jean-Claude Juncker said last month that such an outcome would shatter the credibility of monetary union. It certainly shatters many assumptions.

There will be no inevitable move to fiscal federalism; no EU treasury or economic government; no debt union. It is Stalingrad for the federalist camp and the institutions of the permanent EU government.

I remember hearing Joschka Fischer, then German Vice-Chancellor, telling Euro-MPs a decade ago that EMU was "a quantum leap ... creating an inexorable federal logic". Such views were in vogue then.

Any euro crisis would force Europe to create the necessary machinery to make it work, acting as a catalyst for full-fledged union. Yet the moment of truth has come. There is no quantum leap. We have a Merkel pirouette.

Paris is watching nervously. As Le Monde put it last week, "behind the question of aid to Greece is a France-Germany match that pitches two conceptions of Europe against each other." The game is not going well for 'Les Bleus'. The whole point of the euro for the Quai D'Orsay was to lock Germany into economic fusion. Instead we have fission.

EU leaders may yet rustle up a rescue package that keeps the IMF at bay, but alliances are shifting fast. Even Italy has slipped into the pro-IMF camp, knowing that rescue costs can be shifted on to the US, Japan, Britain, Russia, China, and the Saudis, lessening the burden for Rome.

Besides, too much has been said over the last week that cannot be unsaid. Mrs Merkel's speech to the Bundestag was epochal, a defiant warning that henceforth Germany would pursue the German national interest in EU affairs, capped by her call for treaty changes to allow the expulsion of fiscal sinners from Euroland. Nothing seems so permanent about the euro any more.

Days later, Thilo Sarrazin from the Bundesbank blurted out that if Greece cannot pay its bills "it should do what every debtor has to do and file for insolvency. This would be a suitably frightening example for every other potentially unsound state," he said, pointedly excluding France from the list of sound countries.

Dr Sarrazin should be locked up in a Frankfurt Sanatorium. It was such flippancy that led to the Lehman disaster, requiring state rescues of half the world's financial system. A Greek default would alone be twice the size of the combined defaults by Argentina and Russia. Contagion across Club Med would instantly set off a second banking crisis.

Some suspect that ultra-hawks in Germany want to bring the EMU crisis to a head, deeming delay to be the greater danger. How else to interpret last week's speech by Jürgen Stark, Germany's man at the European Central Bank, calling for tightening to head off inflation.

This is alarming. Core inflation in Euroland was 0.9pc in February, the lowest since the data series began. It is certain to fall further as the doubling of oil prices fades from the base effect. M3 money has been contracting for a year. Business credit is shrinking at a 2.7pc rate.

So, it is not enough for the EU to impose a fiscal squeeze of 10pc of GDP on Greece, 8pc on Spain, and 6pc on Portugal, and 5pc on France over three years, we need a dose of 1930s monetary policy as well to make sure life is Hell for everybody.

Be that as it may, Greece's George Papandreou says his country is in the worst of both worlds, suffering IMF-style austerity without receiving IMF money - which comes cheap at around 3.25pc. So why allow his country to be used as a "guinea pig" - as he put it - by EU factions pursuing conflicting agendas?

The IMF option has its limits too. The maximum ever lent by the Fund is 12 times quota, or €15bn for Greece, not enough to nurse the country through to June. The standard IMF cure of devaluation is blocked by euro membership. So Greece will have to sweat it out with a public debt spiralling to 135pc of GDP next year, stuck in slump with no exit route.

The deeper truth that few care to face is that under the current EMU structure Berlin will have to do for Greece and Club Med what it has done for East Germany, pay vast subsidies for decades. Events of the last week have made it clear that no such money will ever be forthcoming.

Let me be clear. I do not blame Greece, Ireland, Italy, or Spain for what has happened. No central bank could have tried more heroically than the Banco d'España to counter the effects of negative real interest rates, but the macro-policy error of monetary union washed over its efforts.

Nor do I blame Germany, which generously agreed to give up the D-Mark to keep the political peace. It was the price that France demanded in exchange for tolerating reunification after the Berlin Wall came down.

I blame the EU elites that charged ahead with this project for the wrong reasons - some cynically, mostly out of Hegelian absolutism - ignoring the economic anthropology of Europe and the rules of basic common sense. They must answer for a depression.

Gaps in the eurozone 'football league'

By Wolfgang Münchau from the Financial Times

At last we are heading towards a resolution, albeit a bad one. After weeks of pledges of political and financial support, Angela Merkel appears ready to send Greece crawling to the International Monetary Fund.

Germany cites legal reasons for its position. In past rulings, its constitutional court has interpreted the stability clauses in European law in the strictest possible sense. These rulings have left a deep impression among government officials. It is hard to say whether this argument is for real or is just an excuse not to sanction a bail-out that would be politically unpopular. It is probably a combination of the two.

I have heard suggestions that a deal may still be possible at this week's European summit, but only if everybody were to agree to Germany's gruesome agenda to reform the stability pact. That would have to include stricter rules and the dreaded exit clause, under which a country could be forced to leave the eurozone against its will. I am not holding my breath.

But either outcome will mark the beginning of the end of Europe's economic and monetary union as we know it. This is the true historical significance of Ms Merkel's decision.

While Greece faces the most acute difficulties, it is not the only member in trouble. There are at least four - Greece, Spain, Portugal and Ireland - that are probably not in a position to maintain a monetary union with Germany under current policies indefinitely. There may be several more, where the problems are not yet quite so evident. In the presence of extreme current account imbalances and a lack of bail-out or fiscal redistribution mechanisms, a monetary union among such a diverse group of countries is probably not sustainable.

In a column several weeks ago I put forward three conditions necessary for the eurozone to survive in the long run: a crisis resolution mechanism, a procedure to deal with internal imbalances, and a common banking supervisor. Since then, things have been moving in the wrong direction on all three counts.

For a start, we have come from a situation in which the "no bail-out" clause of the Maastricht treaty, having been almost universally disbelieved for 10 years, is suddenly 100 per cent credible. The minute the IMF marches into Greece, all ambiguity will end.

The debate on imbalances is also regressing. It would be unreasonable to ask Germany to raise wages or cut exports, but there is a legitimate complaint about Germany's lack of domestic demand. Berlin should accept it needs to develop a strategy. But the opposite is happening. Rainer Brüderle, economics minister, said last week there was nothing the government could do about demand because consumption was a decision by private individuals. A senior Bundesbank official even compared the eurozone to a football league, in which Germany proudly held the number one slot. The long-term direction of fiscal policy is even more alarming, as the gap between Germany and the others will widen.

On banking supervision, the main reason for a common European system is macroeconomic. In a monetary union, imbalances would matter a lot less if the banking system were truly anchored at the level of the union, not the member state. As banks can obtain liquidity from the European Central Bank, even extreme and persistent current account deficits should not matter in good times. But they matter in times of crisis. For as long as bank failures remain a national liability, persistent imbalances could ultimately lead to a national insolvency. If the banking sector were genuinely European, imbalances would still be an important metric of relative competitiveness but we would need to worry a lot less, just as we do not worry about the current account deficit of a city relative to its state.

The lack of a bail-out system, of an agenda to reduce imbalances and of a common banking system are realities that investors should take into account when making long-term decisions, as should policy-makers when they make important choices for citizens. The reality is that the eurozone, as it works today, is not a monetary union but a souped-up fixed exchange rate system.

In the past, global investors have placed a lot of trust in European politicians. They believed Peer Steinbrück, the former German finance minister, in February 2009 when he ended a speculative attack on Ireland, Greece and others with a simple statement of support. They also believed, as I did myself, that political leaders would ultimately do the right thing to save the system, having first explored all the alternatives. As I follow the political debate in Berlin, I am no longer certain that is the case.

Ms Merkel is not a politician driven by a strong historical destiny, unlike Helmut Kohl, her predecessor but one as chancellor. However real the constitutional problems may be, I suspect Mr Kohl would never have hidden behind a technical or legal argument on such a crucial issue.

Europe's current generation of leaders lacks this accident-avoiding instinct. So when Ms Merkel and her colleagues in the European Council see the iceberg coming, they will tend to rush not to the helm but to the nearest constitutional judge.

I am not predicting a catastrophe. I am merely pointing out that the present policy choices are inconsistent with the survival of the eurozone in its current form.

US data fails to move the markets...

ChuckButler — Fri, 19 Mar 2010 14:24:00 GMT

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In This Issue..

* US data fails to move the markets...

* EU split on Greek bailout...

* Rogers is a seller of pounds...

* Goldman says the renminbi is fairly valued...

And Now... Today's Pfennig!

US data fails to move the markets...

Good day... It is Friday and the end of what seems like a long week for yours truly. While I have enjoyed my time in Florida, I look forward to be able to sit down at my desk to write Monday morning instead of dealing with intermittent access to the internet and a slight lack of market information. You can get the data just fine on the road, but you miss out on the 'feel' of the markets when you aren't on the desk.

But luckily for me, economic data is what ruled the markets yesterday. We had a plethora of data released in the US, but the markets seemed to be focused on the release of CPI and the weekly jobs numbers. CPI led off Thursday morning's data showing prices in the US were unchanged for the month in February from the .2% gains we saw at the start of the year. The core number was up .1% offsetting a .1% dip in January. The YOY (year on year)number showed a drop in the inflation rate to 2.2% from 2.7%. We all know how manipulated this data is, and our friends over at ShadowStats reported the non-seasonally adjusted number was actually just over 5%, which is certainly more realistic. But while this number is higher than the 'official' number, it showed a similar decline; diffusing a rumor which swirled around the markets yesterday afternoon.

Predictions of another 'surprise' move in the discount rate began making the rounds of the trading desks as we approached the close yesterday. A month ago the Fed shocked the market with a .25% move in the discount rate; a move designed to pull back some of the liquidity pumped into the market to stimulate recovery. But bank borrowing at the discount window has been unchanged since the last increase, so many now believe we will see another surprise move by the Fed. "Another increase in the discount rate could be coming soon," Laurence Meyer, vice chairman of Macroeconomic Advisers in Washington said in a recent interview. I always pay attention to Mr. Meyer's comments, not only because he was a former Fed governor, but he was also one of my favorite economics professors at Wash U.

We didn't get a surprise move last night, but it shows the markets continue to be volatile as the Fed continues to try and exit the stimulus measures. The CPI data quieted those calling for an early move up by the FOMC but in spite of this data, the overall market is still fairly hawkish on Fed expectations. Economists are now predicting three interest rate hikes in the next year with a 13.5% probability of a hike in June. As I wrote earlier this week, I don't think we will see the FOMC move to increase the Fed Funds rate until later in the year (if at all).

The jobs data certainly didn't calls for higher interest rates. The weekly data showed a 6,000 dip in unemployment claims vs. last week, but they remained high at 457k. Continuing claims were up again, climbing 12,000 to 4.579 million. The 'official' unemployment rate was unchanged at 3.5%. But we all know the actual numbers are much worse, and referring back to ShadowStatistics www.shadowstats.com, I see the un-government corrupted employment rate remains above 20%. The numbers show that while the US economy may be recovering, it is a jobless one.

The data kept rolling in yesterday, with the current account deficit showing an increase of over 13 billion during the fourth quarter to a figure of $115.6 billion. This equals 3.2% of GDP, the largest deficit since the fourth quarter of 2008. The leading indicators of the US economy for February was the last piece of data released yesterday, and showed a minuscule increase of just .1%. While the number did move up a bit, underlying details show continued weakness in many of the components. A stubbornly weak housing market and poor employment prospects kept consumer expectations at low levels; pulling down the leading indicators.

This data seemed to be far from supportive for the US$, as it showed the US economy may be slipping back toward a slowdown. And while you would think this combination of poor data would have caused a move lower by the greenback, the dollar actually moved higher in the past 24 hours.

It seems traders are willing to ignore the poor economic fundamentals of the US and continue to purchase the dollar as a 'safe haven'. And the continued questions over the Greek bailout or non-bailout by the EU sent fear back into the markets. There was no real news on the Greek crisis overnight, and the major EU members seem to be at a stalemate on the issue. France is backing the announcement earlier this week that the EU would stand behind Greece, but Germany continues to call for Greece to ask the International Monetary Fund for help. The split has caused over a 1 cent drop in the euro which will close the week with the largest 5 day drop since the crisis raised its ugly head in February.

The Euro was the major currency story this morning on the news wires, but there were a couple of other stories which caught my eye. James Rogers, who continues to be a long term bull on the commodity markets, announced yesterday that he is again a seller of the pound sterling. Rogers co-founded the Quantum Fund with George Soros, who made $1 billion betting against the pound in 1992. "I doubt that I will own sterling in my lifetime," said Rogers in an interview on Bloomberg TV. He said continuing deficits in the UK will sink the sterling.

While he is jumping on the bandwagon with this call for a lower pound, he is going against the grain concerning the euro. He believes the EU should let Greece go bankrupt, and not bail them out. If this occurred, the euro 'would go through the roof' as investors would now look at it as a hard currency. But he says there is probably a good chance the Europeans will reach an agreement and 'paper this crisis over' which will probably increase the value of the euro in the short run. He continues to believe gold will go 'much higher' in the next decade and remains bullish in general on commodities. He also believes the Chinese economy will continue growing, and said he isn't worried about asset 'bubbles' in China.

The US congress continues to push Treasury Secretary Tim Giethner to brand China as a currency manipulator, and is threatening to take measures aimed at forcing the Chinese to let their currency appreciate. Chinese Premier Wen continues to say the currency is not undervalued, and Goldman Sachs Chief Economist Jim O'Neill announced this week that he agrees. O'Neill told reporters that the currency "actually isn't particularly undervalued anymore" and "it's unfortunate that we have so much political angst around this. The key thing is that post-crisis, China is importing a lot."

Goldman's stamp of approval is big, as we all know the influence they enjoy in our nation's capital. Other big NY banks are also warning congress against pushing China too hard. Stephen Roach captured many headlines in the financial news sections today when he said "We should take out the baseball bat on Paul Krugman" who has been beating on congress to step up pressure on China for keeping its exchange rate unchanged vs. the US$. Krugman has called on congress to get more aggressive with China by instituting duties and escalating a trade war.

Overall, the dollar enjoyed a bit of strength yesterday, and with no data due to be released this morning, we will probably see further increase today. Continued worries over the Greek crisis, and a the possibility of sanctions against China will keep investors worried. Recent history shows these worried investors continue to be most comfortable parked in US treasuries, which will probably keep the dollar stronger for a while.

Currencies today 3/19/10: American Style: A$ .9203, kiwi .7154, C$ .9822, euro 1.3596, sterling 1.5153, Swiss .9467, European Style: rand 7.3195, krone 5.8654, SEK 7.1194, forint 192.545, zloty 2.8458, koruna 18.64, RUB 29.292, yen 90.46, sing 1.3951, HKD 7.7594, INR 45.472, China 6.8263, pesos 12.523, BRL 1.7917, dollar index 80.27, Oil $81.02, 10-year 3.625%, Silver $17.345, and Gold... $1,123.00

That's it for today...... I am heading back home to St. Louis later today, and am looking forward to getting back. I feel a bit like a kid, as I get to go and pick up a new bike which I bought a few weeks ago. I am training for a half-ironman triathlon later this summer, and finally convinced my wife that I needed a new 'tri bike'. The weather looks better here today, and those staying down for the weekend are supposed to be treated with a beautiful 75 degree weekend (of course it gets warm as I am leaving!). Chuck is having a great time down in spring training, and sent me a text message to my phone of the Cardinal spring training game yesterday. Got to get this out, so I'll end by wishing everyone a Fantastic Friday a Wonderful Weekend!

Chris Gaffney, CFA

Vice President

EverBank World Markets

1-800-926-4922

1-314-647-3837

The Pain in Spain

JohnMauldin — Sat, 20 Feb 2010 05:30:00 GMT

Germany, Greece, and Spain
Two Views on the Euro
The Pain in Spain
How Much Is Too Much?
Tampa, Austin, and California

Last week we talked about Greece. But the problems are more than just Greece. We look at two very different views of the euro, and then opposing thoughts on Spain. Is Spain a problem or not? And how can the US keep on spending? Is there a limit? There is a lot to cover in what has been an interesting, if confusing, week.

Before we get into the meat of the letter, I want to give you a chance to register for my 7th (where do the years go?!) annual Strategic Investment Conference, cosponsored with my friends at Altegris Investments. The conference will be held April 22-24 and, as always, in La Jolla, California. The speaker lineup is powerful. Already committed are Dr. Gary Shilling, David Rosenberg, Dr. Lacy Hunt, Dr. Niall Ferguson, and George Friedman, as well as your humble analyst. We are talking with several other equally exciting speakers and expect those to firm up shortly.

Look at that lineup. These are the guys who got the calls right over the past few years. They called the housing crisis, the credit bubble, and the recession. And, in my opinion, these are some of the best in the world at giving us ideas about where we are headed.

Comments from those who attend the annual affair generally run along the lines of, "This is the best conference we have ever been to." And each year it seems to get better. This year we are going to focus on "The End Game," that is, on the paths the various nations are likely to take as they try to solve their various deficit problems, and how that will affect the world and local economies and our investments. We make sure you have access to our speakers and get your questions answered, and you'll come away with excellent, practical investment ideas.

This conference sells out every year, and it looks like it will do so this year. You do not want to miss it. There is a physical limit to the space. Every year I have to tell people, including good friends, that there is no more room. Don't wait to sign up. There is still an early-registration discount. And while it pains me to say it, you must be an accredited investor to attend the conference, as there are regulations we must follow in order to offer specific advice and ideas. Click on the link and sign up now. https://hedge-fund-conference.com/2010/invitation.aspx?ref=mauldin

Germany, Greece, and Spain

Let's start with a little theater of the absurd. Quoting from a Reuters story (you can't make this up!):

"Greek opposition lawmakers said on Thursday that Germans should pay reparations for their World War Two occupation of Greece before criticizing the country over its yawning fiscal deficits.

"How does Germany have the cheek to denounce us over our finances when it has still not paid compensation for Greece's war victims?" Margaritis Tzimas, of the main opposition New Democracy party, told parliament."

This was during a debate in the Greek parliament on how to handle the Greek debt. And it was echoed by both the left and right political parties. Somehow they forgot about the German government paying 115 million deutschmarks in 1960, not a small sum back then. It seems that many Greek politicians are still in the denial stage of dealing with this crisis.

In Germany, it is becoming increasingly clear that there is little political will to bail out the Greeks without severe austerity measures that will further increase an already deep recession. But I wrote about that last week. Nothing has really changed, except that it has become even less clear how all this will unfold. But whatever happens, there is no positive outcome for the Greeks. Only less bad outcomes.

Well, a few things did happen. The rest of the EU took away the vote on some issues from Greece, and there are noises that if the Greeks do not take severe enough measures, they (the EU) will step in and take over. Now THAT would be an interesting spectacle. Just what the market likes: lots of confusion. Try selling a Greek bond in the midst of a modern Greek tragedy.

There are those, both in Europe and without, who think a default by Greece will mean the end of, or at least do serious damage to, the euro. Count me among the skeptics on that, as a default by California would not do much damage to the dollar. Greece is only about 2.5% of the Eurozone GDP. It would be a problem, and maybe even a crisis, as European banks have large Greek debt exposure; but Germany in fact could bail out its banks a lot more cheaply than bailing out Greece. And Portugal is even smaller.

I wrote in 2003 that I thought the euro (then at $.88) would go to $1.50 (it got to $1.60) and all the way back to parity ($1) over the course of many years. I still think so. It has and will be a long and rocky road. It is still not clear how all of the problems in the eurozone countries will be resolved, and by that I mean the serious entitlement liabilities they will face in the middle of the decade.

Oh, and as a reminder, I wrote last year and at the beginning of this year that the dollar was going to get stronger. I got more than a few people telling me I was, well, wrong, with varying degrees of politeness. (You need a thick skin to write this letter!)

Two Views on the Euro

My good friends David Kotok and Dennis Gartman illustrate the two sides of the euro debate. Dennis has long been a euro skeptic, and of late has been especially forceful as he writes about the problems of the euro. David runs around with serious international thought shapers in Europe. David wrote a letter to Dennis this week, and Dennis responded. I am taking the liberty of reprinting part of that conversation, as it sets up the discussion we will have nicely.

Dennis,

Most of the time you and I are simpatico in view. But this time we are on totally opposite sides. You predict the EUR is toast. I think it emerges from this stronger than ever and that the weaker system is now the deficit-ridden US. I have organized and chaired conferences and seminars in Europe for the last decade as program chair of the GIC, www.interdependence.org. The next one is in June in Paris and Prague, to which I am inviting you with this email.

In the course of this decade those meetings have ranged in location from south (Italy) to Baltic (Estonia) to west (Ireland). All of these meetings were multinational. None of them had language or cultural barriers. All of these various hosts were gracious and hospitable and welcoming. All of them had goodwill among nationals of the various European countries. None of them had internal antagonism.

Come with me in June and see this with your own eyes. Europe wants a hard currency and better economics and knows how to get it. The Greeks will end up better off and the politics will force it.

I am a euro bull. All the best. By the way, I still want you to come fishing with me.

David [Kotok]

Dennis answered.

David,

I'm writing from Calgary this morning. Nice town, and not all that cold. Nice people out here in Canada's west. I always feel better about the world when I get to the Canadian west.

We do indeed disagree on the EUR, David, and I hope you are right, but I fear you are wrong. These cultural differences are simply too great to be overcome. I have always been a EUR skeptic, and have been surprised that the whole experiment has lasted this long, but the Germans are not going to allow any of their money to be shipped to Athens to defend Greeks who have no pride in their own country [and are] tax-paying scofflaws. The German's felt put-upon by the rest of Europe when they paid for the cost of reunification entirely, and they have no intention of now paying for Greeks who thumb their noses at law and fiscal responsibility.

Right now, the market's sayin' I'm right, and for now I'm going to press the issue until the market tells me I'm wrong, David. It's all I know to do. Expecting Papandreaou to change his fiscal spots is simply not wise. He has been a profligate all his life; so too his father. It is genetic and it aint' gona' change.

Be well, my friend. We can disagree and still be impressed by one another's work. I know I am.

Dennis Gartman

Who's right? In an odd way, both of them.

Let's look at what I think is the difference between my two friends. If you read European papers and briefings by serious economists and euro politicians, the idea of the eurozone breaking up is simply unthinkable to them. So much time and effort was put into creating the euro to begin with that there is a lot of vested interest in keeping it. (And by the way, let me be clear that the world is better off with a viable euro.) When David goes to Europe, as he often does, he meets with the top tier of business, investment banking, and central banking circles. And they assure him they will figure this out. These are the thought leaders who brought the euro together in the first place.

Dennis listens to the trading floors and people in the streets. He was a man born in the trading pits. He rightly looks at the politics of Greece and Germany and says that is a "dog that won't hunt."

In the short term, a Greek default will put significant pressure on the European banking system and through that the euro. But it is not the end of the world for the euro. Ultimately, in the grand scheme of things, the value of the euro, within limits, is not significant. If it falls to dollar parity there are winners and losers, of course. European exporters will be delighted. So will be their farmers. If you are a consumer buying goods outside the eurozone, you will not be as happy.

But the valuation of the euro is not in and of itself a reason for the euro to disappear. At one time it was $.82. Then over $1.60. All currencies fluctuate, some more than others. What destroys them is political malfeasance.

What would put the euro at risk of a bad political decision? A Greek bailout without serious conditions would be the one thing that could be a very bad start to a downward spiral. If Greece is bailed out, then why not Portugal or Spain or Ireland? What about the emergency room crisis that is Austrian banks?

The line has to be drawn, and it has to be a hard line. And basically, what David is saying is that the serious leaders with whom he is in contact get it. But it is not certain how things will play out. Will Greek politicians and unions blink when faced with reality? Polls show that a majority of Greeks now favor making serious budget cuts. And the reality is that they will lose access to the credit markets if they do not make major spending cuts and get some kind of pan-European guarantee for their new debt. Losing access to the credit markets will mean even more (and immediate!) drastic cuts.

The real choice for the Greeks is whether to stay in the monetary union. Of course, leaving and defaulting on their debt also cuts them off from the credit markets. It is a sad reality they face.

The Pain in Spain

That of course brings us to the elephant in the room – Spain. While the eurozone can survive a Greek default or a serious Greek depression, Spain is another story. Spain is a very large country whose deficits, if not brought under control, could in fact tank the euro.

Spanish leaders have been all over Europe, loudly proclaiming that they are not Greece. However, their current fiscal deficit is in the same league (9%), and they have other problems. And just as Dennis and David disagree, this week I had two reports on Spain hit my inbox the same day, from two of the groups I respect the most. And they do not agree abut the future of Spanish debt.

The first was from the European team of the Bank Credit Analyst. I have been reading BCA for decades, and they have a real knack for being right. I pay attention when they write something. They are a serious research firm, and consult with the biggest firms in the world. It is not an exaggeration to say the central bankers pay attention to them.

And they think Spain is going to work out. Let's look at a few paragraphs from their latest report:

"Listen to the current market commentary and you might be forgiven for thinking that history is repeating itself. We don't want to minimize the country's woes. Unemployment has after all just breached the psychologically brutal level of 4 million.

"But much of the analysis is backward looking. What the markets fear has already happened. A rerun of the Greek debt crisis is not inevitable, Spanish bonds are cheap relative to Bunds and many of the cyclical imbalances are on the mend. Spain has already undergone 18 months of painful economic adjustment. The current account deficit in relation to GDP has more than halved to 4.6% from its peak in 2008, when in absolute terms it was the second highest in the world after the US.

"The budget shortfall is beginning to roll over, a reduction plan is in place and the public debt-to-GDP ratio is 60%, barely more than half the Greek ratio. Most importantly, the inflation rate has converged with the euro zone average, one of many indicators confirming the decade-long adjustment to membership of the currency club is complete.

"Spain does not fit well into the caricature of a two speed Europe, with the south on a slow, unsustainable growth path. Its demographic profile is far more propitious to economic growth than Germany or France, never mind Greece and Portugal, and its policy makers are in many instances more vehement about the need for financial discipline. After all, it was Spain which recently attempted to get the EC to agree to penalties for countries that did not hit their economic targets, only to be blocked by Germany. If there is to be a euro crisis, it is not going to be Spain that causes it.

"... The shakeout in the labor market will bring a sharp short term jump in productivity, with policy changes providing additional help thereafter. Immigration creates the potential for Spain to grow its way back."

It was just a few months ago that I published a report from Variant Perception on the serious problems of Spanish banks. Spain has almost 20% unemployment and the government deficit is almost 9%. They have a trade deficit of 4%. Real GDP is down by 5%. Getting back to growth and a less severe government deficit is going to take some serious willpower from a socialist government. So I was glad to read that someone I respect as much as BCA thinks things will work out.

Then I read a short report by Ray Dalio and the team at Bridgewater. It is hard to get their work, but every now and then someone gets me a copy. I don't know Ray, but I have serious respect for his work. I am a huge fan. He is one of those men about whom the word brilliant can be used without risk of exaggeration. Bridgewater manages $80 billion or so for some of the largest institutions in the world. (www.bwater.com)

So what do they write about Spain? They are not as optimistic.

"[because of the recession] ... the Spanish government decided to run big budget deficits that have been funded with big borrowings, but the more the debt increases, the closer this approach is to coming to an end. As of now, conditions are tenuous but acceptable because most investors a) are used to thinking of Spain as being safe and not having wide credit spreads and b) have been inclined to pick up yield by holding debt that was generally considered safe, so they funded these deficits with narrow credit spreads.

"We do a lot of work estimating what a country's credit spreads should be in light of its cash flows and asset values and have made more than a few bucks doing this. Based on these criteria, we judge Spain's actual credit spread to be just about the narrowest relative to what it should be on the basis of its fundamentals -- i.e., the spread is 1.4%, and we would assess the fundamentals to warrant it to be 6.5%, on the basis of fundamentals alone.

"We judge Spanish sovereign credit to be much riskier than is discounted because it seems to us that there is a high risk that Spain won't be able to sell the debt that it needs to fund its deficits, and there is virtually no chance that the government can cut spending (nor does it want to). That is because a lot of debt is coming due; the Zapatero government is weak, very socialist and supported by a collection of factions (e.g., those in states seeking independence); and the Spanish people are now politically fragmented and only care about what money the government is going to give them. Also, the private sector debt problems have largely been kept under the rug rather than dealt with via restructurings.

"In other words, 1) Spain has big debt/deficit problems; 2) it is not dealing with these problems by doing the tough, forthright things to alleviate them; 3) it doesn't have the printing press to avoid the risk of default (unless the ECB helps them); and 4) it has a narrow credit spread. Situations like this, in the past, have been associated with both debt rollover and capital flight problems.

"... Spain's external debts, have exploded without a significant offset of external assets. On net, Spain owes the world about 80% of GDP more than it has external assets. As a frame of reference, the degree of net external debt Spain has piled up in a currency it cannot print has few historical precedents among significant countries and is akin to the level of reparations imposed on Germany after World War I. We don't know of precedents for these types of external imbalances being paid back in real terms.

"On top of the debt that needs to be rolled, Spain's cash flows (current account and budget deficit) are extremely bad. Spain's current living standards are reliant not just on the roll of old debt, but also on significant further external lending.

"For these reasons, we don't want to hold Spanish debt at these spreads."

And this, gentle reader, brings us to the heart of the problem. These are two very smart research houses with opposite conclusions. Having disagreements is not all that unusual. Disagreements are what makes for horse races and markets.

But the difference is in essence the same disagreement that David and Dennis have. It is one of political nuance. BCA thinks Spain will get its act together, and Bridgewater does not, or at least not until its hand is forced by the markets (my assumption, not theirs).

The amount of pain that Spain must endure to get it fiscal house in order should not be underestimated. Wages are going to have to fall relative to northern Europe for them to be competitive. The dependence on government is going to have to be reduced. This is not going to be easy for a socialist government with a very thin coalition.

And that brings us back to Greece. While Greece can be readily bailed out (assuming they accept large budget cuts) because it is small, Spain is too big to save. The European Union cannot set the precedent that countries that do not set their fiscal houses in order will be bailed out by countries that do.

This is the nature of the End Game I have been writing about. The decisions are now political. How do we unwind the debts and the leverage? How much pain do we postpone and how much do we take on today? It is the same question for much of Europe, Great Britain (serious problems there), Japan (which is a bug in search of a windshield), and the US. We now have a limited number of path-dependent options. By that I mean the political paths chosen by the various governments will dictate the economic path we go down.

How Much Is Too Much?

And to close, I want to show a chart from today's Wall Street Journal, from a column by Daniel Henninger.

This is the definition of an unsustainable path. Spending has grown 7 times as much in real (inflation-adjusted) terms as median household income over the last 40 years. Like Greece and Spain and much of the rest of the developed world, we will be forced to make hard choices. We cannot afford to do everything that even conservatives would like, let alone liberals. We cannot fight two wars, increase spending on health care, stimulate a faltering economy, and fun a 20% explosion in federal employees in just one year, etc., etc.

Pay attention to Greece and Spain and especially Japan over the next few years. Unless the US gets its fiscal house in order, we will be next. It will not be any easier for us in five years than it is for Greece today.

Tampa, Austin, and California

I leave way too early tomorrow morning to fly to Tampa to be with Jeff Saut, the chief investment officer for Raymond James. Sunday we will spend time on his boat in the bay, and then devote a few hours to work on Monday. Back Monday afternoon and then a quick one-day trip to Austin to be with George and Meredith Friedman of Stratfor, which is always fun.

Then Friday I leave for California to participate in the Singularity U executive conference for nine days, listening to lectures and such for about 12 hours a day on how the world is changing in a dozen different fields from biotech to medicine to nanotech to robotics, informatics, and more. It will be a jam-packed information event. I will be sitting with my computer, making notes on what strikes me as most interesting; and that will be the next Friday's letter, as I leave that day for San Antonio and a speech at the Cambridge conference and have to get my letter done early.

This week we found out that it is once again time for an audit from FINRA. While we have done these before, they do consume a lot of preparatory time. We had one about 20 months ago, and thought we were not due for a while, but evidently we are on the list again. I am all for audits of brokers, as they are needed, but it is not something I personally like going through.

Poor Tiffani, though, has to do most of the work for that. As she pointed out to them when they made the call, the last time they came it was a week before her wedding; and now it is just after she gets back from maternity leave and is behind in all her projects.

As she was walking out after the call that informed us of the audit (in two weeks), she gave a big sigh. "Audits before my wedding and after the baby. I wonder what the next big thing in my life is, because it looks like that will be when they do the next one." I could not help but laugh. Oh well, I guess you had to be there.

Have a great week. Get out and enjoy being with a few good friends, and find some good wine to share. I am bringing some of my marvelous birthday wine to Tampa. Wine is best when it is shared with friends.

Your thinking about how the End Game will look analyst,

John Mauldin