- The past several decades have witnessed an erosion of our manufacturing base in exchange for a reliance on wealth creation via financial assets.
- Fiscal balance alone will not likely produce 20 million jobs over the next decade. Government must take a leading role in job creation.
- A growing number of skeptics wonder whether college is worth the time or the cost.
The trader wrote about this subject back in Mid May, further reading on College Conspiracy-largest scam in U.S. history!
There seems to be no limit to policy uncertainties, ranging from Europe’s stuttering response to its debt crisis, to questions about the end of QE2 in the US, the debt ceiling debate, and that still-elusive balance between medium-term fiscal reform and immediate stimulus to counter a weakening economy.
When these issues are discussed, reference is often made to policymakers’ tendency of “kicking the can down the road.” Indeed, this phrase has been used so often that it prompted CNBC’s Joe Kernen and Becky Quick to solicit alternatives from the viewers of Squawk.
It appears that viewers are jumping on the invitation.
Some opted for “postponing the day of reckoning;” others preferred “delaying the inevitable;” and Michelle Caruso-Cabrera, who is reporting from Athens this week, proposed “extending and pretending.”
These are all great. My favorite, however, is a phrase suggested to me by a viewer of CNBC after I appeared on Squawk yesterday: “pushing a snowball down the hill.”
I like the phrase because it captures more than just the notion of delay. It also indicates that the size of the underlying problem gets bigger in the interim; and the phenomenon itself accelerates.
This is most visible in Greece where the situation has become critical.
European policymakers and the IMF have spent the last year treating the country’ predicament as a liquidity problem as opposed to what it is: a solvency and growth crisis. Unsurprisingly, and despite a massive bailout package and large sacrifices on the part of the Greek population, every single economic and financial indicator has markedly deteriorated. Indeed, the deterioration has gone well beyond the policymakers own expectations.
The Greek problem has morphed in other another troubling way. By ignoring the basic issue of solvency, some previously-pristine balance sheets are now contaminated.
This is most visible in the case of Europe’s central bank, the ECB, which has acquired billions of Euros of Greek securities (through direct purchases and repo operations with commercial banks).
In the process, it has evolved from being an important component of the potential solution to Greece, to now being a challenging part of the problem.
The IMF risks a similar outcome as it is pushed hard to lend further into a solvency sinkhole. And taxpayers throughout Europe are also being impacted, with more Greek liabilities being shifted every day to European-wide balance sheets.
Europe may be the most extreme and immediate illustration of the snowball phenomenon, but it is not the only one.
Here in the US, political dithering (and bickering) is complicating the country’s ability to deal effectively with structural impediments that slow economic growth, limit the reduction in unemployment, and undermine the country’s position at the core of the global system. And this applies to all four of the major areas of structural impediments: housing, bank credit, public finances, and the functioning of the labor market.
In the days ahead, I suspect that Squawk will get many more suggestions for alternatives to “kicking the can down the road.” Perhaps CNBC could aggregate them into a clear message to policymakers around the world: Balance sheets and other structural problems will repeatedly impact headlines (and weigh on markets) unless policymakers alter their course.
What is going on in Athens at the moment is resistance against an invasion; an invasion as brutal as that against Poland in 1939. The invading army wears suits instead of uniforms and holds laptops instead of guns, but make no mistake – the attack on our sovereignty is as violent and thorough. Private wealth interests are dictating policy to a sovereign nation, which is expressly and directly against its national interest. Ignore it at your peril. Say to yourselves, if you wish, that perhaps it will stop there. That perhaps the bailiffs will not go after the Portugal and Ireland next. And then Spain and the UK. But it is already beginning to happen. This is why you cannot afford to ignore these events.
The powers that be have suggested that there is plenty to sell. Josef Schlarmann, a senior member of Angela Merkel’s party, recently made the helpful suggestion that we should sell some of our islands to private buyers in order to pay the interest on these loans, which have been forced on us to stabilise financial institutions and a failed currency experiment. (Of course, it is not a coincidence that recent studies have shown immense reserves of natural gas under the Aegean sea).
China has waded in, because it holds vast currency reserves and more than a third are in Euros. Sites of historical interest like the Acropolis could be made private. If we do not as we are told, the explicit threat is that foreign and more responsible politicians will do it by force. Let’s make the Parthenon and the ancient Agora a Disney park, where badly paid locals dress like Plato or Socrates and play out the fantasies of the rich.
It is vital to understand that I do not wish to excuse my compatriots of all blame. We did plenty wrong. I left Greece in 1991 and did not return until 2006. For the first few months I looked around and saw an entirely different country to the one I had left behind. Every billboard, every bus shelter, every magazine page advertised low interest loans. It was a free money give-away. Do you have a loan that you cannot manage? Come and get an even bigger loan from us and we will give you a free lap-dance as a bonus. And the names underwriting those advertisements were not unfamiliar: HSBC, Citibank, Credit Agricole, Eurobank, etc.
Regretfully, it must be admitted that we took this bait “hook, line and sinker”. The Greek psyche has always had an Achilles’ heel; an impending identity crisis. We straddle three Continents and our culture has always been a melting pot reflective of that fact. Instead of embracing that richness, we decided we were going to be definitively European; Capitalist; Modern; Western. And, damn it, we were going to be bloody good at it. We were going to be the most European, the most Capitalist, the most Modern, the most Western. We were teenagers with their parents’ platinum card.
Must read article,
The support levels held, again. Despite being short term bullish, we see the last months action as a topping out process, where investors redistribute money. We have greed and fear at it’s best. Although we think market could bounce some more, we want to clarify, our long term view is the market is going much lower. It is of great importance to see if this move up will create the right shoulder, that eventually looses steam, and breaks below the trend and neckline, or if a QE3 will spark another leg up, just like last year. Watch 1300/1310 as key levels on the upside. Base case scenario below;
For the ones who followed yesterday and today’s “charts are breaking up” arguments on thetrader (two circles), congratulations. Time to take some chips off the table, before Mr Papp enters the stage later tonight. Once again, dumb money indicator showed too many bears on the support levles.
For our day charts review http://www.thetrader.se/2011/06/21/charts-that-matter-dax-stoxx-ibex-athens-spx-nsdq/
Beside soon buying some cheap Greek assets, and getting control over important pipelines into Europe, Russia seems interested in buying Easter European Assets via Vienna. Stratfor reports;
The two largest state-owned Russian lending banks, VTB and Sberbank, are looking to either acquire or inject capital into two major Austrian banks — Volksbank and Raiffeisen Bank — ahead of Europe’s second round of stress tests in July. Volksbank has important assets in Central and Eastern Europe, including a 7 percent share of the Romanian banking system. Raiffeisen Bank, meanwhile, holds more than 15 percent of Slovakia’s banking assets and 14 percent of Serbia’s. Austria’s geographical proximity to the Danube riverine nations (Slovakia, Hungary and Romania) and the Balkans has historically allowed Vienna to be the financial center of Central Europe. For Austrian banks, the eastward expansion of the European Union in 2004 represented a clear financial opportunity. Austria positioned itself as the premier banking hub for emerging Central and Eastern European member economies. The banks realized they could use their financial links in the region to their advantage, getting a head start on larger French, Italian and German banks. Russian acquisition of shares on Austrian banks could now give Moscow that same advantage, without having to deal with resistance from the Central Europeans to Russian ownership of financial assets.
Gold is marginally higher in most currencies today and on the verge of making new nominal highs in dollars, euros and pounds.
It is holding near record highs as there is no quick end in sight to economic turmoil in Europe after Greece was told to approve brutal new austerity measures to avoid defaulting on its debt. This would threaten the solvency of many western banks and the European Central Bank’s Ordonez (member of the ECB’s governing council) warned this morning that the Greek crisis could have ‘transcendent consequences’.
Further evidence of continuing very significant and robust demand from Asia and from China and India in particular was seen in massive Indian gold and silver imports. The figures released overnight showed a huge surge of 222% in May 2011 compared to May 2010.
Imports of gold and silver were a staggering $8.96 billion in May, a growth of 500% over the previous month and 222% over last year.
Official inflation rates in India have surged to 8.65% and people on the Indian sub continent are concerned about the devaluation of the rupee and the erosion of the purchasing power of their savings.
While the rupee has maintained its value against the beleaguered U.S. dollar it has fallen sharply against gold and silver and against oil and the other food and energy commodities.
Gold has always been seen as a store of value against currency debasement, inflation and hyperinflation in Asia. This is especially the case in India and we appear to be witnessing an acceleration in the recent trend of Indians opting to buy gold and silver bullion in order to protect their savings.
India’s central bank, the Reserve Bank of India’s bought 200 tonnes of gold from the IMF in the months preceding an announcement in November 2009. Given their huge dollar reserves it is likely that they are continuing to diversify their foreign exchange holdings and further announcements of increased gold reserves are likely in the coming months.
Despite the increase in their reserves their gold holdings remain paltry when compared to the U.S. and European gold reserves.
Most creditor nation central banks in the world are now diversifying out of the major currencies, the dollar and the euro, and into gold. These include the People’s Bank of China, the Russian central bank and central banks in Sri Lanka, Bangladesh, Mauritius, Mexico, Iran and Saudi Arabia.
News came yesterday that Russia’s central bank again increased their gold holdings to 26.7 million troy ounces last month, from 26.5 million at the end April. The Bank of Rossii said their gold reserves were valued at $41 billion as of June 1, compared with $40.7 billion a month earlier.
It is interesting that the Reserve Bank of India has granted licenses to seven more banks to import gold and silver bullion and this is indicative of the favourable view of gold and silver in India – both amongst the public and at the official level.
Indian banks are thus likely contributing to the massive increase in demand for gold and silver. Chinese banks are also catering to the increased demand of Chinese people for gold bullion for investment and savings purposes.
This is in marked contrast to their western banking counterparts, the vast majority of which, do not offer gold or silver investments at all.
As of the start of 2011, some 30 banks in India have been granted permission to import gold and silver. New additions to the list were Karur Vysya Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, Punjab and Sind Bank, South Indian Bank, State Bank of Mysore and State Bank of Travancore.
Since the start of 2011, India’s benchmark stock index, the Bombay Stock Exchange Sensitive Index, is down by more than 14% while gold in rupee terms is up 9%. The Sensex is essentially flat in the last year and the last 3 years despite soaring inflation.
The increased demand from India and wider Asia is sustainable and one of the fundamental reasons that gold and silver’s bull market remain very much intact.
Importantly, China was expected to surpass India as the world’s largest gold importer this year. After yesterday’s Indian import figures this is now not certain.
Chinese investors more than doubled their purchases of gold during the first quarter in 2011, compared to the same period last year. China invested $4.1 billion into gold bars and coins during this first quarter of 2011.
China’s investment demand increased to 90.0 metric tonnes (40.7 tonnes in the year prior), compared to India’s 85.6 tonnes.
In a report today, the Australian Bureau of Agricultural and Resource Economics and Sciences conservatively estimated that bullion may average $1,500 an ounce this year. The metal has averaged $1,445 so far in 2011.
“Uncertainty about the ability of many developed economies to stimulate economic growth and control growing budget deficits is expected to encourage investment demand for gold as a lower risk, or safe haven, asset,” the Canberra-based agency said.
Despite some calling the Australian dollar a “safe haven” currency, the Australian dollar has been sold recently and gold appears to be in the early stages of breaking out in terms of Australian dollars.
This is another indication of the global nature of gold’s bull market and the fact that all fiat currencies are now vulnerable to currency debasement and devaluation. Focusing on gold solely in U.S. dollar terms remains simplistic and misleading.
Gold’s consolidation in recent months in all currencies and gradual gains since late January suggest that we may be on the verge of a break out in all currencies and a powerful move upward in the next leg of the precious metal bull markets.
Courtesey Gold Core
Some points from the European think tank Open Europe. Get prepared to open your wallet and start paying to the Greeks.
“It will not be the case that the south will get the so-called wealthy states to pay. Because then Europe would fall apart. There is a ‘no bail out rule’, which means that if one state by its own making increases its deficits, then neither the community nor any member states is obliged to help this state” 1
- Horst Koehler, former German Finance Secretary, April 1992
• EU member states have in total amassed quantifiable exposure to Greece of €311bn (via their banking sectors, the bail-out packages and the ECB’s liquidity programme). France and Germany have exposure of €82bn and €84bn respectively, while the UK only has €10.35bn exposure – although this figure is misleadingly low, as Britain’s huge exposure to other European banks leaves it vulnerable to any escalation of the crisis in Greece through indirect exposure and undermined market confidence.
• On the surface, the interconnectivity of Europe’s economies and banking sector may seem like an argument in favour of another bail-out. In a best case scenario, to carry Greece over until 2014 a second bail-out would have to cover a funding gap of at least €122 billion, in addition to the money the country is already receiving from its first rescue package. This assumes a scenario in which Greece can make good on its deficit targets and privatisation commitments. However, it is far from clear that Greece will meet these targets, not least given domestic resistance to more austerity measures. Therefore, the country’s funding gap leading up to 2014 could well be in the area of €166bn, potentially requiring Greece to make a third request for external aid.
• Despite a second Greek bail-out being EU leaders’ preferred option, it is only likely to increase the economic and political cost of the eurozone crisis. No country in modern economic history has faced similar debt levels to those of Greece – a debt-to-GDP ratio above 150% – and avoided a default. Even with the help of a second bail-out and a debt rollover, Greece is still likely to default within the next few years, as the country’s poor growth prospects and growing debt burden mean that it will be unable to fund itself post-2014.
• It is therefore better for Greece to restructure its debt as soon as possible. Then an honest discussion needs to be had about whether the country can realistically stay inside the eurozone. A restructuring of Greek debt would require the eurozone to enter unchartered territory – and it is impossible to fully identify all the consequences of such a move. However, these doubts will very much remain even under a second bail-out – the various uncertainties associated with the bail- out packages and attached conditions mean that the threat of an eventual default will not go away in any case.
• The cost of restructuring will also increase with time, as Greece’s debt burden will only rise over the next few years. To bring down Greece’s debt to sustainable levels today, half of it would need to be written off. In 2014, two-thirds of Greece’s debt will need to be written off to have the same effect, meaning a radical increase in the cost to creditors.
• Unfortunately, this is a debt crisis and someone will have to take losses. We estimate that the first round effects of a 50% write down on Greece’s debt would
cost the European economy between €123bn – €144bn (uncertainty regarding the ECB’s exposure accounts for the range). Of this cost, €23.55bn would be a direct cost to taxpayers through bilateral loans under the first Greek bailout as well as indirect costs of between €44.5bn – €65.75bn via ECB guarantees. €28bn will be absorbed by Greek banks, while €27bn by other private investors. However, these are only first round losses. It cannot be emphasised enough that the main cost from a debt restructuring comes in the form of contagion and the knock-on effects of losses throughout the European banking system.
• Although this is a substantial cost, we estimate that in 2014 following a second bailout, a haircut of 69% would be needed, equal to €175bn, to reach the same debt level. Even more critically, via the bail-outs, so-called official sector (taxpayer-backed) loans are gradually replacing private sector exposure. We estimate that, under a second bailout, the share of Greece’s debt underwritten by foreign taxpayers (via the EU, ECB and the IMF) will go from 26% today to a massive 64% in 2014. Put differently, each household in the eurozone today underwrites €535 in Greek debt – by 2014 and following a second bailout, this will have increased to a staggering €1,450 per household. On top of this, there are also numerous European banks which are largely taxpayer owned which have significant exposure to Greece (for example the Belgian-French Dexia and German Hypo Real Estate). This makes a second Greek bail-out far more politically contentious than any of the existing rescue packages, given the likelihood of debt write-downs with taxpayers footing a huge chunk of the bill.
Who is Zew, Zew is dead baby….
The ZEW Indicator of Economic Sentiment for Germany has dropped by 12.1 points in June 2011. The indicator now stands at minus 9.0 points. This value is below the indicator’s historical average of 26.3 points.To the decline of the indicator may have contributed that the Greek refinancing requirements have directed once again the attention of the financial markets to the debt crisis in some countries of the euro zone. Furthermore, unfavourable economic data from the US seem to have a negative impact on the assessment of the financial market experts with respect to the current situation and the perspectives of the economy of the United States.
“Troubles in the euro zone as well as the feared economic downturn in the US seem to weigh heavily on the mind of the financial market experts. Moreover, financial market experts see more and more evidence that the boom of the German economy may weaken during the months to come,” says ZEW President Prof. Dr. Dr. h.c. mult. Wolfgang Franz.
The assessment of the current economic situation in Germany has deteriorated in June. The corresponding indicator has dropped from its all-time high by 3.9 points to 87.6 points. Economic expectations for the eurozone have decreased by 19.5 points in June. The respective indicator now stands at minus 5.9 points. The indicator for the current economic situation in the eurozone has dropped by 9.8 points and now stands at 3.8 points.
Euro dropping on ZEW.