Here are the closing statistics from last Friday for our key indicators (04/20/12):
DJ30 – 13,029 up 65
US Treasury 10 Year Bond – 1.97% up 0.02%
USDEUR - 1.3220
Gold – $1643 up $2
Oil – $103.32 up $1.05
Isn’t it nice looking at these 5 market indicators just once a week? They all 5 went sideways – so it would have been a waste of time looking at each day. There was some volatility in stocks as the DOW went up and down over 100 in single days — but it all evened out.
The IMF…….
The head of the IMF, Christine Lagarde, is giving advice to the United States. She is saying:
- The Congress is really messing up things by not attacking the debt issue.
- The US Housing market needs to be solved, and Fannie/Freddie need to be part of the solution by taking selected loan reductions on people who are underwater and/or defaulting.
- The US should send more money to the IMF – as the IMF needs more money to give out around the globe.
Here is my reaction to the IMF statements. In spite of the fact, I am sympathetic with some of the IMF statements, here is what I really think.
“Who do you think you are telling the United States what to do? Don’t you realize that we established the IMF? We are YOUR boss, not the other way around.”
The IMF is a dangerous organization because many of the world’s elite want the IMF to be the lending of last resort – after the FED goes bankrupt – and wants the IMF to provide the “future” currency of the world – the Special Drawing Rights, or SDR’s.
Spain……
The world’s newpapers declared this last Tuesday that Spain had a “successful” bond auction. I will give you the facts, and let you decide for yourself. Spain was selling six month and one year bonds, and all the bonds offered were purchased. The interest rate established by this auction was more than twice the interest rate paid during the last auction of the same bonds – about two months ago.
On Thursday Spain auctioned 2 year and 10 year bonds. These too were entirely subscribed, and they too had higher interest rates to be paid than the last auction.
How can anyone call this successful? Was the press expecting that the bonds wouldn’t be sold? The increase in the interest rate is a disaster for the plans made by the EU and ECB for Spain. This auction can only be called a disaster. But, for those who only read the headlines, you would think everything was just wonderful.
One more news item – bad loans for Spanish banks have hit an 18 year high. It is now 8.9% of all loans are at least 3 months in arrears. The normal rate, in a healthy market, is more like 1%. This is just one of those things that will get much worse as time goes on, and will drag down the Spanish banks.
The World’s Reserve Currency…….
The US Dollar is the world’s reserve currency. It was established at the Bretton Woods agreement that happened just before the end of WWII. It was signed by all free nations at that time. It said that international trade would be done in US Dollars.
President Nixon made a special side deal with King Faisal of Saudi Arabia that said that if Saudi had ALL oil trading done in US Dollars, and Saudi Arabia invested those Dollars in US Treasuries – then the US would protect Saudi Arabis (militarily) against all outside aggressors. Not everyone is aware of this deal, but it is still alive and well today.
But, a large part of the world is moving away from international trade in US Dollars, and is using their own currencies instead. This is a retreat for US power, and can only be viewed accordingly. It is happening, and accelerating over the past 2 or 3 years.
What is the US doing about this? Nothing, in my opinion.
Why isn’t the US calling those who are breaking the Bretton Woods agreement, and stating they must continue to according to that agreement? I really can’t answer this question, but it might be just embarrassment, or it might be a new “policy” of the current administration, or it might be that “sticking you head in the sand” is expected to make the problem go away.
What do you think?
What is the cost to Americans of this action? Or, lack of action? You see, there are TRILLIONS of US Dollars spread all over the world, as every nation had to hold US Dollars and US Treasuries as part of their reserves. That’s the role of a reserve currency.
What will happen to that money if it no longer is needed? It will be SOLD, of course. That will reduce the value of the US Dollar, and make all imports more expensive – and I can say, quite authoritatively, that you will not like that outcome.
What about the Iranian oil embargo? This is front and center in the US Dollar fight for survival. Iran has been “hit between the eyes” in its oil sale by prohibiting Iran’s use of the European SWIFT (money exchange) system, and European insurers stopping the insurance for Iranian oil tankers. But, is this true? Of course not. Iran has stepped quietly around these problems by two clever techniques. First, it is shipping oil on Iranian ships which are ordered to TURN OFF their satellite tracking system – so no one knows where they are really going. Second, they are paying much higher insurance premiums on those shipments – to willing third party insurance companies. Third, they are taking anything (other currencies, or bartered goods) in payment for their oil. And, they are giving longer term payments on those purchases. China, India, Turkey, Syria are among the nations buying Iranian oil today – and skipping the embargo orders from the US.
This simply results in the US position being eroded, and the US military might being laughed at by the rest of the world. The US Dollar is being further diminished by the Iranian problem. It is possible that the US is actually hurting itself more than it is hurting Iran with its embargo. (Something to think about.)
Europe and especially Spain…..
Spain’s industrial output fell 5.1% (year on year) and this is a major blow to economy of this precariously positioned nation. And, this decline is accelerating. Unemployment is 23.6%, and is expected to rise (of course.) And the Spanish government is using the same tricks as the US government – becausae if you used the method defined in 1990 to determine unemployment – the number would be 32% based on a Bank of Spain study.
The big problem, naturally, is the interest rate that the “market” imposes on Spanish debt. To mitigate this problem, the ECB (European Central Bank) has said it will be buying more Spanish debt – thereby pushing interest rates down – and are using the well tested “jaw-boning” method of reducing interest rates.
Here is the real problem in Spain (and Italy). When the ECB loaned out its 1% money for 3 years (the LTRO loans), Spanish and Italian banks took over 250B Euros worth (or over 22% of all the 1 TRILLION Euro loaned). What did they do with this borrowed money? They purchased Spanish (and Italian) sovereign debt. Let’s look at the details. There were two tranches of loans. Spanish banks bought 4.5% (paying) Spanish bonds in December and 3.5% paying bonds in February – and those same bonds are paying 4.77% today. That means all those bonds the Spanish banks bought are “underwater” – or worth less than they paid – if they were forced to “mark to market.” The same thing happened in Italy.
So, what we are really seeing is that the ECB LTRO loans are making things worse in Europe. The “market” is demanding higher interest rates to compensate for the risk of lending to these bankrupt (or soon to be bankrupt) nations. Spanish banks’ borrowings from the ECB jumped nearly 50% in March to •227.6B, as they took up 29% of the central bank’s late-February LTRO. “A consequence of the (LTRO) is that the correlation between sovereign risk and banking risk increased all over Europe.” That’s not some EMU permabear speaking; that’s Spain’s Economy Minister Luis de Guindos.
This should make everyone nervous as a cat on a hot tin roof. And, it did to the world’s stock markets last week.
Last Tuesday, the Bank of Spain had to pay almost 6% on its 10 year bonds that it sold that day. This is a major retreat from the “everything is fixed” announcement made about 2 months ago by the EU and ECB.
Besides the markets demanding higher interest rates, what else is going on in Spain?
- The housing market is a disaster. And the housing prices haven’t crashed – yet. When it does, the banks will be in much worse shape – and the Spanish government, in an attempt to bolster the banks, will be much worse off too. This housing disaster is much worse than the US housing mess.
- Spanish districts and towns are bankrupt too – they are spending more than they take in taxes. Any solution to this problem will make Spain a worse risk to bond investors. This too, is a major problem for Spain.
- All Europe is sicker with Spain
- Italian bonds jumped 1% in one day
- A German bond auction was not fully subscribed – meaning there were less buyers than bonds being sold – a very bad sign.
The real problem is the “size” of the Spanish debt problem. One politician, the Spanish Prime Minister, told the truth about this – by saying that the Spanish problem is “too big” for Europe to solve. Therein, is the problem for Europe – and the world – and you too as far as that goes.
Conclusion:
It appears that the solution to the European problems is unraveling faster than anyone would expect. This is being driven by the bond market – as I said it would have happened about 3 months ago.
It makes you wonder what is happening in those “smoke filled rooms” around the European capitals right now. They must be talking about a break-up of the Euro and how to make it happen with the least pain. That’s what I think.