The Economy Guy

WORLD CRISIS – that’s what I declare is happening today….  The Greek Tragedy continues and the Euro hit a recent low today against the Dollar and Yen.  What’s really going on is that European banks can’t trust other European banks – sound familiar.  That’s what happened here 19 months ago, and our financial system froze up, and we declared a crisis in the US.  Europe is going through this right now, but more slowly because everything is Europe is slower than here.  Here is an interesting tidbit on interest rates: Nigeria can borrow at 4% today, but Greece must pay 15% for the same loan.  Sound crazy to you?  It does to me.

European banks have stopped lending today – there is no liquidity in Europe RIGHT NOW.  The European Central Bank has not stepped in to try to calm the market with liquidity – and that’s what I mean by European being slower than the US.

It was reported that the DOW fell 1000 points today.  It ended down 349 points.  The down 1000 points might have been a technical error, or it might have been the truth – let’s wait and see.

Bonds rose way up today with massively lower interest rates.  Good news, but it won’t last.

Gold rose above $1200 today as people are now seeing gold as a “Safe Haven” as well as Dollars and US Bonds.  Oil/gasoline fell as a slower economy means lower commodity prices.

In the news today…..

Freddie Mac taps Treasury for more funds – Freddie Mac asked for an additional $10.6B from the government yesterday, after reporting a first quarter loss of $8B (including a $1.3B dividend payment to the Treasury). Provision for credit losses was $5.4B, down from $7B in the previous quarter. New accounting rules led to a decrease in total equity of $11.7B, creating a net worth deficit of $10.5B as of March 31. Freddie warned it will still need billions of dollars in additional federal aid because the housing market remains fragile.   So, where is Fannie Mae? – it will need billions too.  The total estimate of what you (the taxpayer) will need to spend on these two sponges is about $200B.  Enjoy it.  Our Congress doesn’t even acknowledge that this problem exists as they hadn’t included Fannie or Freddie in their Financial Reform bill – so please remember to throw all these scumbags out.

Job market up – Several recent data points indicate improvements in the job market. In the April ADP Jobs Report, released yesterday, employment showed its third (admittedly modest) monthly gain, with jobs rising 32,000. March’s figure was revised to +19K from -23K. April’s Challenger Job-Cut Report, also released yesterday, put planned jobs cuts at 38,326, down substantially from 67,611 prior and the lowest level in nearly four years. Monster’s Employment Index, released this morning, rose 8 points to 133, with growth +11% from the previous year and increased job demand in 27 of the 28 major metro markets.  This is all good news for the economy – thank goodness as we need some good news.

Tonight’s Dinner Conversation….

Greece – What is really going on in Greece, and what is really going on with the Euro, and what does it mean for us?

The Greek government is playing a cat and mouse game between the people who will give them money (the EU – Germany in particular – and the IMF) and the populace of Greece.   Too many Greeks are on the government payroll and these employees belong to militant unions.  Strikes are a normal way of life in Greece, as are noisy and sometimes violent election seasons.  The Greek government doesn’t know how to spell the word austerity, but they are having to agree to many austerity terms from the IMF and Germany.  The unions are causing the violent trouble (unions firebombed banks which lead to 3 people burning to death inside of a bank yesterday as firefighters weren’t allowed by the mob to save them) as they won’t agree to any cuts in their numbers or benefits.  Should be a hot summer in Athens.  Fortunately most Athenians leave Athens in the summer and populate the islands.

The markets are reacting to all this trouble, and aren’t missing the message being spelt out by the unions.  First and foremost, the markets are questioning the ability of Greece to pay its debt.  This is very important to understand.  Bond buyers won’t buy Greek debt unless their risk premium (measured by the interest rate) goes up, and it has soared recently – as high as 26% for a 2 year note.

The currency market is saying that the Greek Problem isn’t constrained to Greece, but carries over to Spain, Portugal, Italy, Ireland and the UK.  In other words, Europe is being questioned whether or not they can pay back their debt….  And, this means that the future of the EU, and the future of the EURO is being questioned.  We have seen the EURO meltdown – dropping 6 cents in 3 days – in the currency market.  These markets are speaking very loudly, but the average person just doesn’t know that the market is talking, or what it is saying.

What does this mean to you?  Well, when to dig down into the financial aspects of the Greek problem, and you compare them to the USA, you will find there isn’t much difference.  The debt to GDP and budget deficit to total budget ratios are the same or will be in the near future.  So, it is entirely possible that the market vigilantes will someday question the ability of the USA to pay its debt too.  The Chinese have already questioned it.  Austerity in the USA is an unthinkable political event.  Would it result in riots in the street?  Maybe or probably – I haven’t made my mind up yet.  Riots would not be new to the USA, so it is truly possible.

One big difference between Greece and America is that America can print its own money – so it has the ability to inflate its way out of any problem.  Greece must rely on the holders of EUROs to print those EUROs – and the EU Central Bank has that control.  Greece’s only option is to default on its loans.  The money being given to Greece doesn’t solve the Greek problem – it only delays the inevitable default.  Greece does not have any plan to grow its way back into a balanced budget.  That’s why Greece will eventually default on its loans.

You are seeing in Greece the future of America, but only on a very small scale.

So, what can Europe do to get itself out of this mess?  One of the key things is to get the Southern European nations on a course where they can become productive to the point where they can pay their debts.  I only see two solutions:

1. Devalue the Euro until money flows in from the outside of Europe and allows production to increase again.
2. Destroy the Euro and reinstate the old national currencies.  No one wants to admit a mistake, but the Euro could have been a big experimental mistake.  Then each nation can go its own way economically, and the Southern European nations can devalue until they become productive again.
   

Oh, by the way, YOU are also being hit in your stock portfolio prices today as you read this.  Too bad that things in Europe can cause your portfolio to go down here.

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,520 (down 349)
10 Year Treasury Bond – 3.40% (down 0.20%)
Euro – $1.2621
Gold – $1209 (up $34)
Oil – $76.95 (down $3.02)
Gasoline – $2.16  (down $0.06)