Sunday, January 29, 2012
Wednesday, January 25, 2012
Isn't this just putting lip stick on the PIIGS?
In late 2011, the U.S. agreed to lend dollars for euros , and the ECB agreed to lend money to troubled European banks . The positive outcome was the stabilization of the Spanish and Italian bonds. The world has collectively exhaled from the event and is breathing normally again. Before that moment the Italian and Spanish bonds were escalating to epic rates that could have led to a series of defaulting European banks and then who knows what would have happened next?
With the stabilization of the European sovereign debt, the U.S. stock market has turned from red to green. The VIX is down and the positive growth indices are up such as the Dow, S&P, and GLD. Everything looks pretty rosy now, but has anything really changed? Haven’t we just put lip stick on this pig?
The PIIGS are still structurally a mess, and only through recent monetary policy, bureaucrats have been able to successfully calm the markets. The ECB said they were not going to bail out the PIIGS, but doesn’t their most recent policy do so indirectly?
If it looks like a duck and quacks like a duck isn’t it a duck? The ECB is not directly lending money to the PIIGS, but the ECB is lending money to European banks at 1% interest for three years. And in only one month, the Euro banks have borrowed close to 500 billion dollars, which happens to be the size of the Greek debt . Eventually, the European banks will use that money to buy up the PIIGS sovereign debt. This is the short run solution to the PIIGS and Euro crisis. The problem of GDP growth and the lack of incentives to work haven’t changed, but the lip stick sure looks good.
With the stabilization of the European sovereign debt, the U.S. stock market has turned from red to green. The VIX is down and the positive growth indices are up such as the Dow, S&P, and GLD. Everything looks pretty rosy now, but has anything really changed? Haven’t we just put lip stick on this pig?
The PIIGS are still structurally a mess, and only through recent monetary policy, bureaucrats have been able to successfully calm the markets. The ECB said they were not going to bail out the PIIGS, but doesn’t their most recent policy do so indirectly?
If it looks like a duck and quacks like a duck isn’t it a duck? The ECB is not directly lending money to the PIIGS, but the ECB is lending money to European banks at 1% interest for three years. And in only one month, the Euro banks have borrowed close to 500 billion dollars, which happens to be the size of the Greek debt . Eventually, the European banks will use that money to buy up the PIIGS sovereign debt. This is the short run solution to the PIIGS and Euro crisis. The problem of GDP growth and the lack of incentives to work haven’t changed, but the lip stick sure looks good.
Tuesday, December 20, 2011
Curb your enthusiasm
Dec. 20th, 2011
The markets were up sharply today, 3%, on little news.
Typically before a holiday traders close their trading books and hit the slopes. The result is less volume which can exacerbate minor moves. Short covering may have also been a culprit for the strong rally. Short covering occurs when shorts need to reverse their trades and thus go long. When the market started moving north, the shorts began losing money and ultimately they had to close their positions by going long and thus cover their shorts.
The markets were up sharply today, 3%, on little news.
Typically before a holiday traders close their trading books and hit the slopes. The result is less volume which can exacerbate minor moves. Short covering may have also been a culprit for the strong rally. Short covering occurs when shorts need to reverse their trades and thus go long. When the market started moving north, the shorts began losing money and ultimately they had to close their positions by going long and thus cover their shorts.
Sunday, December 18, 2011
Germany has the memory of an Elephant
The sovereign debt crisis in Europe will create wild gyrations in the stock market for years to
come. Germany is in control of the Euros future and of the fate of the European Union.
Germany must decide whether to hold these profligate countries accountable for their sins of excess or forgive some of the debt in exchange for greater short run stability and growth. If they choose the former, they risk a splintering of the Euro and European Union. If they choose the latter, they risk inflation and kicking the problems down the road.
Germany still remembers the Versailles Treaty and how the world crushed their economy by placing war reparations that the defeated state would never be able to repay. Ironically, Italy was one of the countries they owed money. The Germans were not let off the hook to pay off their debts when they needed the help of their neighbors, and now they are holding their neighbors to the same standard. Moreover, the war reparations debt led to the printing of money that led to hyperinflation. Therefore, there is less hope of the ECB printing money or forgiving debt due the Germans elephant like memory.
Due to these conclusions, in 2012 the U.S. equity market will have wild swings and most likely finish the year flat to lower. The Europeans will have a massive deleveraging exercise and thus liquidity will be lower as will growth. Europe will fall into a recession and that will also slow the Bric countries down possibly sending the world into a global recesssion.
Markets that will do well:
Dollar
U.S. bonds
Markets that will struggle:
Euro
U.S. stocks
Gold
Commodities
Tech stocks -Nasdaq
U.S. exporters
come. Germany is in control of the Euros future and of the fate of the European Union.
Germany must decide whether to hold these profligate countries accountable for their sins of excess or forgive some of the debt in exchange for greater short run stability and growth. If they choose the former, they risk a splintering of the Euro and European Union. If they choose the latter, they risk inflation and kicking the problems down the road.
Germany still remembers the Versailles Treaty and how the world crushed their economy by placing war reparations that the defeated state would never be able to repay. Ironically, Italy was one of the countries they owed money. The Germans were not let off the hook to pay off their debts when they needed the help of their neighbors, and now they are holding their neighbors to the same standard. Moreover, the war reparations debt led to the printing of money that led to hyperinflation. Therefore, there is less hope of the ECB printing money or forgiving debt due the Germans elephant like memory.
Due to these conclusions, in 2012 the U.S. equity market will have wild swings and most likely finish the year flat to lower. The Europeans will have a massive deleveraging exercise and thus liquidity will be lower as will growth. Europe will fall into a recession and that will also slow the Bric countries down possibly sending the world into a global recesssion.
Markets that will do well:
Dollar
U.S. bonds
Markets that will struggle:
Euro
U.S. stocks
Gold
Commodities
Tech stocks -Nasdaq
U.S. exporters
U.S. Economy Projections for 2012
Gold recently has been selling off. Is this just profit taking or does this demonstrate a structural change in psychology? I believe it's the latter. Stocks will perform poorly next year due to weak GDP. Here are the growth laggards for GDP:
Consumption- The housing market is hurting wealth creation and thus slowing consumption. Real income for income earners making less than $45, 000 is going down. The unemployment rate is still stubbornly higher than the natural rate of unemployment. Structural unemployment is a major issue that will increase the natural rate of employment from 5% to close to 6%. The Nordstrom consumer will prop up retail sales, but the WalMart consumer needs to fully participate to drive retail sales back to trend.
Investment-Companies are reticent to spend or hire due to the lack of transparency from the political environment. The election year will create more uncertainty and thus delay capital projects.
Furthermore, Europe will act as a drag on profits. S&P 500 (NYSEARCA:SPY) companies derive 14% of sales and 18% of profits from Europe, according to a report by Bank of America (NYSE:BAC).
According to Rick Newman from U.S. News and World Report, 40 percent of profit for firms listed in the S&P 500 stock index now come from overseas.
Gov.- Government is cutting their budget federally and locally.
Net Exports- The appreciating dollar will decrease our exports and increase our imports. Europe and the BRICs are slowing and exports to these regions will diminish.
Consumption- The housing market is hurting wealth creation and thus slowing consumption. Real income for income earners making less than $45, 000 is going down. The unemployment rate is still stubbornly higher than the natural rate of unemployment. Structural unemployment is a major issue that will increase the natural rate of employment from 5% to close to 6%. The Nordstrom consumer will prop up retail sales, but the WalMart consumer needs to fully participate to drive retail sales back to trend.
Investment-Companies are reticent to spend or hire due to the lack of transparency from the political environment. The election year will create more uncertainty and thus delay capital projects.
Furthermore, Europe will act as a drag on profits. S&P 500 (NYSEARCA:SPY) companies derive 14% of sales and 18% of profits from Europe, according to a report by Bank of America (NYSE:BAC).
According to Rick Newman from U.S. News and World Report, 40 percent of profit for firms listed in the S&P 500 stock index now come from overseas.
Gov.- Government is cutting their budget federally and locally.
Net Exports- The appreciating dollar will decrease our exports and increase our imports. Europe and the BRICs are slowing and exports to these regions will diminish.
Thursday, November 4, 2010
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