June 4th, 2012
in Gary's blogging
Several things you need to know, if you don't already know them, and that is the Eurozone is in terrible shape particularly the single currency Euro that binds it together. Greece is ready to depart going back to the Drachma, Spanish and Italian 10 year debt yields are both north of 6%, which is unsustainable and the yield on the 2-year German Schatz falls to 0%. The big laugh is that Spanish Finance Minister De Guindos says Spain's banks will be asked to make provisions of €84B to cover potential real-estate losses with funds that do not exist.
Like Cam Hui, I spent the weekend wondering where the markets were going to go next; if down, how far down? As I have pointed out before, it doesn't look good out there for the bulls, but just how bad is it? Follow up:
Is 2012 Like 1998? by Cam Hui
“My best wild-eyed-guess is that we will see a major air pocket like 1997 (Asian Crisis) or 1998 (Russia/LTCM Crisis) in which some macro event sparks a major selloff, but turns around based on policy response. There are plenty of macro triggers out there. Greece, Spain, China, etc.
Nevertheless, were this scenario were to play out, it suggests that we haven't quite seen enough pain and we need one more capitulation down leg to equities.”
Everyone is looking for a resolution as to how Spain will provide funding to not only Bankia and its real-estate losses, but future losses in other big banks especially those in France. Then you have the rapidly deteriorating European economic data including depressing employment numbers. The election of a socialistic leader in France who wants to impose a 70% tax on the wealthiest French is a step backwards. Greece appears to be in the process of rejecting European mandated austerity measures which can only lead to insolvency, greater unemployment and civil unrest in the long run.
There are many signs now that the Chinese economy is slowing along with Brazil and India and that can't be a good thing for the US economy that is at a sub 2% growth.
“China's non-manufacturing PMI fell to 55.2 in May from 56.1 in April, showing that the services sector is still expanding, albeit at the slowest pace in over a year. Service industries now account for 43% of the Chinese economy; officials want to raise this to 47% by 2015.”
The markets are displaying their displeasure by declining in spite of the 'Cramer Cheer Leading Crowd' and the ever present bullish 'dippers'. I guess the 'dippers' didn't get the memo that the World finances are being run into the ground by the worst politicians ever to be assembled in a single time frame of history. Even beyond the dismal events of today the signs are pointing to more devastating effects to the already weakened World markets and not much hope is in sight.
Doug Short provides us with some startling facts when considering the negative effects on the US economy should the Eurozone continue in its death spiral. The European Union is not going to implement anything to help their financial situation in the foreseeable future and the state of affairs is getting worse by the day.
The World Is Worried About The PIIGS, And It Should Be by Doug Short
“To put the size issue in a broader context, consider this: The European Union, would be the largest entity if I had [included it in the chart]. It's about 4.8% larger than the U.S. based on GDP purchasing power parity. The PIIGS collectively constitute about 5.05% of world GDP, but they account for 25% of the GDP of European Union.
The world is worried about the PIIGS, and it should be."
The World is worried not only with the PIIGS, but everything else and the 'Hopium' hangover is about show its ugly head as reality sets in. The pace in which the Eurozone is trying to 'fix' its problems is slow, very slow.
"The reality that the global Status Quo has fixed absolutely nothing in four years is finally coming to roost in the global economy. . . . . too much debt that will never be paid back. Making matters much worse, much of the money that was borrowed--by sovereign governments, local governments, households and private enterprises--was squandered on consumption or malinvestments, and so there are precious few assets or collateral underlying the debt. . . . . The reality is that trillions of dollars, euros, yen and renminbi in phantom wealth will disappear when the losses that have already taken place are finally recognized."
The real issues with the difficulties in Europe is that the politicians are totally unrealistic in their approach plus they haven't realized that they are unattainable. Hollende, the new French president wants to place a 70% tax on the rich, lower retirement to 60 among the many, well, outright stupid ideas that can not save the failing French economy.
Greece is about to elect a socialist, dooming their economy and the United States is not far behind if we keep the same pace. The 'Big Swing' is just starting to move and heaven help you if you get in its way. The talking is over, the party is done and it is time to put the baby in bed.
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Written by Gary