Zandi vs Taylor: Did stimulus funding help or hurt the U.S. economy?

Monday, August 2nd, 2010

A new study by economists Mark Zandi and Alan Blinder showed the U.S. government’s nearly $800 billion economic stimulus and the Wall Street bailout likely steered the American economy away from another depression. Jeffrey Brown moderates a debate between Zandi and Stanford University economist John Taylor.

Click here for a transcript of the interview.

Source: PBS Newshour, July 29, 2010.

Tags: Alan Blinder, American Economy, Bailout, Debate, Depression, Economic Stimulus, Economist John, Economists, Interview Source, Jeffrey Brown, John Taylor, Mark Zandi, Pbs, Pbs Newshour, Stanford University, Wall Street
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David Rosenberg: Hold Off on Rate Hikes for Now – Surprising Downside GDP Revision

Monday, May 31st, 2010

This article is a guest contribution by David Rosenberg, Chief Market Economist, Gluskin Sheff, in Toronto, Canada.

U.S. real GDP was clipped to a +3.0% annual rate in the first revision to the Q1 data from +3.2% (and the actual +5.6% print for Q4). Outside of inventories, practically every category was taken down with commercial construction (now – 15.3% SAAR from -14.0%) and capex (+12.7% from +13.4%) the major culprits. What this means is that real final sales growth was shaved to a mere 1.4% annual rate from 1.6%, not to mention the 1.7% in Q4. Averaging out the past four quarters, real final sales have averaged 1.3% at an annual rate, which represents the weakest post-recession recovery in demand on record – it is usually running closer to a 4% annual rate at this juncture, which is alarming in view of all the bailout, monetary and fiscal stimulus in the system.

he equity market may have only figured this out, but outside of inventories, the U.S. economy is barely growing and is actually stagnant in real per capital terms. We are not sure how an 80% rally off the lows could have ever been considered by anyone as being consistent with such an anemic recovery in the real

economy. And, if you are wondering how on earth the yield on the 10-year Treasury note can possibly be anywhere remotely close to 3%, it is because that is exactly where the trend in nominal GDP is — and we are well past the peak of all the government stimulus efforts. Believe it.

As Chart 1 below illustrates, we are still in the throes of a deflationary experience. Price per unit of production on the nonfinancial sector declined at a 1.5% annual rate in Q1, the fourth decline in a row and down 1.9% year-on-year, which is the steepest decline since Q1 1950.

Tags: Bailout, Canada, Capex, Chief Market, Culprits, David Rosenberg, Fiscal Stimulus, Inventories, Juncture, Lows, Market Economist, Nominal Gdp, Rate Hikes, Real Gdp, Sheff, Throes, Time Unit, Toronto Canada, Unit Labour Costs, What This Means, Year Treasury Note
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Eric Sprott: “A Busted Formula”

Sunday, May 30th, 2010

This article is a guest contribution by Eric Sprott and David Franklin of Sprott Asset Management.

There’s nothing wrong with throwing a little money at a problem to make it go away. There’s equally nothing wrong with throwing a little borrowed money at a problem to make it disappear, as long as you have the means to pay that borrowed money back.

But what happens if you throw a lot of borrowed money at a problem, and the problem doesn’t go away? If you’ve ever experienced a situation like that you can probably understand how Europe feels right now. It just unleashed a magnificent $1 trillion euro bailout and the market responded with a selloff by the end of the week! So what happened? That money was supposed to make the problem go away, after all. And it was a lot of money. Why did the market respond to it with such disdain?

We believe the market’s reaction is confirming what we have long suspected: that these bailouts provide next to no long-term value. They don’t produce real jobs. They don’t improve productivity. They just prolong the precarious leverage game played by the financial sector, and do so at tremendous cost to taxpayers. “Bailout and Stimulate” has been the rallying call for governments and central banks since the beginning of this financial crisis – and it has certainly had its impact over the last two years, but not the type of impact we need to propel real, sustainable growth. There are three recent, glaring examples of this busted “Bailout and Stimulate” formula in action:

Exhibit A: The United States

From the outset of this financial crisis, the US Government and Federal Reserve have spent prolific amounts of money to save its banks and stimulate its economy. According to Neil Barofsky, special investigator general for the Troubled Asset Relief Program, the United States has now spent approximately $3 trillion on various programs to stem the financial crisis.¹ This figure is expected to be updated again in July.

This $3 trillion expenditure includes stimulus programs like ‘cash for clunkers’, the extension of unemployment benefits, infrastructure spending, the “Making Home Affordable” program, as well as the activities of the Federal Reserve. To measure what the fiscal stimulus has actually accomplished we looked to the US Federal budget outlays/receipts to gauge the impact of the stimulus on GDP.

Table A presents current dollar GDP increases year-over-year alongside current dollar budget deficits. Comparing the two in current dollars provides a sense of the hard dollar impact that stimulus spending has had on the economy. As the chart illustrates, the net impact of the stimulus contributions and promises made since 2008 have resulted in a combined budget deficit of close to $2.5 trillion dollars and an incremental net increase in GDP of $200 billion. A $200 billion return for a $2.5 trillion increase in debt represents a terrible return on investment. It implies that the net impact of the stimulus on GDP since 2008 has been a mere 9 cents for every deficit dollar spent. Buying dimes with dollars is bad business, government-funded or not.

Another troubling statistic relates to the cost of job creation for the American Recovery and Reinvestment Act (that’s the $787 billion program designed to produce real jobs in the United States). The White House estimates that it takes approximately $92,000 of government spending to create one job in the US. The White House justifies this exorbitant amount by stating that at the current employment level, each job in the US economy generates $105,000 in GDP, thus resulting in good “bang for the (taxpayer) buck”.⁵ Spending $92,000 to generate $105,000 in GDP seems justifiable on the surface. But further digging reveals that the actual cost to save or create one job in the US was $117,933 per job from February to December 2009.⁶ That’s well over $92,000, and more than the $105,000 “return” each job is supposed to provide in GDP. If this metric is correct, it means the US government is actually suffering a negative return from its job stimulus.

To further convolute the issue, one must also consider that the supposed $105,000 GDP return for each new job doesn’t incorporate the fact that the $92,000 (or $117,933) spent to create it was BORROWED. Why does this aspect of government expenditure never make it into the analysis? Spending $92,000 for a $105,000 pop in GDP represents bad logic when that $92,000 isn’t yours to spend. If we incorporate the interest costs required to borrow the $92,000, are we really producing value or just digging a deeper hole?

Numerical discrepancies aside, the fact remains that GDP is a terrible metric to measure the return of a job program. GDP is technically the value of all finished goods and services produced in an economy. From a business perspective, GDP is akin to revenue, which isn’t an asset, and is different from ‘earnings’ or ‘profits’. Businesses don’t hire additional workers for their marginal increase to ‘revenue’ – they hire to increase their marginal ‘profit’. The White House approach to job stimulus will maximize spending, not profit. Rather than maximize spending, why not maximize actual employment by finding a way to produce a job for less than $92,000? Surely some of the fifteen million unemployed workers in the US would appreciate some help in that area.⁷

Tags: Asset Management, Bailout, Bill Gross, Canada, Central Banks, David Franklin, Disdain, Economy, Eric Sprott, Federal Reserve, Financial Crisis, Financial Sector, Glaring Examples, Gold, Governments, Leverage, Outset, Productivity, Selloff, Sustainable Growth, Taxpayers, Trillion, Us Government
Posted in Bonds, Canada, Gold, Markets, US Stocks | No Comments »

Barry Allan: Intermediate and Development Plays Are the Golden Ticket

Saturday, May 15th, 2010

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This article is a guest contribution by Brian Sylvester and Karen Roche of The Gold Report 5/14/10

In this exclusive and revealing interview with The Gold Report, Mackie Research Capital’s Barry Allan, always among Canada’s top-ranked mining analysts, says the European currency crisis and crippling debt problems will push gold—and the U.S. dollar—higher throughout the rest of 2010. But gold and the greenback may not be the biggest winners as a result of a faltering euro. Allan suggests other currencies could have the most to gain as investors seek other havens. Allan also sheds some light on why the best bets in the gold sector are intermediate and development plays.

The Gold Report: Barry, the last time we spoke, you told us gold typically has a rough first quarter. Tell us how the yellow metal fared in Q1.

Barry Allan: It’s typically the end of the first quarter where gold gets into problems, and then into the second quarter. We’re kind of still in that process. What we did see was a rather good gold price relatively speaking; it largely held, and the price went more laterally over the last short while with the whole potential bailout of Greece. By that, I mean it didn’t have a sharp correction, but it did go sideways.

TGR: And where do you see the gold price heading later this year?

BA: We will be looking at a better gold price environment. I think the variable that we now have, which we didn’t have previously in our discussion, is the impact of the potential desegregation of the euro, and the whole notion of what that will do for the gold price vis-à-vis the currency crisis. With the euro crisis, you’re going to get a flocking to the U.S. dollar and gold. With the rise of the U.S. dollar, you’re also going to get a rise in the gold price, which is a bit of an unusual feature—and we’ve already had that.

TGR: So you think the sovereign bailout of Greece is likely to fail?

BA: Certainly in my travels—I was just in London, England and New York—there’s a general belief that the whole concept of a bailout of Greece is going to fail, and it will take some time, but it will ultimately fail. And that will cause further dislocation of the euro and hence benefit gold and the U.S. dollar. So later this year, we fully expect a better gold price.

TGR: Do you see a dramatic rise?

BA: Certainly, the elements are there. I think we’re all dealing with the same hand to a certain extent, in the sense that what will ultimately happen with the euro remains to be seen. The indications are that Greece is definitely having issues. But there are also other weak parties in the euro that may show some problems. If that happens, that’s just going to accelerate the whole crisis of the currencies, which will be a positive for the U.S. dollar or other world currencies and for gold.

TGR: In the same way people are talking about Greece, people are talking about Portugal and Ireland; people are even talking about England. If England shows any kind of debt issues, will people really flock back to the U.S. dollar or look to alternative currencies as a safe haven?

BA: The practical part of it is that you can move huge amounts of currency in a pretty short period of time, and what typically happens is money will slosh around in different currencies and go from one currency to another as circumstances change. I saw it a while back by virtue of friends of ours in Ireland who were wanting to move money out of Ireland and saying, “Where do we go?” and their first impulse was to go to the U.S. dollar. I said, “Well, I’m not so sure that is your best place to go. Would you consider putting money into gold?” Their immediate response to me was, “What you say might all be true, but you don’t understand how bad the prospects look for the Irish currency.”

TGR: How long can we expect this situation with the euro to last?

BA: It will occur until such a time as the situation in Europe stabilizes, and then we will find a more moderate exchange rate. But there will be—and there has already been—a movement to world currencies, and other potential currencies might emerge as world currencies.

TGR: As far as gold investments go, what sort of vehicles are you most likely to recommend to people?

BA: It really all depends on one’s tolerance for risk when it comes what vehicle you choose or how you gain that exposure to gold. On a recent trip through Europe, as well as New York, for the first time ever I found almost no interest in senior gold stocks. People are saying to me, “If I need that kind of exposure, I will just go to the ETF, thank you very much, and not take on operating risk. If I want to invest in equity, I want something that is going to give me a 20%-30% rate of return; hence I am going to look into the smaller tier of gold stocks where there’s something that’s got more sex appeal, with exposure to the kind of company as well as gold.” That struck me.

TGR: What are the reasons behind it?

BA: I think there are probably two reasons behind it. One has been the evolution of the ETF as a viable instrument and one that factors in people’s thinking; the other is exposure to the gold price without taking on operating or political risks. You may have some element of counter-party risk there, but you certainly don’t have the operating risk aspect. Until recently, the senior gold stocks had not really distinguished themselves because they were not able to show really good increases in bottom-line performance with this rise in gold. They were largely wrestling with operating costs, the growth in cash flow and earnings as a result of better commodity prices. I think the backlash was people saying, “Fine, if I’m going to buy an equity, I want something that’s going to give me good, solid rates of return, and that’s something more than just 10%”

TGR: An April research report from Mackie says you’re bullish on Barrick Gold Corp. (NYSE:ABX;TSX:ABX) and Newmont Mining Corp. (NYSE:NEM), but less so on some of their competitors. What are Barrick and Newmont doing that others are not?

BA: What I had recognized in making that statement is that certainly both Newmont and Barrick would give us good bottom-line performance. In other words, show us good leverage in a gold price environment, give us earnings, give us cash flow. Both Newmont and Barrick did handily outperform street expectations in Q1 based on much better commodity prices.

TGR: What’s your view of Goldcorp Inc. (NYSE:GG;TSX:G) and Kinross Gold Corp. (TSX:K;NYSE:KGC)?

BA: I was only a little bit more moderate on Goldcorp because of the fundamental fact that Goldcorp has a very big mine it is developing, called Peñasquito in Mexico, which really doesn’t hit full stride until the end of 2010. I thought the share price would tend to lag initially, but certainly get better toward the end of the year.

In the case of Kinross, again it was a fundamental issue that I wanted to see, which I have not yet seen. One of the major mines it has developed—the Paracatu mine in Brazil—has some operating issues. It’s been a recovery problem, and sometimes recovery problems can be systemic. I was being a little bit more cautious with Kinross; as with Goldcorp, their major portion of growth is yet to come.

TGR: What are some of the mid-tiers best positioned to capitalize on the stronger gold price like Barrick and Newmont have?

BA: The two we have selected within that group are El Dorado Gold Corp. (TSX:ELD;NYSE:EGO) and Agnico-Eagle Mines Ltd. (TSX:AEM). What I recognize in both of those names is a tremendous growth profile—when I say “tremendous,” I mean quite dramatic growth profiles over the next two years, whereby the companies are effectively transformed from where they are to where they ultimately should end up.

In the case of Agnico, that’s probably going to be the year-end before we see that transformation. In the case of El Dorado, it’s probably going to be more into 2011. But both of these companies have a tremendous growth profile, so they’re going to dramatically increase production. We are not alone in looking at them; they’re probably the two names in the intermediate space that the “Street” loves to love, and so they tend to be expensive. You’re paying up front for growth that’s going to happen later this year or next year. We’ve been a little bit more “nimble,” if you will. We’ve always bought Agnico-Eagle on bad news; we try to get a better value based on whatever startup issue it might have. In the case of El Dorado, we try to do the same. We recognize that both of those companies are exceedingly well positioned for the next 18 months to deliver spectacular growth rates.

TGR: You place gold companies in four groups: senior equities, intermediate equities, junior equities and development equities. Could you explain what differentiates companies in the last three categories?

BA: When we talk about a junior mining company, we’re probably talking something that has a production capacity of less than 500,000 ounces. An intermediate would be 500,000 ounces or more. Typically, the market cap is, in the case of Agnico-Eagle, a $10 billion market cap type company, whereas if you get down into the juniors, the market cap will be more into the $2-$3 billion kind of range. The junior mining company probably has one or maybe two operating assets in its portfolio, whereas the intermediate guys will have more and that provides them with more production base diversity.

TGR: And the risks of each?

BA: The intermediates probably have a lower liquidity risk. And because they have multiple mines in production, they have a bit more portfolio-type flexibility in managing their production base. So a little bit lower risk there as well.

In the case of the juniors, you tend to be leveraged to a particular mine. So you have a higher degree of operating risk associated with the junior, and you may have an element of political risk, depending on where that mine is located. From our perspective, the risk profiles are a little bit higher on the juniors than on the intermediates.

TGR: There was also a “development” category. Describe those companies.

BA: Companies in that tier are not producing. They’re companies either building mines or at the early stage of mine assessment. They’re companies that have advanced beyond exploration but don’t have a mine in production.

TGR: And the risks?

BA: They have incumbent risks associated with them depending on where in the development cycle they are. For companies that are reasonably well advanced as far as having mines under construction—Osisko Mining Corp. (TSX:OSK) is an example—it would typically have a lower-risk profile than a company like Oromin Explorations Ltd. (TSX:OLE;OTCBB:OLEPF) or Sandspring Resources Ltd. (TSX.V:SSP), which really have just a National Instrument 43-101 resource estimate and are conducting pre-feasibility studies of those resource ounces and trying to get to the feasibility stage. So it is a much higher-risk profile.

TGR: What types of risk?

BA: There are lots of different types of risks. You clearly have a funding risk because most of these are unfunded projects. You have a construction risk in the sense that if you have a reserve, then you have to start building the mine. In some cases, we don’t even have a reserve; we have a resource, and we’re not sure how much of that resource is going to convert into reserves, so you have a geological risk. In that tier, you’re going to want a much better return to compensate you for the risks.

TGR: Some companies in the development category have been doing quite well. Tell us about those.

BA: In the development equities, it’s about taking those risks that we talked about and removing them from the equation. A company that was our top pick for this year was called Comaplex Minerals. It’s been taken over by Agnico-Eagle. That’s a classic in what we really are looking for in this group of companies. What Comaplex did was de-risk the project to the extent that there was someone out there, in this case Agnico, who felt that this would be a good fit for its asset base. We got a good valuation as a result.

We’re looking at a couple more that fit into that category, albeit much further behind than a Comaplex, like an Oromin or a Sandspring. We would say Oromin is probably a year or so behind where Comaplex was; we expect there will be some form of take out there as well, but it won’t be until the end of this fiscal year until we’ll be in a position to really see that.

And then with a Sandspring, which is even further behind than Oromin, that’s likely going to be a 2011 event. But this is about expanding the resource size beyond what we currently believe it to be; then taking those resource ounces and de-risking them into reserves; and then about looking at the economic prospect of developing them into an operating mine. That’s where you have your highest risk; but if you get it right, you also get your best returns.

TGR: What are some other development-stage juniors on your radar?

BA: We’ve been deep into Rubicon Minerals Corp. (NYSE.A:RBY; TSX:RMX); we were their first financiers. But let’s be clear, Rubicon has the highest risk profile of probably any company out there. It was pure exploration, and they’re still in exploration at this juncture. Rubicon has found something of very significant size and proportions, and the real question is: what have they found? That’s what the market is debating. They’ve got well over 150 holes drilled into something that is holding together very nicely. We’re clearly, and have been for some time, on record as saying that we think there is something very material to Rubicon. We have put some numbers around it, but we’re ahead of where the company is.

TGR: Any others?

BA: Detour Gold Corp. (TSX:DGC) has the Detour Lake project. It will be a big project to build so there’s a big funding requirement. The market has taken a little bit of a slower response in looking at Detour because of those issues. It’s really a question of how they are going to fund this thing. Are the shareholders going to be diluted, or is it going to be a very large debt position? That’s a major part of that story that needs to be de-risked before you see the next increment. They’ve got an economic assessment of what all those ounces mean, and it’s now time for them to actually fund and build a mine.

TGR: Do you still see share price upside on either Detour or Rubicon or both?

BA: Definitely; probably more so on a Rubicon than on a Detour, but that’s a personal judgment. I think Detour has more significant issues to deal with in the development cycle than its compatriot, which would be Osisko. Osisko and Detour are direct comparables, and there’s a third one, which is called Rainy River Resources Ltd. (TSX.V:RR), which would fit into that category as well. These are the large, low-grade, open-pits in Canada.

TGR: The track record of these projects is somewhat sketchy, no?

BA: That’s absolutely correct. The mining industry takes a very cautious view on these large low-grade pits when they get up to this size in this part of the world. We have not had a successful track record in Canada of running and operating these large low-grade open pits. So there’s a bit of a technical hesitation among the mining companies about getting involved in a takeover bid, but there’s also a very significant entry price, because we’re talking about some big market caps to buy and build.

Sandspring’s Toroparu is much smaller and more modest in an area—Guyana—where there have been a number of these deposits developed over the years. Historically, they’re a little easier to mine, so there’s a better track record there.

TGR: Are you saying Sandspring is a more likely takeover target than Detour?

BA: Our view on Sandspring is more about adding ounces to the resource than it is about an imminent takeout. Detour has done all that work; they’ve shown the economics, and now the market is saying, “Alright, let’s see you build it.”

TGR: Among some of the risks you highlight, you say that share liquidity has impeded some valuations, at least in the short term. To what extent has the merger and acquisition activity overcome the restrained evaluations?

BA: Well, for instance , we can point to the recent purchase of Comaplex by Agnico-Eagle. Comaplex had quite a good market performance over the fiscal year. I know that just prior to the purchase by Agnico-Eagle, the stock was in the $8 range and Agnico offered them $10. There was a 20% premium right there. That reflects a little bit of that valuation you get off of better liquidity and the better values at which senior golds will trade—or an intermediate in this case—relative to a junior. They can offer those kinds of prices and still show accretion to their shareholder base. So that is another way of looking at that element of liquidity: what can it do for you? Now, there’s also the possibility that the senior mining company is prepared to be more aggressive with the purchase price. But I would suggest to you that generally speaking, the valuations on a more liquid stock are better; thus, they are able to offer the junior a premium and still be able to show accretion to their bottom line.

TGR: What about some noteworthy junior golds?

BA: Aurizon Mines Ltd. (TSX:ARZ; NYSE.A:AZK) is a steady-as-she-goes type of company. They’ve done a good job building their mine, which is Casa Berardi. They have reached a steady level of operation and they’re not going to embarrass us. I think the market has started to ask—and we have asked this as well—”Alright, where do we go to from here other than the gold price? We’re a producer of 160,000 ounces. Where’s my sizzle? Where’s my joy? To get off into that intermediate category, I am going to have to double my size; so how is that going to happen?” That’s really been the issue for Aurizon at this point. They know that; they have a development team that’s been out looking at new acquisitions. Aurizon has a property called Joanna that probably is not sufficient at this point to get them to that level, but they are spending. Lately they’ve had a little bit more success drilling there. And they’re drilling Casa Berardi to get additional mineralization. Those are kind of organic things, and the market is looking for something that is a bit more of a step change.

TGR: Are there some other junior companies that are steady producers with some upside?

BA: Alamos Gold Inc. (TSX:AGI) is similar to Aurizon to a certain extent, except it’s a Mexican producer. Alamos fits into that category with a Gammon Gold Inc. (NYSE:GRS; TSX:GAM) as an operation that is in Mexico that is producing gold and silver. It’s an open pit; it had initial start-up problems, but the practical part of is that they got it right, and they’re doing very well on an operating front. They’re producing consistent operating results from quarter to quarter with good operating costs, and now what they’ve done is they’ve gone out and tried to leverage their operating talent into two properties in Turkey.

The catch with Alamos is it’s a big step for a one-mine company going from Mexico to Turkey, and that’s just sheer politics of jurisdiction. The assets look like they’re similar; I have not actually seen them.

Barry Allan joined Mackie Research’s Investment Banking Department in 1998 as a mining specialist, and transferred to the Research Department as a Mining Analyst in 2001. Barry has over 15 years of experience in the mining sector. Prior to joining Research Capital, Barry was a Gold and Precious Metals Mining Analyst with Gordon Capital, BZW, and Prudential Bache. Prior to equity research, Barry was a member of the specialist finance group at CIBC, one of Canada’s largest financiers of mining projects. Barry earned his B.Sc. (Geology) and MBA degrees from Dalhousie University.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester and Karen Roche of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None
The following companies are sponsors of The Gold Report: Aurizon Mines Ltd., Detour Gold Corp., Sandspring Resources Ltd., Rubicon Minerals Corp., Goldcorp
2) Barry Allan: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family are paid by the following companies: None.

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Tags: Bailout, Best Bets, Canada, Currency Crisis, Currency Euro, Debt Problems, Desegregation, ETF, European Currency, First Quarter, Gold, Gold Price, Gold Report, Gold Sector, Golden Ticket, Greenback, Havens, Last Time, Notion, Roche, Second Quarter, Sylvester, Tgr
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Rosenberg: “Bazooka Bust” and Gold Glitters

Thursday, May 13th, 2010

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This article is a guest contribution from David Rosenberg, Chief Market Economist, Gluskin Sheff, “Breakfast with Dave”, May 12, 2010.

Bazooka Bust

It was almost comical to read this headline yesterday on page 2 of the FT — Blast of Relief as Bazooka Finds its Target. The word “bazooka”, in this context, was coined by former Treasury Secretary Hank Paulson back on July 15, 2008 to describe his weaponry to safeguard Fannie and Freddie. The stock market rallied that day by over 1%, to 1,215 on the S&P 500, and the short-covering rally took the index above 1,300 by early August. Little did anyone know that we had almost 50% to go on the downside before the interim lows were turned in. Beware of bazookas; they don’t always work.

Speaking of the GSEs, it really is so encouraging to see that a week after Freddie went cap-in-hand to the Treasury for a $10.6 billion cash infusion, Fannie had to go begging for $8.4 billion to cover its burgeoning losses. These two wards of the state have now drained $148bln of aid out of taxpayer pocketbooks since the mid-2008 bailout (the size of the entire deficit before the recession began).

And what a housing mess it still is — Fannie reported that its delinquency rate still rose to 5.47% in Q1 from 5.38% the quarter before. What is happening now is that a growing number of people who can in fact pay their mortgage have stopped making their payments out of “anger” — according to a disturbing article that showed up on page A4 of yesterday’s WSJ (Emotion Drives Many Defaults).

Why it’s disturbing is that it cites research showing that 12% of mortgage defaults are now “strategic” and that somehow this is now okay on our increasingly hedonistic society. In fact, a law professor is quoted as lamenting why people are “throwing their money away on a home in which they may never have equity.” Wow. Look how far we have progressed. We used to be told “why throw your money away on rent? Why don’t you own?” Now it’s “why throw your money away on a house?” Maybe because you signed a contract — now why should that matter.

You really can’t make this stuff up.

Gold Glitters

In the aftermath of the Lehman collapse, gold faltered as there was a huge margin call everywhere and investors seeking liquidity sold off their winners. The secular bull market for bullion did not end at the time, no long-term trendline was violated, and gold did rise in non-U.S. dollars and far outperformed other currencies. But what happened during this recent round of intense European-led volatility and financial market weakness was that gold rallied even in U.S. dollar terms, which is significant seeing as there were large-scale safe-haven inflows into greenbacks. So this time, gold has managed to hit new highs in all currencies, and gold rallied even with the overall commodity complex slipping noticeably over the past few weeks.

This is a sign. Of what, you may ask? That gold is no longer trading just as part of the resource sector but is now taking on the characteristics of a currency. While the U.S. dollar has gained ground since late last year, there is no doubt that an Administration that has a stated policy of doubling exports in the next five years to “support” two million jobs absolutely craves a depreciating greenback.

Meanwhile, a new socialist government in Japan wants a weaker yen. Sterling has only one way to go in an environment of heightened political uncertainty and a balance sheet that is at least as extended as Greece. And the ECB just gave notice with its agreement to buy sovereign and corporate debt that it is willing to distort the pricing of risk in the bond market for the greater good of helping profligate countries to avoid either defaulting or certainly help them finance their obligations at a subsidized cost. The Bundesbank, this is not.

So gold is no government’s liability and the shape and shift in its supply curve is the shape would seem to be a little easier to make out than fiat currency. We may end up being overly conservative on our peak gold price forecast of $3,000 an ounce.

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Copyright (c) 2010 Gluskin Sheff

Tags: Bailout, Bazooka, Cap In Hand, Cash Infusion, Chief Market, David Rosenberg, Delinquency Rate, Downside, Early August, Gold, Gold Glitters, Gses, Hedonistic Society, Law Professor, Lows, Market Economist, Mortgage Defaults, Page A4, Pocketbooks, Target, Treasury Secretary, Wards, Weaponry, Wsj
Posted in Bonds, Gold, Markets, US Stocks | No Comments »

Some less than rosy views from Themis’ Joe Saluzzi and Jim Rogers

Wednesday, May 12th, 2010

This article is a guest editorial contribution by Tyler Durden, ZeroHedge.com.

Themis Trading’s Joe Saluzzi, who still has oddly not be asked to discuss his perspectives on the flaws in not only HFT but broader market structure and topology issues before a congressional commission, is interviewed by Bloomberg (and amusingly Carol Massar, after mocking him the last time around, finally gives him props for having been right all along). Fans of A. Joseph Cohen would be better advised to look elsewhere for their daily dose of Vitamin H_opium. The take home message “It’s gonna crumble, it’s just a matter of when.” Alas, with gold now at $1,241 even lifelong Keynes fanatics are finally throwing in the towel. The time when we could have done something to fix the system is now long gone, courtesy of the administration’s waffling for the past two years as instead of getting to the root cause of the last and future crash, it was focused on bailing out bankrupt banks.

And in related news, Jim Rogers, joins the Euro death squads, and says that the $1 trillion bailout is the “Nail in the coffin for the euro.” As Rogers said in discussing the now failed bailout: “I was stunned. This means that they’ve given up on the euro, they don’t particularly care if they have a sound currency, you have all these countries spending money they don’t have and it’s now going to continue. It’s a political currency and nobody is minding the economics behind the necessities to have a strong currency. I’m afraid it’s going to dissolve. They’re throwing more money at the problem and it’s going to make things worse down the road.”

Rogers’ investment recommendations: “Investors should buy precious metals including gold or currencies of countries that have large natural resources.” We still would recommend staying away from the Chinese imminently popping bubble, which will likely reprice industrial commodities by 30-50%.

Source: ZeroHedge.com

Tags: Bailout, Carol Massar, Commodities, Congressional Commission, Currencies Of Countries, Death Squads, Editorial Contribution, Getting To The Root, Gold, Guest Editorial, Industrial Commodities, Investment Recommendations, Jim Rogers, Joseph Cohen, Market Structure, precious metals, S Joe, Saluzzi, Themis Trading, Throwing In The Towel, Tyler Durden, Vitamin H
Posted in Commodities, Gold, Markets | No Comments »

Europe’s bailout is short-term panacea

Tuesday, May 11th, 2010

This post is a guest contribution by Asha Bangalore of The Northern Trust  Company.

The colossal rescue package from Europe announced today to stabilize markets is a coordinated contribution of euro-zone governments (€440 billion in loans), the IMF (€250 billion), and an EU (€60 billion) emergency fund amounting to a sum total of  €750 billion ($955 billion). There is support also from the European Central Bank (ECB) through its purchase of euro-zone government bonds and private bonds to “ensure depth and liquidity”. The actions of the ECB would be “sterilized” or offset by other bank operations.

On the other side of the Atlantic, the Fed reopened swap lines with the ECB and central banks in Japan, U.K., Canada and Switzerland. Essentially, the Fed extends loans to foreign central banks, which in turn use these funds to make U.S. dollar denominated loans to financial institutions in their home markets.

This is the gist of the actions announced today to stem the financial crisis in Europe. World markets have responded positively and markets have moved to calmer waters from the recent turbulent market sessions.

But, it is only a short-term respite; markets are bound to get jumpy again. The longer term issues will haunt financial markets eventually. The industrialized world is awash with public debt at levels not seen in peacetime. It is well known that the fiscal house of the industrialized world is in dreadful shape compared with less advanced world (see table below). If members of the euro-zone facing dire fiscal problems fail to put their house in order following the historic support program, moral hazard issues will creep in the short-term.

More compelling are the medium to long term problems not only of the troubled euro zone nations but the entire industrialized world arising from the pressing fiscal situation. A failure to address the explosion of public debt in the advanced economies will translate into higher interest rates, set backs in productivity and capital formation. In other words, the standard of living in the industrialized world is threatened by the rapid growth of public debt. The likely market response to the fiscal challenges ahead, after the dust settles, is the true dragon to slay. Or will the industrialized act soon and decisively to prevent another financial storm?

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, May 10, 2010.

Tags: Bailout, Bank Operations, Canada, Central Banks, ECB, Emergency Fund, Euro Zone, Financial Institutions, Fiscal Problems, Fiscal Situation, Government Bonds, Hazard Issues, Home Markets, Market Sessions, Members Of The Euro, Moral Hazard, Northern Trust Company, Peacetime, Private Bonds, Public Debt, Turbulent Market
Posted in Bonds, Canada, Markets | No Comments »

Rosenberg: “Greece Is The Same Coalmine Canary As Thailand Was To LTCM And As New Century Was To Lehman”

Tuesday, May 11th, 2010

David Rosenberg is out with some very fitting analogies of the current sovereign crisis. If he is proven prescient, which we have no doubt he will, the Greek near-default will have massive repercussions to the entire developed world when all is said and done.”In my opinion, Greece is the same canary in the coal mine that Thailand was for emerging Asia in 1997, which ultimately led to the Russian debt default and demise of LTCM; the same canary in the coal mine that New Century Financial in early 2007 proved to be in terms of being a leading indicator for the likes of Bear Stearns and Lehman. So, the most dangerous thing to do now is to view Greece as a one-off crisis that will be contained.” Furthermore, as he makes all too clear, if a $1 trillion bailout can only buy 400 points in teh Dow, Europe, aside from all the other fundamentals which confirm the same, is doomed, and even the ever-optimistic market now realizes it. Lastly, should Europe pursue the required austerity measures, the hit to European GDP will be massive, and is certainly not being priced in European stocks, but certainly not in US stocks, whose primary export market is about to disappear.

From today’s Breakfast with Dave.

Well, I think the turbulent global events of the past few weeks underscore the reason why I have maintained a cautious investment approach for the past year, notwithstanding the massive recovery in risk assets we saw from the March 2009 lows, which from my lens bore a huge resemblance to the bungee jump in the market back in 1930. In fact, at one point two weeks ago, at the highs, the stock market had already achieved, in barely more than a year, what took five years to accomplish in the 2002 to 2007 bull market, and at least that market wasn’t being fuelled by unprecedented government intervention in the economy and incursion into the capital markets.

The dramatic government stimulus was global in nature, and this was the primary prop behind the rally in equities over the past year and change, and the message coming out of Greece, and not just Greece but many other governments in the European Union and across the globe, is that governments are probing the outer limits of their deficit finance capacities. History does indeed show that it is quite common to see sovereign default risks follow on the heels of a global banking crisis, which was the story for 2007 and 2008; it took a respite in 2009 and we are now in a new chapter of this prolonged debt deleveraging story. These cycles of balance sheet repair, alternating between the private and public sector, typically lasts 6 to 7 years. We are barely into year three, and what is extremely important in this roller coaster ride is to focus on capital preservation strategies that minimize the volatility in the portfolio, which is one reason why I have favoured long-short income and equity strategies.

In my opinion, Greece is the same canary in the coal mine that Thailand was for emerging Asia in 1997, which ultimately led to the Russian debt default and demise of LTCM; the same canary in the coal mine that New Century Financial in early 2007 proved to be in terms of being a leading indicator for the likes of Bear Stearns and Lehman. So, the most dangerous thing to do now is to view Greece as a one-off crisis that will be contained. Even with this new and aggressive EU-IMF financing arrangement that has managed to trigger a wild short covering rally yesterday, the risks are still high that the contagion spreads to countries like Portugal, Spain, Italy and even the U.K., which has already received some warnings from the major rating agencies and is gripped with political gridlock in the aftermath of last week’s uncertain election results.

The problem of there being far too much debt on balance sheets globally has not gone away and in many cases has become worse, and the ability to service these debts especially in countries that have weak economic structures like Greece, Portugal and Spain has become seriously impaired. It remains to be seen how Greece and the other problem countries in the euro area will manage to cut their deficits without, at the same time, controlling their monetary policy and their currency, which of course we were able to do here in Canada during the 1990s but with the help of a 30% currency devaluation.

Speaking of Canada, the downdraft in our market and our dollar shows once again that we can be doing everything right, and in terms of fiscal policy we still look good on a relative basis. However, being a small open economy sensitive to commodity prices, this is one of those times where sudden shifts in global economic sentiment can hit us disproportionately.

Even before this latest leg in the European financial crisis, China was already tightening monetary policy aggressively to lean against what appears to be a property bubble in various urban centers. One has to consider what the outlook is for the global economy in general, and near-term prospects for the resource sector in particular, when the Shanghai equity index is down more than 20% from the nearby highs; yet something else to add to the concern list.

Recall that we headed into this latest round of turmoil with the equity markets priced for a return to peak earnings as early as next year, bullish sentiment on the stock market and institutional investor cash ratios at levels we last saw in late 2007 when the market was just rolling off its highs, and measures of volatility at extremely low levels, the VIX index was a mere 15 as an example, a sign of widespread complacency. It is at times like that, when all the good news is priced in and then some, and the exact opposite of what was happening at the lows just over a year ago, that the markets are most susceptible to a pullback.

With the benefit of hindsight, it is clear that the time to start to wade into the risk asset pool was a year ago after a 60% plunge in equities. However, 80% later on the upside, it’s time to get more defensive and less cyclical with a keen eye towards taking advantage of this crisis if it presents opportunities in the equity market as the panic in the corporate bond market presented to us back in early 2009. I, for one, am looking forward to having my temptation level tested if this market heads back into undervalued or even fair-value terrain, which it only managed to achieve for a few months early last year.

While the coincident economic indicators, such as employment, have improved in recent months, many of the leading indicators have begun to roll over. In fact, these indicators are pointing towards a discernible slowing in economic and earnings growth in the second half of the year and into 2011 when we will see the stimulus shift to significant fiscal restraint in both Canada and the U.S., and the lagged impact of the Chinese policy tightening.

In addition, while the periphery of Europe received a financial lifeline package, the conditions for accessing the funds will require massive fiscal tightening and it will be interesting to see how countries like Spain, let alone Greece, can cut spending and raise taxes at a time when the unemployment rate is at a sky-high 20%. Remember, 20% of the global economy is going to be slowing down going forward, the question is by how much and this in turn will impact North American exports. On top of that, the equity and debt cost of capital, which had been on a declining path for much of the past year and has very supportive of risk appetite, is now going on the opposite path. This is not necessarily a double-dip recession scenario, but I would not rule it out.

What’s important from an investor standpoint is that the uncertainty surrounding the macro outlook is much wider now than it was before. Over the near term, there is still more downside but the main message is that one should be prepared to take advantage of the springtime selling by using cash and near-cash as part of a tactical asset allocation strategy because one of the best way to make money in this tumultuous environment is not to lose it, but to have it ready to put to use once things get really cheap.

At the same time, we are confronting a deflationary shock at a time when most measured rates of underlying inflation in most parts of the world, especially the U.S. are already extremely low, barely 1%, and in such an environment, having an income theme as a core component of the portfolio makes a whole lot of sense.

As for the GDP impact on Europe now that all the dirty laundry is out int he open, here is why it will get very ugly:

We did some in-depth analysis on how the economies of the “PIIGS” (Portugal, Italy, Ireland, Greece and Spain) countries (and the rest of Europe) would fare if deficit-to-GDP ratios were to revert back to the Maastricht criteria of 3%. The adjustment will be painful for Europe in general, slicing off about 1% GDP growth annually over the next three years, and very painful for the PIIGS specifically. If these countries’ fiscal ratios were return to 3%, Ireland would see four percentage points (ppts) shaved off nominal GDP annually over the next three years, Greece 3.5ppts, Spain 2.8ppts, Portugal 2.2ppts and 0.8ppt for Italy.

It would not be a picnic for the rest of Europe, where many countries were running deficits greater than 3% of GDP in 2009. We estimate that fiscal cuts will shave about 1.5ppts off France’s nominal growth, 1.0ppt for Belgium, and 0.8ppt for the Netherlands. Austria and Germany would only have to endure 0.2ppt and 0.1ppt lower GDP growth, respectively, to bring their ratios back in line with targets. Finland is the only country with a GDP deficit under 3% (using 2009 data). Note that the starting point for our analysis was 2009 — the adjustment could be more painful as deficit-to-GDP ratios look to have deteriorated further in 2010.

Lastly, it appears that even Rosie has had it with the unbearable hypocrisy of our “leaders.”

Maybe it’s all about false pride. The need to counter-attack those who would dare to attack the Euro. How interesting was it to see the sharpness of the political rhetoric over the weekend from the European political elite. Please, fund our lifestyle, Mr. Market, but don’t hold us to our commitments:

“ … a battle of the politicians against the markets. I am determined to win” (German Chancellor Angela Merkel).

“… unfounded off-the-wall suggestions and speculation” (EC President Jose Manuel Barroso).

“… confront speculators mercilessly … know once and for all what lies in store for them” (French Present Nicolas Zarkozy).

It is a sad deflationary reality when a trillion dollars can only buy you 400 points on the Dow. What can the politicos do for an encore?

Tags: Austerity Measures, Bailout, Bear Stearns, Bungee Jump, Canada, China, Coal Mine, Coalmine, Dangerous Thing, David Rosenberg, Debt Default, Dow Europe, Emerging Asia, European Stocks, Export Market, Global Events, Government Intervention In The Economy, Investment Approach, Leading Indicator, Massive Repercussions, New Century Financial, Russia, Russian Debt
Posted in Bonds, Canada, Markets, US Stocks | No Comments »

Full Details On The European Bailout From Bank Of America

Monday, May 10th, 2010

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An expanded, if conflicted (it comes from one of the pillars of modern-day Keynesianism: Bank of America) overview of the full European bailout by “Europe”, which will now rely on the Fed to purchase EU debt and fund hundreds of billions in FX swaps. Can we now drop the charade that the EU is a viable structure, and stop pretending that Europe is anything but America’s most recent geographic and monetary acquisition, or is it still too early?

€750bn: Europe gets serious – ECB to buy bonds

Tags: Acquisition, Attachment Size, Bailout, Bank America, Bank Of America, Billions, Bofa, Bonds, Charade, ECB, Email, Europe, Pdf, Pillars, Swaps
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Hugh Hendry: The Greek “Bailout” Is Really A Bailout Of French Banks

Thursday, May 6th, 2010

This clipping and video  is courtesy of Tyler Durden, ZeroHedge.com

Below is an RT clip in which Hugh Hendry confirms just this: according to the Eclectica head man, a mark Greek debt to realistic market would wipe out E35-billion in French bank capital, “and it is questionable whether the French banking system would take such a hit.” Hendry’s solution, as has been the case from the solution, is for Greece to leave the euro, and points out that due to FX inflexibility, there will be no tourists in Greece this year as everything becomes painfully expensive, not in Drachmas but in Euros.

In typical fashion, Hugh dismembers Angela Merkel’s hypocrisy: “When the truth becomes unpalatable, what is the truth. Angela Merkel, when we say she is being generous, there is nothing generous about spending taxpayers’ money in another country, that is not generosity, that is merely trying to salvage a bankrupt set of political ideology. So to blame the messenger when it’s the truth that hurts, I find that inexcusable.”

[Hendry's huge bet against the euro has proven to be a terrific success.]

Source: ZeroHedge.com, May 6, 2010

Tags: Angela Merkel, Bailout, Banking System, Bet, Clipping, Drachmas, E35, French Bank, French Banks, Generosity, Head Man, Hugh Hendry, Hypocrisy, Political Ideology, Realistic Market, Salvage, Taxpayers, Terrific Success, Tyler Durden, Typical Fashion
Posted in Markets | 1 Comment »

Are China’s Policymakers Upsetting the Growth Apple Cart?

Sunday, May 2nd, 2010

It might have seemed great in writing, and it definitely prevented a deeper recession, but China’s large policy stimulus might however be a drag on development.

For more than ten years, the central government has put strict limits on the capability of nearby governments to borrow cash. But, to avoid these limits, local governments have increasingly set up local investment companies, referred to as LICs, and when credit policy was eased in 2009, these LICs raised debt at an apparently mad pace. What amount of cash did they raise? Controversy rages over whether the actual amount is 6-trillion yuan or 11-trillion yuan. However the argument is actually also missing the point. The two numbers happen to be huge, and, far more considerably, the end result depends greatly upon precisely how as major a portion may become non-performing loans during the coming several years.

Research from the International Monetary Fund of banking crises in 37 countries puts the median peak in non-performing loans at 22 per cent of total loans. By comparison, if only half the smaller 6-trillion yuan estimate outcomes in poor loans—the most optimistic forecast—this would still represent a sizeable 10-percent of total loans, with the actual figure likely to be higher.

Are these claims poor news for the country’s economy?

It’s definitely not the very first time China has confronted such a concern. In 1999, China bailed out its banks, purchasing 1,400-billion worth of non-performing loans. The bailout equated to 16 per cent of GDP, a similar figure to today’s estimates. But robust nominal GDP, averaging 14 per cent for a lot more than a decade, had reduced that figure to a paltry 4 per cent of GDP by last year, regardless of recovery rates.

The lesson is clear. It’s China’s capability to rapidly bring its LICs to order and create an additional decade of robust nominal GDP development which will determine its chances of escaping today’s mess. So long as today’s NPLs are frozen at their current levels, they will appear far smaller in time.

However, you will find problems. To begin with, China was kept floated on strong global demand throughout the 10 years following 1999. It not benefiting from the same support these days as Europe and also the US reduce debt. Second, the LICs warn from the limits to fiscal stimulus. It’s not clear whether China could, or would be willing, to commit to an additional round of fiscal stimulus given the consequences from the last. And although the risks of the double-dip within the global economy are far smaller, the chances of a property market correction aren’t, meaning a lot more fiscal stimulus might however be required.

The LICs also underscore the deep-rooted difficulties within the financial marriage between the local and central governments. However, China is hoping that domestic demand, particularly within the interior provinces, will drive economic development more than the next decade. If so, then finding a sustainable method to fund nearby governments will be crucial to meeting that objective.

Background indicates China will succeed. But a sudden slowing in nominal GDP development, or a failure to prevent the LICs from investing in a lot more white elephant ventures and generating a rising tide of poor loans, will make today’s difficulties far harder to digest than those a decade ago. So regardless of whether the true figure is 6 trillion yuan or 11 trillion yuan, there remains great reason for concern.

Tags: Apple Cart, Bailout, Central Government, China, Crises, Drag On, Emerging Markets, End Result, GDP, Gdp Development, International Monetary Fund, Investment Companies, Local Governments, Missing The Point, Nominal Gdp, Npls, Policymakers, Rages, Recession, Stimulus, Strict Limits, Time China, Trillion, Yuan
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Greece – GIIPS – Eurozone – Big Problem

Thursday, April 29th, 2010

This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

Greece is now “high yield”, “junk”, “below investment grade”, at least according to S&P. What I mean by that is S&P now rates Greece’s foreign and local currency sovereign debt at the BB+ level (with a negative outlook), below the sometimes-coveted investment grade status, BBB- is the minimum. Why did S&P feel the need to do this now? Just covering its *ss – Greek debt was rated A- as recently as December 2009.

On to the Germans. What they are doing is actually quite striking: offering a bailout in order to appease markets so that international investors will pick up the Greek bill (never was going to happen anyway); and then telling markets that bond investors in Europe will take a haircut so that international investors won’t pick up the Greek bill. I guess the light-bulb finally went on that there is a contagion brewing here because bunds are tight, while all Peripheries are wide.

The original bailout will likely be offered to satisfy Greece’s near-term obligations. However, in the meantime the probability that the liquidity crisis spreads across the GIIPS (Greece, Italy, Ireland, Portugal, and Spain) – especially Portugal with a 2009 current account deficit equal to 10.3% of GDP, making it shockingly susceptible to capital outflows – is rising.

We’re in crisis mode – the calm before the storm. I see the Eurozone disaster happening in three waves:

First, there is a liquidity crisis in Greece (already underway).

Second, it turns into a full-fledged financial crisis for the GIIPS. The capital account drops precipitously with investor confidence in GIIPS markets, leaving the very vulnerable countries, like Portugal and Spain with current accounts very much in the red, seriously short of cash.

What Germany wants out of Greece (and any bailout thereafter) is the equivalent of an economic anaconda. It will force Greece to meet the limits of the EMU Stability and Growth Pact (3% of GDP) by some period, let’s say 2012.

Of course that cannot happen without an epic surge in exports. Here’s the death spiral: sharp austerity measures translate into unemployment, economic contraction, deflation, and yes, higher deficits. There’s just no way out of it.

So what is the be all and end all policy script? Regain competitiveness in world markets, no less. The Economist on Portugal:

Low growth reflects a disastrous loss of competitiveness since the country joined the euro. Portugal has lost export-market share to emerging economies (including those of eastern Europe) that churn out similar low-value products. This is largely due to a steady rise in unit labour costs, as wage increases outstripped productivity growth (see chart).

The IMF’s consultation on Italy, as per its latest Article IV report:

Economic rigidities, along with Italy’s specialization in products with relatively low value added, have also been contributing to a steady erosion of competitiveness. Consequently, Italy has been losing its market share of world trade.

And my favorite part of the Italy Article IV:

In the past, other countries have overcome similar challenges from very difficult starting positions with comprehensive policy packages.

Note the very incriminating term, “comprehensive”. That usually includes expansionary monetary policy and the depreciation of a currency to drive export income, both of which elude any of the GIIPS countries.

The Economist portrays Portugal’s path away from depression-land via export income by lowering ridiculously high labor costs (i.e., productive labor as measured by the unit labor cost index) relative to those in Germany. As such, Portugal should be able to pick up exports while the government drops the deficit and constricts domestic demand. Notice the catchy title!

But what they fail to illustrate is the fact that all of the GIIPS are in EXACTLY THE SAME UNCOMPETITIVE BOAT!

So we get to the final stage, GIIPS go depressionary, and the economic contagion spreads across the Eurozone, hitting yes, Germany. Notice that Ireland is the only GIIPS with a fighting chance, according to the Eurostat’s forecast.

I’m married to a German – I understand stubbornness. But this time, being stubborn is just going to get the Germans in trouble.

The GIIPS are 34% of Eurozone GDP – try to export your way out of that one when 1/3 of the “Zone” is reducing costs and cutting wages. It’s a fallacy of composition to assume that the GIIPS are cutting spending while the aggregate remains intact. Furthermore, each EU country exports an average of 68.6% within Europe, so Germany’s clearly going to feel this, too – at least if the “Zone” gets past the immediate liquidity crisis.

Nobody talks about this – but Greece can secede from the EU as per the Lisbon Treaty.

Source: Rebecca Wilder, News N Economics, April 28, 2010.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

Tags: Anaconda, Bailout, Bbb, Bond Investors, Calm Before The Storm, Contagion, Crisis Mode, Current Account Deficit, Current Accounts, Greece Italy, International Investors, Investment Grade, Investor Confidence, Liquidity Crisis, Negative Outlook, Peripheries, Sovereign Debt, Term Obligations, Three Waves, Vulnerable Countries
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