Posts Tagged ‘Eurozone’

Embrace the Bailout, Reduce the Federal Debt

Friday, February 28th, 2014

Finally, the U.S. Treasury Department has figured out a way to reduce the federal debt – by giving money away.

That may not make sense, but keep in mind that we’re talking about the federal government.  And that means that money isn’t just given away; there are strings attached, unless you’re a preferred government contractor or an expert in Medicare fraud.

Bailouts

So consider this shocker.  Fannie Mae is scheduled to make a $7.2 billion payment to the U.S. Treasury next month and, when it does, the total payments from Fan and Fred will add up to $192.5 billion, exceeding the $187.5 billion they received from taxpayers.

Granted, a 3% profit over five years isn’t really a profit, but we’re talking about the “toxic twins” here.  And their payments are scheduled to continue, much to the chagrin of Fan and Fred shareholders.  They can just get in line, though.
That’s not the only government bailout that’s been profitable – the Troubled Asset Relief Program (TARP) required a $250 billion investment for troubled banks, but brought in more than $272 billion, a profit of about 9%.  AIG’s bailout was even more lucrative, bringing in $22 billion on an investment of $152 billion, for a 15% return.

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The Economy Is Booming – Unless You’re A Consumer

Friday, November 8th, 2013

At least it sounds like good news.

The U.S. Bureau of Economic Analysis announced that the economy grew at a rate of 2.84% during the third quarter.  That’s up significantly from recent growth, which has been below 2%.

But if you find a silver lining in today’s economy, it’s sure to be surrounded by a black cloud.  There are a few black clouds in this report:

  • Preliminary numbers are almost always wrong.  Funny how sometimes they’re overly optimistic.
  • In spite of the higher growth rate, consumer spending is at its lowest level since the second quarter of 2011.  In a healthy economy, consumer spending usually drives growth.
  • Fixed investment, an indication of capital spending, dropped from 0.96% in the previous quarter to just 0.63%.
  • Inventory doubled from 0.41% the previous quarter to 0.83% of the 2.8%.  An increase in inventory is an underwhelming sign of economic growth.

Interestingly, government grew 0.04%, in spite of sequestration cuts.  The numbers predate the 16-day government shutdown.

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The Age of Low Expectations

Friday, August 16th, 2013

Observing today’s global economy is like watching Adam Sandler’s best movie.  It’s horrible, but it could be worse.

Consider what passes for improvement today:

Europe is no longer in a recession.  Under the headline, “Eurozone’s longest-ever recession comes to an end,” the Associated Press quoted Eurostat, the European Union’s statistics office, announcing that the 17 EU countries that use the euro saw their economic output increase by 0.3% in the second quarter of 2013.  Over a year, the Eurozone’s growth rate would be 1.1%.

The DJIA is following a familiar pattern.

The DJIA is following a familiar pattern.

That’s the first quarterly growth for the Eurozone since 2011, but it requires some perspective.  China’s growth slowed to just 7% this year and it’s widely regarded as a calamity, signaling that the world’s second largest economy is on the brink of failure.  Europe’s economy is growing at a rate of 1.1 % and the party hats are out because some believe that the Eurocrisis is finally over and we’ll never have to hear the term “sovereign debt” again.

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Two Banks With a Country Attached

Monday, April 1st, 2013

Cyprus?  Really?  The population of Cyprus is just north of 1 million people.

In comparison, the Boston area has a population of 4.6 million.  Greece has a population of about 10.8 million.  Central Massachusetts has a population exceeding 800,000.  Would a financial crisis involving two banks in Worcester shake the financial system the way the financial crisis in Cyprus has?

Of course not.  Then again, Worcester is not a tax haven for Russian billionaires, who use Cyprus as their Cayman Islands.  Russia has kept many Cypriots gainfully employed through the country’s two largest banks, Bank of Cyprus PCL and Laiki Bank.

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Europe – The Weakest Link

Friday, February 15th, 2013

With the election, sequestration showdown and other pressing domestic news, we’ve hardly had time to think about Europe.  Yet the continent is as troubled as ever and is crying out for attention again.

Keep in mind that, in this era of a global economy, our fates are intertwined.  Europe and America are heavy trading partners and our multinational businesses are located throughout each other’s continent.  Our banks own European bonds.  So when Europe is in trouble, so is the U.S.

Well, Europe is in trouble.  We’d say “in trouble again,” but it’s never really gotten out of trouble; at least not since Greece triggered the sovereign debt crisis.  The popular British game show, “The Weakest Link,” could serve as a metaphor for the whole continent, except that what’s happening in Europe is not nearly as entertaining.

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Ignoring the Cliff

Monday, December 17th, 2012

The fiscal cliff beckons and, as previously predicted, a resolution is unlikely.  So let’s ignore the cliff this week and consider what’s happening elsewhere.

Viva Europe!

Last week was a good week for Europe – at least in comparison to most weeks.

The Eurozone is in a recession; unemployment continues to rise, and both industrial production and retail sales have dropped even further than had been predicted.

So where’s the good news?  Well, for starters, European leaders were given the Nobel Peace Prize.  While we’re not sure what the sovereign debt crisis has to do with war and peace, at least Europe is not the Middle East.  In what other continent do neighboring countries lend billions of dollars to each other when they have no hope of ever getting it back?

In addition, the European Union reached two agreements this week:

  • The 27 EU countries agreed to give the European Central Bank (ECB) oversight of their banks
  • They also agreed to provide Greece with an additional $64 billion in bailout funds

The ECB has not always shown sound judgment and the wisdom of pouring more money into the Greek sinkhole remains to be seen.  But the Greek funding will at least stall a default, which could potentially bring down the currency union, and the banking agreement should at least expedite decision making.

Whether the new agreements will help solve the crisis or prolong the pain remains to be seen, but at least the European Union negotiated and reached compromises.  That’s more than can be said for President Obama and the U.S. Congress.

Volatility: Europe vs. the U.S.

The inability to compromise is affecting the volatility of U.S. markets.

This week, for the first time this year, Europe’s volatility index (VIX) dropped below the U.S. VIX (16.6% vs. 16.8%).  In addition, Europe’s Euro Stoxx 50, the European equivalent of the Dow Jones Industrial Average, is easily outperforming the DJIA, with a year-to-date return of +13.5% vs. +7.75%.

Zero Hedge reported, “Are we seeing a wholesale capital outflow beginning as US’ Fiscal Cliff fears trump any year-end shenanigans potentially coming from Europe (post-Summit)? One thing is for sure, certain media individuals will have to change their tune now Europe is the year’s winner and the US becomes the center of the world’s event risk focus.”

High-Frequency Trading Is “Predatory”

Credit Suisse’s trading strategy team released a report this week called, “High Frequency Trading – Measurement, Detection and Response,” in which the firm said, as Zero Hedge put it, “that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition.”

Get Your Food Stamps!

With unemployment figures and the housing market improving, the U.S. economy is on the upswing, right?  If that’s the case, why are a record number of Americans receiving food stamps?

According to the U.S.D.A., a record 47.7 million Americans are now living in poverty.  In September, a record 607,544 Americans became eligible for food stamps.

Imagine if we were in a recession!

The Good News: No More Election Ads

Friday, November 9th, 2012

In the wake of Tuesday’s re-election of President Obama, the Dow Jones Industrial Average fell 434 points in two days, a drop of 3.3%.

That’s better than when he was first elected.  After a 305-point rally on Election Day 2008, the DJIA fell 486 points, or more than 5%, on the day after, which was the largest post-election drop ever.

In 2008, the housing bubble had burst and we were dealing with the biggest financial crisis since The Great Depression.  Today, we still have not recovered from the financial crisis, but face a “fiscal cliff” and continuing troubles in Europe.

The fiscal cliff, which combines $800 billion in tax increases and government spending cuts, has investors spooked for many reasons.  Unless action is taken:

  • Corporate dividends will be taxed like earned income, increasing the tax from 15% to a top rate of 39.6%.
  • The Affordable Care Act adds a 3.8% on investments, so the tax on dividends could nearly triple overnight.
  • The top tax rate on capital gains will increase from 15% to 20%.
  • Income taxes and estate taxes would also increase, and many more Americans would be subject to the alternative minimum tax (AMT).
  • The re-election of President Obama, who favors tax increases, makes it more likely that the increases will take place.
  • With Republicans controlling the House and Democrats controlling the Senate, Congress is divided and it will be difficult to reach an agreement that would avoid or reduce the impact of the fiscal cliff.

Of course, there’s plenty of time between now and the end of the year to deal with the issue.  But Congress will be on holiday for much of the time between now and the end of the year.

Meanwhile, in Europe

While Europe’s sovereign debt crisis received little attention during the busy election season, it’s not because the crisis has abated.

Once again, Greece is the little country that can’t, as it increasingly appears that “the Greek ‘austerity’ vote was merely theater,” as Zerohedge put it.  The resulting news in Europe this week is that European finance ministers may delay approval of the next bailout payment for Greece from November 16 to late November, when they will hear a full report on Greece’s compliance (or lack thereof) with the terms of the bailout.

The unveiling of the Outright Monetary Transactions (OMT) program in September by the European Central Bank (ECB) boosted market confidence that Europe was doing something about its problems.  But, like America’s ongoing quantitative easing, Europe’s OMT won’t eliminate economic problems.  Lower interest rates just make it less expensive to keep borrowing more and more money.

Maybe that’s why economic confidence in Europe has sunk to a three-year low.

So the economic misery continues, but at least we won’t have to see or hear any more election ads.

The Other QE

Friday, September 7th, 2012

It’s not QE3, the Fed’s highly anticipated and much discussed quantitative easing program, but the European Central Bank’s (ECB) bond buying program is having a similar impact.

Stock markets worldwide rose announced its bond-buying program yesterday.

Bond buying is Wall Street’s version of crack … it costs money and has a negative long-term impact, but it creates a temporary euphoria and makes everything seem just find for the those who want to live in the moment.

As The Wall Street Journal put it, “we suppose the good news is that it isn’t as sweeping as it might have been.”

To receive money from the ECB, countries that want help must first apply to the eurozone’s bailout fund.  Countries that receive assistance must consent to reducing government spending and debt.

In reality, though, countries like Spain, Italy and Greece are under pressure from citizens who don’t want austerity.  They’re protesting in the streets of Spain because the government would like to reduce their generous benefits … and politicians who want to survive had better take heed.

The program also has the potential to send bond yields soaring, not to mention causing higher inflation.

Conversely, one reason the markets responded favorably is that the program reduces the risk of a Eurozone break-up – at least for now.

French Tax Policy: One For You, Three For Me

Friday, August 10th, 2012

French President Francois Hollande’s proposal to take three quarters of the money earned by France’s wealthiest earners is bound to create an economic boost – for Belgium, Germany and other European countries.

The number of high earners in France is low, so the tax will not raise significant revenue, but it very likely will drive many wealthy taxpayers to relocate in other countries with lower rates.  Even many young professionals with the potential to become more successful will likely relocate, according to blogger Mike “Mish” Shedlock, an advisor with SitkaPacific Capital Management.

In comparison, Sweden has a top rate of 57%, Belgium has a top rate of 55% and Great Britain reduced its top rate to 45% from 50%.  France’s top rate is already scheduled to increase from its current 41% to 44%.

President Hollande’s idea of taxing those who earn more than €1,000,000 ($1.24 million) a year at a 75% rate, but “even young, dynamic people pulling in €200,000 are wondering whether to remain in a country where making money is not considered a good thing,” Vincent Grandil, a partner at Altexis, told Newsmax.

“Here, someone who is a self-made man, creating jobs, and ending up as a millionaire, is viewed with suspicion,” Grandil said.  “This is big cultural difference between France and the United States.”

Apparently, he has not been to the United States recently.

A Step in the Right Direction?

Wednesday, July 11th, 2012

An unemployment rate above 8% is no longer news – it’s been above 8% for 41 months, which is the longest streak since the Great Depression.

However, during the Clinton Administration the federal government narrowed the definition of unemployment.  Add back in those who have given up looking for work or who are underemployed in temporary or part-time jobs and the unemployment rate becomes 14.9%.

That’s not as bad as Spain, Greece or Italy.  But it’s certainly not good news.

Yet President Obama called it “a step in the right direction.”

It’s true that the economy added about 90,000 jobs in June, up from just 77,000 new jobs in May, but the U.S. labor force grew by 189,000 people, or twice the number of jobs created.  Overall, the official unemployment rate remained unchanged at 8.2%.

Job creation at this rate is a “step in the right direction,” only if your intent is to step off of a cliff.