While our earlier discussion of the implications of Greece's exit from the Euro are critical reading to comprehend the real-time game of chicken occurring in front of our eyes, JPMorgan's somewhat more quantifiable estimates of the costs and contagion, given the results of the Greek election have raised market expectations of an exit of Greece from the Euro, also provide key indicators and flows that should be monitored. Identifying what has gone wrong with Greece's co-called 'adjustment' program, they go on to identify key transmission mechanisms to Spain and Italy, how it could potentially improve (Marshall-Plan-esque) and most critically, given the exponentially growing TARGET2 balances, if and when Germany throws in the towel. Immediate (cross-border claims) losses are estimate at around EUR400 billion, but the EUR1.4 trillion of Italian and EUR1.6 trillion of Spanish bank domestic deposits is the elephant in the room which a Greek exit and the introduction of capital controls by Greece has the potential to destabilize.
Trading in markets dominated by the Icelands and AIGs of 2012 can be very challenging.
By mainstream media accounts, the presidential election in France and parliamentary elections in Greece on May 6 were overwhelming verdicts against “austerity” measures being implemented in Europe. There is only one problem. It is a lie. First off, austerity was never really tried. Not really. In France for example, according to Eurostat, annual expenditures have actually increased from €1.095 trillion to €1.118 trillion in 2011. In fact spending has increased every single year for the past decade. The debt there increased too from €1.932 trillion €1.987 trillion last year, just as it did every year before. Real “austere”. The French spent more, and they borrowed more. The deficit in France did decrease by about €34 billion in 2011, but that was largely because of a €56.6 billion surge in tax revenues. Again, there were no spending cuts. Zero. Yet incoming socialist president François Hollande claimed after his victory over Nicolas Sarkozy that he would bring an end to this mythical austerity: “We will bring back Europe on a track for jobs, growth and the future… We’re no longer doomed to austerity.” This is just a willful, purposeful distortion. What the heck is he talking about? Certainly not France.
When the founder of the world's largest currency hedge fund FX Concepts says that Greece will be out of money by June and out of the Euro soon after, people should listen. While we disagree with the premise that Greece's exit will not be chaotic, his general thoughts on the situation in Europe, espoused in this Bloomberg TV interview, are summed up by his reply when asked if Europe is a sell "I do. I also feel passionately that the euro is effectively a break up." Taylor also points out that the stability of a post-Greece Euro landscape is really up to the ECB noting that "I think the ECB should let the Euro go down. To hell with Germany." Covering whether the Euro will crater, the contagion effects, and how the rest of Europe will behave, the non-Duran-Duran Taylor who readily admits his mistakes on misjudging the Fed's excess, sees the timeline for exit as soon after the next round of elections in Greece this summer.
The entire bogus recovery is again being driven by subprime auto loans being doled out by Ally Financial (85% owned by the U.S. government) and the other criminal Wall Street banks. The Federal Reserve and our government leaders will continue to steer the country on the same course of encouraging rampant speculation, deterring savings and investment, rewarding outrageous criminal behavior, purposefully generating inflation, and lying to the average American. It will work until we reach a tipping point. Dr. Krugman thinks another $4 trillion of debt and a debt to GDP ratio of 130% should get our economy back on track. When this charade is revealed to be the greatest fraud and theft in the history of mankind, Ben and Paul better have a backup plan, because there are going to be a few angry men looking for them.
Fraud ... What Fraud?
While Germans work longer hours and retire later....
What makes this time different? Several items:
- The Crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.
- The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).
- The Fed’s resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS monetary program which would cause a Crisis in of itself.
In what could be one of the better deals encountered on Ebay, one can submit a winning bid for none other than the country of Greece, currently going for the modest price of $1,550 (although with 6 more days left in the auction, there is a small chance Goldman will outbid and use it as LTRO 3 collateral). Of course, since the country is worth much less than the debt (all 7 subordinated classes of it) any new equity buyer would assume, this is a trick auction: our advice - settle for nothing less than getting paid as much as possible for "buying" the country.
The Deepwater Horizon incident demonstrated that most of the oil left is deep offshore or in other locations difficult to reach. Moreover, to obtain the oil remaining in currently producing reservoirs requires additional equipment and technology that comes at a higher price in both capital and energy. In this regard, the physical limitations on producing ever-increasing quantities of oil are highlighted, as well as the possibility of the peak of production occurring this decade. The economics of oil supply and demand are also briefly discussed, showing why the available supply is basically fixed in the short to medium term. Also, an alarm bell for economic recessions is raised when energy takes a disproportionate amount of total consumer expenditures. In this context, risk mitigation practices in government and business are called for. As for the former, early education of the citizenry about the risk of economic contraction is a prudent policy to minimize potential future social discord. As for the latter, all business operations should be examined with the aim of building in resilience and preparing for a scenario in which capital and energy are much more expensive than in the business-as-usual one.
In the US, we instead chose to undermine capitalism and the economic cycle. In the process we’ve undermined trust in the system. Until this is remedied there will be not REAL recovery.
In a brief but as usual succinct statement, MEP Daniel Hannan points out the country that decided to say no to establishment-rules and stuck to its guns by taking losses, devaluing its currency, and growing its way out of its pit of despair. The eloquent Englishman notes Iceland's current enviable position in terms of not just growth but Debt to GDP and proffers upon his European Parliamentarian peers that perhaps, just perhaps, there is a lesson in here for all European governments (cough Greece/Portugal cough). 67% of 'shrewd and canny' Icelanders are now against joining the Euro.
I firmly believe we will see Europe start to crumble during the May-June window of time. We have a confluence of political (French, Greece, Irish elections), fundamental, seasonal, technical, and monetary factors (Operation Twist 2 ends in June) occurring in that time period make the possibility of a banking Crisis in Europe higher than at any other point in the last three years.
Remember Europe's so-called success story - Ireland? Time to scratch it off the list, as the "best performing" PIIG, and "peripheral reform" wunderkind, just reminded everyone that the only true success story in Europe is that other I country - Iceland, after its fourth quarter GDP unexpectedly dropped 0.2%, well below consensus estimates of a 1.0% GDP boost. Odd - recall that back in October, following the announcement that Greece would be allowed to extract a bondholder haircut, initially at 50% and ultimately at 78.5%, we said that "this means that Portugal, Ireland, Spain and Italy will promptly commence sabotaging their economies (just like Greece) simply to get the same debt Blue Light special as Greece." Looks like Ireland is well on its way to doing just that, and the GDP slide is actually not all that surprising. Next: prepare for more "surprising" GDP misses from Portugal, Spain and, of course, Italy.