Greece Is Now ‘Lose-Lose Game’



(Bloomberg) — The chances of Greece leaving the euro area are now 50-50 and the country could go “down the drain,” billionaire investor George Soros said.

“It’s now a lose-lose game and the best that can happen is actually muddling through,” Soros, 84, said in a Bloomberg Television interview due to air Tuesday. “Greece is a long-festering problem that was mishandled from the beginning by all parties.”

Greek Prime Minister Alexis Tsipras’s government needs to persuade its creditors to sign off on a package of economic measures to free up long-withheld aid payments that will keep the country afloat. Since his January election victory, the leader has tried to shape an alternative to the austerity program set out in the nation’s bailout agreement, spurring concern that it may be forced out of the euro.

The negotiations between Tsipras’s Syriza government and the institutions helping finance the Greek economy — the European Commission, European Central Bank and International Monetary Fund — could result in a “breakdown,” leading to the country leaving the common currency area, Soros said in the interview at his London home.

“You can keep on pushing it back indefinitely,” making interest payments without writing down debt, Soros said. “But in the meantime there will be no primary surplus because Greece is going down the drain.”

“Right now we are at the cusp and I can see both possibilities,” he said.

The start of quantitative easing by the ECB at a time when the U.S. Federal Reserve is considering raising interest rates “creates currency fluctuations,” said Soros, one of the world’s wealthiest men with a $28.7 billion fortune built partly through multi-billion dollar trades in currency markets, according to the Bloomberg Billionaires Index.

Ukraine Risk

“That probably creates some great opportunities for hedge funds but I’m no longer in that business,” he said. The war in eastern Ukraine between government forces and rebel militia supported by Russia’s President Vladimir Putin concerns Hungarian-born Soros the most, he said.

Without more external financial assistance the “new Ukraine” probably will gradually deteriorate and “become like the old Ukraine so that the oligarchs come back and assert their power,” he said. “That fight has actually started in the last week or so.”

To protect your portfolio see

Europe Has A Crisis — And It’s Much Bigger Than Cyprus

English: Various Euro bills.

English: Various Euro bills. (Photo credit: Wikipedia)

In a way, Europe should be thrilled by the week that was because financial markets barely batted an eye at the crisis in Cyprus.

But Europe has a problem on its hands that’s bigger than Cyprus: The economy stinks.

This week we got fresh proof that things are bad or getting worse.

In Francethe Flash PMI report (which is a mid-month look at the combined services and manufacturing sectors of the economy) came in dismal, with the output index falling to a four year low.


french flash PMI



Germany is in better shape:



Meanwhile, the horror show in Italy and Spain continues unabated.

This week, Danske Bank economist Frank Øland Hansen warned that France was beginning to look more like a peripheral country than a core one.

Not only is the economy sinking, but from a labor cost/competitiveness standpoint, it’s looking PIIGSish.


france competitiveness

Danske Bank


Not only is the European economy a mess, and the second biggest country looking more and more peripheral, there isn’t much action being taken to address any of it.

Cyprus hasn’t made a dent in markets, and it might not. On the other hand, all of the above is a crisis.

Euro Zone Update – The Big Picture

December 1

Weekly Eurozone Watch: November 30, 2012

Posted: 30 Nov 2012 02:30 PM PST

Key Data Points1
German 10-year Bund 5 bps lower;
France 10-year 6 bps tighter to the Bund;
Ireland 7 bps wider;
Italy 20 bps tighter;
Spain 25 bps tighter;
Portugal 23 bps tighter;
Greece 30bps tighter;
Large Eurozone banks up  0.5-3 percent;
Euro$ up 0.33 percent.

– France, Italy, and Greece 10-year yields at lowest weekly close of the year;
– Rumors circulate about downgrade of ESM and EFSF bailout funds;
Bundestag approves Greek deal without the Chancellor’s Majority and only with the support of the opposition  – 473 MPs in favor and 100 MPs against, 100 MPs abstained;
– October youth unemployment rate in Eurozone rises to 23.9 percent, up from 21.9 percent a year ago;


Not all countries have the same sense of urgency as some months ago.

– José Manuel Barroso, President of the EC


Der Spiegel on The Euro Zone Debt Crisis

Nov. 20

Interview with Economist Hans-Werner Sinn

                  ‘Temporary Euro-Zone Exit Would Stabilize Greece

In a SPIEGEL interview, pugnacious German economist Hans-Werner Sinn warns of the huge dangers associated with a continuation of current bailout policies, why he believes Greece and Portugal should temporarily leave the euro zone and why financial markets are anything but irrational.

SPIEGEL: Mr. Sinn, Chancellor Angela Merkel feels as though economists have left her in the lurch. She once said that the advice that she receives from economists is “about as diverse as it gets.” Can you see where she is coming from?

Sinn: No.


Hans-Werner Sinn, sitzend

Hans-Werner Sinn, sitzend (Photo credit: Wikipedia)

SPIEGEL: Excuse me? Economists have completely different ideas about how the euro can be saved. You suggest, for example, that countries should temporarily leave the euro zone until they have re-established their competitiveness. Others, by contrast, recommend collectivizing debt across the euro zone. How should politicians deal with such contradictory advice?

Sinn: There are differences in the recommended therapies, but fewer divergences in the analysis. There is considerable agreement today on the euro’s defects.

SPIEGEL: But not on how the euro can be saved, or even whether it should be.

Sinn: I hope that it can be fixed. The euro crisis proceeds in phases, and we are always told that there is no alternative to the next phase, because otherwise the euro would crumble. So there was supposedly no alternative when the European Central Bank (ECB) granted its TARGET loans, when it forced the German central bank, the Bundesbank, to purchase sovereign bonds from Southern European countries against its will, and when increasingly larger rescue funds were approved. Now, they are planning to create a banking union to socialize the debts of banks in Southern Europe. The next step will be the introduction of euro bonds …

SPIEGEL: … which the German government vehemently rejects.

Sinn: By the time France is hit by the crisis, as everyone fears will happen, the German government will no longer be able to refuse this demand. This development will ultimately lead to a system that has little in common with a market economy. The ECB and the European Stability Mechanism (ESM), the permanent successor to the current rescue fund, will then direct the flow of capital — with the approval of euro-zone governments — into countries where it no longer wants to go. This will result in growth losses throughout Europe, and money will continue to be thrown out the window in Southern Europe. Furthermore, it will create considerable discord because it makes closely allied countries into creditors and debtors.

SPIEGEL: The alternative that you are pushing for, in which individual countries would withdraw from the monetary union, would cause enormous turmoil: Companies and banks would go bankrupt and Europe could possibly plunge into a deep recession for years to come. Doesn’t that alarm you?

Sinn: I don’t agree with the prognosis. If Greece exited the monetary union, the Greeks would purchase their own goods again, and wealthy Greeks would return to invest. And if Portugal leaves, it will have similar positive experiences. The Ifo Institute has studied some 70 currency devaluations and found that recovery begins after one to two years. We are, of course, also suggesting just a temporary exit. Greece and Portugal have to become 30 to 40 percent less expensive to be competitive again. This is being attempted through excessive austerity measures within the euro zone, but it won’t work. It will drive these countries to the brink of civil war before it succeeds. Temporary exits would very quickly stabilize these countries, create new jobs and free the population from the yoke of the euro.

SPIEGEL: But who knows what would happen to the population in the event of an exit?

Sinn: We should stop proclaiming the end of the world in the event of an exit. Instead, we should shape the exit as an orderly process with relevant aid for the banks of the country in question and for the purchase of sensitive imports. What we are currently witnessing in Greece is a disaster — and it’s not a disaster caused by an exit, but rather by remaining in the euro zone.

SPIEGEL: How do you intend to ensure that one country’s withdrawal won’t automatically precipitate a wave of speculation targeting the next potential candidate?

Sinn: The markets aren’t stupid — they don’t lump the countries together. We clearly see this with Ireland. Since the end of last year, Ireland’s interest rates have fallen more significantly compared to other crisis-ridden countries because Ireland has reduced its prices by 15 percent, allowing it once again to generate current account surpluses.

SPIEGEL: Portugal and Spain are not Ireland.

Sinn: Such countries are in a position to convince investors. Spain only has to devalue by 20 percent. That’s achievable within the euro zone. Greece and Portugal are in a separate category. These are the only two countries that consume more than they produce.

SPIEGEL: Now you are appealing to the financial markets to be reasonable. Yet they often overreact and behave irrationally.

Sinn: Where have you seen that?

SPIEGEL: Minor events are often enough to spark sharp increases in sovereign bond interest rates for countries in Southern Europe.

Sinn: But the markets are reacting rationally when they get cold feet and pull out of bad investments in Southern Europe. Last winter, interest rates rose in some cases to over 6.5 percent. Before the introduction of the euro, these countries had to pay interest rates of between 10 and 15 percent. The interest rate reflects the risk that investors will never see their money again. What’s irrational about that?

SPIEGEL: If investors are afraid that the monetary union is collapsing, they will pull out their money. And that will, in fact, cause the euro-zone to fall apart.

Sinn: Not if countries change their budgetary policy. If they offer investors collateral in exchange for loans and plausibly argue that they don’t intend to take on any new debt, then there will be no discrepancies in interest rates.

SPIEGEL: You say that the long-term consequences of the current rescue policy are more dangerous than the risks associated with changing course now. Is that science — or a matter of faith?

Sinn: On the basis of sound analysis, I am pointing to a danger that that many do not perceive, and I am weighing things up. Euro-zone member states have made available €1,400 billion ($1,780 billion) in bailout loans, €700 billion of which has been contributed by the Bundesbank through its TARGET loans. On top of this, there is the ESM with €700 billion, which is to be leveraged to €2,000 billion with the help of private investors. This stabilizes the capital markets, but it also destabilizes the remaining stable European states and wipes out the savings of retirees and taxpayers. We are gradually sliding into a trap from which we will no longer be able to escape. This risk is, in my opinion, the greatest risk of all.

SPIEGEL: But other economists arrive at different conclusions when they analyze the situation. Honestly, if you were the chancellor, wouldn’t you also take the safest apparent route forward, just as she is doing?

Sinn: I understand very well that politicians always have to bridge the gap until the next election, even if long-term dangers increase as a result. But as an economist, my time horizon is longer.

SPIEGEL: Isn’t it perfectly reasonable to be extremely cautious in this situation?

Sinn: You can’t convince me that it makes sense to stand by idly and watch as we take on increasingly greater risks. We are destabilizing our political system with this excessive rescue policy …

SPIEGEL: … but not if the rescue succeeds.

Sinn: I think that is rather unlikely because it would give us the wrong prices and thus result in a lack of competitiveness in the countries that are receiving public loans. I can’t save drug addicts by meeting their demands for more drugs.

SPIEGEL: Proposals by economists also meet with skepticism because their field’s reputation has been severely tarnished in recent years. Very few economists predicted the financial crisis, so it’s no wonder that politicians no longer place much value in their advice.

Sinn: Only very few economists correctly predicted the time of the crash, that’s true. But many had warned of dangerous developments on the financial markets. In 2003, for instance, I dedicated an entire chapter of my book, which deals with systems competition, to the lack of banking regulation — and sparked a debate in which I favored stronger banking regulation. There were also American economists such as Martin Feldstein and Robert Shiller who repeatedly warned that the bubble on the US financial markets would eventually burst.

SPIEGEL: But surely you don’t deny that up until the last decade the vast majority of economists were of the opinion that the financial markets should be liberalized as much as possible.

Sinn: Not in Germany. Leading German proponents of financial market theory such as Martin Hellwig have, like me, always emphatically urged stronger regulation of the financial markets.

SPIEGEL: In the United States, economists are characterized by their unrestrained faith in the markets, whereas here in Germany they are known for their argumentativeness. Last summer, two groups of economists, with two completely contradictory positions, went public on the euro issue: One group, which you belong to, strictly opposes a European banking union, while the other favors this move. Was this a successful initiative?

Sinn: You speak of contradictions where there were none whatsoever. Both groups were against collectivizing bank debts in Europe. The second spoke out in favor of a joint European banking regulatory agency, but the first group has yet to comment on this. The truth is different than how you perceive it: 495 German economists are warning the German government against bailing out Southern European banks with German tax money.

SPIEGEL: This raises the question of why

you didn’t formulate a joint appeal in the first place.

Sinn: I didn’t write the appeal, but I signed it. The author was Walter Krämer from the University of Dortmund. A few days later, Krämer und I wrote an article for theFrankfurter Allgemeine Zeitung, in which we both came out in favor of a joint banking regulation regime. This could have admittedly also been part of the first public appeal.

SPIEGEL: Doesn’t this show that the appeal may have been the wrong way to launch an economic debate?

Sinn: The idea was not to launch an economic debate, but rather to rouse the public. We saw a threat that the decisions made at the EU summit in June could pave the way for a collectivization of the debts of Southern European banks. The debts of the banks in crisis-ridden countries, however, are three times as high as the national debts. Who, aside from the banks’ creditors, should assume these burdens?

SPIEGEL: Still, it should be noted that economists’ recommendations are fraught with considerable uncertainty, particularly when it comes to a complex issue like the euro crisis. Your colleague Gert Wagner, president of the German Institute of Economic Research (DIW), says: “Everyone who says that they know precisely what to do is guilty of making the pretence of knowledge in a historically unique situation.” Are you not being somewhat presumptuous?

Sinn: Economics professors are not paid to slink away during a crisis.

Greek Bailout – Not Credible (Investors Won’t Be Fooled )

Greek parliament

Greek parliament (Photo credit: Wikipedia)

Nov. 18

The meeting of the EZ finance ministers next Tuesday (20th November) to “settle” on a deal for Greece is certainly a “must be watched “event. The market consensus suggests that some kind of deal will be done. Well, that may be the case, but let me just raise the following.

• The current plan being hatched up by the EZ is to allow Greece 2 more years to achieve its budget targets – which we all know Greece will never deliver on – after all, why destroy a perfect record of non compliance;

• It is true that the Greek Parliament passed the bill which approved further austerity measures and, in addition, the tougher budget. Well that the plan, but what about delivery boys and girls. However, there is rebellion in the air. Today, Greek press state that a junior coalition member has announced that it will oppose the labour reforms demanded by the Troika (the EU/ECB and the IMF);

• Allowing Greece a further 2 years will require the EZ to provide more bail out money (around an extra E30bn+) for the country – a close to impossible proposition, for the Dutch, Finnish (probably Slovaks – but the EZ does not really care about the Slovaks) and, the German’s, though recent comments by the German’s suggest that they may be rethinking – certainly been raised in the German press as an option, though I find this hard to believe;

• Germany, Holland and Finland need to obtain Parliamentary approval of any deal – not at all assured, especially as all three countries are becoming more euro-sceptic, especially Finland and Holland. Mrs Merkel is facing a growing number of dissenters from her own coalition – the last time around, she needed the support of the opposition to pass through the legislation which established the EZ bail out fund, the ESM;

• The Troika has not issued its final report – no great surprise (though, as usual, the contents of the draft report have been well leaked), as the EU/ECB is at odds with the IMF over the crucial issue of debt sustainability. The IMF (Mrs Lagarde) stated publicly (indeed contradicted Mr Juncker, the head of the EZ finance ministers – he’s the guy who came out with the classic line, namely that it was OK for politicians to lie – at last weeks Press Conference) that Greek debt to GDP must not exceed 120% by 2020, whereas the EZ are trying to extend the deadline to achieve the 120% level to 2022. Just to be clear, there is no rational basis as to why a 120% threshold should be considered as the maximum level possible for debt sustainability purposes – in reality, the 120% level was chosen (together with the IMF) as it just happened to be the debt to GDP percentage of Italy, at that time, the highest in the EZ. Furthermore, the EZ forecasts will have been, almost certainly, pretty optimistic and the reality is that Greece will perform much worse and, in addition, will be light on delivery – as they always have been. However, even these reports suggest that Greek debt to GDP will increase to over 190% in the interim period, with Greek GDP declining by some 25%, since the crisis began;

• We all know that Greece will NEVER repay the funds already lent to them. As a result, a haircut is necessary, though politically impossible for the EZ, in particular, Germany to accept at this time, as Mrs Merkel has “assured” the German public that there will be no losses on bail out funds !!!! and she faces a general election next September. Further funding will just make the haircut, which everyone knows is coming, larger. I’m amazed that EZ taxpayers – the guys who will pick up the eventual tab, don’t storm their governments and demand a rethink;

• The Greeks report that they need the next tranche of bail out funds asap, or else they cannot pay their bills. In reality, the Greeks always cry out for more and more cash but, at the end of the day, manage to continue for a while longer;

• The political situation in Greece is, lets just say, fraught. The main opposition party (Syriza, who is recommending that Greece defaults and, according to the most recent polls have the support of 30.5% of the population – which by the way would make it the largest party in the Greek Parliament if an election was called today) is gaining yet more support, as is the extreme right wing (basically a Nazi) party. Social disorder is ever rising – not a healthy environment. The current coalition, which had 179 seats in the 300 seat Parliament, now just has 167 seats, as defections continue from those opposed to further austerity measures and reforms. Essentially, the current coalition is far from being stable;

• Mrs Merkel faces a general election in September next year and wants to kick the can down the road until after this date – is that likely/possible, given we are talking about Greece. Me thinks not;

• Current proposals, in addition to the 2 year extension for Greece to meet its targets, include (a) a reduction in interest rates (down to zero?) on funds provided and to be provided to Greece – very likely (b) a transfer of “profits” on the ECB’s holding of Greek bonds, which it bought some time ago – back to Greece, thereby reducing Greece’s debt to GDP. However, Mr Draghi stated that, following this transfer of “profits”, the ECB was “done” with Greece ie over to you politicians – I’m out of here. However, once again, a very likely option (c) “extend and pretend” and “fiddle the books” type schemes, certainly the usual “cunning plan” of the EZ, but with the IMF there, who are not playing ball, difficult (d) giving Greece all the funds already approved in one go – probably the stupidest thing that the EZ can do, given the propensity for the Greek’s to ensure that money “disappears” – however, likely, though I really do hope the EZ make arrangements to stop the greatest heist from happening, by insisting on some controls/supervision and (e) debt buy backs at the discounted levels that such Greek debt is trading in the markets, so as to reduce Greece’s overall debt to GDP – possibly, but will not make enough of a difference. No doubt other pretty hairy schemes will be raised – after all, the EZ has moved firmly into Alice in Wonderland country;

• The IMF (Mrs Lagarde) is to attend next Tuesdays EZ finance ministers meeting. Mr Rehn, a senior EU official, has stated that the EZ needs the IMF to continue to participate (in terms of handing over money to Greece, in addition, to overseeing its “rescue”) Hmmm. Mrs Lagarde, on Friday, stated that it was not all over “until the fat lady sings”, suggesting to me that she will press the IMF’s position – in any event, I cant see how she can back off a publicly stated position, given the IMF’s international standing. Furthermore, the IMF, unlike the other EZ countries, has “preferential creditor status”, which means that it will get its money back, though the haircut on the EZ countries, which have provided Greece with funds, will be even larger as a result. Oh dear!!!.

OK, so how does the EZ sort out this awful mess. I have to say that whilst virtually every commentator/analyst tells me that this will be sorted out next Tuesday and, furthermore, ratified by the Parliaments of those EZ countries that need to obtain such approval subsequently (by the end of November), I am far from sure that this is the “shoe in” that people think. I do not underestimate Mrs Merkel and her ability to force through measures which she deems important and providing further funds for Greece, at least until her next general elections in September next year, is certainly her goal – indeed an increasing priority for her. However, the more the “fiddling” and “extend and pretend” type games, the greater the complexity. History is littered with examples where, in these situations, a normally totally unexpected event, just blows these kinds of “deals” to pieces.


• The current plan being hatched up by the EZ is to allow Greece 2 more years to achieve its budget targets – which we all know Greece will never deliver on – after all, why destroy a perfect record of non compliance –  THE Lesson: don’t place your portfolio in the hands of politicians.

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Goldman Sachs : Little Hope For Eurozone

Image representing Goldman Sachs as depicted i...

Image via CrunchBase

Nov. 17

Goldman Sachs Asset Management chair Jim O’Neill tends to look on the cheery side of things, but in his latest weekly letter (.pdf) he’s more bearish than we recall

His most interesting comments concern Europe. He notes that it won’t be too long before Germany‘s export exposure to the rest of the Eurozone is rather small (compared to its BRICs export exposure) and so therefore it won’t be too long before Germany just doesn’t have any economic rationale in saving it.

He writes:

A Growing Big Picture Threat to EMU?

Despite the tone of my post-Rome trip comment and much of what I often write about EMU, especially my belief that the Euro show will go on, I do find myself worrying more and more about the “big picture” economic rationale for it. I asked James Wrisdale, on my team, to project what 2020 trade patterns might look like for each of the UK and Germany if trends since 2000 broadly continue. You end up with some pretty interesting results as can be seen in the attached table.

Let me just highlight a couple of things. In 2020, Germany will have not much more than one third of its exports with the euro area, and nearly as much with the BRIC countries. Its exports to China would be more than 15%, easily the largest, and nearly double the exports to France. Perhaps Germany will be proposing a monetary union between itself and the BRIC countries by 2020?

For the UK, oddly, they would have more export exposure to the euro area than Germany would, although that is only because of exports to Germany itself. But overall, UK exports to the region would also decline more in significance and I find myself wondering why the UK would want to be so concerned about the Euro area, and dangerously thinking that if the UK isn’t prepared to get more involved in the core Euro issues, then what is the point of being involved in the EU at all?

But most importantly I come again to the conclusion that I did earlier in the year in terms of debt sustainability. This time, because of trade patterns, the window for truly sorting out their organisational issues is quite short as by 2020, it wouldn’t be worth sustaining if it isn’t saved and strengthened. The weeks, months and the year after the 2013 German election seem like the last window of time they might have in my view.


the economist france

The Economist

In the short term, he also keys off the controversial Economist cover on France, with the exploding baguettes:


If The Economist is right about France then a further, much more dramatic stage of the Euro crisis is yet to happen, because of course it doesn’t get more “core” than the joint founders of the whole project. It will be interesting to see whether this attention gets a lot of response or focus. I don’t have any grounds for questioning the line taken although as I pointed out, their own commentary last week was surprisingly positive about the latest policy measures. I do think there are two even bigger issues that relate to France. The first being the mindset of the elite thinkers, that in order for EMU to ultimately survive, the French have to be prepared to give up quite a lot of their pride in their sovereign control and shift towards the Germanic view of a united states of Europe, even if they can deal with their own economic challenges. There is an even bigger issue that I shall return to below*.

*The bigger issue he refers to is what’s noted above, about trade and the economic justification for saving the Euro.

Nomura Forecasts A Market Spike Then A Dramatic Fall

English: A frame from a screencast from the US...

English: A frame from a screencast from the US House Financial Committee full committee hearing “An Examination of the Extraordinary Efforts by the Federal Reserve Bank to Provide Liquidity in the Current Financial Crisis which took place Tuesday, February 10, 2009, 1:00pm, 2128 Rayburn House Office Building. The frame shows Chairmen Ben Bernanke responding to a question posited by John E. Sweeney Full Committee (Photo credit: Wikipedia)

Nov 13

Nomura’s bearish macro strategist, Bob Janjuah, is out with his latest update on the stock market in nearly two months. 

Nothing has changed about his long-term view–he is still very pessimistic on markets and the economy.

However, Janjuah thinks we could see a major move higher in the over the medium term, owing to some sort of fiscal cliff deal that kicks the can and full-blown QE from the ECB.

Here’s what Janjuah has to say in his note:

If I look out 3-6 months I am open to the idea of one last parabolic spike higher in risk-on markets in this interim timeframe. I think we will eventually get fiscal and debt ceiling fudges in the US. Of course long-term credible solutions are needed, but are the most unlikely outcome.

Instead we may well be ‘forced’ to celebrate another round of horrible fudges which DO have a consequence. Namely, that the private sector continues to ignore Bernanke and the Washington elite (who between them continue to enjoy printing significant sums of money and/or spending way beyond their means) by instead doing the exact opposite, which means holding onto/building cash and savings, delaying spending/investment/hiring and thus hurting growth.

Markets will I think worry about these negative consequences eventually (see paragraph above), but in the interim the knee jerk reaction of markets to fiscal/debt ceiling fudges will likely be positive. Furthermore, and again on a 6 to 12 month interim timeframe, I think we could also see the ECB finally move to all out QE driven by another round of eurozone panic and driven in particular by the strong deflationary data trends that are emerging in the eurozone and which we in GMS think will get much stronger.

A combo of ECB QE and fiscal/debt ceiling fudges in the US – perhaps also complimented by a short-lived centrally planned but debt fuelled and ultimately wasteful China uptick – could even cause a parabolic spike powerful enough to take S&P – briefly – into the 1500s, before resuming the longer-term march over the rest of 2013 and 2014 to the 800s.

However, for the rest of 2012, in the short-term, Janjuah still remains bearish.

Barry Ridholtz Forecasts Stagflation – and a tough market ahead

Go Away Federal Reserve System!

Go Away Federal Reserve System! (Photo credit: r0b0r0b)

The market diary -results and predictions:

1)The Fed, ECB, BoE, BoJ and SNB will continue to print huge amounts of money, CHECK.

2)Earnings growth globally is slowing with GDP and we’ve seen the peak in profit margins, CHECK.

3)Election is over, DC doesn’t change, taxes are going up at exactly the wrong time, CHECK. An entry today: 1)stop saying “Uncertainty” as the only thing that is certain is uncertainty. 2)stop saying “fiscal cliff” as until market based solutions come to medicare, medicaid and social security, the can will get kicked all over the place and well passed any supposed ‘deal’ in the next two months. 3)Oh yeah, stop saying “kicking the can down the road.”

Bottom line, the stock market correction is not over, earnings will continue to slow, higher taxes of any kind in 2013 will bring a US recession, central banks will print more money (but can’t prevent a cyclical bear market after the near 3 yr bull run) and 2013 will be the most challenging both economically and from a market perspective that we’ve seen in a few yrs. Stagflation here we come is my call. Buy the flation and sell the stag.

Inflation means that gold will rise:

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The European Court of Auditors reported, once again, the the EU made material errors in spending, amounting to 3.9% of its budget. The report will add to the pressure to limit the EU’s budget and will be good news for the Euro sceptics. The UK, in particular, wants a freeze (at worst) in the EU’s budget and the UK PM has little flexibility, given the recent Parliamentary vote (non binding) that he must obtain a cut in the EU budget, let alone a freeze. There is an increasing possibility that the UK will have a referendum as to its continued participation in the EU;

The UK PM meets Mrs Merkel today to try and agree on the EU budget ahead of the 22/23rd November meeting. The EU has proposed a rise of 6.0% in its 2014 to 2020 budget (they have suggested that EU countries cut back on their budgets, by the way), though Mr Cameron wants a freeze, at worst. The Germans have proposed that the EU budget is limited to 1.0% of the EU’s GDP;

The German’s plan of continuing to push austerity is unsustainable. As you know, I expect more pro growth policies, quite possibly as early as Q1 next year. The impact of fiscal multipliers is worsening the fiscal position of countries including Greece, Spain and Portugal and arguably France. This nonsense has to end. The clear downturn in Germany may well be the trigger for a change in policy

German September industrial production (seasonally adjusted) came in at -1.8% M/M, much worse than the -0.7% expected and -0.5% in August, which is yet another confirmation the recent weaker economic data, other than domestic consumption, which to date is holding up, though for how long;

The EU has forecast that the French economy will grow by +0.4% next year (half that forecast by the French) – personally, I expect the French economy to decline next year, especially if current policies are maintained. They added that whilst France should achieve its budget deficit target of -4.5% of GDP this year, it will be higher than the -3.0% next year (-3.5% expected). Personally, I believe that France will find it near impossible to meet even the -3.5% budget deficit forecast next year, based on current EZ policies. I continue to believe that France is the real big problem in the EZ, far more so than Italy (similar to Spain) – so long as the Italians deal with their political issues;

The EU forecasts that 2012 GDP will contract by -0.25% this year, with the EZ to decline by -0.4%. The EZ’s 2013 forecast has been slashed to just +0.1%from +1.0% previously – still too optimistic, based on current policies. Inflation is expected to decline to +1.8% in 2013, in line with previous forecasts, with 2012 inflation at +2.5%, rather than +2.4% previously. They have raised the Spanish budget deficit to -8.0%, much higher than the -6.3% target. Basically, a much weaker EZ economy in 2013 – why is anyone surprised. Indeed, unless policies change, a much worse outcome is likely;

Euro Banks Downgraded ( yes , again )

2010 BNP Paribas Masters

2010 BNP Paribas Masters (Photo credit: Wikipedia)

Oct 26

A Very Bad Way to Save European Banks: Sell Shares to Depositors

by Mark Gimein

Standard & Poor’s cut the rating of BNP Paribas SA and issued a negative outlook for other French banks, including Credit Agricole SA and Societe Generale SA. Shares of French banks fell. On top of the ongoing eurozone crisisand recession, S&P said that French banks face a “potentially limited, but still noteworthy, impact from an ongoing correction in the housing market.”That’s awfully careful phrasing. It does seem to invite a question: if that impact is “potentially” limited, could it also be potentially not-so-limited? The recent history of European banking downgrades gives some reason to think so. In other cases, ratings agencies have been behind the curve on bank losses.

S&P downgraded Spanish banks in October, 2011, again in April/May 2012, and yet again this month . This is the kind of cycle of downgrades that’s the sign of a ratings agency that’s not so much forecasting the economic climate as it is trying to keep up with the bad news. 

And on the subject of Spanish banks: When Spain’s Banco Popular Espanol SA announced plans for a sale of 2.5 billion shares in new sales to prop up its capital, The Market Now expressed a hope that Popular was not planning to sell those shares to its retail customers, as Bankia SA did.

That wasn’t meant as a totally serious point. The Market Now assumed that after shares Bankia SA sold to its small account holders collapsed, nobody in Spain would stand for anything similar happening again. Well, that was wrong.

Banco Popular is now planning to sell 60 percent of its new shares to ordinary depositors . If you think it’s a great idea for Spanish pensioners to take money out of their savings accounts and invest in European bank stocks, go ahead and raise your hand now. 

Click here for  much more detail on the ins and outs of investing in gold.

Euro Zone Rot Spreads To Germany

English: OccupyFrankfurt at the European Centr...

English: OccupyFrankfurt at the European Central Bank (Photo credit: Wikipedia)

from Reuters

Oct 25

LONDON — The eurozone’s biggest member Germany is being sucked into the bloc’s worsening economic quagmire, business surveys suggested on Wednesday, as similar data signalled the slowdown in China may be abating.

The slump that began in Greece and spread to other smaller eurozone economies was clearly gripping the core in October, marking the worst month for the 17-member bloc since it emerged from recession more than three years ago.

Markit’s Composite Purchasing Managers’ Index (PMI), which polls around 5,000 businesses across the 17-nation bloc and is viewed as a reliable growth indicator, fell to 45.8 this month.

That was the lowest reading since June 2009, confounding consensus expectations in a Reuters poll for a rise to 46.4. The index has now been below the 50 mark that separates growth from contraction since February.

Similar PMI data for China suggested the world’s second biggest economy, a key world exporter, is slowly recovering from its weakest period of growth in three years, with new orders and output at their highest in months.

U.S. manufacturing improved slightly in October but slow growth and economic uncertainty suggested the sector’s recent struggles may persist over the final months of 2012, an industry survey showed on Wednesday.

information firm Markit said its U.S. “flash,” or preliminary, Purchasing Managers Index for the manufacturing sector edged up to 51.3 this month from 51.1 in September. A reading above 50 indicates expansion.

A modest rise in output helped boost business conditions in the sector, which suffered its weakest quarter in three years during the July-to-September period.

But fewer orders from domestic clients and a fifth straight monthly decline in overseas demand for U.S. goods indicates manufacturing was acting as a drag on growth and employment, said Markit chief economist Chris Williamson.


The manufacturing PMI for Germany – another major exporter and Europe’s economic powerhouse – plunged to 45.7 from 47.4, also confounding expectations for a rise and well below even the lowest forecast polled by Reuters. The rate of decline was even worse in France.

“(It) reinforces concern that the economic downturn in the region may be deepening and widening,” said Martin van Vliet, senior economist at ING.

The data were published just before European Central Bank President Mario Draghi was due to appear before German lawmakers for a grilling over whether his plans to buy eurozone sovereign debt might trigger inflation or compromise ECB independence.

They also coincided with the latest numbers from Germany’s Ifo institute showing business sentiment in the country dropped sharply to its lowest in more than 2-1/2 years, the sixth consecutive monthly fall.

“Any hopes of a rebound appear to have been dashed for now. Germany is heavily dependent on exports so a global slowdown is going to impact on Europe’s growth motor,” said Peter Dixon at Commerzbank.

Germany has been mostly resilient to the three-year-old sovereign debt crisis. But economic data in recent months have shown the rot is spreading.

The eurozone economy contracted 0.2% in the second quarter and is predicted to have shrunk 0.3% in the third, meeting the technical definition of recession.

While official data implies a similar decline in the third quarter just ended, Markit said the PMIs suggest the downturn will accelerate into the current quarter – a far gloomier prediction than in a Reuters poll last week.

“We are more downbeat than the official data. The PMIs are running at levels in the third quarter and start of the fourth quarter historically consistent with GDP falling at about 0.6%,” said Chris Williamson at data collator Markit.

Bad news has been flowing out of company boardrooms too.

Carmaker Volkswagen reported a fall in nine-month operating profit on Wednesday and sportswear maker Puma reported sales in the region dropped in the third quarter.

Heineken NV, the world’s third-largest brewer, reported a stronger than expected increase in third-quarter revenue, but sold more beer everywhere except western Europe.

Markit’s measure of services business expectations sank to its lowest reading since February 2009, at the nadir of the last recession and when world stock markets were tumbling.


But it was a different story for China, where the HSBC Flash Manufacturing PMI rose to a three-month high of 49.1 in October but remained below the key 50 mark.

“(This) adds to recent signs of stabilisation of the Chinese economy, thus underpinning our view that the slowdown in activity is bottoming out,” said Nikolaus Keis at UniCredit.

A Reuters poll taken after last week’s GDP data showed economists anticipating a modest rebound in growth in Q4 to 7.7% from Q3’s below-target 7.4%.

Even that figure would not be enough to lift full year expansion from an expected 13-year low, however.

Clich here for  much more detail on the ins and outs of investing in gold.


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