June 18, 2012

Why Greece is a big deal

Posted in Banking, Big Banks, Economy, Europe, Finance, greece, sovereign debt, Uncategorized tagged , , , , , , , , , , at 4:55 PM by Robert Barone

I’ve read in several different places that a Greek exit from the European Monetary union is not a big deal because Greece’s economy is small and represents only a small fraction of the economic output of the eurozone. Besides, it is already discounted in the markets. I disagree.Remember in the ’90s, when the Thai baht crashed, people said that Thailand was such a small part of Asia that there would be no fallout. But the fallout was huge because every country in the region had the same issues. This is clearly the case in the EMU. In reality, the issues in Portugal, Spain and Italy are the same as those in Greece. While I believe that there could come a time when Greece could exit gracefully, that time is not now because there is no process or set of rules governing such an exit.

Besides, if a sovereign country wants to exit, what, short of war, could prevent it? If Greece decided to exit now, it would repudiate its external debts and, as a result, banks and important European institutions could face insolvency. Greek society could deteriorate into chaos, including rioting, civil unrest and economic dislocation of many Greek citizens. Such contagion could well spread to Spain, Portugal, and even Italy.

Here’s some of the challenges Greece is facing:

• A return to the drachma means radical devaluation of the liquid assets held by Greek citizens;

• Greece imports all of its energy and most of its raw materials. Already, Greek utilities are in arrears to their Russian power suppliers because citizens are not making utility payments. And the Russians are threatening to cut off the power supplies;

• Money is already fleeing the country, so Greece would have to impose capital controls to further prevent money, capital and assets from fleeing, including restricting free access to and from the country via military operations;

• There would be significant impacts on Cyprus, or even on Turkey;

• The European Central Bank holds a huge volume of Greek bonds; in a chaotic exit, with Greek debt repudiation, the solvency of the ECB could be called into question (imagine, one of the world’s premier money printers having to deal with insolvency). Worse, the central banks of Germany and other stronger EMU countries will have to write off significant Greek assets, which have resulted from Greek citizens making euro deposits in the banks of these stronger countries.;

• There are implications, too, for the other external lenders like the International Monetary Funds and the European Financial Stability Facility;

• Bank runs, considered silent until now, would erupt in the other suspect countries (Portugal, Spain and Italy).

If Greece leaves the EMU under these conditions, what is to prevent Portugal and/or Ireland from doing the same? A Greek chaotic exit would make the capital markets skeptical as to whether the aforementioned countries plus Spain, and even Italy, could remain in the EMU. And the capital markets will test their resolve by raising rates in these countries to unacceptable levels until action is taken.

Portugal, Spain and Italy are repeats of Greece on a much larger scale. While aid from the other EMU countries for Spain’s insolvent banking system appears to have been forthcoming, at this writing, the terms of such aid have not been clearly established. Furthermore, the Spanish citizens are up in arms (literally) that the banks are being saved with nothing for the common citizen. And, if Spain’s banking Portugal’s, Italy’s or Ireland’s? Unfortunately, after Spain, the funding source, the EFSF, is essentially out of cash.

The Greeks go to the polls today and may elect leaders who will repudiate the austerity deals that the former government made in return for bailout funds. Or, as happened in the May elections, no one party may end up having enough influence to form a government. Furthermore, the Greek government is set to run out of money by June’s end. Let’s hope that Syriza’s party leader, Alexis Tspiris, if he heads the government, is just posturing about debt repudiation to get a better deal from the other EMU countries.

There are grave implications for the capital markets. The chaos and contagion in Europe could well spread to the U.S. financial system because, as we recently saw at J.P. Morgan, no one, including Jamie Dimon, knows what is on the balance sheets of the large U.S. banks. Any crack in the financial system foundation could well cause chaos even in the U.S. In addition, financial chaos always causes large equity market downdrafts.

Today’s elections in Greece are key, and the results of those elections will determine if Greece will even cooperate. If it doesn’t, sometime in late June or early July, it will run out of money. Given the track record of the European politicians, the probability appears low that Europe can avoid the chaotic Greek exit. Greece isa big deal, and I believe that we will find out just how big very soon.

 
 
 
Robert Barone and Joshua Barone are Principals and Investment Advisor Representatives of Universal Value Advisors, LLC, Reno, NV, an SEC Registered Investment Advisor. Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.
 
Universal Value Advisors, LLC is a registered investment adviser with the Securities and
Exchange Commission of the United States. A more detailed description of the company, its management and practices are contained in its “Firm Brochure”, (Form ADV, Part 2A). A copy of this Brochure may be received by contacting the company at: 9222 Prototype Drive, Reno, NV 89521, Phone (775) 284-7778.
 
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, an SEC Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee.
 
Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.

June 6, 2012

Analysis: Little to like about last week’s employment data

Posted in Banking, Big Banks, Economic Growth, Economy, Europe, Housing Market, recession, Unemployment tagged , , , , , , , , , , , , , , , , at 5:31 PM by Robert Barone

Worse yet, the March and April Establishment Survey reports were revised downward by 49,000, not an insignificant revision. So, employment has been much weaker than originally indicated for the past three months. Further, we’ve recently seen an upward pop in the weekly first-time applications for unemployment insurance.
 
The more comprehensive unemployment rate (U-6, which is the broadest measure of labor-market slack) rose to 14.8%, from 14.5%. We are seeing employers substituting part-time workers for full-time workers — again, a negative indicator.
 
Average weekly earnings fell 0.2% in May because of fewer hours worked, on average. This indicator has fallen in two of the past three months and is a harbinger of what we are likely to see in second-quarter consumption spending.
 
Construction employment, while up slightly in the actual number count, was negative when seasonal adjustment is applied. May normally shows positive hiring in the industry, but this May, hiring was significantly below expectations, thus the negative seasonally adjusted number. I suspect this is because of housing markets still struggling with falling prices and excess inventory (Nevada, Arizona, Florida and parts of California). Additionally, we have recently seen a fall in the number of building permits.
 
Downward revision to first-quarter gross domestic product, to 1.9%, from 2.2%, was mainly because of a weaker consumer. Given this poor employment report, second-quarter real GDP might barely be positive in the official reporting.
 
I have written about downward bias flaws in the reporting of official inflation indexes. That means real inflation is higher than what is reported. Those who buy gasoline and food already know this. The implication is that official real GDP numbers are biased upward. Think about that! If inflation is only 2% higher than that officially reported, then the recession that “officially” ended three years ago might be ongoing.
 
None of the above speaks to the potential future shock that might hit the U.S. economy from the fallout of the European banking and debt crisis and the deep recession unfolding there. Any contagion from Europe will only compound the issues identified above.
 
The only silver lining is that weakening demand so evident in the reports has pushed oil prices down precipitously. Thus, we can expect some relief at the pumps this summer. Otherwise, the report was abysmal.
 
 
Robert Barone and Joshua Barone are Principals and Investment Advisor Representatives
of Universal Value Advisors, LLC, Reno, NV, an SEC Registered Investment Advisor.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.
 
Universal Value Advisors, LLC is a registered investment adviser with the Securities and
Exchange Commission of the United States. A more detailed description of the company, its management and practices are contained in its “Firm Brochure”, (Form ADV, Part 2A). A copy of this Brochure may be received by contacting the company at: 9222 Prototype Drive, Reno, NV 89521, Phone (775) 284-7778.
 
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value
Advisors (UVA), Reno, NV, an SEC Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the
Investment Committee.
 
Information cited has been compiled from various sources which UVA believes to be accurate and credible but makes no guarantee as to its accuracy. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.