Federal Reserve non-voting, regional members stated positions that the Fed could taper its easing policy as early as this summer but the rumors could not dim the fact that US consumer sentiment is moving forward aggressively. Buoyed by rising sentiment, especially strong in high income Americans, the US dollar climbed to multi-year highs against the a basket of currencies and struck a 4-year high against the yen on Friday.

Global equity markets and US equities gained upward momentum and looked to close strong for the week. The benchmark S&P 500 rose from its worst decline in three weeks on strong consumer sentiment and a rally on European shares. Europe noted surprisingly strong data from automakers and in domestic sales.

However, the euro trembled under a release that the European Central Bank (ECB) was making overtures to its banking members. With the region mired in a deep recession, the ECB is considering turning the overnight deposit rate negative. This would mean that member banks would have to pay the central bank to access overnight reserves.

The euro dipped below the $1.28USD mark briefly touching $1.2795 before bumping above the threshold. At 1.2824, the euro was down 0.4 percent for the day.

Meanwhile the dollar touched its highest rate against the yen since the Lehman Brothers collapse in 2008. The dollar climbed to 103.09 yen before steeping back to 102.95, up 0.7 percent overnight.

Gold endured another day of sharp declines while Brent oil rose 78 cents settling at $103.56 a barrel. US crude jumped 68 cents to $95.94. The consumer confidence index surprised analysts and is spurred by a more optimistic view of personal finances. Declining gas prices and stable inflation rates are allowing US consumers to spend more, a critical driver for GDP growth.

The Federal Reserve Debate

The Federal Reserve has stated that it will continue its aggressive buying policy until the unemployment rate hits 6.5 percent, one percent lower than it is currently. Additionally, despite all the easing to date, has not led to significant inflation rises.

It is expected that the sequester, which has taken a back seat to the recent fabricated crises, will dampen job growth, the administration’s prime concern. These factors point to a continued easing policy.

In terms of the Fed’s stimulus program, only voting member have input. The voting members are Board members. Regional Presidents rotate onto the Board but play a minor role in terms of policy.

On Friday, Richard Fisher, the President of the Dallas Federal Reserve Bank, told the National Association of Realtors that; “We can rightly declare victory on the housing front and (reduce) our purchases, with the aim of eliminating them entirely as the year wears on. I believe the efficacy of continued purchases is questionable.”

Fisher’s comments set off a firestorm of activity that took equities slightly lower. As a non-voting member, Fisher’s hawkish comments will have little bearing on policy. That is not to say that his views have not been echoed by other non-voting member.

Philadelphia Fed Reserve Bank President, Charles Plosser, and Richmond’s President, Jeffrey Lacker, have also been outspoken in calling for reduced purchases and the elimination of the buying policy.

However, Sarah Bloom Raskin, a Federal Reserve Governor and voting member stated her position which coincides with the popular position of the Board; “The U.S. economy has continued to recover from the effects of the financial crisis and deep recession, though at a pace that has been disappointingly slow. The recovery does appear to have picked up steam in some sectors, most notably in housing … However, federal fiscal policy remains an important source of restraint.” Raskin was speaking to the National Economics Club.

The inability of Congress to take decisive action and put forth a responsible, balanced approach to deeper deficit reduction is also paralyzing the Fed. If Congress could put a plan in place that included new jobs programs, the Fed could exit much more quickly.

The US Fiscal Cliff – Part I

American CEO’s are taking aim at the December 31^st deadline for the launch of the “US Fiscal Cliff,” the most critical national and global economic issue. Regardless of what side of the rigid political fence Americans are on, the Fiscal Cliff represents a threat to every American consumer, every American worker, every American citizen and every economy in the world.

The US has 67 days before the Bush Tax cuts expire and the short-term payroll tax reduction will expire and before a series of devastating budget cuts will go into effect. This combination of events has been designated the Fiscal Cliff for good reason. Each of these events will have serious repercussions for the biggest contributor of to the national GDP, the American consumer.

CEO’s of American companies have unified in a collective, aggressive call for swift and dramatic progress on the construction of a serious plan to significantly reduce the national debt and implement a budget and tax policy that is far-reaching and stabilizing. This pressure from CEO’s seems a call to action for the creation of a functioning environment for the good of the nation, an environment serving the benefit of the electorate not the political agenda of political parties. Congress must turn from self-serving policies to a cooperative, collaborative effort and do the right thing, regardless of political consequences.

CEOs have clout. When financial leaders like Warren Buffet, Jeff Immelt and Lloyd Blankfein call for political action, politicians must respond. These are some of the tangible repercussions if the Fiscal Cliff occurs:

• JP Morgan reports that the expiration of the 2 percent temporary payroll tax reduction will result in trimming household spending capabilities by $125 billion in 2013 alone.  This will decrease an already fragile GDP growth by 0.6 percent next year.

• The expiration of the Bush Tax Cuts will drain another $600 billion in 2013.

• At a time when food prices are destined to increase due to disappointing crop production and the Department of Agriculture projects food price increases of 3.5 to 4.0 percent, a formula for crisis. These food increases will hit home in early 2013, the worst possible time.

• Add projected increases of health insurance and the math is devastating. In 2012, increased premiums costs increased an average of $2,200 per employee. In 2013, projections indicate a further increase of 6.6 percent. In the past 5 years, health insurance premiums have risen 50 percent.

• The most serious repercussion of the Fiscal Cliff is the automatic, across the board budget cuts that were passed into legislation as a contingency of the political differences surrounding the debt limit increase. These automatic cuts are called sequestration. If the cuts are imposed, $1.2 trillion over nine years. Half these cuts would come from defense but sectors like education and employment would be ravaged. The country would five into recession.

On the national election scene, sequestration has only been discussed in general terms. Politicians have been working behind the scenes to arrive at a sincere, structured plan for reducing the debt.

The consensus is that the Fiscal Cliff will be avoided in the short-term with a longer-term solution in six months. The immediate damage would be averted with the promise of a bi-partisan agreement along the lines of the $4.6 trillion debt reduction similar to the Simpson-Bowles Deficit Reduction plan that failed to reach Congress because of Republican pledges not to accept any legislation with tax increases.

American business CEOs have heard enough. The Fiscal Cliff will cause an immediate loss of millions of jobs.

The expectation is that a short-term compromise consisting of a down payment and a basic structure would be submitted during the lame duck session of Congress after the election and prior to December 31. Permanent and sweeping cuts would be put into legislation in the following 4 or 5 months.

CNBC reported that legislation along the lines of Simpson Bowles would create 2 million new jobs, solidify the USD and boost investor confidence. This is what will inspire US businesses to bring stored capital reserves into play. A Simpson Bowles type plan will without doubt cause pain throughout the middle and low income earners and some discomfort to high income earners.

The US must pay its debt and no amount of spin can change that reality or the pain that must ensue. Even with Simpson Bowles, there will be more work to do in the future.

If the Bush tax cuts expire and necessary austerity cuts to social programs are implemented, there appears an imbalance in pain distribution. Cuts to Medicaid, education and education grants, social security, Medicare and other social programs tend to hurt low income and middle income persons and families much more than high income individuals.

What the US cannot compromise upon is creating an environment where businesses and entrepreneurs understand tax policy and administrative costs. You can debate tax increase for the rich and elimination or reduction of tax deductions until the sky falls, but the reality is the solution will be painful and how the pain will be distributed is a critical concern. The strategy has to be to improve the environment for economic growth and, at the end of the day, the American consumer is the best vehicle to grow the economy. Whatever reduces the debt significantly and does not kick the can down the road more than in the short-term and adds new jobs, thus broadening the power of the consumer, is the correct ticket.

American CEO’s are taking aim at the December 31^st deadline for the launch of the “US Fiscal Cliff,” the most critical national and global economic issue. Regardless of what side of the rigid political fence Americans are on, the Fiscal Cliff represents a threat to every American consumer, every American worker, every American citizen and every economy in the world.

The US has 67 days before the Bush Tax cuts expire and the short-term payroll tax reduction will expire and before a series of devastating budget cuts will go into effect. This combination of events has been designated the Fiscal Cliff for good reason. Each of these events will have serious repercussions for the biggest contributor of to the national GDP, the American consumer.

CEO’s of American companies have unified in a collective, aggressive call for swift and dramatic progress on the construction of a serious plan to significantly reduce the national debt and implement a budget and tax policy that is far-reaching and stabilizing. This pressure from CEO’s seems a call to action for the creation of a functioning environment for the good of the nation, an environment serving the benefit of the electorate not the political agenda of political parties. Congress must turn from self-serving policies to a cooperative, collaborative effort and do the right thing, regardless of political consequences.

CEOs have clout. When financial leaders like Warren Buffet, Jeff Immelt and Lloyd Blankfein call for political action, politicians must respond. These are some of the tangible repercussions if the Fiscal Cliff occurs:

• JP Morgan reports that the expiration of the 2 percent temporary payroll tax reduction will result in trimming household spending capabilities by $125 billion in 2013 alone.  This will decrease an already fragile GDP growth by 0.6 percent next year.

• The expiration of the Bush Tax Cuts will drain another $600 billion in 2013.

• At a time when food prices are destined to increase due to disappointing crop production and the Department of Agriculture projects food price increases of 3.5 to 4.0 percent, a formula for crisis. These food increases will hit home in early 2013, the worst possible time.

• Add projected increases of health insurance and the math is devastating. In 2012, increased premiums costs increased an average of $2,200 per employee. In 2013, projections indicate a further increase of 6.6 percent. In the past 5 years, health insurance premiums have risen 50 percent.

• The most serious repercussion of the Fiscal Cliff is the automatic, across the board budget cuts that were passed into legislation as a contingency of the political differences surrounding the debt limit increase. These automatic cuts are called sequestration. If the cuts are imposed, $1.2 trillion over nine years. Half these cuts would come from defense but sectors like education and employment would be ravaged. The country would five into recession.

On the national election scene, sequestration has only been discussed in general terms. Politicians have been working behind the scenes to arrive at a sincere, structured plan for reducing the debt.

The consensus is that the Fiscal Cliff will be avoided in the short-term with a longer-term solution in six months. The immediate damage would be averted with the promise of a bi-partisan agreement along the lines of the $4.6 trillion debt reduction similar to the Simpson-Bowles Deficit Reduction plan that failed to reach Congress because of Republican pledges not to accept any legislation with tax increases.

American business CEOs have heard enough. The Fiscal Cliff will cause an immediate loss of millions of jobs.

The expectation is that a short-term compromise consisting of a down payment and a basic structure would be submitted during the lame duck session of Congress after the election and prior to December 31. Permanent and sweeping cuts would be put into legislation in the following 4 or 5 months.

CNBC reported that legislation along the lines of Simpson Bowles would create 2 million new jobs, solidify the USD and boost investor confidence. This is what will inspire US businesses to bring stored capital reserves into play. A Simpson Bowles type plan will without doubt cause pain throughout the middle and low income earners and some discomfort to high income earners.

The US must pay its debt and no amount of spin can change that reality or the pain that must ensue. Even with Simpson Bowles, there will be more work to do in the future.

If the Bush tax cuts expire and necessary austerity cuts to social programs are implemented, there appears an imbalance in pain distribution. Cuts to Medicaid, education and education grants, social security, Medicare and other social programs tend to hurt low income and middle income persons and families much more than high income individuals.

What the US cannot compromise upon is creating an environment where businesses and entrepreneurs understand tax policy and administrative costs. You can debate tax increase for the rich and elimination or reduction of tax deductions until the sky falls, but the reality is the solution will be painful and how the pain will be distributed is a critical concern. The strategy has to be to improve the environment for economic growth and, at the end of the day, the American consumer is the best vehicle to grow the economy. Whatever reduces the debt significantly and does not kick the can down the road more than in the short-term and adds new jobs, thus broadening the power of the consumer, is the correct ticket.

The unnerving euro debt crisis has clearly crossed the big water and landed solidly on US turf.  Friday’s US Commerce Department report revealed wavering consumer confidence and 2^nd quarter GDP growth of 1.5 percent. The Commerce Department’s first quarter GDP report increased first quarter growth from 1.9 percent to 2.0.

Many analysts were surprised by the 2^nd quarter results which were expected to fall to 1 percent.  Analysts quickly jumped on the bandwagon for another round of quantitative easing by the Federal Reserve. The call for action by Wall Street is ironic. Capitalists that hold no regard for financial regulation and strongly oppose government intervention are new appealing for a third round of quantitative easing.

The Fed has already supplied $2.3 trillion in easing initiatives.  The central bank does not have the bazooka capabilities that it once possessed. The fluttering economy will be the subject of the next Federal Reserve’s two-day meeting next week but no easing could be implemented before September.  In the meantime, early July figures indicate a slow start for the traditionally underperforming third quarter.

Many analysts suggest that while a weak GDP 2^nd quarter showing, there is not enough evidence to support another round of easing. The theory is that the Fed has limited resources remaining and will holster the easing until it is time to pull the trigger.  Those triggers will be a worsening unemployment rate or lack of GDP growth.

Consumer Spending Turns Cautious

Whether attributable to high gas prices or to unrest about the European theater, the USA’a biggest importer, consumers turned to saving rather than spending. Americans saved more money in the second quarter than was saved in the last year.

Consumer spending comprises approximately 70 percent of the GDP. Spending increased at 1.5 percent compared to 2.4 percent in the first quarter. A report from Reuters indicated that consumer spending in July fell 1 percent from June.

New jobs fell to an average of 75,000 in the second quarter. In the previous three months job growth averaged 225,000 per month. Stalled or expanding unemployment figures could be the incentive the Fed needs to unleash QE3.

Combining reduced consumer spending with stalled demand from Europe has led to a substantial 1.2 percent increase in US inventories.  Mired in a prolonged drought, Midwestern farm production is stagnant. Exports have fallen off sharply. The 2^nd quarter export – import ratio trimmed GDP by one third of one percentage point.

Some Positive Data      

The volatile housing market, demand for housing rose 9.7 percent. The industry is aided by low, long-term interest rates.  However, the first quarter increase in residential sales was an outstanding 20.4 percent.

Personal spending rose 0.7 percent in the second quarter, the lowest rate since the 2^nd quarter of 2010.

Interestingly, housing rentals in the 2^nd quarter increased to post-recession highs. The vacancy rate is 8.6 percent, the lowest level since 2002. As foreclosures continue, the number of unqualified homeowners continues to create a strong and active rental market.

At the same time, persons owning underwater mortgages are turning to the rental market for temporary remedies. There is demand for rental homes. Rental housing vacancies fell to 2.1 percent, the lowest rate since 2006.

Consumer confidence is not solely economically linked. Politics often influences consumer confidence. Consumers are being bombarded by negative advertising in the presidential race.  Adding the lowest congressional approval rating in country’s history to what promises to be a bitter and negative election cycle, it would be hard to explain why the American consumer would have a positive outlook.

Spain’s Prime Minister, Mariano Rajoy, has steadfastly declared that the country could handle its debt crisis. His cabinet continues to support his vision, but S&P doesn’t see it that way. After downgrading Spain’s credit rating to BBB+, S&P issued a poignant message that, “In order for Spain to restore financial confidence, the euro zone must include a greater pooling of fiscal resources and obligations, possibly direct bank support mechanisms to weaken the sovereign-bank links, and a consolidation of banking supervision or a greater harmonization of labor and wage policies.”

The other top rating agencies, Moody’s and Fitch, do not have the same opinion as S&P. The two credit rating services have stated that Spain has the “strong payment capacity.” While Spain’s rating is not considered “junk” status, it is considered risky.

The Prime Minister and his cabinet insist that they can accomplish their budget goals with austerity measures. However, Spain’s populace is resisting the austerity program. Unemployment is now at 24 percent and expected to increase. Retail sales were down in March for the 21^st consecutive month. Adding to the problem, the loss of employment has caused billions of euros in lost tax revenue. With 365,000 unemployed workers in the first quarter 2012, Spain has lost more than 950 million in tax revenue.

To compensate, Spain has increased the value added tax (VAD). Spain is suffering its second recession in the past three years. With declining GDP and low levels of consumer confidence, the future looks bleak for Spain and its neighbors. Romania and Czechoslovakia are the newest center stage regional economic disaster areas.

On Thursday, Spain’s Economy Minister, Luis de Guindos, projected GDP growth of 0.02 percent in 2013 and a bold 1.4 percent in 2014. Spain has already reduced 2012 spending by 42 billion euros in 2012. Like many of the euro zone projections, it is difficult to ascertain upon what figures the Economy Monitor is basing his projections. But, Spain needs investors and the cabinet is on message as the country looks for financial support.

Another initiative implemented by Rajoy, who assumed office in December, calls for the foundation of a holding company where failing real estate loans will be centralized. This action follows consolidation of the country’s banks. The existing banks have aggressively managed their toxic assets but the country’s banks are over-burdened with debt as deposits shrink an withdrawals decrease.

S&P made it clear that austerity was not enough to stabilize Spain’s economy and the country’s banks. In a message to the entire euro zone, the credit agency echoes the call by the ECB that the region must adopt and implement uniform standards and action plans as a means to a better outcome.

Andrew Lim, an analyst with Esprito Santo in London, says that Spanish banks are holding the largest amount of toxic loans sine 1994. He suggested that a 53.8 billion euro buffer was about half the amount needed for the banks to ride through the storm ahead. Spain needs another immediate 20 billion euros to consolidate three more banks. The government is considering the issue of bonds secured by future contributions, but this seems an unlikely remedy.

While Portugal, Greece and Ireland are in line for support from the European Stability Fund (ESM), euro zone officials are not optimistic about help for Spain. Spain has not complied with the standards set by the IMF or the ECB.

The real issue here is the impact of the severe austerity cuts upon a nation’s economy. The consensus is that the penalties of austerity outweigh the advantages of some form of monetary easing.

The perfect model for this debate is Romania whose government is in the midst of a political and economic rebellion. Prime Minister Mihai Razvan Ingereanu has been in office for two months. His reign received a lack of support in a vote of confidence on Thursday.

Romania is the European Union’s second poorest nation. Ingereanu has launched a wave of austerity cuts that have the country reeling. The lack of confidence leaves President Traian Basecu with the duty of proposing a new Prime Minister. Victor Ponta is the probable replacement.

However, the IMF, which has already made two loans to Romania has stated that they will not provide further funding until the political situation is resolves and the budget cuts are enacted. This could take several months. Once again, the euro zone impacts every other market place and there is growing sentiment that would suggest this single currency is in jeopardy.

In a long past due scenario, the euro zone members are weighing the German policy of austerity against GDP growth.  The controversy jeopardizes the euro as a single currency and even the survival of the euro zone.  The weekend did not produce the results that the IMF’s leader, Christine Lagarde, had hoped to accomplish in her fund raising initiative.  Compounded with weekend activities in the region, the euro zone looks to be on tenuous footing.

 Dutch Prime Minister, Mark Rutte, resigned as the Dutch Coalition submitted their collective resignations to Queen Beatrix.  The resignations are the result of a split with the populist Freedom Party, which had supported the coalition until the recent austerity legislation.  Queen Beatrix has requested that the coalition continue to serve until such time as new elections can be held.  That may not be occluded until late Summer.

The Dutch crisis preceded the results of the first round of French presidential voting.  The biggest winner in the surprising elections was not the winner, Socialist Francois Holland, or incumbent Nicolas Sarkozy, but Maine Le Pen, the far right activist who succeeded her father as head of the National Front. Le Pen capture a sunning 19 percent of the popular vote.  Although the margin was not enough to qualify for the two-way runoff in the next round, it assured the Front Line of a significant voice in the upcoming second round.

It is projected that Sarkosy, the first incumbent to not win the first round of elections, would be the more significant benefactor of the Le Pen followers.  However, Le Pen has repeatedly attacked Sarkosy for enabling the euro zone crisis to affect the country’s economic stability. 

Both Le Pen and Holland have been critical of Sarkosy’s willingness to implement severe austerity cuts to meet the euro zone’s budget restrictions.  LE Pen is well positioned to increase her coalition’s influence.  Her platform stresses returning a national currency and terminating France’s subscription to the euro zone.

The magnitude of the Le Pen, Holland vote is emblematic of the anti-establishment posture that is sweeping across the euro zone.  This sentiment clearly jeopardizes the investors in the Greece bailout.  With Greek elections scheduled for May 6^th, there is real concern that the new government will not comply with the terms of the bailout.

As other euro zone countries have discovered, the austerity cuts are too large and too quick.  Most nations implementing these restraints will be unable to grow economically.  Although not strictly a quantitative easing mechanism, the participation of the ECB comes about as close as possible to quantitative easing. 

To further underscore the euro zone crisis, Spain has rejected further austerity cuts.  Instead, the government has sided with its populace that is opposed to further constraints.

The news does not get any better.  In addition to all the negativism about the euro zone austerity and lack of growth, Germany reported its lowest manufacturing data in three years.  The euro zone paymaster looks to be a big loser if the Dutch, Greece, Spain and France reject austerity programs.

The biggest political loser could well be Germen Chancellor Angela Merkel, the driving force behind the euro zone negotiates to date.  The Dutch are a favored trading partner with Germany.  As one of the few euro zone members with a triple A credit rating, the economic differences ion the Netherlands could well result in a lowering of The country’s credit rating.

In early trading, the euro gave away some ground to the dollar, settling at $1.3129, down 7 percent over the weekend.  ING projects that the euro will fall to $1.20 by the end of the second quarter. That marks some serious volatility.

To cut to the chase, the continuation of the euro zone is going to boil down to which nations are willing to comply with the budget cuts necessary to contain spending to 3 percent of GDP.  It is growth versus austerity and while the politicians may talk the talk, the people have the power and they seem poised to act at the polls.

Once again, the ADP Payroll number runs counter to the Department of Labor’s Non-Farm Payroll Report.  The optimistic ADP employment numbers were released on Thursday but today’s Labor Department Non-Farm Payroll report indicates that the private sector added 120,000 new jobs in the month of March.  The Labor Department data indicates 100,000 fewer jobs than the ADP survey.

Despite the disappointing news, the unemployment rate fell 8.2 percent, the lowest rate since 2009.  New jobs created in March settled at the lowest level since October 2011.  The reduction is attributed to the fact that unemployment benefits have expired for a vast number of workers and that a number of persons have stopped looking for work.

Earlier in the week, Fed Chairman Ben Bernanke commented that the recent successes in job creation would be difficult to sustain.  Bernanke had previously predicted that GDP growth would slow in the first quarter to an annually adjusted rate of 2 percent compared to the 3 percent rate enjoyed in the 4^th quarter of 2011.

The disappointing employment numbers lend credence to speculation that the Federal Reserve is considering another round of stimulus spending. Bernanke continues to warn those who listen that the US recovery is on fragile footing. One standard that the Fed seems to use is job creation.  In a one-month cycle, Bernanke would like to see 300,000 jobs created.

There is speculation that the February employment gains were fueled by seasonal workers returning to the work force due to the warm winter weather.  However, the most encouraging component is that the manufacturing sector added 37,000 jobs.

Canada Employment Surges

While US employment figures teeter, 82,000 Canadians returned to work in March.  To understand the magnitude of this employment surge, analysts had projected the addition of just 10,000 jobs in March.  For the past six months, job growth in Canada had been flat.  However, the Canadian workforce had already returned to pre-recession strength.

Canadian unemployment dropped from 7.4 percent to 7.2 percent.  The Canadian jobs report stabilized the Canadian dollar against the USD.  The Canadian dollar settled at C$0.9938 against the dollar.  The number of investors flocking to the Canadian currency led to a 0.4 percent lift before the Easter weekend.

The numbers may well justify a Canadian interest rate increase in the third quarter of 2012.  If The Bank of Canada raises interest rates, the Canadian dollar will increase immediately.

Over recent months, the Canadian dollar has been a model of stability, never increasing or decreasing by more than $0.02.  The Canadian economy would suffer if the economic conditions in China or North America worsen.

The 2-year Canadian bond settled at 1.259 percent while the ten-year climbed 2 cents to 2.128 percent.  Canada’s good fortune seemed to positively impact the SD more than its own currency.        

The Euro

On Thursday, the euro fell to 3-week lows against the USD.  News from Greece never fails to impact the euro and with Spain in treacherous waters euro anxiety continues.  The Swiss National Bank is expected to initiate actions designed to pare the Swiss franc against the euro.  During the week, the euro fell 0.6 percent against the dollar.

Broad selling of the euro saw the currency dip below the 1.2 Swiss franc level for the first time since the Swiss National Bank established the 1.20 level as a cap in September 2011. The euro fell to 1.192 francs.

The plight of Spain will most likely cause the European Central Bank (ECB) to re-enter the investment market.  The action plan will be expected to stabilize the Spanish bond market.

Spain is the euro zone’s 4^th largest economy.  The region’s 3^rd largest economy is Italy, now run by technocrat Mario Monti.

To add to the euro worries, Greece is pressuring Greek bank shareholders to post billions of euros to re-capitalize the state.  April 20^th is the target date for the contributions.  Failing to raise the necessary funds, it is probable that the state will nationalize the banks; not exactly the remedy investors have in mind.

In 2011, Greek bank shares have trimmed by 77 percent.  The banks are calling for 3.5 percent interest on any investments in the state.  Importantly, there “investor exhaustion” is a coined term that best decides the Greek debt.  And, everything about Greece remains exhausting.  Unfortunately, the handling of Greece and the strong possibility that another euro zone member may be falling by the wayside has signaled a retreat for investors.

The future of the dollar looks to be improving.  Improving employment numbers and a vote of confidence from consumers is paving the way for a careful escape from the recession.  The national debt is atrocious but most analysts feel that after the 2013 elections, the powers that be will present a balanced but painful strategy to debt reduction.  Anything else would be irresponsible.

Unlike other countries or regions, the 4^th quarter 3 percent increase in GDP can only be viewed as a compelling and surprising number.  In Europe, the forecast for GDP growth is negative. Enthusiasm is somewhat tempered by the bitter reality of oil at $123 per barrel. This number could have bad repercussions for the Obama Administration as well as for the recovery.  The good news is that it is an election year and as Treasury Secretary Geithner said in a CNBC interview the country may have to tap into its oil reservoir.  Obama will do everything he can to control the pump price of gasoline.

Fuel prices are a critical part of the economy.  But, there is another marketplace that can lower unemployment and add to the GDP.  That market is the residential and commercial real estate marketplace.  Last week, Warren Buffet told CNBC that if he had the management capabilities he would purchase thousands of distressed homes.  In reality, that is exactly what is happening across the country.

Buyers with real estate management and repair abilities are exercising bulk purchases of homes at foreclosure sales.  These investors are not looking for one or two properties.  They are looking at clusters of properties in the same geographical areas where a management team can do everything to manage the property.  That includes rent collection.

Why is this important to the dollar?  Well, the housing crash and unregulated lending practices got us into this mess and while it is usually a lagging indicator, it is the housing market that will signal the end of the recession. 

In the past, investors looked at residential housing as a short-term “flip,” or buy low, sell high strategy.  That was great when there was an undersupply of inventory.  That is not the case now. In fact, quite the opposite.  Most analysts feel supply will outweigh demand for three years.  It could be longer.

But, there are positive signs that supply is moving.  Not by one property at a time but by 20, 30 or 40 units at a time.  These investors do not expect to turn the properties quickly. In fact most are repairing the properties and leasing them in a robust rental market.

The rental market is cluttered with displaced former homeowners. These families and individuals are desperate to keep their family and home life in act.  In many cases, they become tenants in the same home they lost to foreclosure.

Because there is an abundance of renters, there is demand.  Investors are purchasing “fix ups” in the $10,000 range or slightly more or less.  They are bringing the houses up to code. They are painting and doing only the necessary repairs.  Instead of selling, they are renting.

Part of the mortgage interest and real property taxes are deductible and rentals are yielding excellent monthly returns.  A typical scenario is an investor purchases a one-family or multi-family home and with the help of the management team brings the building up to snuff.  Let’s assume the purchase price is $10,000.  Let’s assume the repairs come to $20,000.  Let’s assume the investor finances the renovated property at 80 percent for ten years at 4.5 percent.  The monthly payment would be $248.00. The longer the term is, the less the monthly payment will be. 

If the property is in a good school district, this is a homerun scenario.  The investor puts out about $6,000 and about $1,500.00 to cover closing costs and rents the property for a modest $750 or $800 per month.  There is income every month.  Maintenance is covered.  In ten years the property is owned outright.  In the meantime, the investor is taking good deductions.  In ten years, the owner has no mortgage and the market price should increase.

This is based on a few assumptions. The first is that the economy and market come back.  The second is that the rental market stays strong.  But, if it does not, that means the housing market is up. If the investor has no tenants, the property should be saleable.

The biggest assumption is that the market is at or near bottom.  Here are some data that should be considered. 

• Mortgage rates are low, low, low.
• Existing home sales fell in January, but revised data for the fourth quarter was strong.
• Despite lower volume overall, sales were improved in the Northeast and South.
• Consumer confidence in February rose to 75.3, the highest score since February 2011.
• Indications are that February existing unit sales rode to a 1.5-year high.
• Waypoint Homes in California purchased 1,000 homes and received $250 million in funding from a venture capital firm.

 As with Ben Bernanke, when Warren Buffet speaks we should listen.

 Commercial Real Estate

 The Administration has taken plenty of criticism for its handling of the disastrous Bush presidency.  Some of it is deserved, but the complaints are slowing now that there is an upwards tick in the economy.

One of the wisest decisions of the Treasury Department and the FDIC was to permit commercial lenders to modify the terms of their commercial mortgages.  Had that action not taken place, the commercial real estate market would have copied the overwhelmed marketplace cluttered with foreclosures and defaults.

In the 4^th quarter 2011, commercial lenders expanded their portfolios by $5 billion.  Large banks led the way but some regional lenders were also active.  The 4^rh quarter 2011 marked the first quarterly increase in commercial paper since the first quarter of 2010.

The default rate on commercial mortgages fell to 3.78 percent, the lowest since the third quarter o 2009.  The default rate for multi-family real estate plummeted to 2.5 percent, the lowest default rate since the first quarter 2009.

As businesses have trimmed expenses, they have consolidated space and taken tighter control over operational costs.  Vacancy rates were at their peak at the end of 2009.  That trend is reversing and the commercial real estate market has definitely bottomed.  Combining an appetite for space with low prices for natural gas and favorable interest rates has treated commercial real estate developers very well.  The US is not out of the woods yet, but we are getting there.

After a hectic run on Friday, the euro marked a surprisingly strong rally by crossing the $1.34 threshold.  Presumably, the market anticipated a successful G20 summit this weekend in Mexico City.  Many voices have been heard at the summit but as usual the fate of Greece and the rest of the euro zone resides firmly in the hands of Germany.  The divide between Germany and Greece has not eased, despite Greece’s stifling austerity revisions.

Germany cannot get comfortable with Greece, the bailout and the political instability that, despite indications, could place Greek commitments in the hands of a new reign.  On Friday, the G20 ministers delved into a more comprehensive view of the euro zone and European Union’s plans for GDP growth.  This is a subject that has been pushed aside due to Greece’s calamity.

However, the region’s plan for economic growth should have received more attention before now. Let’s be clear that if there is no growth in the future, there are no investors today. In reality, the Europeans have played their cards close to the vest.  Any gains in the euro are simply short-term wagers.  The long-term view of Greece, Portugal, Italy, Ireland and Spain and some of the northern nations is not good.

The only way for the euro nations to recover demands steep austerity cuts and economic growth. Concentrating on growth makes Greece’s case very weak. The country is experiencing its fifth year of declining growth and this year might be the most damaging.  This is why long-term investors are wary of the entire region.  The happiest investors are the ones that are not invested in the region.

The G20 ministers voiced their opinion and the majority cautioned against austerity cuts that might be too severe.  At the same time., Germany has not wavered on its position that Greece must trim even more and must commit to meet the conditions of the bailout plan that calls for a reduction of debt to GDP to 120 percent.

France cautioned against deeper cuts.  This was a rebuke for Germany who takes a contrary view of the Greek deal.  Most of the G20 ministers agreed that steep cuts now will only slow growth.  The ministers voiced concern that the solutions on the table now were merely short-term fixes. 

European nations are entering their second recession in three years.  Greece has been in recession for five years. 

The IIF represents 450 premium banking and insurance companies. In Europe, there exists a stiff credit crunch. The credit market has already shrunk 25 percent in year-over-year comparisons.  The IIF submitted a paper stating that, “Although a degree of financial and household sector balance sheet adjustments clearly has been necessary, policies that promote further deleveraging at this time should be reconsidered.”

G20 doctrines that extend capital surcharges to large domestic banks and insurance companies may well lead to further deleveraging and crippling competitive participation.

Where Does Germany Stand?

After all the rhetoric and ideas have been considered, the burning question is will Germany soften on its position relative to expanding the firewall or the region.  Politically, this is a challenge for Angela Merkel.  Financially, it is hard to tell if this action is in Germany’s best interests.  Emotionally, Germany does not favor Greece.

However, most G20 ministers acknowledge the need for a larger financial firewall.  To date, most European nations are prepared to move ahead but Germany is uncompromising.  G20 nations are ready to make contributions to the firewall but no funds will arrive unless Germany is on board.

Sources at the G20 report that China may contribute $100 billion and Japan may throw in another $60 billion.  The IMF will administer all funds contributed by foreign investors.

It is clear that German apprehension has some history.  The nation is most concerned about not only Greece’s but other nation’s willingness to abide by the austerity programs once they have the funding in their hands.  Discipline and enforcement mechanisms are not tight enough for Germany or the German taxpayer. Private investors outside the region quietly share the same concerns.

Creditors unexpectedly walked away from the bargaining table after late Friday night negotiations came to a halt.  The news is likely to reshape the Monday meeting of finance ministers from the euro zone.  At stake is the fate of billions of euro Greek bonds and very possibly the future of the euro alliance.

The plan on the table would require investors to accept a 65 – 70- percent loss on current Greek obligations.  Greece would take the remaining balance and convert the balances to 30-year bonds that would yield an average of 4 percent.  The plan also calls for a 15 percent cash sweetener from  

Private investors left town but agreed to further discussions via telephone.  The private investors have retained The Institute of International Finance (IIF) handle their negotiations.  Charles Dallara is the chief negotiator.

While this general remedy creates an outline, there are many conditions and aspects of the negotiations that need to be resolved.  Drawing of the mere paperwork is tedious and could not be completed in less than three weeks from acceptance.

One of the big concerns is what role the European Central Bank, (ECB), the European Union (EU) and the International Monetary Fund (IMF) will play in the rescue plan.  Greece has an upcoming 14.5 billion euro call that is covered by the European Finance Stability Fund (EFSF).  All agreements are contingent upon that infusion.  The total bailout package consists of 130 billion euros.

The IMF has stated that no funds will be extended to Greece unless a plan is in place to reduce the debt from 160 percent of GDP to 120 percent by 2020. With Greece in the midst of its fifth recession, there is little hope for GDP growth.     

The finance ministers meeting in Brussels would have to approve whatever plan is presented and the clock is clicking.

Greece Calls The Shots

The bailout of Greece is about as far from a win-win scenario as could be imagined.  The only winner is Greece, the country who cooked their books to gain admission into the euro zone.  It is anybody’s guess what financial condition accurately portrays the depth of the Greek crisis.

Despite the pitiful condition of Greece, the country holds a stacked deck. The creditors must decide between a ”voluntary structured” loss or a “coercive” exchange. Taking a 65-70 percent hit strikes a stale note, but the alternative could be worse with far reaching consequences.

However, Greece’s creditors face the reality that the Collective Action Clauses (CAC) that will be attached to their debt.  If Greece activates these clauses, hedge fund managers have little control over how the final deal will be shaped.  As the majority of Greek bonds are held by euro zone banks. Greece simply needs to appease the banks and the hedge funds will be forced to comply.

Greece can structure the CAC to a loss ratio that European finance ministers will accept.  That 65-70 percent ratio will settle bank resistance.  If the bonds were handled on a one-on-one formula, the hedge funds would have more clout.  As it is, Greece will need to negotiate further with hedge funds.  They can simply force the deal upon the funds. 

Watch Out For Portugal

After the Greek negotiations fell apart, the focus immediately shifted to Portugal, another euro zone member in a prolonged recession.  Standard & Poor’s has reduced Portugal debt to junk bond status. 

This has led to speculation that Portugal will be the next country to seek voluntary relief from its creditors.  Lloyds Bank in London issued a statement saying that the gap between 10-year Portuguese bonds and the 10-year German bunds will widen between 100 and 200 basis points.

Euro zone finance ministers have repeatedly said Greece was a one-time situation but evidence points to the contrary.  The region’s biggest fear is contagion but countries like Italy, Hungary, Spain and Portugal are mired in recession and there seems no clear path to GDP growth.  Everything in the euro zone points to negative growth.  The net effect is that no matter how much money is thrown at these countries, without growth the crisis will only intensify.

For the time being, the news from the euro zone seems to have stabilized the region.  On Friday, the euro held ground as euro zone equities turned upwards.  The European Central Bank’s commitment to pump 500 billion in three year notes into the region’s banks has temporarily stopped the bleeding.

Some of the biggest banking names on the continent received much needed cash infusions.  The intent is to relax credit markets and stabilize the banking sector.

Deutsche Bank, BNP Paribas, Societe Generale and UniCredit are just a few of the big banks under pressure to avoid a downgrade from S&P. These behemoths of banking in the euro zone have other problems.  While they will receive help with capitalization, these banks and many others hold too much regional debt.

As financiers untangle the crisis in Greece, the latest developments are discouraging.  The very necessary structured debt settlement on Greek bonds is hovering between 50% and 75% redemption. While the euro zone and other global entities holding Greek notes will not be surprised by the 50% settlement, but a 70% settlement will increase the pain and raise doubts about the viability of the overall strategy.

Yet, with Italian yields in the 6-7% range and the debacle in Athens unwinding, euro zone equity markets staged a late week rally.  This has been typical of the peaks and valleys in the euro zone.  However, in the longer-term, much more capital will be needed.  This 500 billion euro infusion can only be seen as a short-term fix.

Big challenges remain.  Many of the euro zone’s most pressing issues sound familiar; unemployment, tight credit inflation, anemic growth.  If the euro zone is to survive these challenges, it will require more capitalization.

S&P still has the region’s banks on credit watch.  The ratings agency issued a statement that the 500 billion euro infusion does not remedy the lingering exposure to failing economies.  As a whole, GDP growth in the region is stagnant.  Most euro zone economies are experiencing negative growth.

While euro zone leaders say that Greece’s failure is unique, investors are taking a much more cautious look at Spain, Ireland, Italy and Portugal.  Even the euro zone’s biggest economies, Germany and France are under pressure from the massive amount of regional debt.

Compiling the debt crisis with a lack of demand, layoffs have become commonplace. It is difficult to believe that the end game does not call for more debt restructuring.  Spanish bonds are still yielding over 6%, and Germany topped 3 percent in a recent auction in which subscriptions left 40 percent of the offering on the table. 

Even with a 70 percent write-off, it is difficult to see how Greece will survive.  The citizenry feels the crush of massive austerity cuts. However, when the country tried to liquidate or sell certain assets, like government controlled utilities, there were no buyers.

Unemployment is high.  Students cannot find work.  Food prices are rising.  The Greek economy is in crisis mode.  Tourism is slowed.  GDP has turned lower every quarter for the past two years.

How will Greece reverse the trend?  This question plagues other countries.  Many of these economies are unproductive.  Europe’s export trade is sharply lower this year than last.  While the falling euro should have provided a positive effect for the export marketplace, orders have not increased. 

The ripple effect goes further, reaching the shores of the US.  As Europe is America’s biggest importer, the US has more problems with the euro zone than our euro zone bond holdings.  At a time when the US shows some signs of a recovery, we can hardly afford for Europe to slow any further.

But, as political ideologies have caused turmoil in Washington, the 17 members nations of the euro zone and 27 members of the European Union are far from harmonious.  At least the US only needs three wings of government to coordinate.  The politics of the EU and the euro zone make it nearly impossible to reach policy agreements.

The EU has applied for help to the IMF.  However, the UK opposes the application to the IMF for more funding.  The governing rules of the EU prevent applications for IMF intervention unless there is 100 percent in agreement between the EU members.

The ECB infusion is absolutely necessary.  However, there are no quick remedies and the region’s inability to take a unified approach to withstand this second wave of Europe’s recession, the US will be impacted negatively.