Tag Archive | "Global Markets"

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No Cruz Control: Markets Nervous

Texas Tea Party Senator Ted Cruz finally ended his 21-hour-19 minute self-promotion at the expense of the US taxpayer and global markets on Wednesday at noon. His nonsensical attempt to establish himself as a Tea Party Presidential candidate most likely eliminated any chance Cruz has for being regarded as a serious candidate in 2016.

Cruz’s stalling tactics on the Senate floor included such lofty pursuits as improving his ability to read Dr. Seuss. American taxpayers and global investors were left shaking their heads at the ludicrousness. Once again the contrarian and obstructionist policies of the radical right wing Tea Party came at the expense of the public good and the GOP brand.

With a possible closure of the government in the balance, Cruz first encouraged House Republicans to pass a bill that would defund Obamacare and later acknowledged that the legislation was doomed from the beginning. In efforts to save face and assert himself as a Tea Party favorite, Cruz launched his 21-hour self-serving initiative.

With many senior Republicans opposed to Cruz’s stall tactics, the Republican party appeared more divided than in the past, suggesting that the only way to get meaningful legislation in Washington was for centrists from both sides of the aisle to bond. Bystanders had to question Cruz’s motives. Many Independents and Democrats believe that what conservatives fear is that Obamacare may in fact trim the cost of healthcare and be a successful program.

What makes Cruz’s childish performance more puzzling is the fact that he represents a state with the highest number of persons without health insurance. It is clear that Cruz’s presidential aspirations surpass his willingness to represent the best interests of his constituents. Instead, Cruz is following the big money that Tea Party supporters pile into American politics.

Global Equities Nervous        

The debt ceiling increase has global markets on edge and Cruz’s grandstanding did nothing to calm US or international markets. US equities lost ground for the fourth consecutive day as investors considered the possibility of a government shutdown and default.

Republicans deployed the same strategy in 2011, causing a downgrade of the nation’s credit and billions of dollars in increased borrowing rates. The 2011 debt ceiling strategy unnerved consumers and investors alike.

Treasury Secretary Jack Lew advised Congress that the government would not be able to borrow funds after October 17, when government coiffures would only have about $30 billion. If the debt ceiling is not raised, several important government agencies will not be open for business on October 1.

On Thursday, conversation pointed toward a short-term extension of the ceiling while the House and Senate try to hammer out a longer term deal. It is expected that the Senate will strip the defunding of Obamacare provision and send the debt ceiling increase back to the House on Saturday, giving House Majority leader the opportunity to put the stripped down version to a vote.

However, Boehner may or may not bring the Senate’s bill to the floor. House Republicans are meeting Thursday to strategize. Weakened by Cruz’s performance, most analysts expect the House to pass a temporary quickly but American taxpayers have learned that their government is paralyzed by the most dysfunctional Congress in the history of the nation.

According to a New York Time poll, 80 percent of Americans say it is unacceptable for Congress or the president to threaten shutdowns during fiscal negotiations.

Investors and Taxpayers Uncomfortable

Secretary Lew emphasized that if the government becomes unable to pay its bills, the consequences would be catastrophic. Historically, debt ceiling negotiations have a negative effect on equity markets.

On Thursday, the FTSE 100, Germany’s DAX and France’s CAC 40 all opened lower. Equities in Shanghai and Singapore also opened lower.

On Wednesday, the DOW was off 0.4 percent, the fourth consecutive down day. The S&P 500 lost 0.267 percent, its fifth straight losing day.

The dollar posted modest gains against the yen (98.92), euro ($1.352) and British Sterling ($1.6027). Yields on the 10-year Treasury hovered around 2.64 percent.

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World Tensions Shake Market

With the US on a course to attack Syria and with the continual turmoil in Egypt, global markets are reflecting the tenuous nature of international relations. With resistance expected for a UN resolution to approve multi-national strikes, the US and its allies, including the United Arab League, are prepared to proceed without approval from Russia or China. Citizens of Damascus have been warned that air strikes could begin as early as Thursday.

Syria has chosen to defend itself and has threatened invading entities that many human lives will be lost. The offensive is in response to the alleged use of chemical weapons of mass destruction dispatched from Syrian national sites against rebel forces and civilians.

US Equities Mount A Rally

After two brutal days of mounting losses, US equities and the dollar posted gains as investor overlooked negative home sales data and fled to safety. After two days this week, the S&P had lost 2 percent, posting its single biggest day loss since June. The all-important CBOE Volatility Index (VIX) spiked up 20 percent on Tuesday.

A host of factors came together on Wednesday to reverse the downslide. The biggest influence appeared to be a flight to safety in the face of the ensuing conflict. By midday, the S&P 500 had gained 9.17 points (0.56 percent), the DOW was up 71 points (0.48 percent) and the Nasdaq added 26.882 points (0.75 percent) in a sharp reversal of form.

The gains came in the wake of negative sales data from the housing industry as homebuyers reacted to the rising long-term interest rates. Current pending sales slumped and point to a nervous third quarter.

Brent crude reached a six month high as US crude reached a two year high. Speculation is that the Syrian conflict and the ongoing turmoil in Egypt will further disrupt supply from Middle East oil providers. Airline stocks were among the biggest losers on Wednesday.

The FTSEurofirst 300 lost 3.80 points (-0.3 percent).

Dollar Stabilizes

Investors turned to safe havens on Wednesday. Gold climbed, the USD gained and oil surged. Gold reached a three month high at $1,430 an ounce.

The Societe Generale predicted that Brent could climb to $150 per barrel after reaching a six-month high of $117.34 during Wednesday’s early hours. US motorists have heard that the per gallon price of gas will go to $5.00 per gallon.

The dollar posted gains against the yen, the Swiss Franc and the Euro. The USD recovered to 97.66 yen, up 0.07 percent, after touching 96.83.

The dollar posted gains against the euro reaching $1,3332 as the 10-year Treasury yielded 2.7818. The German bund also realized gains as nervous investors sought safety. The German 10-year bund yield dropped 3 percent to 1.98 percent.

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Nervous Markets Await Fed and Employment

Nervous global markets anxiously await news from the US Federal Reserve and the new Labor Department unemployment data to be released on Friday. Improved data from Europe boosted European equity markets and raised the euro against the USD as the dollar regained footing against the yen.

Markets appear edgy about what Federal Reserve Chairman Ben Bernanke will announce regarding the possible tapering of the current stimulus. Most likely the news will be tempered at best. With unfavorable growth in GDP expected and with modest gains of about 185,000 new jobs expected, there simply is not enough impetus for the Fed to alter policy significantly, if at all. A gain of 185,000 jobs would trim unemployment to 7.5 percent, a step in the right direction but not a level likely to dissuade the Fed.

On Tuesday, US equities continued paring down but are poised to post record gains for the month. Eight of ten S&P 500 sectors declined for the day. All three major indices lost ground Tuesday. Yet, equities are ready to close the month with the sharpest gains since October, 2011. Early Wednesday trading indicated a rally in equities.

Also of interest to Wall Street is the successor to Chairman Bernanke. President Obama’s choice will likely influence markets with hawks boosting markets and selection of a dove bolstering the dollar.

The European Central Bank (ECB) is meeting this week and new forward guidance is expected from the ECB and from the Bank of England (BOE). The euro and the pound have strengthened in anticipation of new guidance and in response to encouraging data.

European equity markets closed flat for the day but the MSCI index of world stocks fell 0.5 percent.

Dollar Nervous

The dollar gained some strength overnight but slumped 0.5 percent against the yen on Tuesday to 97.93. Just last week, the dollar hit new highs against the yen. The dollar index briefly touched a five week low at 81.785.

Lee Hartman, a currency strategist with the bank of Tokyo explained; “The dollar faces a lot of key event risk in the week ahead with the release of the U.S. Q2 GDP report and the latest FOMC policy meeting on Wednesday, followed by the release of the U.S. employment report for July on Friday.”

The 10-year Treasury notes fell 3/32 with yields closing at 2.57 percent on Friday. Over the last two weeks, yields have ranged from a low of 2.l3 percent to a high of 2.63 percent, uncommon volatility. On July 8, 2013, yields hit 2.78 percent, a two-year high.

The German bund ended a comfortable bounce with a decline on Tuesday. Disappointing trade caused the decline.

Japan’s Nikkei touched a three-week low, sliding 3.3 percent. The stronger yen and poor data from Japan’s exporters hit equities unusually hard. The possibility of a new sales tax is weighing heavily on Japan’s economy.

Latin American Currencies

As the USD has strengthened and become more appealing to foreign investors seeking quality, Latin American currencies have suffered. As the Fed has considered tapering, Latin American currencies have fallen sharply over the past two weeks. A number of factors could continue to impact these currencies negatively in coming months.

Brazil’s industry index slumped to its lowest level in four years. The Brazilian real lost 0.4 percent on Tuesday on a sharp plunge in industry confidence.

  • The Mexican peso slid 0.6 percent to 12.7555 per USD, a two-week low.
  • The Chilean peso lost 0.7 percent to 511 USD, a one-month low.
  •  The Argentine peso shed 0.58 percent to 8.61 USD and has lost 21.25 percent this year.
  • The Mexican peso slid 0.6 percent to 12.7555 per USD, a two-week low
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Global Markets Await Federal Reserve Report

The two-day Federal Reserve meeting will conclude on Wednesday with Chairman Ben Bernanke scheduled to conduct a press conference following release of the much-awaited report. Global markets have experienced great volatility since Bernanke’s mixed message released on May 22, 2013.

Ever since, Bernanke has been in the news. On Sunday, President Obama suggested that Bernanke would be stepping down in 2014 after serving 8 years as Chairman. Bernanke’s handling of his press release in May, stirred concerns in global equity and currency markets. It is expected a more carefully worded explanation of current monetary policy will be put forth on Wednesday.

Economic data released today would support a continuation of the existing $85 billion per month bond buying policy. New home construction signaled a stronger recovery in housing that was indicated with strong starts in April. Housing starts are up 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April’s report was also raised from 853,000 to 856,000 new starts.

New permits dipped below April’s strong performance but still reflect the largest number of permits for single family construction in five years. The construction industry has been hit hard by unemployment and contractors report difficulty finding qualified workers and a shortage of building supplies.

May’s 12-mointh core inflation rate remains below the Federal Reserve’s stated goal of 2 percent but does suggest stabilization. The overall CPI jumped 1.4 percent easing concerns about prolonged deflation. This data should not negatively affect the Fed’s decision to scale down its stimulus.

However, the “tapering” of the extraordinary support from the Federal Reserve will be forthcoming but with disappointing growth data from China, high volatility in Japan and unstable conditions in Europe, the dollar is expected to continue today’s improvements against international currencies.

Asian Currencies Decline    

In India and Indonesia, the strengthening dollar or the prospects of a stronger dollar have led to massive withdrawals by international investors. The Indian rupee closed in on another record low to 58.98 per USD compared to the record low of 58.69 set last week. India had attracted more than $12 billion in foreign investment since 2012. The fall could be more severe if markets get what they expect from the Fed’s two-day meeting.

In the last 17 trading session, foreign investors have been net sellers of more than $4.5 billion in Indian bonds.

Indonesia, another Asian entity that relies heavily upon a growing China, saw its rupiah fall 0.7 percent on Tuesday. The fall came on the heels of government action to reduce fuel costs. The central bank was forced to intervene.  The finance ministry was only able to raise 2.65 trillion rupiah of an 8 trillion rupiah offering.

Meanwhile, in the Philippines, the peso fell 0.8 percent to 43.22 USD. The Malaysian ringgit fell 0.8 percent to 3.1580 USD, its lowest rate since July 30, 2012.

If the Federal Reserve announces tapering of its stimulus, the outflows from these nations could be devastating. In Indonesia, foreign investors sold about $1 billion in bonds from May 31 through June 13, 2013. Foreign holdings decreased to 32.4 percent.

Dollar Rallies Against Yen  

Tuesday marked the second consecutive day that the dollar has made headway against the yen. Traders anticipate that Bernanke will extend the current buying initiative but add definition to the inevitable tapering. Tomorrow’s announcement should stabilize equity markets but also give strength to the USD.

Joe Manimbo, a senior market analyst at Western Union Business Solutions in Washington, echoed market sentiment; “The yen’s fresh leg lower today could be a sign that many investors think the Fed will signal a reasonable chance of a taper as later in the third quarter. The yen is seen vulnerable to less policy accommodation from the Fed, a move that would tend to put upward pressure on U.S. Treasury yields, burnishing the greenback’s allure.”

The USD rose 1.1 percent to 95.96 yen after falling to a two-month low of 93.78 yen on Thursday last week. The dollar has touched record highs against the yen since Prime Minister Shinzo Abe radicalized the nation’s currency policy by extreme monetary easing. The liquidity has given rise to Japan’s equities but has greatly weakened the currency.

The Euro Climbs

Despite disappointing data from Germany and the lowest demand for new autos, the euro rose to $1.3385. The climb was based on surprising report from ZEW data, a German analyst firm that showed investor sentiment was improved in June. The FTEU3 shares climbed 0.1 percent on Tuesday.

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Bernanke Mixed Message Sends Nervous Tremors

Muddled messages from the Federal Reserve and a sharp downturn in China’s manufacturing sector and in consumer confidence, sent global equity markets into a tailspin in overnight trading. Better than expected employment numbers in the US brought some stability back as the DJ average rebounded from a triple digit losses at the open. For the week ended May 11, 2013, claims for state unemployment benefits after the first week dipped by 112,000 to 2.91 million recipients, the lowest number of claimants in five years.

Japan’s Nikkei share index .N225 dipped 7.3 percent overnight following data from China’s manufacturing sector and news that the euro zone’s extended pattern of contraction looked more ominous. The Nikkei index had been up a stunning 45 percent this year.

Japan’s newest easing initiative has driven the value of the yen down and led to a very liquid economy that is sputtering for growth. Japan’s profits and growth are stagnant giving reason to question the fantastic gains in equities. It is increasingly clear that global markets are reliant upon quantitative easing that in many ways outweighs output.

Tobias Blattner, a European Economist at Daiwa Capital Markets, told Reuters; “All the global developments we see in the markets right now are purely liquidity-driven, they are no longer underpinned by fundamentals. We must learn to live with that kind of volatility.”

Yen and Euro Rise  

Analysts appeared confused by Bernanke’s statements before Congress. During his questioning, markets slipped immediately. After the Q&A following the Congressional hearing, markets recovered. However, the minutes of the Federal Reserve showed support for reducing Fed’s aggressive purchasing policy if certain factors came into place.

Bernanke told Congress that growth hit 2.5 percent during the first quarter and that employment was encouraging but still well below acceptable levels. He also explained that inflation was steady at about 1 percent, half of the red flag milestone set by the Federal Reserve. Inflation has benefited from reduced energy consumption and pricing.

The dollar-yen dipped as low as 1.01.45 before rallying to 101.68, a 1.4 percent fall from Wednesday’s levels. The euro also made headway against the dollar, trading at $1.2894, a 0.3 percent gain for  the day.

Euro zone weakness is weighing heavily on global manufacturing.

Bernanke Leaves Analysts On Edge

One of the purposes of the Fed’s purchasing program is to increase wealth. Equity markets have been big beneficiaries from this strategy. Americans are saving at the highest rates in 4 years. Recent good news from the National Association of Realtors points to gradual recovery in the housing market.

Bernanke explained the impact of the Fed’s $85 billion monthly bond purchases;  “Monetary policy is providing significant benefits. Monetary policy has also helped offset incipient deflationary pressures and kept inflation from falling even further below the (Fed’s) 2 percent longer-run objective.”

The Federal Reserve’s minutes showed that several board members advocate reducing the purchasing program as early as June. This sent tremors through the equity and bond markets. The benchmark 10-year treasury bond climbed over 2 percent for the first time since March. Japan’s 10-year bonds climbed to 1 percent.

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Good Employment Data Bumps Markets

On Friday, the US Labor Department posted its Non-Farm Payroll report and global markets were swift to act on the positive trend. Private employers added 114,000 jobs and the unemployment rate dipped 0.03 percent to a four-year low of 7.8 percent.

Republicans were quick to criticize the release as a public relations coup for President Obama. However, the unemployment rate returned to the rate when Obama first took office in 2009. To arrive at the improved rate, July and August non-farm payrolls were increased by 86,000 jobs.  It was believed that the unemployment rate had contracted in July and August but the revisions indicate otherwise.

With the Federal Reserve’s QE3 added to this encouraging data, the impact could well be reflected over the next few months.  The Fed’s initiative is already showing positive results as the credit markets appears to be functioning more easily than in the past. There is one more non-farm payroll report due prior to the November 6 elections.

The employment report showed a loss of jobs in the manufacturing sector for the second consecutive month but the dormant construction industry got a boost of 5,000 new jobs. This is a reflection of a slowly improving housing market.

Government employment increased by 10,000 jobs.  This followed an increase in government employment of 45,000 in August.

What is of great importance to the economy and for millions of unemployed workers is the stability of the small business environment. A poll conducted by Vistage International, a consulting firm, indicates that the small business owner does not see a strong 2013. Thus, small businesses are hesitant to add workers.

The undercurrent about the US Fiscal Cliff is weighing heavily on small businesses. Rather than tax reform or austerity cuts, the small business person wants to know how the federal government will stabilize the economy and government spending before the end of the year. 57 percent of business owners stated that the expiration of the Bush Tax Cuts, set to expire December 31st, would definitely have a negative effect upon their business.

However, 12 percent of employers said they intended to add jobs in the next 12 months. Nine percent said they expected to lay-off workers.

Regarding marketplace uncertainty, 30 percent of business owners said the fiscal cliff was a serious issue. 17 percent pointed to political uncertainty as the biggest drain on their business. On the positive side, only 6 percent of the participants indicated tax accessing credit was a problem. This can be attributed to the Federal Reserve’s commitment to hold interest rates at historic lows through 2015.

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Another Day of Betting on the ECB

Another Day of Betting on the ECB & QE3

After a downturn at the open, US equity markets turned positive on news from the euro zone and the European Central Bank (ECB). The DJI closed up 100.51 points while the Nasdaq Composite Index ended the week at 3,089.79 and the S&P 500 climbed up enough to close at 1,411.72. On the whole, US equities are still bullish.

Despite news from the Fed that stimulus was unlikely at this time, an encouraging development in the debt ridden euro zone outweighed the Fed’s Thursday report. Investors have been leaning heavily on the Federal Reserve and appear to be anticipating the controversial QE3 stimulus. The market opened on the downside in anticipation of a selloff due to Bernanke’s announcement.

Fed Chairman Bernanke does not mince words.  After his report on Thursday, equities all turned lower. After meeting with Greece’s President, Antonis Samaras, on Friday and talking with France’s Francois Holland on Thursday, Chancellor Angela Merkel announced that Germany and France were in agreement that they wanted Greece to remain in the euro zone. Merkel stipulated that she would abide by decisions made by the troika of international investors. Once again, the Chancellor stressed that Greece must meet its commitments before any infusion of any further financial aid could be made. Merkel falls short as credible. Without easing her position, it is difficult to see how the euro zone can escape a catastrophe.

Recently rated the most powerful woman on the planet, Merkel’s political future is in doubt. In any case, global markets did not react to the chancellor’s statement.

However, later in the day, ECB President Mario Draghi announced the central bank was contemplating setting targets in another bond-buying spree that would be deigned to control euro zone borrowing costs. The focus of this initiative will be to stabilize Spain’s volatile and unsustainable borrowing rates.

In looking back over the week, perhaps the most unnerving occurrence is Finland’s development of a course of action to withdraw from the euro zone. This would be a voluntary withdrawal and more importantly a signal that other members, including Germany, may be contemplating ending their participation in a broken model.

Draghi has been high profile in stating his case for more ECB easing. It is not certain how his initiatives will be received by his member nations. The ECB President will speak at the G20 in Jackson Hole next Saturday.

Investors still hold out hope that the Federal Reserve will come through before the end of the year, but there does not appear enough negative data to justify what could be a final push to decrease unemployment. New factory equipment purchased was down in July but production was up. The unemployment rate edged up to 8.3 percent. There is no doubt that uncertainty about the euro zone is undermining the US economy.

The US Congress, with its newest approval rating of ten percent, has been called upon by Congressional Budget Office to not repeat the horrific battle about extending the deficit come December. There is little reason to believe that this Congress will put their jobs on the line prior to Election Day.

No matter how you view the politics of the time, Congress, not the President, drives or stops the engine known as the US economy. Two years ago, Republicans used the deficit to force the President’s hand and extend the Bush Tax Cuts, which will revert to pre-Bush tax rates on January 1, 2013 unless a compromise is reached.

The Congressional Budget Office (CBO) warned Congress that if arrangements were not made to avert the $500 billion in tax hikes and pre-arranged budget cuts, the US economy will plummet into another recession in the first half of next year. The CBO further warned that unemployment would rise to 9.1 percent during the first quarter of 2013. It is crunch time for the US economy and nobody is home minding the store. Whoever the President is will be of little consequence unless the House and Senate have similar majorities to the President’s.


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Forex: Bank of Canada Stays Put On Rates

Canada’s central bank painted a dour picture for the world’s 11th largest economy following a decision to keep rates on hold at 1% – as well as corresponding deposit rates.  The move wasn’t all too surprising given the global market and its current headwinds.  But, what was surprising was the bearish sentiment going forward, which forced policymakers to lower forecasts for the near term.

As before, Governor Mark Carney pointed towards Europe’s financial woes as adding volatility and uncertainty to global markets, which are already being underlined by “greater than anticipated” contraction in China and other emerging countries.  The central bank noted the current situation as dampening commodity export growth, which the Canadian economy partially depends on for overall economic growth.  In addition, policymakers noted the current pace of government spending to be minimal in adding to the country’s expansion as consumers deal with “record high household debt”.

As a result, the central bank is foreseeing a 2.1% pace of expansion in the current year, with a slight increase of a 2.3% growth rate next year.  Both rates are lower than the previously anticipated 2.4% forecasted rate – with consumer prices remaining around 2%.

The decision and subsequent central bank text should place some downward pressure on the Canadian dollar in the near term, which is currently being fueled higher by positive correlations with crude oil.

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Markets Calm

Data is trickling in from government agencies that support the belief that a slow, steady recovery is in progress.  On Monday, Fed Chairman Ben Bernanke stated that the current recovery mirrored the more positive trend in the steady increase in jobs. Bernanke did not indicate that a third round of funding was necessary at this time, but he prefaced that remark by declaring that all options remained “on the table.”  This position also leaves the door open for another round of bond purchases that would be deigned to further increase job creation.

Global markets took note of Tuesday’s Consumer Confidence figures, which revealed that consumers were optimistic about jobs and better wages.  The consumer confidence index jumped to 76.2, the highest level since February 2011, and an increase from the 2012 February index of 75.3. 

On the whole, the measure of economic conditions, which includes input from various sectors, jumped to 86.0 in March, again the highest level since February 2011.  Analysts had expected an increase to84.5.  The barometer for February was 83.0.

The only index that fell below expectations was the important consumer expectations index, which came in at 69.8 at the end of March.  February’s rating was 70.3.  The one-year inflation index inched downward to 3.9 from 4.0 early in the month.  This is the highest reading since May 2011.

These stability trends got more support on Wednesday as durable goods rose 2.2 percent in February.  The measure came in below expectations but the market had already factored the possibility into their projections.

Peter Cardillo explained, “It came in slightly lower than the market had been expecting.  It is a very volatile index but it bodes well for the manufacturing sector.  We are at the end of the quarter and the momentum stays upside.”

Perhaps the most encouraging news came on Thursday. The Commerce Department released figures showing that household 4th quarter 2011 income increased more significantly than originally reported.  Disposable income jumped to an annual rate of $11.73 trillion, $10.8 billion more than the originally reported. Consumer spending for the past three months has been flat. However, business spending has increase 5.2 percent in the same time frame.

Importantly, the fourth quarter GDP growth remained at 3 percent but revised income figures indicated that the economy expanded by a healthy 4.4 percent.  Analysts attributed the income increase to the improved labor market.  The income level in the third quarter 2911 was 2.9 percent higher. 

GDP gross in the first quarter is projected to retreat to 2 percent. The US is hanging tough and projects slow but steady growth.  By comparison, many analysts are staking their claim that GDP will begin to expand in 2013.  From here, the view is quite different.  There appears no viable way for GDP to expand in the European Union or Euro Zone.  Going forward, the dollar appears undervalued against the euro.

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Euro Zone Woes Continue

Compared to a few weeks ago, the euro zone debt crisis has taken on an eerie quiet.  Don’t be misled.  At least one and possibly as many as five euro zone nations are on the brink of financial ruin.  Despite the relative calm, investors are particularly wary of Portugal, Spain, Ireland and Italy.  Combined with Greece, the five nations comprise an entity commonly called the PIIGS.

And, there is not a lot of positive spin coming from any of these  entities.  In other words, stay tuned because the fate of the single currency will certainly come under question in the months to come.

As the politicians and economic brain trust take their leave, the numbers from the PIIGS depict a grizzly picture.  Greece may have been fortunate because it was not too big to fail and in dire enough straits that their plight could well have caused massive turbulence in global markets.  The truth is that the country’s investors are not enthusiastic about Greece’s future.

Unfortunately, austerity good girl, Portugal, has done everything asked of her.  Yet, it becomes increasingly clear that Portugal needs more than a hatchet to fix its mounting debt crisis.  Germany has connected to Portugal and set ambitious austerity programs in motion.  The real issue with all the PIIGS is a lack of economic growth or even the unrealistic projections of growth.  Growth is not going to happen in the PIIGS.

According to the Greek model, the action plan is to impose super tough austerity cuts, then find investors and eventually to find buyers for the country’s assets.  The structured default strategy is a very real possibility with all the PIIGS. 

The euro zone could rescue Portugal and Ireland, both of who received substantial aid packages earlier in the recession.  For Spain and Italy, the scale of the crisis eliminates bailout funding.  With the European Central Bank, the IMF and the EU refraining from entering the bond market, the PIIGS are flying solo.  Banks inside the failing nations are attempting to throw a life rope but investors are guarded because of the 75 percent hit private investors took with Greece.

There now exists a war weary mentality about the troubled euro zone economies.  This resistance is well founded but does increase the need for liquidating assets, especially public utilities.  However, the demand for these assets is not inspired.  This causes a trickle down effect whereby the assets are purchased below market value and thus create a deeper strain on the economy.

Compared to Greece, the populations in Portugal and Spain have shown determination.  These countries seem to acknowledge their reckless spending and for the most part have accepted the price to pay will be steep. Yet, Portugal’s unemployment rate is closing in on Greece’s record unemployment.

The relatively calm protests have been directed at the Troika of financial institutions, the IMF, the ECB and the EU.  These institutions have been devising a plan to expand the region’s Emergency Stability Fund.  But, facts are facts.  Portugal is Western Europe’s poorest nation.  Portugal’s socialist faction is represented by the country’s second largest labor union, UGT.  Amenio Carlos is the head of the country’s largest union, CGTP, a communist labor union.

Under Germany’s guidance, a course of action has been suggested to increase the nation’s GDP, which in prosperous times did not exceed .07 percent growth.  Laboring under deflated prices, Portugal has taken a dreadful toll on the economy.  Goldman Sachs recently released a report indicating that Portugal needed to increase prices by 35 percent.  Of course, such an increase could well be disastrous in terms of exports.

Portugal does have some successful export enterprises, including Volkswagen and other car manufacturers.  Successful entrepreneurs credit the country’s resilient labor force.  And, Germany has publicly commended Portugal for its approach to resolving the heavy debt load.  The harsh reality is that the clock is ticking on Portugal, which must enter the bond market in the middle of 2013.  A failure in the bonds will spell doom for private investors.

The German-Portugal strategy projects the debt burden peaking at about the same time.  If projections are correct, Portugal would reach its goal of debt at 3 percent of GDP by the end of 2013.  Investors are privately preparing for the worst outcome, another big dent in investor equity.  On the bright side, Portugal was able to cut its deficit by a crisp 35 percent during 2011. This has led euro zone nations to applaud the country’s commitment to constructive resolution.

The Spain debt experience is drawing comparisons the Japan’s plight in the 1990’s.  Unsustainable and rising bond yields are not being received with optimism by the investment community.  Other euro zone nations are pointing the finger at Spain saying that it will be Spain that could sink the single currency standard.

Spain is increasing taxes and reducing services to the taxpaying population.  Tax collection enforcement must also improve.  Even then, pay cuts and lay-offs run rampant throughout the country.  Credit is reduced to a mere dribble.  Growth is non-existent and banks are investing outside the country.

In other words, the PIIGS are a mess. The possibility that the euro is stabilizing is an illusion and investment here is not for the feint of heart.

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