Greece Disappoints Again!

Here we are… The last couple of days of January… So the first month of 2012 is just about over, and already, we’ve heard the Fed push their rate forecast for near zero rates out further, and the Fed laying the groundwork for another round of QE… But… When we began the month/year, everyone was pounding their chests, and talking about what a great year 2012 would be (economic-wise)… Talk about deflating the balloon in the first month of the year!

On Friday, I told you that the “experts” were forecasting 3% growth for the US economy in the fourth quarter of the year just passed… I told you that I did not expect this 3% growth rate to be sustainable into 2012… Then I was sitting at my desk, feeling very satisfied having just polished off some veggie pizza and salad, when I looked up and saw a news flash on one of the TV screens… NY Fed Head, Dudley, who’s always got some Aaron Neville in him, and tells it like it is, told reporters that the “fourth quarter economic boost was temporary growth and will not carry over.” He went on to say… “the US economy will probably slow this year while confronting risks skewed to the downside. It is unlikely that the faster growth experienced in the fourth quarter of 2011 will be matched in the first half of 2012.”

So… There! The legal beagles, who cringe every time I mention a Fed Head, in fear that I’ll say something I shouldn’t, won’t believe their eyes when they see that I commend Fed Head Dudley for telling it like it is!

Oh… And fourth quarter GDP didn’t print at 3% after all! It did muster a 2.8% growth rate, which isn’t shabby… But… A large portion of the increase was a 1.9% add to growth from inventory adjustment… Consumer spending grew 2% in the quarter… Funny, though, the Christmas sales were negligible at best, but consumer spending grew 2%… The big hit to GDP was government spending, which is about time! However, unless consumer spending really takes off, the absence of government spending is going to be a real drag on economic growth…

Not that I want to see government spending underpin economic growth… But, I find it curious that the government spending began to back off during an election year… Someone will notice that, and correct that, I’m sure!

So… When the US fourth quarter GDP printed on Friday, we saw the currencies rise and bring gold and silver along for the ride… The euro (EUR) printed above 1.32 on Friday, and the really interesting thing that caught my eye, was the fact that US stocks were getting sold like funnel cakes at a state fair, while the currencies were rallying! WOW! Could it be? Could we really begin to see a return to real fundamentals, and risk asset valuations based on those fundamentals and not just the stuff we’ve had to live with since 2008, which is simply throwing all risk assets in a barrel? Could it be? Well… As I always tell you, one swallow doesn’t’ make a summer… And so, one day of “the way it used to be” doesn’t turn things around for good… But I’ll be watching this, you can bet your sweet bippie!

Well, all that currency frothiness on Friday was wiped out last night, and in the morning session…The euro has led the currencies and metals lower on the heels of yet another disappointment from Greece. Greece was supposed to have reached an agreement with the private creditors yesterday, but once again it got postponed… But that’s not the biggest thing that happened this past weekend to deep six the euro…

Late Friday, The Financial Times (FT) leaked news of a German proposal to get tougher on Greece. They would do this by appointing an external ‘Budget Commissioner’ who would have an ultimate veto on Greek fiscal decisions. The proposal also suggests Greece should legally commit itself to servicing its debt before spending money on anything else.

Hmmm… Greek ministers fully rejected the idea. I don’t think that even the Greeks are ready to give up their sovereignty, which is what this German proposal would do… Apparently the proposal was supported by Austria and Finland… Another Hmmm…

Well… Anyway… We’re left with picking up the mess created by Germany with this proposal. And now the euro looks like it will have a difficult time holding on to the 1.31 handle, after being over 1-cent higher when I went home on Friday!

There WAS some good news from the Eurozone this morning, though… Italy sold 7.5 billion euros of debt, with borrowing costs falling… This makes two consecutive auctions for Italy that have seen decent interest, and with borrowing costs falling. I would doubt that their borrowing costs can fall much more, though… Unless, of course, things get better in the Eurozone.

Another European Summit begins today… And these summits hang over the euro and thus all the other currencies like the Sword of Damocles… So, as I look at the currency screens, this morning… The Canadian dollar/loonie which hugged parity with the green/peachback all day on Friday, is weaker, as are the Aussie and New Zealand dollars. And gold is down $17 this morning! UGH!

Last week I wrote to you about how maybe, just maybe the bond bears had come out of their hibernation, as bond yields in the US and Germany were moving higher… But, then along came the Fed… OK, I don’t know that the Fed was the real reason for the drop in the yield of the 10-year, but the “risk on” trade was on last week, thus eliminating the need for the so-called “safe haven Treasury market”… But, curiously, the yields dropped like a bad habit, moving from 2.06% to 1.85% in less than a week! So… The reason I say along came the Fed is simply that there are guys out there that track this stuff, and they say they can prove that the Fed’s balance sheet increases by huge amounts any time you see this drop in yields occur… And we all know that this isn’t the first time this has happened!

So… Do we really care if the Fed is indeed supporting the Treasury market? Somebody’s got to do it, if we want to keep rates low, right? And economists would tell you that they are simply taking up the slack left by the private market… And if that was all there was to it, that would be fine, for they would simply sell off the “slack” when the markets turned around… But, that’s not what has been going on… The Fed’s balance sheet just continues to balloon, larger, and larger…

When something like that goes on and on, the Treasury bond bubble… I’m reminded of what one of my economic mentors would always talk about… Hy Minsky, was his name, and it was his thought many years ago (this was the ’80s when I would talk to him), that a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs the worse the crisis will be.

So… When the Treasury Bubble finally pops… Remember Hy Minsky… But more importantly, steer clear of Treasuries! That is unless you enjoy receiving tiny yields, and a potential bear market if you sell before maturity…

But, the popping of the bubble isn’t going to happen as long as the markets allow the Fed’s balance sheet to expand… So… Yields will remain low for an even longer period of time, which, according to Minsky, will only increase the severity of the crisis…

Oh… And a recent survey by the Fed indicates that the US economy faces a risk of deflation, not inflation…. Never mind that the cost of gasoline is up 10% from a year ago… And that Americans face sticker shock every time they go to buy groceries… And companies are having to deal with soaring commodity prices (remember the Hostess cupcake people?)… And tuitions, insurance, medical costs, and baseball tickets just keep getting more expensive… But our Fed Heads are all about deflation, folks…

The Chinese return from their week-long new year holiday last week… And they immediately marked the renminbi (CNY) weaker versus the dollar by a very large amount! Here’s something that’s going to really tick off US lawmakers… The renminbi, which reached a high on January 4th of 6.2920, has steadily fallen in value versus the dollar, falling to 6.3330 today… (Remember, renminbi is a European priced currency, which is opposite of what we normally think about prices) That’s about 2/3 of a percent… And while it’s not that big of a deal, the lawmakers will not like it…

Actually, I’m surprised by the move, because the dollar fell by quite a bit last week, even with the selloff overnight and this morning. So, to me, I would have thought the Chinese would play catch-up today… But not so… Oh well… Like I said, no biggie… Really…

The Brazilian real (BRL) has gotten back on the rally tracks, and without too much fanfare and chagrin of the Brazilian officials, who have done everything, including throwing the kitchen sink at Brazilian real strength. But, as I said all along… Brazil needs financing from outside of the country for their infrastructure projects for the upcoming Olympics and World Cup… So, Brazilian officials are sort of like the comedian that tells people to stop applauding but at the same time motions with his hand to keep the applause coming… They want to appear to the world as though they are turning away inflows of investment, while waving them in the back door…

Then there was this… There was a new release this weekend in New Zealand, which caught my eye… Reserve Bank of New Zealand (RBNZ) Governor Allan Bollard, announced that he will not seek another term as Governor when his current term ends in September, later this year… Bollard served 2-5yr terms as RBNZ Governor and I have to say that I was never a fan of him… He was the antithesis of what I believe a central bank leader should be, as he never missed a chance to deep-six his own currency, the kiwi (NZD)… I’ve always believed that if a central bank says enough times that they need a weaker currency, eventually the markets will get the hint and oblige them!

So… We get Bollard’s insistence to diss kiwi for eight more months!

To recap… After a wild and crazy rally in the currencies and metals on Friday, most of those gains have been wiped out overnight and this morning. We actually saw the currencies rally while stocks sold off after the somewhat disappointing fourth quarter GDP printed at 2.8%. Greece disappoints once again with no agreement with private creditors, and a new European Summit begins today. China returns from its weeklong New Year’s celebration and immediately weakens the renminbi… And Chuck talks about a Minsky Moment…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning