Greece Forms a New Government

It’s raining on the Eurozone leaders again this morning. To get you caught up, let me go back to what happened since I signed off on Friday morning. First of all Greek Prime Minister (PM) Papandreou, did receive a positive Confidence Vote from his Parliament, regarding the Eurozone Grand Plan… But there was a caveat to the vote… It was approved only on the understanding that Papandreou would step down, and that a new government would be formed to take them into the next election on February 19, 2012.

This new government was formed over the weekend, which was a combination of the two existing parties, to form a Unity Party. This was done to give the markets confidence about Greek carrying out the measures of the Grand Plan. And at first, the markets took the bait, and the euro rallied… But then someone with a brain (borrowed from the Wizard of Oz) realized what the Eurozone leaders had done when they pushed Papandreou to cancel the referendum, which he had proposed for the Greeks to vote on the Grand Plan.

Now remember, the Grand Plan was not just the carrying out of the austerity measures for Greece… The main caveat of the “plan” was that Greek debt holders would take a 50% haircut, which means “loss”, and the derivatives people are still trying to decide whether or not that constitutes a “default”…

So… Getting back to the Eurozone leaders and their pushing Papandreou to cancel the referendum… I was reading some comments last night, and the ones that make the most sense are about how the Eurozone has gone someplace that they should never have gone… Remember now, that German Chancellor Merkel, and French President Sarkozy, told Papandreou that if the Greeks voted “No” on the referendum that they were voting to leave the euro (EUR)… Knowing that his countrymen would vote no… He cancelled the referendum.

I liken the whole situation to what we saw here last summer… Remember when we had all the saber rattling about the debt ceiling… It was the first that some of us had heard of the voting program that was called the “nuclear option”… Well… I think Merkel and Sarkozy threw the nuclear option at Greece… And that’s probably not what the markets wanted to hear…

Of course they didn’t like the idea of Greece voting, and they sure didn’t like the idea that there now exists a “nuclear option” that Eurozone leaders can throw at a country… A financial institution also used a phrase that I’ve used for 15 years, saying that “Eurozone leaders have ‘Opened Pandora’s Box’ of unintended consequences.” So much for “all for one”, eh? Does this mean that the Eurozone/euro experiment is doing a Wicked Witch and “melting away”? Not sure we can make that call just yet, folks… The euro is still holding its head above water… But, like I’ve said for a couple of years now… The euro gets its strength from the fact that it is the offset currency to the dollar…

And on that note… There is an economic data print this morning… Eurozone Retail Sales for September fell -0.7% versus August. The consensus forecast was for a fall of -0.1%… And year-on-year Eurozone Retail Sales have fallen -1.5%… But, still the euro remains stronger than the US dollar…

Not to say that one retail sales report would make the euro crash to parity, but the point is that even a weak report like this — and this isn’t the only one we’ve seen from the Eurozone lately — would be enough to push the euro much weaker…

The goings on in Greece have pretty much brought the euro from 1.50 to 1.37… And if you want to see the euro crash to parity, the rest will have to come from the dollar strengthening…

This weekend, I saw a graph that tells it all, folks… It was a graph that showed one big circle that represented US debt… And then all these smaller circles that represented the Greece and other Eurozone countries’ debt… Needless to say, the US debt was larger than all of these smaller circles… Much larger! So… When people ask “with all these problems in the Eurozone, how does the euro remain stronger than the dollar”? Now, you have an answer for them!

OK… On Friday, the Jobs Jamboree left the US wondering about its so-called economic recovery… For if the economy was truly recovering, the economy would generate more than 80,000 net new jobs… And from the BLS I see that they added 102,000 jobs via the Birth/Death model… So, in reality, job creation in October was negative! I read a story over the weekend from a writer and analyst who claims that the employment problem in the US is over… What? What tea leaves are you looking at? I can’t believe someone would say something like that… But, I’ll keep my eye on him, to see how many times he says that again as we go forward…

The key item for the currencies today is a Parliamentary Budget Cote in Italy that PM Berlusconi, presented… There are people in the streets calling for the removal of Berlusconi… I have to tell you something here, folks… Back in the ’90s I used to write about the scandals and exploits of Berlusconi, and how he hurt the Italian lira… Here we are late in 2011, and now he’s hurting the euro… Some things never change.

The Treasury buyers and holder’s trip on Mr. Toad’s Wild Ride continues, with the 10-year Treasury rallying once again, to 2.02%…

I don’t get it with Treasuries… Yes, it’s debt from the largest economy in the world, but it’s also debt that continues to grow, and grow, and grow…

Speaking of growing debt… We’re now one week into November, and the clock is ticking on the Super Debt Committee, even if they got an extra hour this past weekend, their time to come up with $1.2 trillion of debt cuts is ticking away… They have until Thanksgiving… If they don’t present their plan by then, $1.2 trillion of discretionary spending cuts will automatically go through… That was all agreed on last summer…

I’ve talked about this before, and threw out there for those who like to plan ahead, the thought that the Committee fails, and then Congress doesn’t go through with the $1.2 trillion of discretionary spending cuts… Moody’s and Fitch will be very interested should the US fail to carry through on their spending cuts… And do you really think that with the economy teetering, unemployment still soaring, and an election year about to start, that they will go ahead with $1.2 trillion in cuts? I doubt it seriously, folks… What do you think? Do you think there is political will to do this? What happened to the last debt commission’s suggestions to cut the debt? That’s right… They were ignored!

So… The currencies get pulled one way one day, and another way the next day… And gold gets thrown into that back and forth pulling… Gold is up about $10 this morning, and with the uncertainty in the Eurozone going on, gold should be up… And probably up more than $10, but with the CFTC admitting that there are outside influences on gold and silver’s price, but either not having the intestinal fortitude to do something about it, or not having the guns big enough to do something about it… Either way, nothing’s being done…

In Switzerland, the Swiss National Bank (SNB) made some noise over the weekend about standing ready to take further measures to weaken the franc (CHF) if economic or deflationary developments made it necessary. SNB Chairman Hildebrand went on to say that the franc was still highly valued against the euro and that he expected it to weaken further from here. Then add to those comments the fact that Swiss inflation printed at -0.1% year-on-year… (Here are those “deflationary developments”)…

We all forget the pain… Yes… Even SNB Chairman Hildebrand has forgotten the pain of the SNB’s previous interventions… And yet, he stands prepared to lose more… I have an idea for the SNB and the Bank of Japan (BOJ) as long as we’re talking about intervening… You say that you’re intervening because your exporters are losing money… Hey! How about you not intervene, and take the money you DIDN’T lose and give it to the exporters who say they are losing money… That way, instead of you both losing money, because the intervention never works in the long run, you can both hold your heads up high! HAHAHAHAHAHAHAHA!

The data cupboard here in the US will get down to business Thursday when the trade deficit for October prints, along with the monthly budget deficit… I just MAY BE about the only person who keeps track of these two anymore, as the markets and most consumers have become “comfortably numb” with the deficit numbers…

To recap… The situation in Greece gets even more confusing, as Papandreou steps down, and a new government is proposed… Did Eurozone leaders come up with their own “nuclear option”? Currencies are drifting today… No real direction. And the Jobs Jamboree was disappointing once again, with real net job creation a negative on the month…

There are conflicting reports this morning, but it just came across that Berlusconi has resigned… I doubt that has happened, as he may have been forced out, but I doubt he quit.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning