Marc Faber: Germany Should Have Left The Euro

On Bloomberg:

Remember: nothing has been fixed...

“If you put one or 100 sick banks in a union, it does not change the fact that they're sick. In my view the markets are rallying because they were grossly oversold. When markets are grossly oversold, especially markets of Portugal, Spain, Italy, France, then any news that is not disastrous news propels stocks higher. I think that combined with seasonal strength in July, the rally has carried on somewhat. But it is another cosmetic fix, a quick fix that does not solve the long-term fundamental problem of over investment in the euro zone. And what it does, basically, it forces Germans to continue to finance people in Spain and Portugal and Greece that are living beyond their means.”

“If I were the Germans, if I were running Germany, I would have abandoned the eurozone last week…It is a costly decision, but losses are there and somewhere, somehow, the losses have to be taken. The first loss is the banks. In the case of Greece, one should have kicked out Greece three years ago. It would have been much cheaper.”


“Yes. In Portugal, Spain, Italy, and France, the markets are either at the lows of March 2009, or lower. Along with bad companies and the banks, there are also reasonably good companies. Stellar companies, but they have been dragged down. I see value in equities, regardless of whether the eurozone stays or is abandoned.”

 “anything that has a high yield, or what I perceive to have a relatively safe dividend. In other words, I do not expect the dividends to be slashed by 90%...I am not buying banks, but maybe they could rally. I am just not buying them because I think there will be a lot of equity dilution and recapitalization. I’m not that keen on banks.”

28 Banks Downgraded, Yields Double

It's not raining, it's pouring in Europe. This was all expected, in spite of the flowery stock market on this first half of the year,

Moody's downgraded 28 Spanish banks yesterday, just when Spain formally requested loans to bail out its banking sector. Moody's said the downgrades were driven by the Spanish government's "reduced creditworthiness", which impacts its ability to bail out the country's banks.

They also said that the banks will sustain further losses in Spain's moribund real estate market.

The auction of Spanish bills resulted in yields that were more than double the previous auction.

Big Bad Banks Downgraded

Yesterday Moody's downgraded 15 banks by one to three notches to reflect "the risk of losses they face from volatile capital markets activities".

Banks of course criticized the move as backward looking.

Morgan Stanley had its long-term debt rating lowered by two notches. The downgrade left Morgan Stanley more highly rated than Bank of America Corp and Citigroup Inc., but a step below Goldman Sachs Group.

Barclays PLC, BNP Paribas SA, Royal Bank of Canada, Citigroup, Goldman Sachs Group Inc, JPMorgan Chase & Co., Credit Agricole SA, and Deutsche Bank AG were also cut two nothces.

HSBC Holdings plc, Bank of America, Royal Bank of Scotland Group plc and Societe Generale SA were cut by one notch.

Euro Bailouts: A Giant Ponzi Scheme; At the End of the Day The Whole Thing is Going Bust

I have been saying this for years. These bailouts don't do anything to fix the underlying causes, it's just can-kicking and a Ponzi scheme.

"The Whole Thing is a Giant Ponzi Scheme".

European Bailout Drawing From From ESM, What ESM?

These events in Europe are not going away, they simply can't until the real issues are dealt with. How is lending more money going to solve anything?

From Phil Davis today:

 "From what we know, the eurozone's leaders aim to deploy the European Stability Mechanism (ESM) to cap borrowing costs for Spain and Italy by purchasing sovereign bonds on the open market.  Unfortunately, the ESM fund does not yet exist. It has not been ratified by Germany and Italy. When it does come into being, it won't have much money.  It has a theoretical limit of €500bn — a nice wish — but its paid up capital will start at just €22bn.

Britain's George Osborne cautioned against exuberance. "One thing we have learnt is: don't expect a single summit to solve the eurozone's problems, otherwise you are going to be disappointed. The eurozone is inching towards solutions."

They are promising, yet again, to fix the problem.

The Great Bailout Dellusions: Gone faster and Faster; Spanish Bank Bailout Turns Sour

The markets jumped at the open, but The Wall Street sums it up:



Bailouts have been great delusions, or illusions, but their effects are dissipating faster and faster. As if a bailouts would fix anything!

Spanish bond market has been very unimpressed: Spanish 10 year bonds fell all day long, closing with yields up 30 basis points from Friday's close, to 6.5%.

Like A Broken Record: Spain Downgraded Again, Near Junk

This looks like broken record, well, that's because they have so many countries in bad shape over there. Fitch downgraded Spain's sovereign debt rating not by one but by three notches today, and warned that the nation is at risk of being downgraded into junk bond status.

The nation's debt rating was cut from "A" all the way to "BBB," the lowest rating that is considered investment grade, with a negative outlook.


"Fitch pointed to the estimated cost of a Spanish bank bailout, which it said is likely to cost between €60 billion to €100 billion, as well as a prolonged recession that Fitch now expects to run throughout 2013.
"Spain's high level of foreign indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in Greece," the agency said in the note. "The much reduced financing flexibility of the Spanish government is constraining its ability to intervene decisively in the restructuring of the banking sector and has increased the likelihood of external financial support."

The firm said that part of the reason for the downgrade was "policy missteps at the European level that in Fitch's opinion have aggravated the economic and financial challenges facing Spain.
"The absence of a credible vision of a reformed [eurozone] and financial 'firewall' has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding," said the report.

Fitch said Spain is helped by a relatively high value-added and diverse economy, one that is competitive enough that it might have a trade surplus this year". (CNN)

Investing in 2012: 6 Months Later... Back to Square One

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Eurozone Unemployment Hits All-Time High

The bizarre recent market optimism has gone down the drain  today.  On top the dreadful U.S. employment numbers, the eurozone's unemployment rate reached the highest level since the Euro was created 13 years ago.

The rate has risen to 11% in April. Employers cut 110,000 jobs.

In the larger 27-nation area that makes up the European Union the rate also rose to 10.3% in April, the highest EU unemployment rate on records that go back to 2000.

Staggering Figures. There were 24.7 million unemployed in the EU in April, 17.4 million in the eurozone.

Unemployment Ticks Higher Again Sinking Silly Markets

Jobs creation abruptly hit a stop in May, with the economy adding just 69,000 new jobs. Unemployment rate climbed to 8.2%,  rising the first time in nearly a year. 

The Bureau of Labor Statistics reported that job creation missed economist estimates for 158,000 new positions (where did they get that from?).

The actual figures may be much worse as labor force participation remains near 30-year lows though incrementally better than last month, rising to 63.8%.

The number unemployed for 27 weeks or more jumped from 5.1 million to 5.4 million. The average duration of unemployment moved from 39.1 weeks to 39.7 weeks.

All bad news, not really unexpected, but the silly markets react negatively.

Euro Hits Near 2-Year Low on Spain Troubles

The euro fell today to it lowest level in 23 months against the U.S. Dollar.

Spain's banking sector and soaring borrowing costs are the topic of the day, and after Italy was forced to pay dearly to sell debt.

"The euro was seen highly vulnerable to further falls, with many analysts looking for a drop towards $1.20.
Concerns are growing that Spain may have to tap debt markets at a time when bond yields are near unsustainable levels. Market players fretted that it may be forced to seek an international bailout.
Adding to the euro's woes, Italy sold bonds at a very high cost, with 10-year yields topping 6 percent for the first time this year as sentiment on the indebted economy looked vulnerable to contagion from Spain's worsening problems". (Reuters)

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Fitch Donwgrades Japan

Fitch lowered its assessment of Japan’s sovereign credit to A+, still investment grade but just above countries like Spain and Italy.

The agency criticized Japan for not doing more to pare down its burgeoning debt.

According to the agency, Japan’s public debt will hit almost 240% of its gross domestic product by the end of the year.

 "The new rating also heightens the pressure on Prime Minister Yoshihiko Noda to rein in spending and raise taxes at a delicate time, when the Japanese economy is still recovering from natural and nuclear disasters last year.

Mr. Noda has warned that Japan could eventually face a debt crisis akin to that afflicting Europe and is staking his job on a plan to double the consumption tax rate to 10 percent by late 2015. That increase, he has argued, is necessary to pay for soaring welfare costs and pension payments".  {New York Times)

Der Spiegel: Bundesbank Has No Clue What is Happenning To Spanish Banks

German magazine Der Spiegel  has an article emphasizing the need for financial reform not only in Spain but throughout Europe.


The publication emphasizes that at this time, the Spanish banking system is built on unstable loans worth approximately one billion euros and encrypts the Spanish banking rescue between 50,000 and 200,000 million.


"Since that amount of money would be an overload for both banks to the government budget, experts believe that the Spanish government should seek urgent assistance to European Financial Stability Fund (EFSF).


However, Der Spiegel notes that Mariano Rajoy "resists this movement," because it would give members of the euro "a voice in governing the country." Also displayed are the magazine, also hang the disgrace to Spain as a country of high risk and, probably, "this will cause isolation of the international financial markets for a long time."


Under the circumstances, says Der Spiegel, direct payments to the banks of the euro countries become "a sensitive issue." The German Government completely rejects the idea "for fear that their money disappear into a bottomless pit." In fact sources said that the German central bank, the Bundesbank, say they have no clue what is happening in Spanish banks.


To Der Spiegel, this lack of knowledge is a consequence of nationalism in Europe has allowed the flourishing of its financial industry. The European banking industry is more connected internationally than any other, however, "each country controls its national bank and, if necessary, rescue their banks on their own."


Therefore, the journal recognizes citing Clemens Fuest, a German economist, professor at Oxford University and adviser to the German government, "without a fundamental reform of the European banking sector, the euro is in danger."

Spain Bonds Plunge

There is no relief in Europe. Spanish 10 year bonds hit a new cycle high today, with the yield moving up to 6.08% - 23 basis points in one day.

The previous cycle high was 6.07% reached April 16th.  (Chart)

Europe Burns, Buffet Comments on U.S.

While Europe burns today after the defeat of the "austerity" governance, Warren Buffett commented on the bad jobs reports last week. He states the obvious: no construction, no jobs. He says he is not surprised there were no more jobs created without a more meaningful pickup in residential construction.

"When we see a million residential units constructed annually," (CNBC's Squawk Box), "only then will we see more decent numbers on jobs growth."  

He says GDP growth of 4 to 5% "would be unsustainable in the long term," He believes that a 2.2% GDP print is not as abysmal is is being made currently. 

"If you have a 2.2% growth in annual GDP and have a 1% growth in population, that would be 1.2% increase in real per-capita growth."  

That, according to him is equivalent  a generational growth of ~20%. "That means that every succeeding generation has a 20% better standard of living than the preceeding one,"

"If we were guaranteed 2.2% for the next 100 years, that would be Nirvana!"  

Is the population growth only 1%?

Canada's Ontario Downgraded

Moody’s Investors Service’s downgraded Canada's Ontario, following a sharp warning and dimmer outlook one day earlier by Standard & Poor.

The downgrade reflect the provinces very high debt and dim prospects for improvement.

The Globe and Mail says that Moody’s downgrade of the province’s debt rating to Aa2 with a stable outlook from Aa1 with a negative outlook brings the agency’s score more in line with S&P and DBRS, which both downgraded Ontario by one notch in the fall of 2009. DBRS, which also weighed in Thursday on Ontario’s fiscal state, decided to maintain its “stable” outlook on its debt rating for Canada’s largest province, saying the government’s increased focus on controlling spending was “an encouraging step in the right direction.”

But DBRS, too, struck a note of caution. Limiting debt growth will be very challenging and require a “significant pickup in fiscal resolve,” DBRS analysts Travis Shaw and Eric Beauchemin said in a report to clients.

Spain Downgraded Again: Shocking?

Not a real topic for the "shocked" investor since there is nothing shocking here, it was all expected.

S&P downgraded Spain’s rating by two notches due to “mounting risks to Spain's net general government debt as a share of GDP in light of the contracting economy”.

Spain's GDP is expected to shrink by 1.5% in 2012 and 0.5% in 2013. 

The US-based ratings agency is also worried Spain’s troubled banking sector will require fiscal support from the government.

Now the country is rated at the same level as Ireland and Italy, which are also struggling with debt problems.
Meanwhile experts believe the Spanish economy is likely to show some improvement in the next few years.

But the country probably won’t meet its 2012 budget deficit target of a 5.3%. 


Spain said that borrowing costs surged despite a 27.3B euro austerity program announced by the government late last month.

The country’s authorities pledge Spain won’t follow Greece and ask for financial help.

Really?

France Elections: Hollande and Sarkozy Battle for 1st, But Anti Euro Protest Votes Steals The Show

The 1st round of the french election was a show of the protest vote. Centre-left Hollande narrowly beat the conservative Sarkozy in Sunday's 10-candidate first round by 28.6% vs 27.1%, with 99% of votes counted.

 She wants France to abandon the euro currency

 Le Pen, the far right candidate daughter of former paratrooper and National Front founder Jean-Marie Le Pen stole the show by surging to 18.0%, the strongest result for a far-right candidate.

First Round Totals

• Hollande: 28.6%
• Sarkozy: 27.1%
• Le Pen: 18%

Le Pen's "breakthrough mirrored advances by anti-establishment Euroskeptical populists from Amsterdam and Vienna to Helsinki and Athens as anger over austerity, unemployment and bailout fatigue deepen due to the euro zone's grinding debt crisis".

 "The battle of France has only just begun," She said: "We are now the only real opposition."

Stunning Natural Gas Drop to Below $2: 1 Handle is Here

A '1' handle was reached today, simply amazing:

Golds Repeats the 2008 Period: You Know What Happened Afterwards

Gold has been dropping lately, but that is a very short term view. Please see the various cycles of gold prices:

In particular, the 5 and 10 year charts show a very similar period during the 2008 crisis.