Last week Greece attempted to shift the blame for their debt woes onto Goldman Sachs and other nefarious speculators. The fact that they’ve been in default for roughly half of the last two centuries is the fault of their bankers apparently. It is the press and short sellers that are the problem, not the fact that government is over 50% of GDP. It is the CDS market which is the problem not the fact that tax evasion is a national past time. It is the other countries in the EU talking badly about Greece that prevents the government from continuing to borrow at the same rate as Germany to fund an austerity budget with a deficit of 8% of GDP. Sounds a lot like the banks during the financial crisis who assured us the problem was caused by short sellers and had nothing to do with the fact they loaned money to people who had no intention or means of paying it back.
Spain has taken the blame the speculators game to another level by opening an official investigation by their secret service into whether there was collusion to drive down Spain’s market. How would one tell the difference between collusion and widespread consensus that Spain’s economy is a total mess? If everyone is shorting Spain does that mean they are colluding or that Spain is an economic basket case? I’ll take economic basket case for $1000, Alex.
We shouldn’t get too smug about this though because the US has its own basket cases and speculators will surely try to separate them from the herd. California is still on the ropes and may have to start issuing IOUs again to pay its bills as it did last year. California did get some good news recently when tax revenues came in $1 billion higher than expected in January. Still that’s a long way from closing the $20 billion deficit and economic recovery can’t happen fast enough to close the entire gap. Other states are also having troubles including New York, Illinois, New Jersey and Michigan. And there are a lot of cities facing significant budget problems, mostly as a result of overly generous pay and benefits for public employees.
The politicians will be desperate to find a scapegoat to blame for these emerging troubles but they really have no one to blame but themselves. Public sector unions negotiated pay and benefits packages that the private sector would kill for and they negotiated them with politicians for whom they were the largest source of campaign cash. In that situation the only party not represented is the public. Politicians, whether they sport an R or a D after their name, can be expected to look out for themselves. Now as the economics of these deals come to light, there will be a backlash and any politicians seen as supporting the unions over the public will be in real trouble. So they’ll be looking for a set of bad guys to deflect the blame on and speculators are the obvious target.
The budget woes of the states and cities may be a headwind for the recovery, but I don’t think it will be enough to stop it. The recovery continues to gain steam and I suspect that tax revenue, as it did in California, will rebound sufficiently to avoid the direst predictions. In addition, stimulus spending is still flowing to states this year and the real problems will not have to be faced until 2011, safely after the elections are over. A lot of politicians are betting that tax revenue will rebound enough so they don’t have to face the music at all, but that is probably just wishful thinking. The budgets that were drawn up during the real estate boom will have to be pared; real estate values will not rebound that much no matter how robust the recovery.
The world is confronting the debts run up in the last boom and just as in every other such boom and bust, there will be defaults. That doesn’t have to mean an outright repudiation of debt; in most cases it will mean a restructuring. But the answer for all government entities with too much debt is the same – cut spending to match tax revenue. The public is in no mood for tax hikes after watching how their tax dollars have been wasted. And shifting blame to speculators seems unlikely to work. It elicited more chuckles than sympathy last week when Greece and Spain tried it.
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Weekly Economic and Market Review
The market stabilized last week as good economic news outweighed the uncertainty of the Greek situation. The big reports for the week were jobless claims and retail sales which both showed marked improvement. Jobless claims had been rising for the last few weeks and even optimists like me were getting worried, but last week claims fell 43,000. The Labor Department has been saying all year that the numbers were distorted due to administrative backlogs but they say that is over now, so we should start to get a clearer picture of the jobs situation. Continuing claims also fell but speaking of a lack of clarity, the extended benefits programs make this number almost useless.
Retail sales were a clearer picture of improvement. Retail sales less autos and gas stations were up 0.6%. Overall sales were up 0.5% month over month and December was revised higher. Sales year over year were up 4.7% which is consistent by the way with a pretty robust recovery. Yes, things were awful this time last year, but that is kind of the point. Things were so bad last year that showing improvement – even very big improvement – is not that hard.
Stocks were up on the week with the S&P 500 rising 0.87%. Foreign markets – with a few exceptions such as Korea and Israel – generally lagged the US. I suspect that is a situation that will change over the coming months. Assuming I’m right about the US economy, foreign markets’ higher betas should mean outperformance when the uptrend resumes. Commodities improved a bit last week, but the dollar strength is a significant headwind. The dollar is enjoying its tallest midget status among developed economies right now, but as the recovery gains steam other currencies should return to favor, particularly the Aussie and Canadian dollars.
Stocks stabilized last week. My target is still in the 1200-1300 range.
Commodities are at support:
Gold is at the downtrend line. A breakout is probably dependent on the direction of the dollar:
The dollar is running into resistance:
Bonds had a tough week with a lousy 30 year auction hurting the long end. The bear market remains intact: