by Addison Wiggin & Ian Mathias
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Media pronounce the Greek contagion contained: The mob begs to differ…
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Consumer recovery “back on track”… unpacking the first read on Q1 GDP
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Strategic mortgage defaults exploding… what it means and why it won’t stop…
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Fish meal, copper thieves and the case for a sustained bull run in commodities…
Concerns over the Greek tragedy have “eased,” says the Dow Jones Newswire, this morning. That exact word shows up in The Washington Post, too.
If it were that easy, we’d be out of work:
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Fortunately, the mob is not so easily appeased. Seen here, police firing tear gas at hundreds of demonstrators in front of the Finance Ministry of the Hellenic Republic.
More of these shenanigans are on the way. A general strike is planned for Wednesday.
The real threat is the risk Greece poses to banks — not just in Greece, but throughout Europe. While we were ensconced in the Fiscal Summit on Wednesday, Rob Parenteau called frantically alerting us to his forecast that civil unrest in Greece in particular, and Europe generally, was about to get worse.
We coaxed him into visiting our HQ in Baltimore to record a video interview. He acquiesced. Late last evening, he outlined the chain reaction that may result in a bank run in Greece and the knock-on effect that would have across Europe. You can watch our “interview on the fly,” here. Access is free.
Watch to the end. Rob gives three ways to play the situation as we’re wrapping up.
“With no restraints on capital flows within the European Union,” Eric Sprott of Sprott Asset Management explains, “Greek savers are free to transfer their assets elsewhere. Given that bank deposit guarantees in Greece are the responsibility of the national government, rather than the European Central Bank, we suspect Greek citizens are pulling money out of their banks because they question their government's ability to honor its domestic deposit guarantees.
“We envision Greek depositors asking themselves how a government that can't raise enough money to stay solvent can then turn around and guarantee their bank deposits? It's a fair question to ask.
“It's a vicious spiral from financial crisis to sovereign debt crisis to banking crisis, and there is no reason it can't spread to other European countries suffering from similar fiscal imbalances. With Spain and Portugal next in line with their own sovereign debt issues, we can expect depositors in these countries to make similar runs to the bank for their cash.”
Indeed. Look at what’s happening to the credit default swaps on Spanish and Portuguese banks…
Spain’s looking twice as risky as Germany and France. Portugal, three times.
Again, if you want to know what this means to North American investors, watch the interview with Rob Parenteau. We’ve invited Eric Sprott to join us in Vancouver in July, too. He’s one of the finest resource fund managers in the business. And he’ll be helping us figure out what to do while enduring The Assault on Enterprise in Vancouver.
The EKG suckled onto the U.S. consumer’s chest registered a slight pulse this morning. The Commerce Department says that’s who drove GDP up an annualized 3.2% in the first quarter of 2010. Here are the blips:
• Businesses are building inventories, anticipating growing consumer demand
• “Core” inflation for those of us who don’t eat and drive rose 0.6% — the lowest since 1959
• Consumer spending rose 3.6%. That’s the strongest since the first quarter of 2007, those halcyon days when we were first promised “subprime is contained.”
A reminder, this is the first of three estimates Commerce gives us on GDP. We’ll see what the revisions have to say in the coming weeks.
Looks as if the SEC’s civil fraud charges against Goldman Sachs have morphed into a Justice Department criminal case. The investigation has just begun. Nobody has confirmed whether it’s the John Paulson derivatives that prosecutors are looking into, or something else. In an open probe, it doesn’t matter.
If the investigation does result in criminal charges, Goldman officials won’t be able to make them go away by coughing up a sliver of their market cap. Likewise, we suspect the impact on stock markets will last longer than the one-day swoon that followed civil charges last week.
We see Warren Buffett is promising to answer all questions about his own relationship with Goldman this weekend at Berkshire Hathaway’s annual shareholders’ meeting. Heh. Could be amusing. We’ll report back on Monday.
No surprise here: The Obama administration says it won’t issue new offshore drilling permits until it knows more about what touched off the explosion on the Deepwater Horizon rig in the Gulf of Mexico. The resulting slick is washing ashore today in Louisiana.
Current projects are still a go. But it’s still putting a hurt on the oil services sector this morning. The Philadelphia Oil Service Index opened down more than 3%.
Traders chewed on the GDP numbers, the Goldman investigation and the offshore drilling announcement… then decided to buy. Sort of. The major indexes opened up a skosh.
As the markets fret over sovereign debt in Europe, Treasuries here in the U.S. have reasserted themselves as the “flight to safety” trade. An auction of 7-year notes yesterday went off without a hitch.
Demand was higher than average, higher than expected, and foreign central banks showed up in droves. The yield dropped to 3.21% by the close.
The homeowner tax credit expires today.
Meanwhile, the number of “strategic defaults” on mortgages is exploding. Northwestern University researchers figure 31% of all U.S. foreclosures last month were initiated by homeowners who were underwater but nonetheless could keep with their payments. That compares with 22% the same month last year.
Don’t expect these numbers to improve anytime soon. The researchers also concluded that homeowners whose neighbors send in jingle mail are 23% more likely to follow suit themselves. And First American CoreLogic estimates 24% of residential properties are underwater still.
“The CRB commodity index is up more than 8% from its February lows,” says Eric Fry, continuing his commodity musings we last shared on Tuesday. “Why would commodities be rallying so noticeably, even when the stock market is not? Is the answer that the commodity market:
A) Senses a budding inflationary trend in the U.S.?
B) Detects the European Central Bank will implement inflationary tactics in response to the credit woes of Greece, Portugal, Spain… and a roster of profligates to be named later?
C) Anticipates credit woes in the U.S. that will prompt an even more inflationary response from the Fed and Treasury?
D) All the above.
“We are bullish on inflation,” Eric answers, “bullish on gold; bullish on Goldman put options and, most of all, bullish on volatility.”
Another sure sign of a coalescing commodities boom: The return of copper thefts. We note the following recent incidents…
• A rash of thefts from vacant houses in the Detroit suburbs
• Five men arrested in a copper theft ring in upstate New York
• More than 1,500 feet of copper cable swiped in Edmonton, Alberta — cutting off phone service to nearly 500 people
The most brazen case came last weekend, when thieves made off with copper tubing from a high-voltage TV transmitter in Kansas City. Presumably, they knew what they were doing… since they weren’t fried by 35,000 volts of electricity or scalded by the coolant flowing through the tubing.
The caper took the station off the air for several hours, too, depriving thousands of their weekly Desperate Housewives fix. Oh, the humanity.
Another commodity rising in price — fish food. Not the stuff you feed your goldfish, but fish meal.
“We use fish meal to feed pigs and chickens and in fish farming,” says Chris Mayer. “About 40% of all the fish we consume is farmed fish. The UN Food and Agriculture Organization said that the fish trade is ‘one of the world’s most hotly traded food commodities.’ The value of exports in 2008, the latest figures, topped $100 billion.
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“Fish meal is an important commodity in the food chain. It’s one of the world’s most internationally traded commodities. The average ton of fish meal travels 3,000 miles to reach its end market.
“Today, we see the effects of what can happen to that fragile fish stock supply. We’ve got fish meal prices hitting all-time highs, as the earthquake that hit Chile wiped out the world’s second largest exporter of this commodity.”
Chris consistently tracks markets that you and I rarely consider. That alone makes his Capital & Crisis worth the read. If you’re not a subscriber already, you can sign up here.
“So Greece will default,” writes a reader engaging in a thought experiment. “Let's say that Spain, Portugal and Ireland get it together enough to avoid default and that they find some combination of EU subsidies, loan guarantees and homegrown austerity adequate to get them through the next few years. Can you give us some blue-sky thinking about what this will mean for the U.S. and China (or the other BRIC nations)?
“It seems to me the problem with the PIIGS will weaken the euro and so dim Europe's rising star. And though this won't actually improve anything in the U.S., it will make our light seem brighter in comparison.
“I'd think this will mean the dollar will remain the world's reserve currency; the U.S. will continue to be able to borrow even more; and unbridled consumerism financed by more personal debt will return strongly as the accepted, dominant way of life here. All this would seem to set the stage for a far greater worldwide catastrophe in five-10 years (maybe a little more).
“Whadduhyatink?”
The 5: “What good is it,” David Walker quips in the end credits of I.O.U.S.A., “being the best-looking horse in the glue factory?”
We can’t help but refer again to the hideous fiscal imbalances we spotlighted yesterday in our first report from the Fiscal Summit in Washington.
Once the Peterson Foundation gets them online, we’ll be sharing a series of charts handed out during the conference. You’ll see graphically what’s making our foreign bondholders nervous.
“The bespectacled octogenarian,” another reader writes referring to comments Alan Greenspan made at the Summit, “shouldn’t be one to talk about forecasting. His track record is worse than woeful on the matter. He shouldn’t project his failure onto the rest of us, even if most of ‘us’ are also terrible forecasters.
“At least ‘we’ have the decency to not make a public spectacle of ourselves like he has.”
The 5: Right.
Have a good weekend,
Addison Wiggin
The 5 Min. Forecast
P.S. Today’s also the last day, if you’re interested, to fill out the collectable coin survey. Have at it.