The Euro Crisis Part Deux

by Addison Wiggin & Ian Mathias

  • Greece tragedy reprise: The Hellenic Republic fares little better than our favorite South American dictatorship

  • Like lambs to slaughter… households pile into municipal bonds

  • Why the Fed’s getting more cautious on the “recovery” talk

  • Fannie’s crackdown on strategic defaults, and other nonsensical housing news

  • Readers offer back story on new home sales, take us to task for “inconsistent thinking”


  Maybe it’s just the summer heat roiling Agora Financial headquarters in Baltimore this week.  But from here, the world looks a bit screwy when the world’s strongest assets are gold and the British pound.

So what’s going on? Let’s dive in…

  The euro is down big today. Not against the dollar (it stands at $1.23 as we write), but against nearly everything else. It hit an 18-month low against the pound overnight.

The pound has strengthened considerably since Tuesday, when the new government announced budget cuts (and tax increases) — something our new forex specialist Abe Cofnas labeled “the June 22 bombshell event.”

“The market severely punished the pound,” Abe says by way of background, “as Great Britain navigated through the great global recession. From a height of 2.00 to the dollar in July 2008, the pound fell to 1.349 in January '09. In August 2009, it had retraced almost precisely 50% of the way back, and then went sideways until the beginning of a new descent since January 2010. In May 2010, it was at 1.4230.”

So last week, with a budget announcement days away, Abe prepared his readers for a move in the pound — which is exactly what we’ve had. From the time he issued his alert through today, the pound has moved up around 2 cents, to $1.489. In the forex market, 2 cents is a big deal.

What’s more, Abe says the pound “looks like it can go much further. The bullish sentiment wave is also being supported by a hint in the Bank of England's minutes that an interest rate increase is now on the horizon.”

We’ll be relaunching our forex service as the summer goes on in response to readers looking for plays with more flexibility. Watch this space for an announcement when it’s open to new members.

  Euro weakness is gold strength.  Gold has moved up $10 to $1248 as we write.  The dollar index is not benefiting… In fact it’s in danger of breaching 85.5.

  So what’s the problem with the euro today? Well, the Financial Times reports that banks in four of the PIIGS, or GIIPS, take your pick, countries are turning increasingly to the European Central Bank to stay afloat. Banks in Greece, Portugal, Spain and Ireland account for more than two-thirds of ECB lending to eurozone banks over the last two years.

  Also hurting the euro: Credit default swaps on Greek government debt have reached an all-time high. Greece is now only a marginally better risk than Hugo Chavez’s Venezuela.

Here’s an update to a chart we brought you last month It shows what the CDS market is saying about who looks shaky… and to what degree.

Look at that… In a little over six weeks, Greece has gone from a 3-to-1 shot at default to better than even money.

Note also the growing overall risk. The No. 10-ranked risk last month had less than a 20% chance of default. Now it’s over 24%.

Elsewhere on that list, we see that even though California’s risk has grown, Illinois has vaulted past California.

  Meanwhile, U.S. households are piling into municipal bonds. The household sector accounts for 80% of all flows into munis over the last three quarters, according to the Federal Reserve’s flow of funds report.

Of the $2.8 trillion in municipal debt currently outstanding, households hold $1 trillion. And that doesn’t count what they hold indirectly through banks, insurance companies, mutual funds and so on.

We can just imagine what the average broker is telling his clients right now: “If you think stocks are too risky right now, munis are the perfect way to earn a respectable return. And munis are always a place to turn at a time like this when income tax rates are likely to rise.”

Yikes. As we point out in the current issue of Apogee Advisory, municipal debt holds the same laundry list of risks that subprime mortgages did in 2006. We also suggest an intriguing speculation that could deliver a mighty nice gain when it all goes boom. We’re still accepting “beta testers” to give us feedback before we formally launch the newsletter. If you’re interested, here’s where to sign up.

  The oh-so-cautious spinmeisters at the Fed are starting to sound a little more gloomy about the “recovery.” “Financial conditions have become less supportive of economic growth on balance,” says yesterday’s statement from the Federal Open Market Committee, “largely reflecting developments abroad.” (Um, that would mean Europe.)

As such, the Fed is once again leaving the fed funds rate unchanged. The statement didn’t fail to deliver those now-familiar words: “Economic conditions… are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Say it loud, say it proud.

  All this general trepidation drove down the major U.S. stock indexes about 0.7% on the open today.  Yesterday was a roller-coaster kind of day; despite the Fed statement, and the rotten new home sales numbers we reported, markets traded flat by day’s end.

In the midst of all that indecision, readers of Bulletin Board Elite had the chance to collect up to 71% gains on a tiny mining firm in just five weeks. Not bad… and right now, we’re offering a significant discount on membership… but only through midnight tomorrow. Here’s where you can join in.

  Orders for durable goods — stuff meant to last three years or longer — fell 1.1% from April to May. Not a huge surprise, and most of that drop was driven by a fall in orders for commercial aircraft. Take out transportation and the number rose 0.9%. Not bad, not good either.


  Here’s something that’s not helping the cause of durable goods: Uncle Sam’s 2010 version of “cash for clunkers” is going over with a clank.

The Department of Energy is offering $300 million worth of rebates to consumers who buy energy-efficient appliances. But as of this week, only $108 million has been doled out.

Some of that is because the states were put in charge of administering the program, so the rules and dollar amounts vary depending on where you live. Why Washington chose to devolve power to the state level in this instance is one of those great mysteries of life.

  A few postscripts to the three-strikes-and-you’re-out housing numbers we brought you yesterday:

  • Applications for new mortgages have fallen to their lowest level since 1997. Even a 30-year fixed rate of 4.75% isn’t enough to bring people through the door, now that the homebuyer tax credit has expired

  • An inspector general at Treasury has discovered nearly 1,300 prison inmates have claimed more than $9 million in homebuyer tax credits. 241 of those inmates are serving life sentences

  • Fannie Mae is now proposing to crack down on strategic defaults. Homeowners who can keep up their payments on an underwater home but choose to walk away will now be denied a Fannie-backed mortgage loan for seven years.

According to Morgan Stanley, 12% of defaults in February were of the strategic variety.

Somehow, we doubt that a homeowner prepared to take the step of a strategic default will be dissuaded by the prospect of being a renter for the next seven years. But in addition, Fannie is promising to join up with lenders on mortgages in “recourse states” to recoup the full value of the mortgage. In other words, in states that allow it, Fannie will go after the borrower for the amount the home is underwater, in cash.

For a quasi-government outfit that squeezed out maximum taxpayer-backed profit for its executives by pumping up the housing bubble, this is rich.

  “New home sales numbers are even worse than they seem,” a reader replies to yesterday’s issue. “I know well a senior VP of commercial real estate at a major bank in the San Francisco Bay Area who has had several conversations recently with his developer customers. Their thoughts on new home sales:


"The one thing that analysts/economists fail to realize is that these new home sales for the most part are at a loss to the developers. At best these new home sales help them recapture some of their initial equity. Since March of 2008, our developers have sold 775 homes in the projects that we financed for them. None of them have made a profit on any of the sales. They keep building to liquidate the land debt and to recapture as much of their equity as they can.

"I had dinner last night with XXXX. He owns one of the premier homebuilders in YYYY. He built between 100-200 homes per year. He has sold all his inventory and is just sitting on the remaining lots. Most of his lots are in the ZZZZ area. I asked him what his plans might be for future development of those lots. He said he wouldn't even think about it for at least another five years.


“Most of these homebuilders are not building to make money, but to keep their staff working. If they make a 5% profit or lose 5%, they consider it a small price to pay for keeping their remaining team together. XXXX sees a double dip in for sale housing. He said the odds of that occurring are 100%."

  “I for the life of me cannot understand why people are looking for the high in gold in dollar terms,” writes a reader who takes exception to a casual remark we made yesterday about there being “a lot of room for the gold price in dollars to run up.”

“That line of thinking is inconsistent with why the gold trade is so compelling. In Weimar Germany, those who tried picking tops in gold merely lost their position and ended up in the same boat as those who didn't buy gold in the first place. I think the answer is relative value. Gold relative to the Dow, farmland and barrels of oil and the silver-to-gold ratio, etc., are the only ways to value assets in a world of zero interest rates.


“I think we can call this decade ‘The Decade of the Return to Intrinsic Value.’ What is the intrinsic value of a government promise? What is the intrinsic value of gold? What is the intrinsic value of a lifeboat in calm water? Stormy waters? When you are in the water?!?! It is relative. Holding fiat paper as a store of value in the current conditions is itself madness.”

The 5: We don’t have a bone to pick with anything you say. But where’d you get the idea we’re trying to “pick a top” in gold? We much prefer the advice of James Turk — buy some gold every month and average your way in.


Dave Gonigam

The 5 Min. Forecast

P.S. The deadline is tonight if you'd like to get in on EverBank's latest MarketSafe CD. This one is geared toward precious metals — investing in one-third gold, one-third silver and one-third platinum. Like all the MarketSafe CDs, this is principal protected — its value cannot fall below your initial investment — while the upside is all yours. Here's where you can learn more.

Full disclosure: Agora Financial is in a commercial relationship with EverBank and may receive compensation if you open an account. But as with all our services, we wouldn't offer them to you if we didn't think they were a good deal for you.


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