Update to The Weight of a Nation, now more appropriately referred to as The Weight of a Union

Written by Klaraos | 05 March 2010

Since our last post on the European Union and more specifically the Euro Currency things have continued to deteriorate when it comes to Greece’s accounting. The most recent resurgence of this crisis came when Greece announced that they had recently discovered 40 billion Euro of previously unreported sovereign debt. Hard to believe that you can miss that much of a number, but thank goodness Greece recently converted from accounting using an Abacus to QuickBooks. This crisis has begun to ebb as Germany reluctantly seems to be stepping to the forefront and pass some 5 Billion Euro to Greece so as to paper over the issue for at least a time.

One of the interesting acronyms that has developed from the European sovereign debt crisis is PIIGS. Very apropos since it covers the most distressed sovereign debt countries of Europe: P: Portugal, I: Ireland, I: Italy, G: Greece, I: Spain As pointed out by Tyler Durden from www.zerohedge.com Germany is the Sugar Daddy of the European Union:

Without Germany, the EU would not exist. The country, which receives €78 billion from the EU annually, pays out more than double that, or €164 billion, for a net impact of (€1,045) per capita. Surely the Germans would be just as happy to see this money retained by their economy instead of going to assorted hangers-on. And speaking of the latter, one of the biggest recipients, with a net benefit of €2,284 per person, is Greece, which pays just €15 billion a year to the EU but receives nearly triple, or €40 billion.

This graphic provides a great illustration as to which countries affect the EU the most. Once you reach Spain in the chart the country welfare program kicks in except for a few countries. Obviously Germany is the pivotal country here and the fear causing market jitters from Greece seems unfounded given their size, but the concern is if the contagion spreads. The PIIGS to really watch out for are Italy and Spain. Only time will tell.

Financial Regulation

Written by Klaraos | 04 March 2010

4th Quarter 2009 Posts a Boom Time like adjusted GDP Number of 5.9%. Thank you Inventory Build Cycle!

Written by Klaraos | 04 March 2010

The Commerce Department today slightly revised GDP for 4th quarter 2009 up to a robust 5.9%; as discussed in today’s Market Watch article from Rex Nutting (http://www.marketwatch.com/story/gdp-revised-up-to-59-on-slower-inventory-cuts-2010-02-26-83100). If you really care, read the full report on the government’s web site (http://www.bea.gov/newsreleases/rels.htm).

Some of the body parts that were most interesting in Rex’s report were where the growth came from:

Consumer spending increased at a 1.7% annual rate, down from 2.8% in the 3rd quarter when the government's cash-for-clunkers program boosted auto sales.

Business investment grew at a 6.5% annual rate, the first increase since the spring of 2008. Investments in equipment and software increased at an 18.2% annual rate, but investments in structures plunged at a 13.9% pace.

The strong gain in capital spending is "consistent with our view that business investment will be a major factor propelling this recovery forward," said Merrill's Dutta.

Investments in homes increased at a 5% pace, the second straight increase after 14 consecutive quarters of falling investment.

The economic pressure in the manufacturing section of the economy is very indicative of the stage of the business cycle that we are presently moving through. It is in this stage, stage four, that the economy begins heating up and the Federal Reserve typically comes to the realization that they have over accommodated from a fiscal standpoint. As the manufacturing portion of the economy begins to out-perform as an industry group, along with industrial materials and energy, bonds/interest rates begin to perform poorly, or rates/credit conditions begin to tighten. A good example of this tightening can be seen in the federal funds rate increase that, while that was nothing more than a rate change, it is more indicative of the general move toward a tighter credit environment punctuated lately by a record low level of corporate debt issuances and expanding credit spreads, or higher relative rates.

The big question this time is will there actually be any end-consumer demand after the inventory rebuild cycle comes to a close? If there is not, which is indicated by the above numbers, stage 4 and 5 could be very quick.

Take on Mortgage Rates

Written by Klaraos | 04 March 2010

Came across this article from Michael Panzner, and think the following excerpt does a good job of explaining the issue on potential rising Mortgage Rates. As we have discussed with some of you in recent weeks, it looks like we are indeed getting a setup for potential rising mortgage rates.

Submitted By Michael Panzner Mortgage Rates: Only One Way to Go There's been plenty of speculation about what will happen to mortgage rates if and when the Federal Reserve wraps up the last of its planned purchases under the $1.25 trillion Mortgage-Backed Security (MBS) purchase program, first announced in November 2008. While there have been some suggestions that the Fed may extend and expand the program beyond the end of next month, nothing has been said officially. Assuming it ends on March 31st as planned, the laws of supply-and-demand would seem to indicate that the MBS market is headed for a heap of trouble. Why? The Fed has been the biggest buyer of residential mortgage-backed securities by far over the past year or so. That means yields and/or spreads on mortgage-related borrowings have only one way to go. As it happens, a quick read of the chart of the 30-year fixed-rate mortgage yield less its government bond market counterpart lends further weight to that view. That is, it looks rather bullish -- which is bad for borrowers. In fact, based on what happened following the similar technical pattern that developed in the early 1990s, we may well be on the cusp of a secular rise in the cost of mortgage-related financing costs. Another reason, perhaps, to bet against a near-term recovery in house prices.

If the spread tells us that history has the tendency of repeating itself, we may see a period of rising Mortgage Rates. Whether the government, backed by the good faith and credit of us, the tax payer, allows this to happen is another story for another blog.