Just finished reading an excellent article by John Mauldin on Spain and the EZ – by the way, you should subscribe to his blog if you have not already – it’s very, very good and a must read. He rightly points out the problems in Spain and, inter alia, the Spanish residential housing market – some 1.5mn of unsold homes (according to the WSJ) with prices allegedly down just 15% – 20% – oh yeah, in fact they are actually down 50%+. The Spanish are basically dead worried about their banks and mortgage/property loans they have on their books, hence the ludicrously low official estimates of the decline of Spanish property values. As Mr Mauldin states, when calculated on a comparative population basis to the US, the unsold homes in Spain would (in US terms) represent some 15mn homes (as opposed to the 2.43mn unsold homes in the US, together with shadow inventory). With 23% unemployment (youth unemployment is over 50%), declining GDP and personal income, low population growth and a much, much higher debt to GDP than reported officially (some of the numbers I have seen are really scary and away above the 85% I previously reported – as opposed to the official figure of debt to GDP of just around 70%), the Spanish housing problem is going to take close to a decade to resolve, in my humble view. In addition, at one stage at the peak, Spanish construction related activity amounted to around 25% of GDP. Furthermore, Spanish private sector debt is above 220% of GDP and concentrated, as only 25% of homeowners have mortgages. How does one restructure Spain;
Mr Mauldin goes on to talk about Portugal unraveling pretty fast. He is right to do so – it is. The EZ has stated that Greece was unique. Oh yeah. A restructuring of Portuguese debt is inevitable and surely the EZ, having gone through the Greece experience, will understand that they have to act immediately. However, with Portuguese debt trading at the levels they are, a restructuring is possible. In theory, the EZ could buy Portuguese bonds at a modest premium to current prices and write of around 50% of overall Portuguese debt, if they want to avoid the PSI route, though PSI remains the most likely option, now that the EZ has got around their phobia of triggering CDS’s – what was all that about, you may well ask !!!. Basically, Portugal can be saved and, as I keep banging on, will be rescued. Recent data, shows improvement, though GDP continues to decline as it pursues its austerity measures, without any compensating growth schemes. Once again, austerity, without growth, will just make the situation worse. The Germans continue to plug austerity, but they certainly did not do that when they took over East Germany, for example. They poured in money by the truckload. However, they were Germans and if you ask West Germans now whether they would repeat the exercise, given what they know, I suspect a number would be reluctant. There lies the problem for the periphery of the EZ;
The 2 LTRO’s have been a success in that it has avoided a severe liquidity problem within the banks. However, a number of European banks are insolvent. What’s worse is that a number of European banks are playing the carry trade with the LTRO funds – they are buying their country’s Sovereign bonds. I had thought that only the small, non public and “basket case” banks would do this, given the obvious problems of potential haircuts down the road, but it appears that even larger banks are playing this game. Mama Mia. These guys call themselves bankers. Wow, they are clearly congenitally insane;
Mr Asmussen better push through his bank resolution fund as quickly as possible. It sure it’s going to be needed. Stealth money printing by the ECB will go on and on and……., it’s basically the TINA principle – There Is No Alternative.
And the Euro remains at current levels. Hmmmmm.
As spring comes, so do strikes and social problems in the EZ. Unfortunately, I cant see that decreasing anytime soon, given the current circumstances.
A number of you disagree with my view that the ECB will cut rates further. Well, I continue to believe a rate cut(s) is/are likely, indeed inevitable. Yes inflation remains a problem and is declining only slowly – would have been faster if it were not for the higher oil prices. However, what choice does the ECB have – they are facing serious and ever increasing problems. My best guess is for a cut in May/June, indeed possibly as early as May. Remember you have a far more market savvy Draghi in charge, rather than that (…..) Trichet. Yes, there may well be German opposition, though their traditional allies Luxembourg, Holland, Austria and Finland are increasingly deserting the (incomprehensible) hard line German position. In addition, the German’s can and will be outvoted at the ECB. You will recall that at the ECB’s recent press conference, Draghi (in not very diplomatic terminology) was particularly critical of Mr Weidmann or Mr “Weirdmann” as I call him. Not before time;
I had thought that there would be some calm before the IMF spring meeting in mid April, at which time the EZ should get more more for their bail out funds. However, the market is looking pretty dodgy. Having ignored the very obvious problems in Spain for so long (really amazed me), all that people are talking about is Spain.
Hold on to your hats.
I remain bearish, though can see the market pop on the IMF contributing to the EZ bail out fund. Dumped a lot of my long positions on Friday – should not have been in them in the 1st place – silly me.
Just to finish off, I believe the chances of a sterilised QE3 programme by the FED has risen to 65/35, from my previous estimate of 55/45. However, I read an excellent research piece by Bianco Research the other day, which shows that the positive effects of QE on markets is decreasing, as every new programme is introduced. Oops.
Very short note today – off to visit my God daughter, together with her parents and siblings. Going to be an excellent afternoon.
Have a great weekend.