Around the Globe 06.26.2013

ECB Monetary Policy to Stay Loose –

Eurozone Loans to the Private Sector

Loose ECB monetary policy is not fueling the growth of loans to the private sector.  While the ECB is quick to blame “transmission problems,” there are two reasons for the rapid decline in bank lending.  First, the banks are not healthy and continue to hoard capital.  Second, the deep recession has reduced the number of profitable lending opportunities.  Keep in mind that the banks are still lending, just not to businesses.  The percentage of sovereign debt in their portfolios has increased dramatically since the recession began.

There is not much that the ECB can do about all this, so Draghi continues to jawbone.  Will his pledge celebrate its first birthday intact in one month?

Economy in U.S. Grew Less Than Projected in First Quarter – Bloomberg.

U.S. first-quarter growth cut to 1.8 percent | Reuters.

US First-Quarter GDP Gets a Haircut, Rises 1.8%.

Americans’ View of Economy Hits Post-Recession High: Survey.

US GDP Performance 06.2014

Economic growth is stagnating, because wages have not grown much since the end of the Great Recession.  Consumer spending accounts for over two-thirds of GDP in the U.S., and consumers are tapped out.  Adding to the bad news, Americans views on the economy have hit a post-recession high.  This is actually a contrarian indicator.  The dumb money is always the last to know.

Gold Prices Sink to Lowest Level Since August 2010.

Gold 06.26.2013

The gold rout continues.  Slowing world economic growth, taper talk and the lack inflation are the major culprits.  Gold will remain a poor investment for the immediate future, but it is still valuable as a disaster hedge.

Housing Market Shrugging Off Rise in Mortgage Rates.

Mortgage Applications Collapse To Lowest In 19 Months | Zero Hedge.

House Affordability 06.26.2013

From ZeroHedge


The headline is very misleading.  Housing prices rose in April, but mortgage rate and application information is from June.  A more appropriate headline would read, “Rising Mortgage Rates Have Yet to Affect Housing Market.” But, they will.  Note our chat above.  Houses are quickly becoming unaffordable at today’s increasing rates.

Now let’s bring a little reality to our “housing experts” who said:

On Tuesday, many housing experts shrugged off that concern, noting that the effect of a single factor like mortgage rates would be tempered by other forces like prices, wages and changes in employment.

As to those other tempering forces, prices are rising while wages and employment remain stagnant.  This means that housing is heading for a fall, which the lumber market has been telling us for a couple of months now.  What we have here is good, old-fashioned cognitive dissonance.  When facts disagree with the  mainstream media’s housing narrative, the facts are changed to support the narrative.

Financial Stress Index Hits Scary Level.

Financial Stress Index 06.25.2013

While the index has risen, it has yet to hit “scary” levels.  Note the red line in the chart above.  Currently the index is well below 0, which is neutral.  A rise to one would be concerning, and a breakout above would signal a meltdown.

While the index level itself is not a alarming, what is scary is the rate of change.  Note the red circle in the chart below:

Financial Stress Index YTD

Junk Bonds Suddenly Don’t Look So Good Anymore.

HYG 06.26.2013

From Google Finance

The junk bond market is seizing.  While the price decrease from the highs is less than 5% including the recent dead cat bounce, rumor has it that certain issues have stopped trading.  If the holders of these issues had to sell, prices would fall much more.  Free money may have stopped fueling price increases in this market, but it is still holding prices up.

EU’s Eroding Support Imperils Crisis Response –

Euro Flag Map

Here’s a little more cognitive dissonance for your day.  Europeans are displeased with the EU and believe that it has weakened their national economies, but they still overwhelmingly support the euro.  This is exactly the opposite of what it should be.  The single market has most definitely fostered growth within the EU, but the euro has become a hindrance.  The single currency is great for Germany, but a poor deal for practically everyone else as we see in this handy chart:

Euro Fair Value Germany

UPDATE 2-Italy denies risk to public finances from debt derivative deals.

UPDATE 2-Italy denies risk to public finances from debt derivative deals | Reuters.

Italy 10yr Bond 06.26.2013

From the Wall Street Journal

Markets are shaking off the latest scandal being reported from Italy, but they shouldn’t.  This is exactly how the Greek debt crisis began.  After derivative contracts were considered, Greek debt was actually much higher than had been reported.  Three bailouts later, we are now preparing for a fourth.

If the Italians are admitting to the contracts revealed by the media, then there are probably more that remain in hiding, but there is no reason to worry about bailing Italy out.  It is much too large for that and will just collapse.

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