As we predicted yesterday, the troika approved the next Greek aid payment after engaging in the usual theatrics in order to satisfy German voters that Merkel is tough on Greece. After the election, Greece will receive its 4th Bailout with its Eurozone partners forgiving a large chunk of the debt they hold. Unfortunately for poor Greece, this may not even be enough to make its debt sustainable. Optimistic and unrealistic forecasts on future growth and privatization virtually ensure that the program is a failure.
Long term economic forecasts are no better than random guesses, but this does not stop anyone (including me) from making them. Our chart shows the IMF eternally predicting an end to the Eurozone’s recession. Note that each forecast is predicated on a take off occurring shortly after the release date, which has yet to materialize. Note also that there is not indicator pointing to an end of this recession. Unemployment is rising, while PMIs continue to remain firmly ensconced in contractionary territory.
The IMF has been revising its World GDP forecasts for quite some time now. The red arrow should remind you of the direction of IMF forecasts, and I am very worried about future growth prospects. The current forecast is probably as unrealistically optimistic as the last five, which implies sub-3% growth in the world’s GDP. The true extent of the Chinese slowdown makes this likely by the end of 2013.
Joining the euro will not sap Latvia’s growth in the short-term. It’s currency is already pegged to the euro, and it has been growing nicely since it emerged from depression three years ago. It took seven years for the unintended consequences of the poorly designed currency union to rear their ugly head in the periphery. Prior to that, those countries experienced a boom. I think that Latvia will enjoy a honeymoon with the euro for a time before the consequences of surrendering monetary and financial sovereignty reveal themselves.
The yen has not been this weak since early June, but I believe that the currency’s fall is done for now. U.S. rates do not offer enough upside to pry the JGBs out of Japanese investors’ hands. While nominal U.S. yields are higher, the real yields are lower.
To wit, the U.S. 10 yr is trading at 2.6%, and when we subtract the 1.7% inflation rate, we find that the real rate of return is 0.8%. On the other hand, the JGB trades at 0.88% subtracting the -0.5% inflation rate gives you close to a 1.4% real rate of return. The yen should remain range-bound for now.
This is what is happening in Spain. Banks fraudulently converted savers into preferred equity holders in order to stave off insolvency. Our chart illustrates the period preceding the scheme, and you can see that fall of the Spanish banking system and the recruitment of all of those retail savers was more than a coincidence.
There is really no way of making these people whole without hitting up the strapped, Spanish taxpayer, so look for more protests leading going nowhere in the future.
By the way, this same thing could happen in the U.S. TBTF banks are not allowed to market their own securities to customers unless they are investment grade, in which case they may steer client towards their debt and preferred stock.
The mainstream media must make every piece of economic data conform to its recovery narrative. While it is not bad news that credit card delinquencies are shrinking, the main reason the rate is at record lows is because of the record number of defaults in 2010 in the chart above. The weak accounts have been written off leaving the strong. The good news is actually the effects of selection bias.