Around the Globe 07.03.2013

Housing Recovery Rides Mortgage Rate Roller Coaster.

Rise in mortgage rates cut into homebuyer demand last week | Reuters.

Mortgage Applications 07.03.2013

From ZeroHedge

As the chart above plainly illustrates, there is a strong, negative correlation between mortgage applications and rates.  The move upward in mortgage rates from their May lows reduces the buying power of a home buyer 15%.  This dynamic is pushing down housing sales though real estate industry shills claim that housing sales will remain buoyant.  Usually, raising prices for a product reduces demand, but the housing recovery narrative dies hard.

Service sector growth slows to three-year low in June: ISM | Reuters.

Service Industries Unexpectedly Grew at Slower Pace in June – Bloomberg.

ISM US Service PMI 07.03.2013

From ZeroHedge

US Markit PMI 07.01.2013

The charts above show both the services and manufacturing sectors simultaneously slowing down.  Fortunately, they barely hold onto expansionary territory.  Unfortunately, the economic data continues to disappoint, and the recovery remains lackluster four years after the supposed end of the recession.  For the future, expect more of the same.  A little luck could help pick up the pace, but a shock will throw the country back into recession.

Trade Deficit in U.S. Jumped in May as Imports Near Record – Bloomberg.

US Trade Deficit 07.03.2013

From Bloomberg

Exports are falling as China and Europe continue to disappoint while imports spiked.  Yet, these negative trends are spun into good news.  The rise in imports is not a sign that the economy is heating up.  It indicates that Americans spent a larger share of their incomes on energy. Persistent high trades deficits will continue to sap economic growth.  This was the reason that 1Q2013 growth was revised downward almost a quarter from 2.5% to 1.9%.  How soon the mainstream media forgets the articles it published only weeks ago.

WTI Crude Rises Above $100 a Barrel as Inventories Drop – Bloomberg.

WTI quote 07.03.2013

Middle Eastern crises are excellent for oil prices, but they are bad for the economy.  Higher energy prices mean that consumers get less bang for their buck in virtually every sector.  This price spike will sap economic growth in the second quarter as explained in the comments regarding the trade deficit above.

Companies in U.S. Added More Workers Than Forecast in June – Bloomberg.

Jobs data upbeat, but trade and services dim outlook | Reuters.

ADP Jobs Added 07.2013

The economy actually needs to create 500, 000 per month for the next three years or so to raise employment to the level last seen before the onset on the Great Recession.  You would never know this from reading accounts of payroll increases in the mainstream media.  188,000 jobs created is less than half what we need, but it is also a relatively strong number as the chart shows.  The best thing you can say about the employment picture is at least it isn’t getting worse.

Analysis: Portugal, Greece risk reawakening euro zone beast | Reuters.

Portugal’s Coalition Splinters on Austerity Fatigue – Bloomberg.

Portugal Stocks Slide as Political Crisis Worsens.

Portugal Resignation Rocks European Markets – WSJ.com.

Portugal 10yr Bond 07.03.2013

From Bloomberg

Let’s not panic, because there will be plenty of time for that later.  While the markets are roiled at the prospect of Portugal reneging on its bailout, a lot must happen before that becomes a reality.

First, the current government must fall, and there are still coalition negotiations to be had.  Second, a anti-bailout government must be elected, and then that government must follow through.  Keep in mind that the current ruling coalition in Greece made a lot of noise in the election before meekly succumbing to the troika’s demands once firmly in power.  Third, the troika must actually pull the plug on Portugal, and it is doubtful that this risky decision will be taken before German elections.

Of course, it was doubtful that France, Russia and the U.K. would rush to the defense of tiny Serbia after Austria handed the country an ultimatum fully backed by the Kaiser’s blank check.  Be wary of Europe in the summertime.

Retail Sales Rise in Euro Zone – WSJ.com.

Euro zone slump eases just as debt crisis returns to haunt progress | Reuters.

Eurozone Retail Sales YoY 07.03.2013 Eurozone Retail Sales Mom 07.03.2013

Here’s another example of anchoring bias.  Eurozone economic data is so awful that when less awful data is released it is perceived as “good.”  While retail sales rose 1% from April to May, they actually decreased slightly from May of 2012.  Moreover, we have been down this road before.  As the red circles in the charts highlight, European retail sales have occasionally risen or stopped falling so dramatically several times since the beginning of the Eurozone recession.  Despite the positive spin bestowed on this news by the usual suspects, the chart of truth shows  that sales have not risen in consecutive months since the summer of 2011.  And the recession wears on.

 

 

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Around the Globe 05.30.2013

5.2% Drop Takes Tokyo Stocks Into a Correction – WSJ.com.

Japan’s Stocks Correction Raises Stakes for Abe’s Growth Plan – Bloomberg.

Is Japan the canary in the coal mine? – MarketWatch.

Japan Stocks Dive Ahead of Sensitive US Data.

Nikkei 225 05.30.2013

The Bank of Japan embarked upon the latest experiment in money printing in early April.   This scale of money printing has never been attempted in a modern, industrialized economy.  The BoJ will be purchasing $75bn worth of JGBs per month for the foreseeable future.  If the Fed were to pursue its QE program with the same gusto, it would be purchasing close to $200bn per month of treasuries and mortgage bonds, over double the current clip of $85bn per month.

Unlike the Fed, the BoJ confines its open market activities to only a few days per month resulting in increased volatility in Japanese markets on the off days.  If this plan has any chance of being successful, the BoJ will have to smooth out its purchase schedule.  A constant flow will create a consistently rising market, and then the Japanese can even have their own version of Turbo Tuesdays.

Morning MoneyBeat: A Bond Selloff, But Not the Big One – MoneyBeat – WSJ.

From Bloomberg, US Treasury 10 year

From Bloomberg, US Treasury 10 year

Treasury yields have plummeted since the beginning of May when a raft of strong US economic data was released.  Strong economies usually increase the demand for money raising its price, the interest rate.  This dynamic is absent in the new normal.  The economy is not as strong as the buoyant stock market and increasing yields indicate.  Moreover, there is a shadow inventory of cheap money waiting on the sidelines to keep rates in check.  Those bonds will rally again and trade within a range of 1.6 – 2.2% as long as the Fed is running the magic money machine.

U.S. Stocks Rise on Fed Stimulus Hopes After GDP Report – Bloomberg.

DJIA 05.30.2013

This is all you need to know about the wacky paradigm created by massive money printing:

U.S. stocks advanced, following the Dow Jones Industrial Average’s biggest drop in four weeks, as weaker-than-expected data on economic growth and jobless claims boosted speculation the Federal Reserve will maintain stimulus.

Weaker data should equate to weaker profits driving the market down, but the exact opposite is happening.  Or maybe this is just a random price move, and it doesn’t mean anything.

Euro-Area Economic Confidence Climbs Amid Recession – Bloomberg.

Euro-Zone Sentiment Picks Up – WSJ.com.

EC Economic SentiMent Indicator 05.2013

Compare and contrast.  The first quote is from Bloomberg

Economic confidence in the euro area increased in May, adding to signs the region is beginning to emerge from the longest recession in the single-currency era.

and the second from the WSJ regarding the same exact data:

Businesses and consumers in the 17 nations that share the euro were less pessimistic about their prospects in May, the first improvement in sentiment since February, although one that is unlikely to herald a substantial pickup in economic growth in coming months.

Now, examine the chart illustrating the survey over time.  A rating of 100 indicates the confidence of an expanding economy.  Despite the happy talk from BBG, the confidence number overwhelmingly indicates a further contraction in the coming months despite the small improvement in May as illustrated by the chart above.

Bloomberg editor, here’s free rewrite of the first line of your article.  It’s what we call “accurate” here in the real world:

Economic confidence in the euro area increased in May, but the survey indicates a continuing recession for the Eurozone.  The rise in confidence was the first since February, but Europeans remain pessimistic about future economic prospects.

Exclusive: Europe plans major scaling back of financial trading tax | Reuters.

This was a bad idea, the chief product of the Eurozone.  Fortunately, cooler heads have prevailed, and the tax will be scaled down and its implementation delayed.  As to why it is a bad idea, click this link:

Good News for London and New York | DARECONOMICS.

Credit returns to Portugal economy, more to be done-bankers | Reuters.

Portugal Loans to Private Sector

“I am sure that we are entering a phase of greater supply of credit to Portuguese companies and even adjustments to its price,” Nuno Amado, chief executive officer of the country’s largest listed bank, Millennium BCP (BCP.LS), told a conference hosted by Reuters and TSF radio.

The headline is based on a quote by someone who is paid to say optimistic things about his business.  There is no evidence that credit is rising in the Portuguese economy. As usual, the chart dispels happy talk.  The best case scenario in play is that Portugal has hit the bottom.  While I do not agree with that analysis of the data, it is at least plausible.  Claiming that the supply of credit is increasing is not.

Around the Globe 05.08.2013

Fed’s credibility tested as inflation drifts below target | Reuters.

US CPI 05.01.2013

The Fed wishes to continue its money printing experiment to maintain the asset price bubbles that the world central banks have inflated since the onset of the GFC.  The problem that they are experiencing in implementing this policy is the decreasing marginal returns of each new round.  $85bn a month may no longer be enough, so  the organization leaks stories about the labor market and low inflation to justify moar.

Not only will the current program be continued, but I bet that the amount will be raised to $100bn per month.

BofA Traders Have Perfect Quarter as Morgan Stanley Lags – Bloomberg.

Fed QE versus SP500

Res ipsa loquitor.  The thing speaks for itself.   Lest one have any doubts that the market is rigged, note this piece.  A firm should not have quarter long winning streaks in efficient markets.  The TBTF firms are the beneficiaries of the Fed’s $3tr+ in purchases since 2009.  They sell bonds to the Fed and buy stock realizing profits and inflating the value of their inventories.

When this madness ends, it will not be the Fed that lost billions of dollars but the taxpayer.  Will the banks give the profits back to help recapitalize the Fed when the time comes?

Poland Cuts Interest Rates to Record Amid Lack of Recovery – Bloomberg.

Polish Benchmark Interest Rate

A few days ago, the Polish government began selling euro membership to its wary citizens.  If the government gets it way, Poland will surrender its independence and monetary policy for nothing, and the country will no longer be able to cut interest rates to offset an economic slowdown.

China Trade Surplus Draws Doubts – WSJ.com.

China opens new front in war as yuan speculation distorts export data | Reuters.

China Export Gains Spur Renewed Skepticism of Figures – Bloomberg.

Chinese Export Growth

How do exports continue rising dramatically when China’s key trading partners reported small or flat increases in Chinese imports? Exporters are adding to invoices, particularly in Hong Kong, so that they have more clean capital that they can use to speculate in Chinese markets.

These massaged export numbers are significant.  Chinese GDP is probably not growing at the official rate of 7.7%, and this slower growth will continue to sap world demand particularly in the commodities space.

Asian Governments Take Measures to Battle Strong Currencies – WSJ.com.

JPM Asia Dollar Index

When the major central banks print money, the effect ripples throughout the world.  The initial rounds in 2009 led to food price inflation that in part caused the Arab Spring.  Currently, cheap central bank money is finding its way to every corner of the globe in its quest for yield.  This dynamic raises the demand for emerging market currencies, which appreciate slowing economic growth.  In response, EM central banks are forced to cut interest rates and sell their own currency in the markets to hold down exchange rates.  And the bubble continues to inflate.

Call to End Troika in Europe Crises – WSJ.com.

Unsustainable Bailouts

Now we all know that everyone has two reasons for adopting a course of action: the reason that they say and the real reason.  You can read all about the reasons for ejecting the IMF from the European bailout regime that the Eurocrats say in this article.

The real reason is that the IMF has begun insisting that debt restructurings are sustainable after remaining silent throughout the Portuguese, Irish and first Greek bailouts.  While the IMF supported sustainability in the third Greek bailout and the first Cyprus one, it quickly caved.

Nevertheless, the IMF seems less willing to pretend that 170% debt to GDP ratios are okay, and the rich countries refuse to any form of debt forgiveness.  If you think this policy will change after German elections, then ask yourself why the IMF is being retired.

EU Commission or ESM could wind down ailing banks: report | Reuters.

Italy, Spain NPLs as of 03.2013

This article reports more talk from the eurocrats.  In order for there to be a banking union, the rich countries must decide to become joint and severally liable for the banking systems of countries like Spain and Italy.  When the rich countries put up about €1trn to start a resolution and deposit guarantee system, then you have a banking union.  Until then, you just have talk.

McDonald’s Sales Slip 0.6% on China, Europe Weakness – WSJ.com.

McDonald’s Sales Slip 0.6% in April.

McD 05.08.2013

McDonald’s sales worldwide sales performance confirms slackening international demand led by Europe and anemic growth in the U.S.  A barely positive 0.7% rise in American sales was more than offset by a 2.4% drop in Europe, McD’s second largest market, and smaller decreases in Asia and Africa.  This has been the McD story for the last year or so, but that has not stopped the stock price from appreciating over 20% since November.  I wonder what could cause a stock with falling revenues and profits to rise so much.

Portugal Marks Return to Bond Market – WSJ.com.

Portugal 10yr Bond 05.08.2013

Portugal managed to sell bonds today in what the mainstream media has decided is an important step for the country to regain independence. Unfortunately, there is no regaining independence in the Eurozone.  A country with a tremendous debt pile and no growth is only able to sell bonds because the ECB has made vague promises about supporting the price and cheap money allows TBTF European banks to speculate in this debt free of charge.

 

 

Around the Globe 05.07.2013

What’s Beyond the S&P 500’s Relentless Rally.

Fed QE versus SP500

From ZeroHedge

The chart above shows the effect of the Fed’s successful attempts to stoke asset price inflation in the stock market.  The answer to the question and headline “What’s Behind (sic) the S&P 500’s relentless rally” is Fed’s money printing as is made painfully obvious in the chart above.

Here’s What Is Really Behind Home Price Gains.

Special Report: Subprime bond bounces back, leaving behind a subprime borrower | Reuters.

Housing Prices 2008 to 2013

When I read the headline to the article, I thought that finally the mainstream media would admit that there is no housing recovery, just a lot of cheap Fed money.  No such luck.

The Fed’s purchases of mortgage bonds have increased their prices regardless of the fact that many of the borrowers are still in shaky condition.  While TBTF banks are earning huge windfall profits on their bond holdings, the people who borrowed the money remain busted and without help from their supposedly liberal administration.  The banks were bailed out, and the people have been left behind.

The CNBC article points to increased demand and lower supply for the recent housing price rises.  TBTF banks have gotten their hands on cheap Fed money and are investing it wherever they can.  This has raised the demand for housing.  Supply remains constrained due to a clogged foreclosure pipeline and underwater home owners.  These are hardly the hallmarks of a healthy market.

Insight: Italy came to brink before being saved by King George | Reuters.

Giorgio NapolitanoThis is a very interesting article about the behind-the-scenes machinations that led to the formation of a new Italian government after a two month stalemate.  The most important fact that may be gleaned from this piece is that Italy has had 64 governments in the 68 years since the end of WWII.  That’s a new government once every year and three weeks.  A crazy political situation is normal for Italy, so if you want to get rich trading Italian bonds it will be a white-knuckle ride.  Let’s pray that the Italians can straighten this situation out.  The president is 88 and will be 94 if he must serve the entire term.  Clio and the grandkids may be waiting longer than they think on the enchanting Isle of Capri.

Letta says Italy can boost growth without increasing debt | Reuters.

Italy Annual GDP Growth and Trend

European leaders say a lot of things, but this statement is accurate.  Italy can boost growth without increasing its debt, but that feat will require draconian economic reforms and a return to the lire.  Italy will not willingly accomplish either task, so only a crisis will spur change here.

France urges quick progress on EU banking union | Reuters.

German Finance Minister softens stance on EU bank union | Reuters.

Wolfgang Schaeuble

As astute readers of Dareconomics understand, there will be no banking union until the rich Northern tier countries decide that they will pay for it.  Schaeuble lifting his opposition to a banking union without a new treaty is just empty talk.  The Germans will not commit money to any project while Merkel is busy campaigning.  What they will do is talk and participate in the negotiation process, and even a little birdie knows what to call talk.

 

Greenspan-Era Faith in Fed Seen With Bernanke: Chart of the Day – Bloomberg.

US Bond Volatility 05.07.2013

BoA via BBG

In this jam-packed issue of Around the Globe, we have already discussed the Fed’s money printing and its effect on the housing and stock markets.  Let’s now switch to the US Treasury market, where we see a similar effect.  Large-scale purchases by the Fed have pushed down volatility and increased prices (decreased yields).  We have been in experimental territory for quite some time here.  The time to get nervous would be when yields begin rising despite the Fed’s best efforts to ramp up it purchases.  No one can tell you when that day will come.

Portugal Selling 10-Year Bonds for First Time Since Bailout – Bloomberg.

Portuguese 10YR Bond 05.07.2013

The Fed is not alone in its madness. While the major central banks are all in, the Bank of Japan has ratcheted up the money printing to a degree that is giving everyone pause.  Since the BoJ announced its 2-2-2 plan, peripheral sovereigns have rallied with the Portuguese 10 year yield dropping almost 100 bps.  That, ladies and gentlemen, is the reason that Portugal is able to reenter the bond market.  Remember this whenever the financial press spins this story into the infamous Recovery Meme.

Africa Enthralls Goldman With Record Bond Sales: Credit Markets – Bloomberg.

Here is all you need to know about the African bond sales succinctly stated in a quote from GSAM’s Jim O’Neill:

The only thing one has to be a little bit careful of are many of those markets are still very undeveloped and suddenly there’s a lot of people around the world regarding Africa to be sort of fashionable and trendy.

So, the only thing we have to worry about is that the whole thing is a bubble, and what has caused this bubble? Don’t make me write the answer.

BTW, I wonder how many of those bonds the underwriters will hold for their own account.  This is the second most important question you should ask the salesperson pitching African sovereign bond.  The most important question is RU FKM.

Southern Europeans Flock to Germany – WSJ.com.

Castle_Neuschwanstein

Germany already benefits from its euro membership by selling debt at record low rates and maintaining a huge trade surplus.  Now, it is also the recipient of a brain drain from the periphery.  Young professionals are taking their skills to Germany, where they will be unable to help their countries recover from ongoing recessions and depressions.

If you can’t beat them, join them.

Portuguese Recovery Meme

Surging Portugal Exports Led by Volkswagen Signaling a Recovery – Bloomberg.

This is my first Portuguese recovery meme article, and the writer follows the form to a tee.  Basically, a few anecdotes and economic statistics are presented without context to show that the country is recovering from the Eurocrisis.

The central theme of the piece is that rising exports are leading Portugal to an economic revival.  Examples of export success are given, and the writer evokes the old trade routes plied by Vasco de Gama, which is a nice touch.  A source even claims that Portugal was the first global economy.  This is not true, though it could claim the second spot.  Venice with its network of outposts and established trading routes with the Ottomans and Far East was the first global economic power.  The Portuguese overtook the Venetians by establishing a trading route around the Cape of Good Hope to the Indian Ocean.

Unfortunately, none of this changes the hard, biting reality of economic statistics.  Exports contribute about 40% to Portugal’s GDP.  This means that exports have to grow 1.5 times the decrease in consumer and government spending just to keep the economic in place.  That is asking too much of the new Atlantic Tiger:

Portugal GDP Performance

Not only does GDP continue to decrease amidst the rise in exports, the decline is accelerating.  Additionally, the export boom is unsustainable anyway, because 71% exports go to other Eurozone nations most of which are in recession including Spain, Portugal’s largest trading partner.

When exports level off, the country has little means to revive domestic demand.  Government spending cuts are causing a vicious multiplier effect throughout the economy resulting in falling consumption as evidenced in the chart above.

Moreover, Portuguese labor costs have declined a mere 6% since the start of the crisis but would have to fall another 25% to equal Germany’s productivity.  The decrease so far has caused a recession and record high unemployment, so it is unlikely that Portugal will be able to endure a further adjustment of the necessary magnitude.

For some reason, journalists writing these articles never consider a Eurozone exit, and ironically that is the only way to solve the Euro Crisis.  Remove the euro, remove the crisis.

The choices facing Portugal are grim.  It can either choose to remain in the euro and experience a lost decade or more in economic growth, or it can exit the euro, endure a one or two year depression that will wipe out citizens’ savings but at least resume growth with a devalued escudo.  As the Euro Crisis has shown, countries that remain within the Eurozone do not resume sustained growth, and this is what they ultimately need to put their fiscal houses in order.

 

Portuguese & Irish Cans Kicked

Portugal, Ireland Get More Time to Repay Loans – WSJ.com.

The Eurozone graced Portugal and Ireland with loan extensions in today’s finance minister meeting in Dublin.  The guy on the corner in Brooklyn is more than happy to give you a loan extension, but remember that the interest keeps running for the duration.

The Diesel-boom claims that Ireland is a living example that adjustment programs work.  Do these charts make it appear that the bailouts are working in either of the affected countries?

Portuguese GDP Performance Irish GDP Performance

The adjustment program is working for TBTF banks who were bailed out of their Portuguese and Irish debt holdings.  The taxpayers of those countries have been left holding the bag and will endure years of misery.

The current situation is unsustainable.  As such, it will eventually stop.

Portugal Heading For Trouble

Portuguese Government Survives No-Confidence Vote – WSJ.com.

The Conservative Portuguese government comfortably survived a no-confidence vote brought by the socialists, 131 to 97, in a challenge to Portugal’s austerity program.

The Socialists had promised to renegotiate the country’s bailout if the no-confidence vote had been successful, but it had little chance from the get-go.  The opposition party’s true purpose is to position itself for the future.

To counter the vote, the government had promised the people that all of this austerity will lead to Portugal regaining its financial independence and be able to access bond markets next year.  If it is unable to deliver, the Socialists will be able to call another no-confidence vote with a much firmer basis.

Austerity also is being litigated in the country’s highest court by Portugal’s president.  The basis of the lawsuit is unfairness to pensioners and government workers, which is a weak constitutional case.  Since the euro crisis began, not one constitutional challenge to austerity in any of the crisis countries has prevailed.  It won’t this time either; austerity should be upheld by the court.

All of this political intrigue is not as important as the numbers.  Portuguese economic data is frightening, and the country will probably require more assistance at some point.  Unemployment is at record highs and trending upward:

Portuguese Unemployment Rate

No relief is in sight as GDP continues to fall due to the lack of demand in both Portugal and Spain, its largest trading partner:

Portuguese GDP Contraction

With decreasing GDP and employment, the budget deficit will grow from 2012’s 6.4%.  In light of these numbers, Portugal will more likely encounter a bail-in next year rather than a return to international bond markets.

Portugal Enters Greek Death Spiral

Portugal Actual Vs Forecast

Portugal Seeks Easing in Bailout Terms – WSJ.com.

The eurocrisis tends to divide into two camps.  One side supports tax increases and budget cuts to close deficits, while the other is against this method.  As one often finds during bilateral disagreements, both sides have merit in their arguments while a third choice outside the mainstream structure remains unexplored.

The only way to reduce a deficit is to eliminate the gap between revenue and expenditures; however, during an economic crisis government spending cuts leads to even greater decreases in GDP reducing revenue thus.  This dynamic is known as the multiplier effect, which creates the pernicious debtor’s trap explained by Irving Fisher,  “The more debtors pay, the more they owe.”

Economic forecasters from the IMF and Eurozone fail to take the extreme multiplier effect into account when making predictions.  The attached graph show how badly they miss, and this is also the case in Spain and Greece.  Note that the IMF has revised its forecasts for Portugal downward for 2013 and 2014, but if history is a guide they will miss again.

Austerity is not a way to help these countries but merely serves as political cover for their bailouts so as not to anger voters in Germany and the other creditor countries.  While countries receive aid, they are punished for it.  Portugal, Greece, Ireland and Spain, soon to be joined by Cyprus, are given just enough aid so that they do not default and exit the eurozone, while their economies continue to contract.

Just like Greece and Ireland, Portugal is requesting more time to pay its bailout loans pushing even more of today’s debts to future generations.  The Germans will approve the request in order to maintain the eurozone for a little while longer ensuring Portugal remains in depression.

The Portuguese have only themselves to blame.  By continuing to belong to the euro, they doom their country to years of economic stagnation.

Ireland and Portugal to Join ECB Welfare Program

ireland-government-debt-to-gdp portugal-government-debt-to-gdp

Ireland, Portugal May Be First to Tap ECB Bond Buying Program – WSJ.com.

Ireland and Portugal are set to exit their bailouts and jump straight into the ECB’s OMT program. This is not surprising. With sky-high debt-to-GDP ratios, they are unlikely to have true bond market access for years.

Both countries currently maintain debt ratios of over 100% with large current budget deficits. At the present rate, the debt ratios will continue increasing into the foreseeable future thereby reducing each country’s fundamental creditworthiness.

Both Portuguese and Irish bonds have rallied since July, but one should not read too much into this. The willingness of the ECB to turn on its magic money machine rather than an improvement in economic or fiscal conditions is the reason for the improvement in yields.

The EU is bifurcating into two zones, a welfare zone composed of the periphery that requires support and a rich zone composed of the Northern countries that pay for the welfare. The welfare countries will require ECB support for years. Draghi cannot end the OMT program, because periphery debt yields will go parabolic instantly. As such more and more bonds will be sold under the auspices of the program making it even less likely that it can end.

In the meantime, the FANG better keep their checkbooks handy.

Portugal Will Need Another Bailout

Portugal passes bailout review, risks remain high | Reuters.

Portugal passes its latest troika review in line with the 1st Iron Law of the Eurocrisis— when it gets serious, you have to lie.

According to the troika, Portugal is on a path of deficit reduction and will be able to reenter international debt markets next year. This is a dishonest optimistic analysis of the data.

In order to proclaim that Portugal’s program is on track, the troika made several rosy assumptions. They believe that Portugal’s economy will only shrink by 1% next year and return to growth by 2014 and will able to reduce its budget deficit in the midst of an economic depression.

The country will never attain these goals. Spain, its largest trading partner is imploding. Additionally, the country plans €2bn per year in additional spending cuts; this figure alone will lop off 1% per year off its €186bn GDP, not even accounting for the multiplier effect.

Since the economy will shrink more than forecast, the government budget will not attain its revenue goals and miss the 4.5% budget deficit for 2013. Of course, this does not stop Ollie Rehn from opening his mouth:

Confidence in Portugal’s prospects continues to grow, both among its institutional partners and market participants…This bodes well for Portugal’s full return to market financing.

Allow me to remind you of the 2nd Iron Law of the Eurocrisis— ignore whatever the politicians have to say, and focus on the numbers.

These are the important numbers, Portugal’s Government Debt to GDP:

Portugal Government Debt To GDP

The ratio has been steadily rising for years. While the rate of increase is projected to slow during the next two years, adding two more annual 5% budget deficits means that Portugal will approach a 120% debt to GDP ratio.

Mind you, that is the best case scenario.  A more realistic two 7% budget deficits blows through the 120% barrier. Just like Greece, there is no way this small, relatively poor country will ever be able to pay back this debt.

Sometime within the next two years, Portugal will need to renegotiate this bailout, just like Greece is doing now; just like Greece, Portugal will eventually default on its debt.