Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

1. “Greece” Needs Another Oil Change: The LRTOs stabilized most of Europe – except those pesky Greeks, who just can’t seem to get their act together. Once again, the ECB is dangling another bailout package (€130 billion loan facility) in front the Greek parliament in exchange for deeper austerity measures totaling €3 billion/year. The proposed cuts will come from government pension benefits, reducing the minimum wage by 22%, and ending permanent state-owned jobs and 150,000 public sector jobs by 2015.

Of course, we still believe all of this to be noise. It avoids the real structural issues Greece faces internally as well as the country’s adherence to the euro. The euro is simply too high in value for Greece to retain the jobs necessary to pay back its loans and/or provide the basic necessities of life for its now 20.9% unemployed (up 7% YoY). Since the beginning of 2010, Greece’s trade deficit has narrowed by about €1.5 billion – a step in the right direction, indeed, but at a pace that will take decades to pay off €100 billion in bad debts.

The lessons to take away from the Greek crisis are many, but the key issues are these:

The Good:

  • Private sector replacement of public (government) sector jobs is a net positive.

The Bad:

  • Restructuring debt only postpones default, and may make matters worse – as will likely be the case here.
  • Because of Germany, the euro is too high for Greece to produce the exports it needs to restore balance.
  • LRTOs (money printing) cause inflation in troubled nations such as Greece, accelerating and/or spreading the crisis instead of reversing it.

The Ugly:

  • Government pensions (retirement benefits) are at risk of being reneged on in high deficit nations. This is obviously not good for the pension owner, but it reduces taxpayer burdens.
  • Austerity is not a stimulus program (though the MSM would have you believe differently). It is a negative adjustment in reaction to a permanent loss in a country’s wealth.

2. Borrowing Pays More Every Day – at least here in the U.S. This week, U.S. banks settled a government lawsuit regarding real estate foreclosures for $26 billion. The settlement requires the banks to reimburse homeowners that have defaulted in the last three years some $5 billion in cash settlements and $20 billion in other aid. The larger issues at hand are, of course, the growing public belief that defaulting bears no consequences, along with a degradation of contract law. The message is now that it pays to walk away from your home. It also puts one more arrow in Obama’s quiver come election time.

Below is a chart of consumer credit. We have been noting ad nauseam that the recent economic “recovery” owed its existence to both mortgage and revolving credit. Consumer credit reached a high of $19.3 billion in December, a level that exceeds pre-crisis levels of 2008.

The expansion in consumer credit underscores the weakness in the U.S. job market and lackluster gains in wages/personal income in 2011. In laymen’s terms, Americans soon won’t be able to handle the debt service. This also supports the theory of a dislocation in the markets sometime this year, QE or no QE.

What’s different this time around, or what may be called into question, is the viability of the U.S. Treasury market. Bloomberg ran an article in which John Chambers of S&P threatened to downgrade U.S. government debt from AA+ if Obama and Co. fail to devise a plan that reduces growing US budget deficits (approaching $2 trillion). So far, Obama’s proposals have called for increases in taxes and reductions only in future growth in spending. Obama is due to release a new plan next week that, during an election year, will more than likely fall short of real solutions.

That said, with U.S. sovereign debt issues now reaching critical levels, we suspect the metals will behave more as they should – as the safe haven of choice. However, markets can do as they please in the short run. A disruption in stocks could cause the metals to retest their lows, temporarily.

Best regards,

David Burgess
VP Investment Management