Portugal will be the next Greece, predicts Mohamed El-Erian (The Guardian)
El-Erian, who is also co-chief investment officer of Pimco, said he expected Portugal’s first bailout package to be insufficient, prompting it to ask the EU and IMF for more money.
“Then there will be a big debate about how to split the burden between the EU, creditors, the IMF and the European Central Bank. And then financial markets will become nervous because they are worried about private sector participation,” he said.
Lets look at the unemployment rate in Greece and Portugal (thanks to Google, it is much easier). As a note, I am trusting Google data feed for now, but I plan to take a look into where the data is coming from for future analysis.
The unemployment numbers are minimized by Governments, and growth is usually exaggerated. Given the current polticial situation in the Euro Zone (aka Shit), it seems that Mohammad El Erian is correct in making that call for Portugal following Greece’s path. The next question is, what other countries will follow Portgual?
I found another fun “Debt” clock – thanks to The Economist. Check it out here. (The funny thing is that Greece has 141% debt to GDP ratio, Portugal: 94.6%, Spain: 78.4%, Italy: 121.6%, France: 92.5%, Germany 77.8%). As the debt increases for one country, then it has to be an asset (loan out by) another country, which will be Germany in most of the cases. Is the last card Germany?
Greeks are not the first ones to protest about austerity measures – however it is the first “first world” country to go through it in the last decade.
If anyone is paying attention to the news in Athens, there is growing social unrest and we are just at the tip of the iceberg. If the Greeks have to do one more bailout in the near future (which is more likely than not – as the Greeks will need more money just to pay its interest payments and tax revenues are down, since the economy has stalled), then we will see growing nationalistic movements in the Greeks. As mentioned in earlier posts, other European countries will also face bailouts. However we will see when/how they react (Italy, Spain, France and Germany will follow – with Germany being the last country to fold its hand).
Greece’s parliament approved a deeply unpopular austerity bill Monday to secure a second EU/IMF bailout and avoid national bankruptcy, as buildings burned across central Athens and violence spread around the country.
Cinemas, cafes, shops and banks were set ablaze in central Athens and black-masked protesters fought riot police outside parliament before lawmakers voted on the package that demands deep pay, pension and job cuts – the price of a 130 billion euro bailout needed to keep the country afloat.
State television reported the violence spread to the tourist islands of Corfu and Crete, the northern city of Thessaloniki and towns in central Greece. Police said 150 shops were looted in the capital and 34 buildings set ablaze.
I think that there should be certain goals for the occupationists, such as:
1. Separation of banks and everything else (such as trading, hedging, derivatives trading, speculations)
Just like the Church and the state – it is difficult to separate the greedy from money.
2. Effective regulation of the banking sector (a corollary from #1)
3. Legislation to enforce speculations to such a degree that risk the capital of the shareholders without their consent. The shareholders must agree in writing that they are comfortable with losing all their money due to the “investments” the firms may be making on their capital. This is comparable to putting images of people inflicted with throat cancer on cig packages.
And what necessary steps should they be taking next? Lets think about this for now. The occupationists, may have arisen from a crowd that is concious and understands the brewing troubling situation of what we see in the U.S. However, the only way to make legislators feel the wrath is to …. put someone incharge. A leader. A visionary – from amongst them. Only when the Republicans and the Democrats realize that their seats are at steak, only then, they will realize that it may be time for change.
My only concern is that if this protest fails, then we will see less effective protests and gatherings in the future. Don’t make it look like a joke, and don’t let Kanye West or any other celebrity to steal the spotlight from the actual cause.
Nouriel Roubini, co-founder and chairman of Roubini Global Economics LLC: distressed banks, weaker currency, monetary and quantitative easing, however with broken credit channels, asset inflation, we expect to see 60% chance of recession.
From Yahoo!’s Daily Ticker Aaron Task interview Jeremy Siegal (Professor at Wharton School of Business), he is expecting a 25% chance of recession. See here
In a recap, the Federal Reserve Chairman Ben Bernanke said that the economy has not deterioated “enough” to need immediate additional stimulus. (Italics by the author). However he believes that if necessary, there could be more stimulus.
The inaction by the Feds is the invisible stimulus all the financial industry has been hoping for. The invisible stimulus is the lack of the increase in interest rates. With the decreased interest rates there is increased appetite for higher-risk assets, and possibly more return. However this is fueling another bubble by itself. Equities have been mispriced for the last two years, fueled mostly by speculation, and not the underlying business. Companies see great volatility in their stock price for an event that may have no connection to the stock. The low interest rates are a terrible incentive since it invites more “investors” ( I use this word loosely, since traders are not really investors) to enter the market and gamble away their money in the hopes of making a quick buck.
However if there is another “major” correction, which is quite possible within the next year (possibly 20% correction), then we will be seeing another round(s) of stimulus. The correction is derived based on the hypothesis that the stock market has reached pre-2007 crisis level, however the earnings have been consistent or decreasing over the last three years. There is disconnect between the underlying stock and the business. Another assumption is that there is yet another housing bubble that is yet to take place due to high unemployment for the people in the middle trench for CDO’s, the guys who could previously afford the mortgages when they signed their contracts. The 2007 crisis was due to default on mortgages who could not afford their mortgages at all! Their sole reason for getting a property was to sell it back within six months, pocketing the difference, or they were suckered into the mortgage due to the temporary low rates. This next housing bubble is going to hit the whitecollar households where one of the person(s) in the household is unemployed and can barely afford the mortgages.
Once companies see their earnings decreasing (due to consistent high unemployment), they will be forced to layoff more people to save their stock prices, thus starting the vicious cycle where the economy is going to shed more jobs than it will create. (Do you remember the 18K jobs created in June vs expectation of 132K?)