Week in Review Part I: Europe, Washington and Wall Street

So last week I wrote that the euro debt crisis would reemerge in “4 to 8 weeks,” adding “what is most apparent is that Spain is about to become the next crisis. Maybe not tomorrow. Maybe not April 5. But it’s coming.”

Actually, we learned this week it could indeed be around April 5, maybe April 3 when the Spanish parliament debates a new austerity program put forward by the government that is designed to slash the budget deficit from 8.5% of GDP to a mandated 5.3% by yearend, with government spending reduced a whopping 16.9%, corporate taxes raised, and public sector pay frozen. But with 23% unemployment, the plan hardly does anything immediate on the growth front. Contained in the budget proposal are sweeping labor reforms that will make it easier to hire, and fire, which didn’t go down well with the unions so there were massive protests across the nation on Thursday that not only shut down much of the country (Iberia canceled 65% of its flights, for example), but also turned a bit ugly, Spain normally not known for violent protests. Prime Minister Rajoy has been in office just three months but it must seem like an eternity and it only gets tougher from here.

So the euro-17 needs a bigger firewall and we’ve only been talking about this for two years now. On Friday, eurozone finance ministers raised the firewall to not only deal with Greece, Ireland and Portugal, the three already receiving bailouts, but also to keep speculators from going after Italy and Spain.

So the bailout funding has been increased to 700 billion euro, 500 from the European Stability Mechanism (ESM) and 200 billion as a temporary fund, such funds currently reserved for Greece, Ireland and Portugal, which will come out of the ESM but at the same time the ESM will have a full 500 billion capacity.

In addition, ministers allowed the 240 billion euro in unused funds in the current European Financial Stability Facility (EFSF), which was part of the original 440 billion pool. The 240 can be used until the ESM is up and running, with ESM not fully capitalized until early 2014.

So you’ll hear talk of a nearly one trillion euro pool to provide for bailouts and beat back speculators but it really isn’t that size. Just more of the same Ponzi scheme if you ask me, plus I’m guessing in a few months we’ll be talking about just how the ESM is actually being funded, as in some nations will begin to renege on their commitments.

An analysis provided the finance ministers noted:

“Contagion may…reemerge at very short notice, as demonstrated only a few days ago, and re-launch the potentially perverse triangle between sovereign, bank funding risk and growth,” as reported by the Financial Times.

And just remember, the financing needs of Italy and Spain alone are about 1.2 trillion euro over the next two years.

Meanwhile, Italian Prime Minister Mario Monti, the toast of Europe these days, still has a huge issue on his hands; getting the Italian parliament to approve the kinds of sweeping labor laws that Spain’s Rajoy is attempting to get through; replacing the old with the young to gain increased productivity.

And elsewhere in the EU, Germany reported a second straight monthly decline in retail sales for February.

Motorists in the U.K. are in panic buying mode as a strike by fuel tank drivers looms in about a week.

Ireland set the date for a referendum on the recently signed European fiscal compact for May 31. If Irish voters turn it down, all hell breaks loose.

And all hell might break loose when Greece holds new elections, sometime in the next 4-5 weeks, with half the electorate apparently prepared to vote for radical parties, leaving whoever wins struggling to find viable coalition partners.

Lastly, I’ve written gobs about the European Central Bank’s two long-term refinancing operations, LTROs, that provided 1 trillion euro in cheap three-year loans to the financial system. More and more are calling it a Ponzi scheme, finally, and should rates rise, as they’ve done in Spain in particular the past two weeks, a very dangerous one. “Weak banks are buying weak sovereigns,” as some have put it. It’s that simple. It’s bound to fail unless…all together, boys and girls…Europe grows!!!!

Washington

The economic data on the week was mixed, at least vs. expectations. The final figure on fourth-quarter GDP was unchanged at 3.0%, which is certainly not the figure we’ll see reported for Q1, with consensus being around 2.0%. February durable goods orders came in up 2.2%, less than expected, while personal income for the month grew only 0.2%, on the light side and equal to January’s weak rise, but consumer spending for February rose 0.8%, so, we were dipping into savings again as the savings rate dropped to 3.7% of after-tax income, the lowest level since Aug. 2009.

On the housing front, the S&P/Case-Shiller data for January showed prices declined 3.8% from year ago levels and are now down 34.4% from the 2006 peak as prices dropped in 16 of 19 major metropolitan areas (Miami, Phoenix and Washington, D.C., bucking the trend…Atlanta, Chicago and Las Vegas among those hitting their lowest levels since 2000). Yes, we’re bottoming, it’s just when is the true recovery in prices? Not any time soon…at least nothing that is sustainable.

Federal Reserve Chairman Ben Bernanke, addressing the issue of unemployment, told an audience of economists:

“(Further) improvements in the unemployment rate will probably require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies.”

Translation: We went from 9.1% to 8.3% over six months. Don’t expect a similar rate of decline anytime soon.

But stocks rallied on Bernanke’s not so rosy forecast because the chairman also seemed to make clear the Fed is determined to provide further liquidity if necessary to help improve the labor picture, which the stock market likes and the quarter finished on a high note, making it the best first three months for equities since 1998, at least in terms of the S&P 500, up 12%. The Dow Jones advanced 8% and Nasdaq had its best first quarter since 1991, up 19%.

On the energy front, the average price at the pump hit $3.91, according to the EIA (check out my “Wall Street History” link for a look at past prices), as the United States, the U.K., France and Japan explored the idea of releasing a large amount of supply onto the market, which helped curb oil prices a little this week. Of course Presidents Obama and Sarkozy are also up for reelection; not that this would have anything to do with their decision to make such a move. According to a Reuters/Ipsos poll, 2/3s of Americans disapprove of the way Obama is handling high gasoline prices, including a majority of Democratic voters, which could spell trouble.

But to beat a dead horse, oil prices are not coming down in any substantial way with Iran still hanging over the world, and according to the International Energy Agency, $100+ oil ($125 on Brent) could tip the world back into recession if it continues. European households, for example, are spending 11% of their income on all things energy-related vs. a normal 6% to 7%. That makes a heckuva difference for an already recessionary environment across the pond.

As for the refinery issue, just remember when you hear of problems and can’t quite understand why, East Coast refineries are largely getting supplies from overseas, or Brent crude, the $125 variety, whereas Texas refineries are supplied for the most part from Cushing, Oklahoma, and the cheaper West Texas Intermediate that I’ve quoted forever down below. So it’s the East Coast ones that are getting killed on their margins with declining U.S. demand.

On the ObamaCare front, after an historic six hours of oral arguments, many believe it will once again come down to Justice Anthony Kennedy as the swing vote, though I’m betting Chief Justice John Roberts could surprise going the other way.

As to what happens to the rest of the Affordable Care Act if the individual mandate is struck down, or “severability,” there seems to be a consensus the whole law would be taken out, seeing as the mandate is “the very heart of this act,” as attorney Paul Clement argued for the 26 states challenging the ACA.

Justice Antonin Scalia argued that severing the mandate from the rest of the law “would require the Justices to comb through ObamaCare’s 2,700 pages and pick out the parts that are connected to the mandate and those that aren’t – essentially asking them to play omniscient time travelers, if not legislators. Striking it down altogether would paradoxically be a gift of judicial modesty by avoiding the legal invention of a new law. A clean slate gives Congress the most options.” [Wall Street Journal]

So now we sit and wait. Actually, as Robert Barnes writes in the Washington Post, the Justices probably met on Friday morning to cast their votes, only they and their clerks are sworn to secrecy. The rest of us won’t know until late June, if precedent is followed. And boy will that be fun.

Finally, three months into 2012 and my predictions are all shot to hell.

Or are they? I wrote on 12/31/11, “I see the three major U.S. stock indices falling 10%, and it is going to be one wild year…Stocks could be up big like 15% to 20%, and then crash.” Seeing as how history has shown after a strong first quarter like we’ve just had, stocks invariably finish up for the year, this already looks like a big miss.

But three months ago, I pointed out a comment of mine from 3/5/11 that when it came to our deficits, “We will meet our Waterloo at some point in 2012.” I still believe that; that it won’t be 2013 as everyone else says it will. Last year, I said of 2012 that we would witness “a 30% decline in a short period of time that will be fueled by our Greece- or Italian-like moment….something will trigger a severe change in sentiment, which in turn may finally force our policymakers to act. No, the president won’t be able to just employ a four corners stall game until November. The markets won’t let him.” [WIR 12/31/11]

In my predictions for 2012, I spelled out how “Obama can lose the election on (the single issue of Iran), if, say, after Labor Day, Iran were to explode even a crude nuclear device.” Which led me to believe Obama would act no later than May. Of course I’ve talked about this every week going back to last fall. We’ll see.

I still believe Pakistan will witness a coup in 2012; Russia may yet see waves of terrorism; Putin will not last the year; Europe will be convulsed in riots over austerity programs; and there will be problems with the Summer Olympics.
I wrote on 12/31/11 that with regards to North Korea and new leader Kim Jong Un, “I’m holding off. No one knows, or can really hazard a guess.”

I also said that in 2012 “the eurozone crisis will continue unabated.”

One thing I’m likely to get very wrong was I really thought Marine Le Pen in France would upset Nicolas Sarkozy and gain the run-off in April’s election. That will not be the case.

So it’s already been a fascinating first three months, but you ain’t seen nothin’ yet.