Friday, May 6, 2011

Greece Exiting European Union?

Rumors are streaming through the financial world today that Greece is in serious discussions to leave the European Union and the euro currency.

This news would have massive implications for the markets.

If Greece were to be removed they would then have the ability to issue Drachma's (their former currency before joining the European Union).  They would then have their own central bank and the ability to print their own currency, which they currently cannot do as part of the Euro.

The result would be an instant decline in the value of the drachma to fair market value, and a rise in the value of the Euro as it would no longer have the anchor of Greek debt around its neck.  Greece would then either default on their debt or print the currency needed to service the debt.

This would trigger a massive run on Greek banks, which is already taking place at a slow rate.

Nothing has been confirmed, but I wanted to provide to you the answer to what would come next should this take place.  The following chart shows Greek 3 year government bonds in relation to the rest of Europe. (Note that Portugal and Ireland are rapidly rising as well)

April Jobs Report

This morning we received the most important piece of economic data of the month which arrives on the first Friday: The Jobs Report.

There were a total of 244,000 new jobs created, with the unemployment number ticking up to 9%.

As we like to do here, we will take a slightly closer look at what is behind this number.

Last month McDonald's held a national hiring event.  They took in 62,000 new employees in the month of April. (Side note: Over 1 million Americans showed up to apply for the 62,000 positions)

In addition to this major boost to the jobs number we have the magical birth/death model.  The government makes up a number every month on the assumption that a certain number of new businesses are being created and hiring employees.  Their magical addition to this months report: 175,000 jobs.

So if we take away the one time McDonald's hiring and the imaginary birth/death model jobs, we have a total of 7,000 new jobs created.

Now we can move on to the unemployment rate.  As Americans give up looking for work because there are no longer jobs available they are not included in the workforce, also called the labor participation rate.  Persons not in the labor force (as seen in the blue line below) hit a new record high last month.  The chart also shows people who want a job now, which is close to a record high.

The final point, and the one least mentioned by the media, is that America is slowing moving further and further into a part time low income employment country.  The incredible chart below shows this clearly.  The blue line represents full time jobs lost since December 2007 (9.1 million) and the red line shows part time jobs gained (2.3 million)

There is no real job creation or wage increase in our country, which is the foundation for real economic growth.    Our continued depression, which began in December of 2007, is about to begin the next leg down.  This will be accompanied by falling home prices, local and state governments cutting spending, a rising cost of living, and a federal government that moves closer every day to their "Greek" moment in the debt markets.

Until then, enjoy the pull back in commodities.  I hope you have kept cash on the sidelines available and you are utilizing this pull back to re-enforce your foundational positions.

A final look at where our current jobs recovery stands in relation to all others over the past century. (Bottom line)

h/t ZH and Calculated Risk

Wednesday, May 4, 2011

Portugal Accepts More Debt

The global government debt crisis continues forward day after day as the debts continue to mount and the pressure builds on the financial system.

We witnessed another piece of the broken system bandaged up this morning when it was announced that the final tally on the Portugal bailout will be $116 billion.

As a reminder, the Portuguese government cannot pay their current debt.  Giving them a credit card loan only compounds the problem and does nothing to solve the fundamental issue.  I discussed this in detail in Would You Lend $100,000?

We have had the opportunity to witness this effect first hand since I wrote that article.  The bond market, after having the chance to digest the original Greece bail out, has now once again turned against the country.

Yields on their debt have soared in the last few weeks.  This compounds the problem for Greece because as interest rates rise it becomes even more costly to keep up with payments. (Think of your credit card, auto loan, and mortgage rates doubling)

Ultimately, all European countries will face this dilemma. The problem is not liquidity (provided with the bailout) but solvency.

With the Portugal bailout secured and their problems pushed down the road for a few months, all eyes will move toward Spain and Italy which are the next likely dominoes to fall.

Spain is monstrous in size and will provide a major test for the EU bailout project.

Tuesday, May 3, 2011

The Silver Sledgehammer Arrives

I sat down to watch some HBO on Sunday with silver comfortably snug next to $50.  On Tuesday after as I am eating my lunch, silver is now at close to $40 and appears to be in free fall.

During the last few months, long time readers and friends have contacted me to ask if it was too late to get into silver as prices crossed $20, $25, $30, then $40.

I usually answered their question is a simple word: "No."  Then I would spend the next five minutes focused exclusively on preparing them for their first silver pull back.

I used phrases like, "getting punched in the stomach," or "getting hit over the face with a sledgehammer" but nothing really describes a silver pull back unless you live through one.

And here we are. 

For those that are new to this experience I wanted to briefly review the silver pull backs (above 10%) over the last 7 years:

April 2004: Silver $8.25 to $5.50. A 33% correction.
May 2004: Silver $6.10 to $5.40. A 12% correction in only 4 trading days.
Sept. 2004: Silver $6.80 to $6.12. A 10% correction in only 8 days.
Dec. 2004: Silver $8.00 to $6.60. A 17.5% correction is only 2 weeks.
Jun-Jul 2005: Silver $7.55 to $6.80. A 10% correction for the summer.
Apr. 2006: Silver $14.25 to $12.10. A 15% correction only 2 days.
May 2006: Silver $15.00 to $12.00. A 20% correction in only 10 days.
June 2006: Silver $12.50 to $9.70. A 22% correction in only 9 days.
July 2006: Silver $11.75 to $10.50. A 11% correction in only 7 days.
Sept. 2006: Silver $13.25 to $10.75. A 19% correction in only 10 days.
Dec. 2006: Silver $14.10 to $12.50. A 11% correction in only 14 days.
Mar. 2007: Silver $14.30 to $12.50. A 13% correction in only 4 days.
Aug. 2007: Silver $13.10 to $11.60. A 11.5% correction in only 10 days.
Mar. 2008: Silver $21.00 to $17.50. A 17% correction in only 3 days.
Apr. 2008: Silver $18.50 to $16.50. A 11% correction in only 13 days.

And then the grandaddy of them all......
July-Oct 2008: Silver falls from $19.40 to $8.85. A 54% correction in under 3 months.

Feb-Mar 2009: Silver $14.50 to $12.70. A 12% correction in 3 weeks.
June 2009: Silver $16.00 to $13.70. A 14% correction in 20 days.
Jan. 2010: Silver $18.75 $16.25. A 13% correction in 18 days.
May 2010: Silver $19.70 to $17.50. A 11% correction in only 11 days.

Did life end during any of these corrections?  Nope.  But it felt like it.  If you had just held onto your metal during this period, what would your total return be?

Jan. 2004 – May 2, 2011: Silver rises from $5.95 to about $40.80. A gain of 685%

The United States of America has no way to fund its deficit without the use of a printing press.

Hope for prices to fall lower. 

Your goal should be to focus on the number of ounces you own, not the dollar value of those ounces.

Monday, May 2, 2011

CBO Report Card: Ten Year Review

For those confident that the CBO's current deficit projections of "only" $1 trillion plus per year for the next decade will pan out according to plan should review what their projections were only 10 years ago.

The following graph shows what composed the unexpected spending items that have brought our country to bankruptcy and soon into a fiscal debt crisis.

Gasoline Soars Toward New Highs

Oil crossed $115 this morning before a retracement this afternoon.  This new high gives us a chance to look at where the price of gasoline today stands compared to the all time record high back in the summer of 2008.

As you can see, we are just pennies away now....

This will continue to put pressure on Bernanke to keep his promise of no QE3.  Our leaders have done nothing to slow down federal spending and are just pushing down firmer on the accelerator.

If buyers do shun treasuries after QE2 as the market is left vulnerable without the $4.1 billion per day of new Fed purchases, it puts the Federal Reserve in a tough position as gas is crossing over to new record high prices.

This is our first glimpse of what the end game will look like in America: spiraling upward cost of living combined with a deteriorating economy.

In other words; the worst possible scenario.  The 40 year debt laden binge spending party has been a glorious ride, and it will certainly be a less painful transition for those taking the proper steps to prepare today.

Silver Price Plunge

The two big new stories this morning in the financial world are the death of Bin Laden (which I will let you hear about on mainstream news), and the major fall in silver prices last night around 8:00 PM. (okay, maybe no one still pays attention to silver)

Trading opened up as normal Sunday evening in Asia when silver suddenly fell off a cliff, diving about 15% in just a few moments.

It has since recovered a significant portion of the fall, but investors are scrambling to determine to the why.

Thus far, and I will bring you more when I get it, it appears to be focused on the margin increases that took place on multiple exchanges around the world on Friday.  When margins are increased it means you can borrow less money from the exchange to purchase silver and either need to come up with some cash to cover the difference or sell silver to raise cash.  It appears someone may have been caught with their pants down.

The second news event was that Bolivia, which was in talks to nationalize their mines and cut off a major flow of supply to the market, decided against that last night.

Is this the start of the major and much needed correction in the silver market?  I certainly hope so.  When weak hands get shaken off it allows investors that understand the big picture to purchase metal at a cheaper price.

When the United States formally or informally defaults on its debt through hyperinflation, you will be far more concerned with the number of ounces you own vs. the price you paid for it.