Month: August 2011

Aug. 8 (Bloomberg) — Nouriel Roubini, a New York University professor and the co-founder of Nouriel Roubini Global Economics LLC, discusses the outlook for the European Central Bank’s bond-purchase program to stem the sovereign debt crisis, and the economic outlook for Europe and the U.S. Roubini spoke with Bloomberg’s Tom Keene yesterday. (Source: Bloomberg)

Aug. 8 (Bloomberg) — Puru Saxena, chief executive officer of Puru Saxena Wealth Management, talks about the outlook for gold prices and the state of the global economy. Saxena speaks from Hong Kong with Mark Barton on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

Aug. 8 (Bloomberg) — Kelvin Tay, chief investment strategist at UBS Wealth Management, discusses investment strategy and the outlook for the global economy after Standard & Poor’s downgraded U.S. debt to AA+ from AAA. Tay speaks from Singapore with Mark Barton on Bloomberg Television’s “First Look.” (Source: Bloomberg)

A sharp decline in the value of the euro (EUR) this morning was offset somewhat after the European Central Bank (ECB) decided to intervene by purchasing Italian and Spanish government bonds. The euro zone has been hit hard by debt contagion spreading to its peripheral countries with more force. Weathering this storm will require crafty work by the ECB in the days ahead.

The ratings downgrade of US debt by S&P’s ratings agency has caused a stir in financial markets, though few see the move as strongly affecting dollar values yet. A big loser in the downgrade has been non-US financial markets that are seeing more disruption by the turmoil recent events are causing on the economic landscape. Europe’s intervention may not be the last of its kind by world leaders in the weeks ahead.

Reports issued this morning by the Bank of Japan (BOJ) have created mixed results. The intervention by the BOJ in forex markets last Thursday has caused several swings in currency values over the last few trading days. This morning’s data releases are generating similar movement.

Annualized data on bank lending revealed a 0.5% decline, highlighting what many had already assumed was a suppressed lending market amid the recent turmoil in Japan over the past year. The island economy’s Current Account also revealed sluggish growth in its trade balance, failing to meet market expectations. However, the Economy Watcher’s Sentiment index rose by over 3 points to 52.6 this month, underlining a recent uptick in financial outlook which was largely unexpected.

Read more forex trading news on our forex blog.

The Australia and New Zealand Banking Group (ANZ) posted its latest findings on the percent change in job advertisements as posted in major newspapers and websites covering the major cities of Australia. The results show an ominous decline of 0.7% in new job postings for July, in a month-on-month format.

Being released ahead of the Australian jobs report tends to give this figure more of an impact and traders have seen the AUD in decline all morning partially due to this figure. Though it cannot be held entirely accountable for the Australian dollar’s recent decline, it does explain part of why this major Pacific currency was hit hard this morning when many were expecting an uptick from the flight away from the US dollar (USD).

Aug. 7 (Bloomberg) — Nouriel Roubini, co-founder of Roubini Global Economics LLC, and Christina Romer, a Bloomberg contributing editor and a former White House economic adviser, speak with Bloomberg’s Tom Keene about Standard and Poor’s downgrade of the U.S. credit rating and its implications. Bloomberg’s Adam Johnson, Elliott Gotkine, Al Hunt and Sara Eisen also speak. (Source: Bloomberg)

Investors start off the trading session this Monday morning with absolute carnage in the markets and much to fret about as world markets react to the S&P downgrade of the United States. Good morning, I’m Kristin Bianco, with the Week Ahead Market Report for August 8, 2011.

The eurozone is rapidly running out of choices. If the currency is to be saved, Europe will need a single fiscal authority and a willingness to print money.

With each passing day, markets seem to get wilder and woollier.

This is only natural after a long, calm stretch. Volatility expands and contracts like an accordion. Mildness begets wildness and so on.

The sharp declines are also a function of harsh reality asserting itself. As we have said many times in these pages, the stimulus never actually worked (in terms of getting the U.S. economy going again). Corporate profits were pumped up, but unemployment levels and heavy household balance sheets were not addressed.

In fact the short-term solutions put in place, bent on avoiding downturn at all costs, only served to make the long-term danger worse.

And this goes as much for Europe and China as the United States…

In Europe, now that investors have shifted their focus to the bigger periphery countries — Italy and Spain, rather than Greece and Portugal — the eurozone crisis has entered a new and more dangerous stage.

Some time ago we argued that Europe is “being held together with duct tape.” Now the duct tape is being violently ripped. When questions swirl as to how even Italy will hold it together, the end game is much closer.

All of this affects the United States (and the rest of the world) because financial institutions and trade flows are so deeply interconnected. Last week we saw huge gyrations in the S&P and the Dow keying off announcements as to what the European Central Bank might do.

How will the eurozone crisis finally be solved? Ultimately there are really only three paths:

• Kick some of the periphery countries out of the euro (or let them leave voluntarily).
• Move toward federalization, where Europe gets a central treasury and a unified set of rules (like the United States).
• Monetize the peripheral country debt (buy it up with printed currency).

There is widespread agreement that the first option — kicking countries out of the euro — could never work.

Just the threat of such an action is enough to inspire huge bank runs. Depositors who fear their local currency might depreciate 50% overnight on a euro exit, or that their local bank might close, have little reason to leave their savings at risk. In contrast, they have strong reason to transfer their cash elsewhere (into stronger currencies or precious metals).

As the pain gets worse, countries like Greece and Italy and Ireland will be tempted to leave the euro voluntarily. But the terror in that solution is a possibility of Zimbabwe-style fiscal collapse for the country doing the leaving. What would a new Italian lira or a new Greek drachma be worth? Who would stick around to hold onto it?

With the exception of Germany, any country attempting to leave the eurozone — to swap the euro for their local currency — would become a financial pariah overnight. Just the hint of such a move would accelerate mass capital flight. Exposed financial institutions would not survive.

And if Germany tried to leave, they would have the opposite problem. A new D-mark would be far too strong, creating the same type of problem experienced by Switzerland and Japan.

When a currency is in strong demand as a safe haven destination, it rises so high that exports are threatened, in turn threatening the whole economy. That is why Switzerland and Japan intervened to push their currencies lower in recent days. A new D-mark would go straight up, and the German export machine — one of the most powerful in the world — would be strangled by a euro exit.

That leaves the other options, federalize and monetize. Europe can become more like the United States in empowering a single financial body. And they can get over their inflation fears and start printing euros with which to buy (monetize) debt.

The Germans may not like the Greeks or Italians and vice versa, but, barring the acceptance of temporary catastrophe, there is no way to get out of the deal.

Germany will have to embrace the likes of Italy and Greece fully. They will have to say “Our credit is your credit… Our wallet is your wallet.” German taxpayers may scream and yell and threaten open revolt at this prospect.

But what else is there? Where else is there to go, without letting the entire eurozone project turn to ash?

At the same time, the periphery countries will have to accept a permanent loss of sovereignty. Europe will have to move toward one ruling body that makes financial decisions for everyone. And Germany, being the “deep pocket,” will call the shots.

At the end of the day, fiscal union is a basic requirement of currency union. You can only get by without it when times are good. When times are bad, the weak points in the system are tested to the breaking point.

It is a really harsh deal for everyone. There is plenty of reason for all parties to be furiously angry.

The Germans will be outraged at the prospect of spending huge amounts of money, conceivably without end and without limit, to prop up their Mediterranean currency partners.

The Greeks and Italians et al. will be outraged that, in exchange for this future flow of money, they will have to hand their financial destiny — the ability to call the shots on important decisions — to someone else.

And last but not least, the Germans’ heads may nearly explode at the need to accept currency debasement, and the prospect of heavy inflation, in order to save the euro currency experiment from fatal disaster. The Bundesbank attitude that says “no inflation at all costs,” deeply embedded in the DNA of the European Central Bank, will have to be abandoned.

It’s an extraordinary situation. The changes being forced on Europe — changes forcing it become more like the United States — run so against the grain that politicians and the populace would NEVER accept them under normal circumstances. Not in a thousand years.

Now, though, the other avenues are all closed off… apart from letting Europe stumble into a “Lehman 2.0” event and total chaos.

Written by Justice Litle for Taipan Publishing Group. Additional valuable content can be syndicated via our RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.

Aug. 8 (Bloomberg) — Paolo Pellegrini, founder of PSQR Management LLC and the former Paulson & Co. executive who helped that firm make more than $3 billion during the U.S. housing crash, is betting on the U.S. dollar as the nation’s debt rating is cut one level by Standard & Poor’s. Jon Erlichman reports on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)