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

The European Union was to meet this weekend to come up with a solution to the euro debt crisis that would then be submitted for final approval to the G20 summit on Nov. 3-4, but the politics between Germany and France, in particular, are such that German Chancellor Angela Merkel and French President Nicolas Sarkozy realized they couldn’t agree on anything by Sunday’s summit conclusion, so they said a second summit would be held by next Wednesday evening at the latest.

But to give you as good a sense as any as to how rapidly the situation in Europe is imploding in terms of the economy, one need look no further than new forecasts from the European Bank for Reconstruction and Development, which took a look at its July outlook for growth for Central and Eastern Europe in 2012 and took it down from 3.7% to 1.6%...in just three months! This is staggering, and the numbers are far less than the IMF’s forecast in September, to give you another example of how quickly the region is deteriorating.

Slovakia, for example, was pegged for 4.1% growth by the EBRD in 2012 and now the bank is calling for 1.1%. Romania was expected to grow by 3.8% and is now estimated to also have just 1.1% growth next year.

These aren’t the PIIGS. These were the countries that had already gone through their wrenching changes to join the EU in the first place, but without a Western Europe solution, you have a vivid projection of the spillover into the rest of the area, let alone the U.S. and Asia. Turkey is another, with the EBRD slashing its forecast for GDP in 2012 from 4% to 2%.

But it all starts with Greece. You saw the awful pictures, the riots, leading up to another austerity vote in the parliament. Prime Minister Papandreou begged his people to accept a further round of tax increases and fresh cuts to pensions and wages, along with plans to dismiss 30,000 state workers, or Greece wouldn’t receive a needed 8 billion euro slug from the Troika (IMF, European Central Bank, and European Commission) as part of the first Greek bailout. Without the 8 billion, Greece won’t have funds to pay state workers. [Actually, they were supposed to have gone broke by Oct. 15, remember?]

The thing is, Greece is still headed to inevitable default but Germany, France and the others keep delaying the day of reckoning which only makes matters worse. It was once thought Greece needed about 110 billion euro in bailout funds, through 2020, to give it time to finally get its house in order. Yet the economy is imploding so quickly, its needs are now thought to be as high as, get this, 440 billion by one estimate! That figure, of course, matches the initial European Financial Stability Fund, which I’ve been writing all year was initially thought to be enough to backstop Greece, Ireland and Portugal. I’ve also written about a needed second fund of 500 billion euro and sure enough that was the talk by week’s end (the European Stability Mechanism, which would replace the EFSF in mid-2013). The original theory behind the second fund was to be big enough to backstop Italy and Spain, if necessary, with both funds also being a source of capital for the big banks as needed. The EFSF wasn’t technically to start until mid-2012, but now there is talk of combining the two as rapidly as possible, though it’s my understanding the 17 parliaments haven’t approved the ESM, certainly Germany’s parliament is required to approve it, and so you’d have that mess all over again.

I don’t even know what to write anymore, frankly. I want to get everything down, as it happens each week to lay out the history and give a little opinion, but as I started this section, for the first time during the past 18 months, I really don’t have a clue what the heck is happening. I mean consider one factor about the 440 billion EFSF. Recall that after Slovakia’s parliament became the last to vote to approve the fund, Slovakia was guaranteeing 4 billion of it, the guarantees being proportional to the size of each of the 17 eurozone nations’ economies.

Well what about Spain and Italy? 200 billion or so is coming from them, meaning troubled countries are lending to each other. It’s why some of us said way back this whole crisis and the supposed solution was nothing more than history’s greatest Ponzi scheme.

So whatever euro leaders come up with the next few days, assuming they do come up with something because the alternative is a global Crash highlighted by old-fashioned runs on the bank that will make Athens’ demonstrations look like a church carnival, any solution must be big enough to, at a minimum, guarantee the bonds of the likes of Italy and Spain, let alone the other PIIGS.

And it has to offer a solution on recapitalizing the banks, which has become the stickiest issue. The EU said only 90 billion was needed to shore up the continent’s big institutions, while others say it is closer to 200 billion, and Goldman Sachs says 300 billion.

These sums never stop amazing. Where is it going to come from? The banks don’t want to have to raise more capital because it reduces their profits and leaves them open to government control. Small business doesn’t want the banks to have to raise more capital because then there will be nothing left to lend to them and thus you have further stagnation (credit availability already being near nil). France doesn’t want to have to use any of its government funds to shore up its banks because then it is guaranteed to lose its Aaa-rating, as Moody’s warned Monday would be the case.

“The deterioration in debt metrics and the potential for further contingent liabilities to emerge are exerting pressure on the stable outlook of the government’s Aaa debt rating,” Moody’s said in a statement.
If France, or Germany, lose their triple-A status, then the EFSF can’t raise rescue money (it is supposed to through the sale of bonds) at low interest rates, meaning a French downgrade could lead to a collapse of the entire rescue system. [Spain, by the way, suffered another wave of credit downgrades from the three leading agencies, including S&P and Fitch. Spain’s GDP forecast for 2012 has been slashed to 1% from 1.8% by Moody’s.]
And I haven’t even mentioned the ‘haircuts’ Greek debt holders are going to have to take as part of its restructuring. Originally slated at 21% in July, now the talk is 50% to 60%, which kills the banks’ capital ratios further, they being the prime holders of the scrip.
Want more bad news? Greece’s privatization program was supposed to bring in 66 billion euro that was to be used to pay down debt. Now the estimate is it will raise no more than 46 billion. I’d be surprised if they raise 30 billion.
But wait…there’s more! We never talk about little piggy Portugal, but Richard Barley of the Wall Street Journal had a piece this week on the country that is the leader in cork and the economy here is now expected to shrink 5% in 2011-2012, with 2012 seeing a contraction of 2.8%. The government is at least being as transparent as possible, but consider this. In August, 70% of Portugal’s exports went to the EU and 24% to Spain, which has no growth. Citigroup says Portugal will contract 5.7% next year!

As for non-euro Britain, Bank of England Gov. Sir Mervyn King warned that as the austerity program hits in earnest, wages in 2011 would be less than in 2005 (a further dampening of his January expectation they’d be flat over this time period), the worst period for living standards in the U.K. since the 1920s. In Britain, the main culprit these days is utility increases, with gas and electric bills going up 13% and 7%, respectively, at a time when wages are falling.

[The Financial Times has a piece Friday night on how even the Queen is having major problems with the utility increases. After all, the bill for gas and electric is expected to account for 8.2% of her frozen income and she has four palaces and a draughty castle.]

But before we head across the pond to the U.S., a word on China. GDP for the third quarter came in at 9.1% vs. expectations of 9.3%. The trend since the fourth quarter of last year is…9.8%, 9.7%, 9.5% and 9.1%. Troubling to some, but still more than solid.

In fact the consensus GDP forecast for China next year is 8.6%, comfortably ahead of the accepted 8% figure that assures a sufficient level of job creation to keep up with urban migration. So while some continue to call for a hard landing here, I’m staying in the soft landing camp.

Other positive figures this week, industrial production rose 13.8% in September vs. a 13.5% rise in August, and fixed asset investment rose 24.9% for the first nine months of the year, better than expected.  

But China’s key stock market barometer hit its lowest level since March 2009 and the price/earnings multiple (trailing) here is 10.8, the lowest in memory. [If my own large holding in Fujian traded at a 10 multiple, I wouldn’t be writing this column anymore…just sayin’. While I’m on the topic, I exchanged notes with the CFO this week, knowing its quiet time. Like all shareholders I’m extremely frustrated, but I pretty much got the answer I was looking for.]

Two other items of import when trying to read the tea leaves in China and whether there will be a hard or soft landing. China Southern Airlines, the largest domestic carrier, cut its 2012 outlook for passenger demand from up 13% to up 8%. Not cause for concern, but something that needs monitoring.

And a major negative, China has suspended work on some 10,000 kilometers of rail projects due to financing issues. Many of the six million migrant workers employed haven’t been paid in months as state banks have tightened lending. This definitely requires attention.

Washington and Wall Street

Stocks finished mixed with the Dow Jones rising a fourth straight week but Nasdaq declining as reported earnings were generally positive. More on this later. Sentiment at week’s end bordered on absurd, though, as traders took the news that the EU was extending a deadline to resolve the debt crisis as a positive because it meant they wouldn’t have to wait out a potential disappointment Sunday night and deal with a down Monday, ergo, they went into the weekend bullish because they wouldn’t have to deal with any negativity until Tuesday or Wednesday, by this logic; as if whatever the EU comes up with is anywhere near being a long-term solution in the first place.

More importantly for the health of the U.S., we learned the federal government spent a record $3.6 trillion in fiscal 2011 (ending Sept. 30). Isn’t that special? Congratulations to all of us for electing such fine representatives, from the president on down, and congratulations for allowing the unelected power brokers and lobbyists to have their way with us as well!

You know, I was listening to CNBC’s Jim Cramer spout off on Friday about Kelly King, CEO of BB&T, and how great the guy is and how you need to listen to one of his bank’s conference calls where Mr. King (who seems to be a decent sort) talks about how great America is…blah blah blah.

I’m tired of this inane chest-thumping. We are a mess, for the handful of you out there who haven’t noticed, and to just say stuff like “America’s best days are in front of us” is incredibly stupid.

Do you want to see the future of our country? Aside from the staggering debt and entitlement obligations we’ve given ourselves, just look at our kids…the supposed future. 95% are walking around like zombies glued to their FREAKIN’ SMARTPHONES THAT WILL DO NOTHING BUT MAKE THEM DUMBER!!!

So don’t give me this America is great garbage. I only want to deal with the facts. I only want to listen to Republicans like Congressman Paul Ryan or Senator Tom Coburn. They may not be the life of the party if you’re entertaining, but in case you haven’t noticed, the party is over!

The country is so dysfunctional that we’ve stupidly given a protest movement, Occupy Wall Street, a platform when it’s increasingly looking like no more than a bunch of Greek anarchists and communists.

I gave myself the ‘wait 24 hours’ notice when it came to discussing the kinds of kids that are occupying lower Manhattan and while I admit I haven’t been there personally, and won’t have a chance to get there for a few weeks, I’ve seen all the local New York area broadcasts and read the accounts and it’s absurd, as pointed out further below, that these lowlifes (who comprise 90% of the crowd) are even granted a forum. Come up with a real protest movement and I’ll listen. This isn’t one.

Sorry to get off track, but this week the Senate failed to pass even a stripped down jobs bill, $35 billion for teachers, firemen and the like, which highlights the antagonism between Democrats and Republicans, as well as President Obama’s failures in leadership as he runs around playing his class warfare game.

But just a few economic notes. September housing starts came in better than expected but the increase was due to a 51.3% rise in multi-family dwellings as opposed to just a 1.7% increase in single-family home construction. Existing home sales were still at lousy levels.

I saw a piece in USA TODAY that addresses the fact local governments have slashed “535,000 positions since September 2008 to close massive budget deficits resulting largely from sharp declines in property tax receipts. That exceeds the 413,000 local government job cuts from 1980 to 1983, the only other substantial downturn in local government employment, according to federal records that go back to 1955.” [Paul Davidson]

Wells Fargo revealed as part of its earnings report that delinquencies on mortgages and credit cards rose 4% in the third quarter, the first increase since 2009, which isn’t good. Citigroup reported a similar rise in delinquent mortgages, CFO John Gerspach saying the bank was seeing “re-defaults” on mortgages that had been modified to make them more affordable. Capital One saw an increase in credit card delinquencies, which means a future increase in defaults on same.

And remember that congressional supercommittee devoted to debt reduction? You know, the bipartisan group of 12 that has to cut at least $1.2 trillion by Nov. 23, thus giving Congress a full month to vote up or down on the proposal or face automatic draconian cuts, half of which come from defense?

Nothing’s happening. The Washington Post reported they have yet to reach consensus on the most basic elements of a plan to restrain spending. Remember, the $1.2 trillion is nothing. Unless the economy takes off like a rocket ship, and in case you haven’t noticed, with the end of the space shuttle program, NASA doesn’t have a rocket ship and we’re relying on the Russians to take us to the International Space Station, the deficit will continue to grow, so we want this supercommittee to think ‘big,’ like a minimum of $3 trillion in savings. Don’t hold your breath.