Notes From Underground: Owed to Europe by lack of Grecian earnings

Yes, Greece is still with us and by the market action and news today, the situation is certainly not improving. The German/Greek differential on 10-years climbed to plus-470 basis points, while the price on Portuguese credit-default swaps continued to rise. No matter what the Eurocrats try to spin, the markets just keep saying “nein” to the positive propaganda. The news from Greece was that unemployment climbed to 11.3%, thus adding pressure to a deteriorating economy. This is the negative feedback loop we have continually talked about, for as the budget is squeezed to meet the politicos promises, the greater the economic stress. Increased job losses lead to lower tax revenue, which of course leads to the need for more cuts. The vicious cycle is what makes the entire PIIGS situation so precarious. Where will the economic growth come from that will relieve the pressure to keep the Greek deficit from exploding?

The EURO FX failed to rally today even as the U.S. and global equity markets rallied. Recently, equity rallies were indications that the European debt situation had stopped deteriorating. Today, that market signal failed to materialize as the S&PS closed almost on their highs while the EURO closed slightly off its lows. This may be the action the market is looking for to begin a new leg down for the EURO. We are aware that we are still within the last few months’ range, but we are also aware that the EURO is making recent lows on several of the crosses.

Money is searching for sound returns and it is nervous about Europe but is not just rushing to the haven of the U.S. The other day, we discussed the possibility of a new round of global deleveraging but after the initial Goldman Sachs scare, the financial markets have stabilized. We still think that a sovereign credit default would create havoc for the global financial situation but if the Europeans and IMF can halt the immediate crisis, interest rates will be forced to stay low and the search for more risk-based returns will be the dominant theme. The market is nervous as there are certainly storm clouds but money is anxious to earn higher rates of returns after being throttled with historically low yields for the last two years. Trade ’em as they lie!

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