Austerity - Not Everyone is a Fan, Higher rates Crush Bonds and Pummel Stocks

12/16/2010 Cochabamba, Bolivia – Pop in your mints…

Ah, the price of austerity.  In a world where up was up and down was down, where all was what it seemed and things worked “as they should”, any attempt to save money or generally economize would be a good thing.  All the more if it meant that the government was retreating from intervening in the economy in areas where it can only do harm.  That would be 99% of government intervention with the remaining 1% being upholding valid contracts between parties.

Alas, this is not the world in which we live.  In Greece we see rioting as the government attempts to do the wise thing and cut back.  Like any bad credit risk, they are not cutting back by choice but rather at the behest of their creditors.  Like an addict needing intervention, so are the debt ridden nations of the western world.  Concretely, Greece wants to change its labor laws to give people incentive to work and by extension business incentives to hire them.  Naturally, this is an affront to “workers rights” that cannot be tolerated. 

Spain’s credit rating is on the verge of being lowered and generally the uncertainty of just what will occur in Europe has investors jittery.  In the US, at least we can count on the FED and Congress to continue to trash the currency.  The masters of the Euro are not so sure about trashing the currency but for some strange reason do not want to let any sovereign debt go bad.  Sorry EuroFEDS, you can’t have it both ways.

Bonds continue their descent with no end in sight.  This usually means that they may actually rise in the coming days.  Don’t be fooled.  Any strength in the Bond markets should be taken for nothing more than a hallucination and a selling opportunity.  Stocks were taken down today by the “Mega Maid” suction of the collapsing Bond Market.  Higher rates make re-financing or rolling over existing debt harder.  It must be either paid or written off.  The money for these activities must come from somewhere and, directly or indirectly, it comes out of equities.

The same advice for the Bond Market applies to the general stock market.  This is a currency and debt system-wide collapse.  Bad decisions must be reckoned with and wrung out of the economy.  Like a forest fire, it must complete its work in order for new growth to occur.

The FED needs to send the Fire Fighers home and let the system burn itself out

Down here in Bolivia, life seems to be slowly plugging along, immune to the European and North American problems for the moment.  The socialist government here last month moved to LOWER the retirement age from 63 to 58 for men and 55 for women.  They also finally are obligating all drivers to carry auto insurance.  Does this sound like progress?  We have no idea if it is fiscally responsible on the government’s part but a decent part of the workforce may be newly retired soon, creating opportunities for the next generation to find a job.

Despite the socialist label, we do still see signs of foreign investment.  When prime commercial office space can be built for $50 per square foot and employees available for $400 per month, the rewards here seem to outweigh the risks.

The big wildcard is how much of their earnings will the Government let these companies to keep?  They'll have to pay for this generous retirement plan somehow.  Give it a few decades and the headlines in Greece may need to be translated into Spanish!

Stay Fresh!

David Mint

Email:  davidminteconomics@gmail.com

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Key Indicators for Thursday, December 16th, 2010

Copper Price per Lb: $4.10
Oil Price per Barrel:  $88.56
10 Yr US Treasury Bond:  3.52%
FED Target Rate:  0.19%

Gold Price Per Ounce:  $1,379

MINT Perceived Target Rate*:  5.25%
Unemployment Rate:  9.8%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,457
M1 Monetary Base:  $1,905,100,000,000
M2 Monetary Base:  $8,779,900,000,000

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.