Based on my calculations, credit default swaps are trading as if Greece has a 70% chance of defaulting, 50% for Ireland, 40% for Portugal and 30% for Spain. Both Greece and Ireland are paying over 80% of their export revenues towards external debt payments which totally unsustainable. After Portugal, Spain is next, then maybe Belgium. This story is as contained as the Asian crisis was limited to Thailand 12 years ago.
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3 Major Points in Yesterday’s Employment Report
1) Workweek didn’t move; it’s stuck at 34.3 hours for the 3rd straight month. History says hours lead bodies so as a leading indicator there isn’t much evidence of improving labor demand 2) State & local governments are downsizing with 20k net job losses 3) Personal income data was very disappointing with average hourly earnings barely rising on top of a flat November.
Deceptive Decline
Today’s decline in the unemployment rate is deceptive. It shows is that people have stopped looking for jobs. The Civilian Labor Force Participation Rate declined to 64.3% last month and is way off its all time high of 67.3% of early 2000. Had the CLFPR remained unchanged, the unemployment rate would now be about 13.4%
Hello? The Irish election in March
The Irish election in March ― I don’t think this is on the radar screen. The point worth making is that if the opposition party wins, and presses for a debt restructuring, the story isn’t going to end there. The real question from there would be what other countries would follow suit ― this to me is probably the big “financial contagion” risk for 2011.
Household Cash Flow
Every penny at the pumps drains $1.5 billion out of household cash flow. Gas prices at the pumps are $3.15/gallon, but back in September it was closer to $2.70/gallon. This is nothing more than a $60 billion annualized drag on U.S. households (absorbing half of the payroll tax relief). If gas prices ultimately go to $4/gallon, then this would siphon over another $100 billion into the gas tank.
The Biggest Myth
The biggest myth being promulgated today is that the economy must be doing better because state & local government revenues are on the rise. Dude! That’s not the economy! It’s called tax increases. In fact, 23 states have boosted taxes in the past year. Eight have even raised income taxes!
Happy New Year!
I want to take the opportunity and wish you all the best for 2011. To health, happiness and prosperity — especially in risk adjusted terms.
Down Jones Industrials
10 From a historical standpoint, the yield on the S&P 500 (2%) is very low. This smacks of a market top and underscores the point that the market is too optimistic; investors are willing to forgo yield because they assume that they will get return via the capital gain. The last time S&P yields were this low was in the summer of 2000, and we know what happened shortly after that.
Gross Deficit Product
Our annual deficit is 10% of GDP. A deficit of 3% is sustainable (trust me) and 2% of the deficit will melt away as the economy revives; leaving a deficit of 5%. Had the Bush tax cuts been repealed that would have reduced the 5% to 2.5%. What this means is that Congress has to find twice the value of the Bush tax cuts to get us to a stainable fiscal level. It may take a decade for voter to digest this.
Budget Brawl Makes no Cents
There will probably a nasty spending fight in ’11 complicated by the need to raise the federal debt limit to avoid a default; a vote many new Republican have indicated they would not make. Republicans say the debt limit vote offers a chance, allowing them to tie a package of spending reductions to the debt increase to make it more palatable. The fight will do great harm.