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Stress in European bond markets is heating up again, led by Spain, Italy, and Portugal. The debt problems are simply unmanageable without massive defaults and restructuring.
Demographic forces will not likely allow Europe or the U.S. to grow its way back to prosperity. The deleveraging process will likely take the better part of the next decade to fully play out.
We wish we were wrong, but unfortunately, when we look at the charts, the balance sheets, and the revenues, they just do not balance no matter how hard we try (we even tried CBO [Congressional Budget Office] math).
The entire euro zone needs to be restructured. Like the Fed, the ECB can print as much money as they want to monetize the debt. The LTRO [long-term refinancing operations] was a facility to help re-liquefy the banks for the inevitable debt defaults too come. The ECB suggested last week they could start buying up Spanish bonds and that seemed to help sentiment for a day. But the increasingly widening spreads and sovereign CDS [credit default swaps], tells us investors are not buying the rhetoric.
We expect the ECB will launch another trance of QE [quantitative easing] by way of buying up Spanish debt in the days and weeks ahead, and this might help for a while like the LTRO did. But even in the days following the Greek restructuring, its bond yields have headed north again, and more needs to be done. Sadly, this too will end badly (another global banking shock), but there is simply no predicting exactly when it will happen. It could be years.
Enter the U.S. political season and a warning once again from U.S. Treasury Secretary Timothy Geithner to Congress and the Senate not to air the dirty debt laundry in prime time. Sadly, we expect this time will be no different and we will likely see another U.S. downgrade in the coming quarters. Little know (but growing) independent debt rating agency Egan-Jones, has already downgraded the U.S. to "AA."
What we do not want to see during this political season is some of these fat cat Washington types making reference to U.S. bond yields being even lower than when the downgrades came last year. They are lower because the bond markets are being manipulated by the Fed (operation twist) and that there is simply enough money terrified of the equity risk that is has to find a home in the reserve currency of the world.
Yes, folks, it is still the best choice of the fiat currencies we have to use.
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