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Welcome to the "Wolf Creek Pass" School of Monetary Policy

I don’t know if you folks remember that hit ditty: a humorous tune about two truckers attempting to manhandle an out-of-control 1948 Peterbilt down the “other side” of Wolf Creek Pass – a death-taunting section of U.S. Highway 160 where the elevation drops a hefty 5,000 feet in a relatively short distance.

The song’s two characters – a truck driver named Earl and his brother, who’s his partner as well as the song’s narrator – are taking a flatbed load of chickens on a speedy trip down this winding, two-lane Colorado highway. After the narrator gives Earl the above-mentioned warning, the ancient semi’s brakes fail.

From there on down, the narrator tells us that the brothers’ trip “just wasn’t real pretty.” The truck careened around hairpins and switchbacks, and then raced at an uncontrolled 110 mph toward a tunnel with “clearance to the 12-foot line” – with chicken crates sadly “stacked to 13-9.”

The drivers and the runaway Peterbilt “went down and around and around and down ’til we run outta ground at the edge of town… and bashed into the side of the feed store – in downtown Pagosa Springs.”

Believe it or not, I started thinking about this funny old country tune the other night – right after I’d read a piece about QE3 and the U.S. Federal Reserve.

As zany as it first sounds, the parallels are striking.

  • Eurozone

  • Why Wall Street Can't Escape the Eurozone Despite all of its best hopes, Wall Street will never escape what's happening in the Eurozone.

    The 1 trillion euro ($1.3 trillion) slush fund created to keep the chaos at bay is not big enough. And it never was.

    Spanish banks are now up to their proverbial eyeballs in debt and the austerity everybody thinks is working so great in Greece will eventually push Spain over the edge.

    Spanish unemployment is already at 23% and climbing while the official Spanish government projections call for an economic contraction of 1.7% this year. Spain appears to be falling into its second recession in three years.

    I'm not trying to ruin your day with this. But ignore what is going on in Spain at your own risk.

    Or else you could go buy a bridge from the parade of Spanish officials being trotted out to assure the world that the markets somehow have it all wrong.

    But the truth is they don't.

    EU banks are more vulnerable now than they were at the beginning of this crisis and risks are tremendously concentrated rather than diffused.

    You will hear more about this in the weeks to come as the mainstream media begins to focus on what I am sharing with you today.

    The Tyranny of Numbers in the Eurozone

    Here is the cold hard truth about the Eurozone.

    To continue reading, please click here... Read More...
  • The Greek Bailout: Why I'm Mostly Bullish about the Eurozone Last week's news that Eurozone GDP declined by 0.3% in the fourth quarter of 2011 set all the usual pundits moaning about the inevitable decline of Europe.

    Even Andrew Roberts, a wonderful historian with whom I almost always agree, wrote in the Financial Times that "Europe's fire has gone out."

    Today, the markets may welcome the Greek bailout deal, but behind the scenes they still dread the fact it won't work.

    Meanwhile, hushed whispers are still being muttered about a Greek default as being "worse than Lehman."

    On this subject I am a firm contrarian.

    If Greece does default and is thrown out of the Eurozone, then I think Europe is actually due for a rebound - not a collapse.

    It's only if they decide to bail out Greece again that I would become less optimistic.

    If that is the case, they would be devoting hundreds of billions of taxpayer dollars (or euros, as it were) to propping up an inevitable failure. Even then, Greece is relatively small compared to the growth drivers in the Eurozone, which are strong.

    The Problem with the Greek Bailout

    What the Greek crisis has shown is that European leaders in Germany and Scandinavia have their heads properly screwed on, but they are not yet a majority of EU opinion.

    The EU bureaucracy simply gave in far too easily to Greece's first demand for a bailout, then suggested further bailouts for the entire Mediterranean littoral, all of which had over-expanded their governments on the back of low interest rates in the first decade of the euro.

    Now reality is returning rapidly to the discussion.

    To continue reading, please click here...
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  • Three Doomsday Scenarios: What Happens If the Eurozone Breaks Up? The time has come to confront an ugly truth: The possibility that the Eurozone will break up, or rather fall apart, is growing increasingly likely.

    In fact, I'd say given recent developments in Italy the probability of a breakup is as high as 40%.

    Indeed, if a country as small as Greece or Portugal were to default or abandon the euro, the effect on the Eurozone would be manageable. The debts of those countries are too small to make more than minor dents in the international financial system, and they represent too small a share of the Eurozone economy for their departure to have much impact.

    The psychological effect of their departure would be considerable - if only because Eurozone leaders have expended so much money and effort to bail them out. However, devastated credibility among the major Eurozone leaders is more of a political problem than an economic one.

    But now that the markets' focus has moved to Italy and Spain, the Eurozone is really in trouble.

    Asking for Trouble

    Part of the problem is that in arranging the partial write-down of Greek debt, authorities made it "voluntary," thereby avoiding triggering the $3.8 billion of Greek credit default swaps (CDS) outstanding. Of course, this caused a run on Italian, Spanish, and French debt, as banks that thought they were hedged through CDS have begun selling frantically, since their CDS may not protect them.

    Honestly, how stupid can you get! I don't like CDS, but fiddling the system to invalidate them is just asking for trouble. And so far, the only effect has been a considerable increase in the likelihood of a Eurozone breakup.

    Italy, Spain, and France are too big to bail out without the European Central Bank (ECB) simply printing euros and buying up those countries' debt. However, if the ECB adopted the latter approach, hyperinflation would almost certainly ensue. Furthermore, the ECB itself would quickly default, since its capital is only $14.6 billion (10.8 billion euros) - a pathetically small amount if it's to start arranging bailouts.

    Of course, Europe's taxpayers could then bail out the ECB by lending the money needed to recapitalize the bank, but a moment's thought shows that the natural result of such a policy is ruin.

    So what would a breakup of the Eurozone look like? Basically, there are three possibilities.

    To continue reading, please click here... Read More...
  • The One Country That Could Take Down the Eurozone – And It's Not Greece It's been a rough few weeks for the Eurozone.

    Portugal is still in trouble, Spain will be back on the coals after its Nov. 20 election, and if I were a bond trader, I would be shorting Belgium, which has serious deficit and debt problems, runs for months at a time without a government and is in some danger of splitting apart into its French and Flemish bits.

    A bailout package for Greece has been agreed to, but the Greeks are struggling to form a government to implement it. And yields on Italian bonds are moving ominously higher, rising above the 7% that some think marks a point of no return.

    So does this mean that a euro breakup and a Eurozone economic collapse are inevitable?

    Not really.

    In fact, of all the European nations in crisis, only Italy has the potential to take down either the euro or the global economy.

    Just take a look for yourself.

    Getting Rid of Greece

    At this point, Greece obviously is a goner as far as the Eurozone is concerned.

    Really, it should have been pushed out 18 months ago, when it was first revealed that the country falsified its figures to gain acceptance into the Eurozone in the first place. Its government deficit at the time was 12% of gross domestic product (GDP) - not the 6% it claimed, let alone the 3% it had agreed to abide to on its entry.

    French President Nicolas Sarkozy already has admitted it was a mistake to let Greece into the Eurozone, because the gap between its economy and the well-managed polities of Northern Europe was much larger than the area's other members.

    Former communist countries like Slovenia and Slovakia have integrated quite smoothly into the Eurozone, because their governments and people had already acquired the discipline necessary for membership. But since its entry into the European Union (EU) in 1981, Greece has lived on handouts, and raised its living standards artificially to a level two- or three-times the market value of its output. Exit from the euro is inevitable; Greece's problem cannot be solved in any other way.

    In fact, the sooner Greece exits the euro, the better. As it stands now, it's rapidly becoming impossible for Greece to get its debt down to a manageable level, since the country's official debt has been deemed untouchable.

    Once the EU leaders acknowledge the need to remove Greece from the Eurozone, the country's exit will be neither difficult nor damaging. The process of recreating the drachma will be similar to that followed in Slovenia, Croatia, and other ex-Yugoslav republics which abandoned the Yugoslav dinar in the 1990s.

    Inevitably, Greece will have to default on much of its debt, but it's already doing that now.

    So if it's handled correctly, Greece should not be a problem for the Eurozone or the world economy.

    The PIIG Pen

    The other smaller Eurozone weaklings aren't major problems, either.

    To continue reading, please click here... Read More...
  • Does the Eurozone Have Its Own Lehman Bros? Does the Eurozone have its own American International Group Inc. (NYSE: AIG), or worse, its own Lehman Bros. when it comes to Greece?

    I believe it does.

    Why else would the European Union have bent over backwards to "save" a member nation that: A) Accounts for 2.01% of the EU by trade volume; and B) Would essentially be like letting Montana go out of business - no offense to Montanans or Montana!

    More to the point, if things really were under control, why would European Central Bank President Jean-Claude Trichet say that risk signals for financial stability in the euro area are flashing "red" as he did following a meeting of the European Systemic Risk Board in Frankfurt?

    The short answer: Because he knows what the European banks are desperately trying to hide from the rest of the world - that there are still enormous risks and they're even more concentrated now than they were in 2008 at the start of the financial crisis.

    Click here to continue reading...

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  • Eurozone Forecast: How to Profit From the Hidden "Good News" in Europe If you wanted to describe how most of the European nations fared in 2010, you would do so quite easily by citing the old adage: "If it wasn't for bad luck, they'd have no luck at all."

    Truth be told, Europe was in the news for most of 2010 - but for all the wrong reasons. A series of financial panics hit the weaker Eurozone countries hard, forcing draconian austerity measures in many countries and igniting concerns that the euro may not survive as a currency.

    Against such an unappealing backdrop, it's no real surprise that any positive information tends to be overlooked.

    And that's truly unfortunate, since for much of Europe - and for its stock markets - 2011 should be a pretty good year.

    To understand what's really happening in Europe, please read on...

    Read More...
  • Germany's Export Reliance Edges Out European Neighbors By relying on exports and not promoting domestic demand, Germany is creating a lopsided recovery that is hurting retailers and foreign exporters.

    While Germany's exports continue to surge, its consumers are refusing to spend. The government has failed to raise wages or encourage consumption and says it has few plans to do so.

    "By cutting its budget deficit and resisting a rise in wages to compensate for a decline in the purchasing power of the euro, Germany is actually making it more difficult for other countries to regain competitiveness," billionaire investor and cofounder of the Quantum Fund George Soros said in a speech on June 23 in Berlin. Germany is "the main protagonist" for Europe's debt crisis, he added.

    Germany's economy - four times more reliant on exports than is the United States - posted the highest second-quarter growth in the Eurozone, growing by 2.2% in the second quarter from the first. The country is headed for about 9% growth this year.

    Read More...
  • Investing Strategies: How to Build a Global-Investing Portfolio Using ETFs It wasn't all that long ago that global investing was an activity that was restricted to only the wealthiest U.S. investors. If you weren't one of America's ultra-rich, you weren't able to access foreign markets.

    That began to change in the 1950s, with the advent of international and global mutual funds, and access further expanded over the next three decades with the introduction of single-country closed-end funds. Today, thanks to the recent explosion in exchange-traded funds (ETFs), investing in overseas stocks is now almost as easy as targeting a given market sector here at home.

    In fact, although it has been a mere 17 years since the first ETF began trading in the United States (in 1993), the most recent count finds more than 290 international, regional and foreign-country-focused funds listed on the various U.S. exchanges - enough to entice any investor with even a modest yen for overseas portfolio exposure.

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  • Wall Street's Mood Shift Is Signaling a Profit-Making Price Push Ahead A mood of mild optimism has begun to spread down Wall Street not long after there was nothing but long faces. Fancy that.

    More good news out of Europe, better-than-expected new home sales, and the latest of a solid second-quarter earnings season has helped resuscitate the animal spirits that were missing in action since the spring.

    Stocks rose past some key milestones in their historic July over the past week, pushing the Dow Jones Industrial Average just barely into positive territory for the year. It was a very professional, low volatility rally this week, a welcome change from the intra-day dramatics that had put everyone on edge lately.

    What has really changed from the point of view of government policy or corporate results? Nothing and everything.

    To find out what’s changing on Wall Street, click here.
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  • Ignoring Sovereign Default Damages Credibility of EU's Bank Stress Tests The European Union (EU) bank stress tests failed to account for a sovereign default, meaning results show a healthier banking sector than actually exists.

    The tests results were released Friday with seven banks failing, but analysts say many more institutions could have failed if the tests simulated a sovereign default. Testing regulators from the Committee of European Banking Supervisors (CEBS) decided against testing securities held in lenders' banking books, where sovereign debt is held and only written down in the case of default.

    "The long awaited stress tests do not seem to have been that stressful after all," said Gary Jenkins, an analyst at Evolution Securities Ltd. "The most controversial area surrounds the treatment of the banks' sovereign debt holdings."

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  • Hungary's Spat with the IMF and EU Could Signal Another Crisis to Come The biggest financial news story out of the Europe this summer is getting very little play in the U.S. mainstream press. However, it has the potential to torpedo the European Union (EU), and has disastrous implications for borrowing costs worldwide.

    Basically, a miniature banking crisis is festering in Hungary. If it isn't contained, it could grow into a genuine crisis that infects the secondary lending markets around the world.

    Hungary is supposed to have about $30 billion in domestic liquidity for exchange, the equivalent of about five months of capital in its national account. But it won't be getting additional funds from the EU machine in Brussels, or the International Monetary Fund (IMF), anytime soon.

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  • Money Morning Mailbag: Jaded Investors Cast Wary Eye On Scope of Bank Stress Tests The results of Europe's bank stress tests are due July 23. But the question remains whether the tests will shed enough light on the banking sector to restore investor confidence.

    "All these stress tests mean that we are peeling away layers of the onions, but chances are we are not going to get the full clarity that we as investors deserve," Neil Dwane, chief investment officer for Europe at equities specialist firm RCM, told The New York Times.

    Readers who are already on guard from Wall Street manipulation and stalled financial reform have pulled back from volatile markets and are skeptical about the effectiveness of bank stress tests:

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  • Uncertainty Undermining the Global Economic Recovery The International Monetary Fund (IMF) said yesterday (Thursday) that the global economic recovery is losing steam because uncertainty in financial markets is keeping businesses and consumers from investing in future growth.

    In a revision to its World Economic Outlook released yesterday in Hong Kong, the IMF said worldwide economic expansion will decline to 4.3% next year from 2010's 4.6% pace. The forecast for 2010 was revised upwards by 0.4 percentage points to reflect faster-than-anticipated growth earlier this year.

    However, "downside risks have risen sharply," the IMF warned, referring to European governments' debt problems and volatility in financial markets.

    Read More...
  • U.S. Economy: Headed For a Second-Half Slowdown Constant stock market volatility, a crippled job market and the troubles plaguing the European markets are starting to take their toll on the U.S. economy. After the major market rally of 2009, is the U.S. economy headed for a second-half slowdown... or, worse, the dreaded double-dip recession? Read this report to find out exactly what’s in store for the U.S. economy... Read More...
  • Money Morning Midyear Forecast: The U.S. Economy is Headed For a Second-Half Slowdown Most textbook economists say that the U.S. economy is engaged in a broad-based recovery. But while there's a consensus that there's no "double-dip" recession on the horizon, the evidence suggests the nation's economy is headed for a slowdown in the second half of 2010.

    The reason: In a market that derives 70% of its growth from consumer spending, the last half of this year will be all about those consumers - and about the economy's inability to generate enough jobs to keep the nation's cash registers ringing.

    If you add to that concern the end of the various government stimulus efforts, possible fallout from the Eurozone debt contagion, and oil in the Gulf of Mexico defiling the shores of four states, you end up with an economic outlook that's clouded with uncertainty.

    And that uncertainty will continue to stifle hiring and will result in another round of consumer belt-tightening - and a continued economic malaise.

    Read More...