We've spoken a great deal about oil in the last few weeks, but new items are emerging on the economic radar that require discussion, so we're shifting focus for the time being.
The first issue is European sovereign debt.
Under the cover of NATO bombing the ancien regime's assets in Libya and the Japanese earthquake and its devastating aftermath, European fringe bonds have sold off in manic fashion. We're talking about Ireland and Portugal specifically – though not exclusively. Greece, too, has seen growing waves of selling and Spain is looking more the dog daily.
But Portugal is now in the center ring of the ongoing European circus. The Iberian pauper was thrown to the debt dogs after its minority government stated it could no longer govern. The cause of the resignation was refusal of opposition parties to endorse an austerity plan that would have avoided triggering a European bailout. But now that tax hikes and spending cuts have been voted down, Portuguese bond yields are screaming higher, and it appears the peninsula dwellers will now be forced to accept terms dictated by their European overlords a la Ireland and Greece. Either that, or go bankrupt.
A Zoo of Debt
The scene now shifts to Brussels, where those same lords and ladies are meeting to decide how best to show the world that Europe is not a joke that has morphed from funny to grotesque, and that earlier blowups in Greece and Ireland have now seen their end in Portugal.
How that show goes is anybody's guess, but for our part, it appears that well-fed Europeans living in la-la land for the better part of a century will now have to deal with the proverbial chickens coming home to roost. When you live too high off the hog for too long on other people's money, you eventually forget how to work and save. And when you can no longer pay for your feed, and no one wants to give you anything without loan shark rates attached, you eventually to learn to live within your means. Upshot is: no matter how you slice it, countries like Portugal, Ireland and Greece will ultimately decree upon themselves austerity whether they like it or not.
Until they get it together, however, the lords of Germany and France will have to pay for the periphery states to borrow at cheaper rates, one consequence of which will be strong headwinds in the face of the German and French economies.
Do Not Invest In Europe
While Europe may look like a soggy souvlaki in a bun, Japan is indescribably less appetizing from an investment perspective.
Take a look at this:
Japan had been counted upon (along with China) to help the EU support the European periphery by soaking up those countries' new debt issuance. Japan is plainly not in any position to continue in that role at the moment, as they're now preparing to turn to global capital markets to finance their own reconstruction.
And as the above chart shows, Japan is literally 'off the charts' in terms of its national debt to revenue ratio, with a current reading of better than 1900% (!), and in the process of expanding appreciably. With new financing needs about to explode and tax receipts expected to plummet, that country will be years in the recovery, and won't be in the lending game in any appreciable way for gawd knows how long.
Around the World in 80 Words
In the meantime, Egypt's market sold off (again) and is down 6% as of this writing, with tanks parked outside the Cairo Exchange. Libyan tanks, too, are active against that country's rebels. And Moody's just downgraded 30 Spanish Banks, leading Euro pessimists to view Spain as the next continental domino to fall. (Spain has 20+% unemployment and a rocky real estate outlook.) Globally, automakers are due to run out of microchips, sensors, rubber and other necessary parts due to the disaster in Japan. Look for plant shutdown to begin shortly.
When it's time to make money
Best to make it in U.S. dollars. There's not going to be any great appetite for yen for the next few months, despite the recent rally and premature calls to buy the dip. Nor will the latest push higher in the Euro last much longer. There's simply nothing underpinning either move, save inertia.
The dollar's gonna rise, folks. Play it with DXY options perhaps. Long dated calls may be the best bet.
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
