Arrivederci Italia: Which shoe drops next in Europe?

Et tu, Brute? Horror show traveling quietly to U.S.

WASHINGTON, June 14, 2012 – First it was Greece. Then it was Spain. Now, perhaps, it’s Italy’s turn to terrorize Wall Street today, not to mention London, Zurich, Paris, Berlin, and everywhere else. According to CNBC, “Italy’s three-year borrowing costs spiked to 5.30 percent at auction on Thursday as the euro zone’s debt crisis intensifies.”

This comes on the heels of another whack by Moody’s after Tuesday’s European market close—three downward whacks, actually—on their rating of Spanish debt, placing it dangerously close to junk at Baa3. Apparently, the rating agency wasn’t pleased with the terms of Europe’s latest rescue bid, which is focused on that country’s banking system. Are you getting the sense that this mess is whirling slowly down the metaphorical toilet bowl these days?

Roman Colosseum.

The glory that was Rome. The Colosseum, from a circa 1896 postcard view. Is the U.S. next in the queue? That’s up to us this November.

Meanwhile, back home in the U.S., the economy continues to wobble, as the Great Recession continues to morph into Great Depression II. We’ve contended for some time that the “economists” have had this recession all wrong from the get-go. Their financial models tell us we pulled out of the recession a couple of years back. But, since policymakers talk only to themselves and to the rich guys who keep them in office, they’ve remained blissfully unaware that for the massive number of unemployed and underemployed former members of the middle class—not to mention those citizens still keeping a single-claw-hold on middle-class status—this economy has never improved at all.

This recession has never ended at all for these folks. While America’s megabanks are back to their old trading tricks again (see JP Morgan), and while Wall Street’s Masters of the Universe continue to collect mega-bonuses, the rest of the country languishes. They’re also in an increasingly surly mood, as the Obama administration well knows but is not telling anyone.

The invaluable but occasionally opaque Zero Hedge can back up this observation with some crucial facts, reporting that today’s initial jobless claims have come in at “386K, a number which will be revised to 390K next week, a swing and a miss to expectations of 375K, and not even the mainstream media will be able to come up with [its] token idiotic headline that claims decline because they did not….This is the 22nd expectations miss in the last 25 reports.”

Worse, though, than this jobless-claim chicanery (which we’ve commented on in other columns) is Zero’s observation that “a massive 135K people fell off the Extended and EUC [Extended Unemployment Claims] claims as the 99 week cliff hits more and more. Recall that last week[,] 105K dropped [off] extended claims. This means that in the past two weeks alone[,] 240,000 people no longer collect the last possible form [of] government unemployment benefits, the most in a two week period since December 2010! We can only hope that they are fat enough to collect the new normal stimulus check: disability.”

Bolding is Zero’s, but you probably got the point anyway.

If you haven’t been unemployed, or haven’t followed this stuff closely, Congress and the administration first extended unemployment benefits back in 2009, revising the rules again to assist states in absorbing various flavors of extended benefits packages while giving providing even more unemployment dollars to particularly hard hit states (i.e., ones that vote for Democrats). What Zero is relating is that, as time marches on, more and more Americans are dropping off even the most extended of unemployment packages.

This has a domino effect, as the budgets of these individuals—who, of course, have no change of finding meaningful work in the Obamanomic system—have to further cut back discretionary budgets in order to maintain survival mode.

Our evidence? Investors Business Daily reported today that “weakening retail sales are a troubling sign for one of the economy’s few remaining growth drivers, just as job gains sputter and Europe’s debt crisis worsens. May sales fell 0.2% vs. April, and the prior month was revised to show a 0.2% drop instead of a 0.1% gain…the first back-to-back monthly decline in almost two years.”  (No link to IBD as it’s behind a pay wall, and we pay.)

To add to our tale of woe, ETF Digest’s Dave Fry tweeted this cheery news bit earlier this morning: “Core inflation higher, up 2.3% yoy.” (That’s “year on year.”) Stagflation*, anyone? Boomers will remember this, but perhaps Xers, Yers, millennials, and whomever else is in the queue will soon learn what it’s like to have stagnant or nonexistent wages while prices creep, creep, creep inexorably upwards.

All this will not be good for the market, going ahead. As we wrap this column up, the Dow has just opened up a dozen points or so and the S&P 500 is marginally positive. But the tech-heavy NASDAQ is down a bit and the market’s tilt still has to be negative going into the weekend, given apprehension about the Greek elections. Plus Italy, etc. You get the picture. Quadruple witching week, as we’ve preached ad nauseam, could game these numbers a bit. But we can’t believe that, with the current very high market volatility, those traders and machines that are left won’t want to dump stocks (or short them) going into this weekend’s headline risk morass.

We continue to hold utilities and a few REITs primarily, and will continue to hedge our portfolios with select inverse (short) ETFs. This is a heck of a way to play, but we have to try to make at least a little money while Congress and the administration fiddle and while Wall Street scoops up those bonus checks.


 * BTW, Presidents Nixon and Ford ultimately got the blame for stagflation. But it was (Democrat) Lyndon Johnson’s monetization of the Vietnam War and his concurrent “Great Society” programs that got this started, and it was (Democrat) Jimmy Carter who took it over the top. The two Republican presidents were only caretakers of this mess, as Democrats routinely controlled Congress back then. Note any parallels with the situation today?


Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.

Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.

References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.

Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.

Follow Terry on Twitter @terryp17



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Terry Ponick

Now writing on investing, politics, music, movies and theater for the Washington Times Communities, Terry was formerly the longtime music and culture critic for the Washington Times print edition (1994-2009) before moving online with Communities in 2010.  



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