I Am an Optimist!!

Seriously I am. I am the half glass full kind of guy. I frustrate my wife with my up beat view on things. Yet for three or so years I have been "a the sky is falling" kind of guy on the economy. Now I am looking at long term fundamentals and will be the first to admit my timing on what is going to happen has sucked big time. This is why, in part, I have posted little in the past couple of years as the markets have not behaved rationally given what I view as reality. But I would be remiss to diss the markets when nonsense is boosting them.

I have begun posting again as I think things have finally gotten to a critical stage where the positive hype is not going to win the day and my predictions are coming to the front, perhaps later than I expected. Let me spell out a few factors here:

• housing in the U.S. is still sucking wind and with shadow inventory will likely do so for a couple of years;


• China is trying to cool down real estate and other bubbles forming there (my hat is off to them for trying to do so) so its economy is bound to cool a bit, which will have a chilling effect on the world economy;


• Greece and the other PIIGS have really no alternative in the long run other than to default (but I have no doubts they (as in EU and IMF) may kick this can for a few years before their toe hurts);


• unemployment is not improving in any significant way soon (Ben supports me on this)


• the economy is sluggish at best and will continue so this year (Ben agrees); and


• Ben ain't doing squat to support us for now (I do however see QE3 late this year or early next)

All said and done, the next six months are difficult at best. It will be interesting!

Disclosures: None.

Buy on the Rumor sell on . . .

If you have not heard, Papandreou got his vote of confidence last night. Really folks, does anyone truly have confidence he can pull this off. The markets were up yesterday on the prospect of this happening, but now that it has happened they are pretty lackluster today. Perhaps this is because the vote of confidence is not the final say even for this go around of EU/IMF support (bailout). Greece still has some tough austerity issues to pass in the next week. I agree it seems likely these will pass now, but the protests in Greece continue and passage is not a sure thing. Either way, passage just buys more time and pain.

Hark back to last year when a package of austerity measures were passed to get the initial bailout package. Unemployment in Greece was a mere 11.6%. It now stand at 16.2% and this decline is in large part due to the austerity measures. Now Greece is going to compound this with further austerity measures, which undoubtedly will worsen an already very weak economy and employment picture. Add to that no reduction in debt, the bailout being lent a relatively hefty interest rates (albeit far below what they could get otherwise) and the need for a lot more bailout money next year and you have a real mess on your hands. The only good news I have read is that the new austerity measures include a crack down on tax cheats in Greece, where cheating on taxes seems to be a national past time for the rich.

Things will undoubtedly get much more dire in Greece before they get better and this can will easily need to be kicked for a good 5-10 years for a default to be avoided. I have a nagging sense that neither the voters in Greece nor the voters in France or Germany are likely to have the appetite for it going on that long. Frankly, no one does.

Disclosures: None (though I do have a Greek friend)

Spin Doctors

So CNNMoney is reporting that the market is up due to hopeful expectations on a vote of confidence in Greece and, I qoute:

"a smaller-than-expected decline in existing home sales."

Okay, the decline was to 4.81 million units and the expectation was 4.8 million units. What really happened here is the number for May was revised downward so that the percentage decline from May to June was less than expected. Slap me in the face here! How is it good news that the decline was smaller because last month's number was wrong to the up-side? Isn't a revision down to last month's number bad news?

Greece On, Greece Off, Greece On, Greece Off

It seems markets around the world are still quite focused on Greece to see what will happen. The same thing happened last year, they were bailed out and the can was kicked. Here we are again and Greece is, if anything, worse off than it was a year ago. So they may get another bail out for a while to ward off the evil spirits, but only to temporarily delay the pain. We will get there (i.e. haircuts or perhaps Greece leaving the EU so it can devalue its own currency), the math makes any other alternative virtually impossible to conceive, but the EU is putting its head in the proverbial sand and hoping that day never comes.

I could link articles but they are everywhere these days on Greece's problems and how it is just the first domino in the PIIGS game. Curiously, what I am not seeing in the press is the well recognized problem in Greece that a significant number of citizens there that make big dollars are not paying the taxes they owe. One might think that cracking down on tax cheats when cheating is rampant might help a tad in their fiscal issues. And for you idiots in Greece not paying your taxes, you will soon pay the price for it. Seriously, the goverment cannot survive for free and the poor being the only ones paying what is due will not make ends meet. I take solace that the tax cheats in Greece may end up paying the price in time, and I think they will. Perhaps better now to save the country and themselves from something worse they should start paying up and consider paying off some back taxes. Just a suggestion.

Greeece's debt will undoubtedly get funded for now and push the press coverage on its problems off until the fall, when once again the markets will focus on the default risks. And by then many others in the chain will have their credit downgraded and the problems simply keep getting worse. Personally I am simply tired of this axe hanging over the world economy. It has been there well over a year and is not going away. It is like unemployment and housing issues in the U.S.

QE2 is coming to a close and we are really not much better off than when it started. This summer looks likely a replay of last summer with the economy cooling, unemployment continuing, markets struggling, housing still in the dumper and Bernanke and Obama trying to explain why their moves to date have not worked as planned. When the PIIGS finally go under, things will get worse - for a while - but letting them hang on with no real hope is simply agonizing for everyone.

So if anyone living in the PIIGS is listening, let me ask one quesiton: do you think the first country to default or the last will do the best? If you have a doubt, ask Iceland.

Disclosures: None