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Spain Is in Big TroubleBy
Tuesday, June 5, 2007
In the last two months, Spain has dumped 80 tons of gold onto world markets. It has also flogged huge quantities of U.S. Treasuries, British gilts, and other similar reserve investments at a similar rate. Why? According to an article in London's Daily Telegraph, the Spanish government is running out of money. The Banco de Espana now has less than $17 billion in foreign currency and gold reserves left. This is enough for just 12 days of imports. An example: In the early 2000s, Ireland was struggling with inflation but had to accept interest-rate cuts because – at the same time – Germany was fighting a recession. Interest rates are set to German considerations. Germany is the largest economy in Europe, and the euro is basically just a new name for the mark. Look at the chart we call the "Euro Convergence Trade." It shows how bond yields in Spain, Italy, Poland, and Greece all converged on German rates when they joined the euro.
The Convergence Trade Anyway, Spain has a notorious problem with inflation. And German interest rates weren't appropriate. You guessed it, the ultra-low rates of the last three years have made the Spanish economy overheat. It's a bit like forcing the Mexicans to use the Fed's interest rate policy. Imagine how bad inflation would be in Mexico right now after two years of interest rates at 1%! The results are amazing. For one, Spain has the largest current account deficit in the industrial world after the United States. This is astonishing for a country with only 40 million people and that until recently was still considered a third-world country. Spain's current account deficit is now 10% of GDP. Household debt has risen to 133% of disposable income... the highest level in the world. (The U.S. ratio has just reached 110%, its own personal best.) Now the interest-rate problem is hurting Spain again – but this time its in the opposite direction. You see, the Germans have decided to raise interest rates on the euro. They've risen seven times since December 2005 to 3.75%. "Spanish housing is about to implode," says Charles Dumas, chief economist at Lombard Street Research. On April 25, a panic swept through the construction sector of the Spanish stock market. Spain's biggest property group, Sacyr, fell 8.15%, while developers Colonial and Inmocaral plunged more than 11%. And Astroc? Its stock crashed 60%. You could short sell the Spanish stock market... using the Spain ETF. The Spanish stock market will struggle when the higher European interest rates begin to kick in to those adjustable rate mortgages.
Market NotesTHE CONSUMER LIVES... AGAIN... AND AGAIN The message from the May 28 issue of Barron's was clear: The "America never saves money" crowd is wrong. Disagreeing with nearly every article you'll read on the status of American savings, Barron's says America's households have plenty of wealth... and are 31% richer than they were 10 years ago, even after accounting for inflation. And casting more doubt on the dead saver/dead consumer theories are the record highs reached this month by the Retail HOLDRs ETF. This fund is loaded with the companies you visit on your weekend shopping trips... Wal-Mart... Target... Home Depot... Best Buy. Obviously, the consumer is healthier than the bears give him credit for. Sure, America has real problems. But it's had the same problems for decades. As the steadily climbing stock prices of the country's retailers show, these problems aren't "real" enough to hamper the American consumer. The market is telling us he's alive and well. |
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