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The meltdown in Europe’s debt market just keeps getting worse. In the past several days …
• Ireland was forced to follow Greece down Bailout Road. The country needed $113 billion in aid to fill a Grand Canyon-sized hole in its budget. Greece got its $148 billion infusion of European cash earlier this year.
• Despite the Irish bailout, European debt markets continued to sell off hard in the other “PIIGS” countries — Portugal, Italy, and Spain. Benchmark 10-year borrowing costs jumped 144 basis points to 5.42 percent in Spain, while Portuguese 10-year yields surged by more than two-thirds to 7.01 percent.
• Worse, the selling is now starting to spread to other bond markets most analysts didn’t even know were in trouble! The yield on Belgian 10-year notes just surged to the highest premium versus equivalent German notes in 17 years. Poland and Slovakia were also fingered by the Organization for Economic Cooperation and Development as fiscally shaky recently. That raises the possibility they’ll be the next to see their bonds plunge.
The Europeans are considering many additional measures to restore confidence as a result. But the only real, lasting solution is going to be debt defaults.
No more of this “take huge amounts of money from European taxpayers so that bondholders get 100 cents on the dollar” garbage. Instead, we’ll need to see actual haircuts in the value of European sovereign bonds. That will help reduce national debt loads to some level that’s manageable for the long term.
What Are U.S. Policymakers Doing to
Head Off a Similar Crunch Here? Squat!
Meanwhile, here in the U.S., you’d think U.S. policymakers would be learning an important lesson from the European debt crisis. You’d think they would take drastic steps to get OUR national finances in order … before a similar sell off hits home.
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But you’d be dead wrong!
Just look at the deficit commission nonsense that exploded into plain view this week. The National Commission on Fiscal Responsibility and Reform finally released its report on America’s debt and deficit crisis. The document contains lots of high-minded talk and lots of strong language — language that mirrors what Martin and I have been saying for a long time:
“America cannot be great if we go broke. Our businesses will not be able to grow and create jobs, and our workers will not be able to compete successfully for the jobs of the future without a plan to get this crushing debt burden off our backs …
“The problem is real. The solution will be painful. There is no easy way out. Everything must be on the table. And Washington must lead.”
Yet the commission has always been a farce because any recommendations that it put forward were nonbinding — Congress couldn’t be forced to pass them into law. And even with that huge loophole, the commission couldn’t get all 18 of its members to agree to the recommendations.
As The New York Times reported on Wednesday …
“The chairmen of President Obama’s debt-reduction commission have been unable to win support from any of the panel’s elected officials for their proposed spending cuts and tax increases, underscoring the reluctance of both parties to risk short-term political backlash in pursuit of the nation’s long-term fiscal health.”
What’s the problem?
The document calls for deep cuts in military spending, an increase in the retirement age for Social Security benefits, and the reduction or elimination of tax breaks for mortgage interest and employer-paid health insurance, among other things.
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The Washington Post calls these measures “political dynamite.” And it’s extremely doubtful that members on both sides of the aisle in Congress have the will to stand up to America and pass these difficult, but necessary, measures. So the country’s debt load and deficits will continue to climb.
That virtually guarantees the bond market will need to force Congress’ and Obama’s hand. You can expect to see Treasury yields rise and bond prices fall here in the U.S. … much like we’re already seeing happen in Europe … despite the Fed’s failed QE2 program.
What to Do …
If you own long-term Treasuries, and you haven’t already sold them on my multiple recommendations, do so now. They’re vulnerable if a European-style debt crisis hits home, if the inflation data gets worse, if the economy picks up — you name it.
The impact on other parts of the bond market is a bit less clear. We just saw a massive sell off in emerging market bonds, even though the prospects for emerging markets are much better than developed ones. So there may be some opportunity there, particularly in shorter-term securities.
And ironically enough, many corporations are actually in better financial shape than some sovereign governments!
They’ve been cutting costs to the bone, generating oodles of cash, and reducing overall debt loads. So as long as you avoid long-term bonds, and stick with short-term securities, you may be okay there too.
If you want more specific recommendations, check out this month’s Safe Money Report. You can get it for just 27 cents per day if you’re not already a subscriber by clicking here.
Until next time,
Mike
P.S. This week on Money and Markets TV, we discussed a topic that’s on people’s minds this holiday season: Technology. Tech devices top many wish lists, and tech stocks are among the hottest buys in the market.
If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.
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This article provides evidence of gross mismanagement of central bankers, wall street money center banks, investment banks, mortgage-backed securities originators and traders, who leverage to the hilt to the point of no return, and the credit rating agencies were negligent and continue to be so.
Plse be factual and fundamentally driven and watch the financial cartels destroy value….
Provide us with the facts and the insights.
Please bear with me as I quote portions of the report’s preamble (the words in parenthesis are my editing):
“Our challenge is clear and inescapable: America cannot be great if (our federal government goes) broke. Our businesses will not be able to grow and create jobs, and our workers will not be able to compete successfully for the jobs of the future without a plan to get this crushing (government) debt burden off our backs.
“Ever since the economic downturn, families across the country have huddled around kitchen tables, making tough choices about what they hold most dear and what they can learn to live without. They expect and deserve their leaders to do the same. The American people are counting on (our leaders)
to put politics aside, pull together not pull apart, and agree on a plan to live within our (government’s and taxpayers’) means and make America strong for the long haul.
“As members of the National Commission on Fiscal Responsibility and Reform, we spent the past eight months studying the same cold, hard facts. Together, we have reached these unavoidable conclusions: The problem is real. The solution will be painful. There is no easy way out. Everything must be on the table. And Washington must lead.
“We come from different backgrounds, represent different regions, and belong to different parties, but we share a common belief that America’s (current and) long-term fiscal gap is (both unacceptable) and unsustainable and, if left unchecked, will see (us,) our children and grandchildren living in a poorer, weaker nation. In the words of Senator Tom Coburn, ‘We keep kicking the can down the road, and splashing the soup all over our grandchildren.’ Every modest sacrifice we refuse to make today only forces far greater sacrifices of hope and opportunity upon (us and) the next generation.
“Over the course of our deliberations, the urgency of our mission has become all the more apparent. The contagion of debt that began in Greece and continues to sweep through Europe shows us clearly that no economy will be immune. If the U.S. does not put its house in order, the reckoning will be sure and the devastation severe.”
Then, after those above stern opening remarks stressing the urgency of getting the government’s
“crushing debt off our backs” and avoiding “severe devestation” the report recommends an action plan that will finally balance the budget – a drum roll please – in 2035.
That is, the Commission’s action plan will allow today’s crushing debt burden to become increasingly crushing for another 25 years! Makes me wonder how many additional crushing years it will then take to pay down the debt to reduce its interest expenses to an uncrushing level.
No wonder Americans and their main-stream media are responding,to the report’s crisis alert with, as usual, ho-hums.
Great line Mike —
“No more of this “take huge amounts of money from European taxpayers so that bondholders get 100 cents on the dollar†garbage.”
The same goes for the US.
Only in reality, we see governments on both sides of the Atlantic going to extremes to keep the Big Banks from taking any losses. This speaks volumes about exactly who controls governments.
So who will win out …the public or the banksters?
If forced to bet … I’d pick the banksters.
But then, moot point as they already have my money.
Father George Bush said on national television….when he was president……that the world needed a One World Government. Does anyone remember that? The world appears to be headed that way. History proves that man’s kingdoms inevitably fail and no doubt that terrible idea will too. But in whose lifetime?. America has a Trojan Horse at her gates! Will she wake up or continue in her spoiled and drunken stupor?
In order to go some way, a very decent way, to correct its borrowing needs the USA needs to cut spending and increase taxes. The best way to increase taxes (admittedley difficult given the thick headed general intelligence of the population) is a fuel duty. Add 5 cents a gallon to the price of gas and diesel once a month for twenty months. This would still leave the cost of fuel relatively low compared to many countries but it would raise billions of dollars and make a considerable difference and improvement to the economy. Americans seem to think they have a special dispensation, a right, to cheap energy, they don’t, the nation needs to tighten it’s collective belt, grab it’s bootlaces and pull ’em up. America seems to me to be going where every other dominant empire has gone throughout history – downhill to the third world of the day. There’s room for two on the slippery slide not just Europe alone. I’d avoid crackpot socialism such as in my blighted land (the UK) if you don’t want to reach the bottom of the slide before Europe does. And one more thing, did anyone notice the more “rights” you have the less freedom. Perverse ain’t it!
I have a business I am developing in Belize. Had to go to Chetumal, Mexico for parts last Thursday. I was surprised that NO ONE, hotels, restaurants, business places would accept American (or Belizean money which is tied to the American dollar) money. Should we seek security in the Mexican peso?