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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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July 13, 2012

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By Eric Sprott

Speaking at a Brussels conference back in April 2011, Eurogroup President Jean Claude Juncker notably stated during a panel discussion that “when it becomes serious, you have to lie.”  Everyone understands that the authorities sometimes lie in order to promote calm in the markets, but it was unexpected to hear such a high-level official actually admit to doing so.  They’re not supposed to admit that they lie.

At this point in the crisis, we are hard pressed to believe anything uttered by a central planner or financial authority figure.  How many times have we heard that the eurozone crisis has been solved?  And how many times have we heard officials flat out lie while the roof is burning over their heads?

Back in March, following the successful 530 billion euro launch of LTRO II, European Central Bank President Mario Draghi assured German’s Bild Newspaper that “The worst is over…the situation is stabilizing.” The situation certainly did stabililize…for about a month.  And then the bank runs started up again and sovereign bond yields spiked.

We have no doubt that everyone is tired of bad news, but we are compelled to review the facts:  Europe is currently experiencing severe bank runs, budgets in virtually every western country on the planet are out of control, the banking system is running excessive leverage and risk, the costs of servicing the ever-increasing amounts of government debt are rising rapidly, and the economies of Europe, Asia and the United States are slowing down or are in full contraction.   There’s no sugar coating it and we have to stop listening to politicians and central planners who continue to downplay, obfuscate and flat out lie about the current economic reality.  Stop listening to them.

Nothing the central bankers have done up to this point has worked.  All efforts have simply been aimed at keeping the financial system from imploding.  QE I and II haven’t worked.   LTRO I and II haven’t worked, and the most recent central bank initiatives are not even producing short-term benefits at this stage of the crisis.

The smart money is finally waking up to the dimension of the problem here and realizing that it’s really a banking issue.  Deposit flight has revealed the vulnerability of the European banking system:  when depositors make withdrawals, the only assets the banks can sell to raise liquidity are sovereign bonds, which creates the vicious downward spirals that up to this point have always resulted in some form of central bank bailout.  Many eurozone authorities still have trouble understanding this.  As Spanish Economy Minister, Luis de Guindos, recently stated to reporters at the G20 Summit, “We think…that the way markets are penalizing Spain today does not reflect the efforts we have made or the growth potential of the economy…Spain is a solvent country and a country which has a capacity to grow.”  Every country has the capacity to grow.  Not every country has a domestic banking system that has already borrowed 316 billion euros from the ECB so far this year, and needs to rollover roughly 600 billion euros in bank debt in 2012.  That may be why the markets are reacting the way they are.

If you want to know what’s really going on, listen to the executives of companies that actually produce and sell things.   On May 24, Tiffany & Co. cut its fiscal-year sales and profits blaming “slowing growth in key markets like China and weakness in the United States as shoppers think twice about spending on high-end jewelry.”  On June 8th, McDonald’s surprised the market with lower than expected same-store sales growth in May, following a lackluster April sales report that the company stated was “largely due to underperformance in the United States, where consumers continue to seek out very low-priced food.”  On June 13th, Nucor Corp., the largest U.S. steelmaker by market value warned that its second-quarter profit will miss its previous guidance after a “surge” in imports undermined prices and “political and economic uncertainty affect buyers’ confidence.”  On June 20th, Proctor and Gamble lowered its fourth quarter guidance and profit forecast for 2012.  Other companies that have recently lowered guidance include Danone, Nestle, Unilever, Cisco Systems, Dell, Lowe’s, and Fedex.  It’s ugly out there, and many companies are politely warning the market about the type of environment they foresee ahead in both the U.S. and abroad.

To give you a hint of how bad it is in Europe today, the most recent retail sales out of Netherlands show a decline of 8.7% year-over-year in April.  In Spain, retail sales fell 9.8% year-on-year in April.  Declines of this magnitude are not normal occurrences and signal a significant shift in spending within those countries.  We fear this is a sign of things to come within the broader Eurozone, which will only serve to complicate an already dire situation that much more.

The G6 central banks are out of conventional tools to solve this financial crisis.  With interest rates at zero, and the thought of further stimulus rendered politically unpalatable for the time being, we cannot see any positive solutions to this problem other than debt repudiation.  We continue to note the contrast between the reporting companies who by law cannot lie about their fiscal realities, versus the central planners who admit that they must lie to preserve calm and control.  We’ll leave it to you to decide whose version of the truth you want to believe.