Monday, November 28, 2011

Dow Up 300+ Points, But Not All is Well.....

The Dow Jones Industrial Average is up over 300 points, about 2.8%, on a combination of economic news, reversing the declines of last week.  One of the keys was the strong holiday sales in the United States this past weekend.  Sales surged 6.6% over last year's levels on Black Friday - and US consumers spent about $52.4 billion in total for consumer goods during this weekend's kick off for the 2011 holiday season.

This, however, brings forth some unknowns that could temper the excitement around the sales activity.  One unknown is if this trend will be sustainable throughout the holiday season or if this represents a temporary demonstration of recession fatigue - where shoppers, tired of the watching their pennies, decide to binge a bit before returning to watching their pennies.  The other unknown is if the sale prices offered by retailers which attracted the attention of the consumers was a case of getting a tactical win while risking a strategic loss by surrendering too many profits for the tactical win.

The other 'good' news that is bolstering Wall Street this Monday morning comes from Europe.  As reported in yesterday's 'Quick Hits', the France and German are developing a new 'Stablility Plan' that will increase the EU's control over the national budgets of the EU member states.  This would centralize control of the budgets to ensure that the needed austerity measures are implemented regardless of the will of the national government.  Also envisioned are plans to provide the European Central Bank with more authority to purchase government bonds of nation's facing economic challenges.  This is a major reversal from the current strategy of the ECB.  The ECB currently operates under the theory that if they would aggressively purchase bonds that are not selling well on the open market, those countries, knowing the ECB will step in, are not incentivized to take more remedial actions to address their fiscal challenges.

With all of this 'good news', pessimism still remains very present in the Eurozone.  The Financial Times is reporting that the Eurozone is days from collapse - and a race is on as to if this will happen before the 'Stability Plan' can be developed.  Another consideration is going to be the blowback from EU members over the "Stability Plan' - will they be so willing to cede their national control of their budgets to the EU Parliament?

The Daily Telegraph in the UK makes the case in this commentary that a German credit downgrade is the next logical step in the economic crisis....
Received wisdom is that the German fiscal position is unassailable. It's true the annual budget deficit there is just 4.3pc of GDP but total debt will rise to 83.2pc of GDP this year, not far off Portugal at 93.3pc and already ahead of France (82.3pc) and Spain (61pc). The German economy, and its management, is seen as being too strong to allow its debt position to get out of hand. But on Tuesday the Bundesbank reminded us that such assumptions are prey to unforeseen events - notably the central bank's decision to downgrade its forecast for German growth next year to just 0.5pc.
There are then the unknown costs to Germany of its share in any future bail-outs of other stricken countries plus likely recapitalisations of its banks.
 As optimistic as Wall Street may appear to be today, there still are some major questions - and funds - needed to address and try to prevent the default of a number of EU nations as well as the collapse of the Euro as a currency.  The International Monetary Fund is drafting a $800 billion bailout plan to cover both Italy and Spain - but questions remain as to where the funds are going to come from.  Since the US is responsible for about 18% of the IMF, does this mean that the US is going to be obligated to fund at least $140 billion of this bailout plan?  Or, should the Federal Reserve of the US take a more direct and active role in bailing out the Eurozone - just as it did with the US and International Banking Industry in late 2008 and early 2009?

The US has it's own major financial challenges including a debt level that is approaching that of the most troubled EU nations - and an annual budget deficit that represents the need to borrow 40 cents of every dollar spent.  But will politics, and the desire of President Obama to advance his personal political aura, take precedence over the economic risks to throw billions into the EU and EU nations that show no interest in reversing the irresponsible policies that brought them to this stage?

Can the President afford, politically, to let these nations which have invested decades in implementing the progressive policies that he advocates, fail because of those policies?

Is China an option for the EU?  How willing are these nations, who are grumbling about some of the conditions that the EU bureaucracy are placing on their countries, to accept the conditions of the People's Republic of China?  China is facing their own signs of economic challenges.

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