Randolph Buss

The joke going around the table goes like this : "We went out of recession, when??" and all the economists start rolling on the floor in laughter.

Dear readers, let's get some perspective : The "PIGS" are still a major problem for the Euro and the European Central Bank. Portugal, Ireland, Greece and Spain are economies in meltdown mode - their debt to GDP ratio is supposed to be 3% max - well, they have something like 10 or 12%. And Greece, in case you were wondering, is teetering on the edge of implosion. Their debt ratings look horrendous. A "common currency", the Euro, blackmailed by dubious standards of qualification and lack of enforcement. It is a political currency - not a currency based on common standards. How can a currency based on heterogeneous nations with different economic cycles march forward together in unison? It can't. And neither can the European Central Bank force them. The ECB must play to the lowest common denominator and try to massage interest rates into a "one size fits all" policy.

Yeh, but what does all this have to do with me, you ask. Alot. The Eurozone is staggering, blundering along with strong recessionary tendencies, little growth perspective and this means many companies are VERY WARY to start hiring again. This also means wages and salaries are more or less going to be capped in the near term. Which means job prospects are limited and more money through wage increases is also not likely. Credit from banks to small business is still being curtailed and this puts a hamper on many business owners to get credit they might need to expand, or at worst, stay alive during a downturn in the economy. This is not me being a Cassandra and painting all black - but it is our current reality. And we would do ourselves a disservice to ignore reality.

Will we come out of this eventually? Of course we will. But the question still open is, in what shape will we come out?

The general point is this : in an economy based largely on exports, Germany must ask the question, who can we export to if everybody else is also in recession ? The German Ministry of Finance has come out and stated today : "the pace of recovery is slowing". Tax revenues are declining by a massive 7%. Communal tax bases are drying up as business slows. This affects you and me, directly. I think the message is : be prepared.

The Euro currency has started to come under pressure and is at its weakest level in nearly six months and may be getting weaker further on the outlook around Greece. Currently trading at 1.3966 to the US Dollar. The DAX market has in these last few weeks broken MAJOR support of the uptrend line - current support lies in the yellow zone.. This may be the start of a larger correction in the equity markets - as anticipated by many.

Two factors have contributed to the massive EUR sell-off. Firstly, and perhaps most importantly, Greek government yields have risen dramatically as Greece is struggling to convince investors it can finance the eurozone’s biggest public deficit. Markets are afraid that the Greek debt problems will have a negative spill-over to other debt burdened countries within Euroland. Secondly, China’s attempt to curb bank lending by increasing reserve requirements and tightening of money market conditions has
increased risk aversion, which benefits the US dollar. A vast amount of traders caught on the wrong foot with long EUR positions and short USD might also have contributed to the sharp decline in EUR/USD.

What does this tell us investors ? The EUR is weakening. The USD is strengthening. On a relative basis, the recent approval of Bernanke as head of the US Federal Reserve takes away one risk to the USD. Likewise, the Federal Reserve has stated they will likely keep interest rates low for 2010 but planning their exit strategy. The ECB has also stated they plan to keep interest rates low in 2010. So, while they tell us the recession is over, their actions of keeping ample liquidity and low interest rates tell us they don't believe their own press releases.

Randolph Buss
Financial Editor
contact me : editor@gmrletter.com