Spain's Housing Crisis Will Be Good for Gold

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The Daily Reckoning | Friday, June 1, 2012 Revenge of the Chumps: Who buys what, when and how... Like a zombie in a horror movie... Plus, Bill Bonner on the golden “tipping point” and plenty more... ------------------------------------------------------- Europe is the last place your attention should be right now... When Greece’s debt crisis first shook the world in 2010, people were so preoccupied by headlines about Europe many of them missed out on the big early gains being generated by America’s explosive shale boom... Now that same distraction could cause them to miss out on an even bigger moneymaking opportunity. Forget about France, Germany, Greece and Spain for a moment — something far more unexpected, important and life changing is about take place right here at home... Click here now to see what it is.   Geniuses or Chumps Who’s Really Holding US Treasury Bonds?   Bill Bonner Reckoning today from Baltimore, Maryland... The Chumps’ Revenge? The German’s Retreat? Another month gone by. Still no sign of recovery. Where are the fools when you need their money? Yesterday, we were singing the praises of the chumps and patsies. Thank God for the dumb money, was the chorus. People willing to spend what they don’t have on what they don’t need — that’s what made the old economy of ’71-‘07 spin around so fast. And now where are these chumps? They seem to have run for cover where they didn’t want to go. They don’t seem to want to buy stocks. Now, they’re buying US Treasury bonds! But what’s this? “Gold Rises $40 As Markets Fall Sharply — Safe Haven “Tipping Point”? Bloomberg (on Wednesday): Gold fell and tested support at $1,530/oz but then bounced very sharply and rose by nearly $40 from $1,532/oz to $1,570/oz. US stocks and commodities remained under heavy pressure and the benchmark S&P 500 ended down 1.43%. Gold consolidated on yesterday’s gain in Asia and during European trading it is challenging resistance at $1,570/oz. Gold is set to incur its 4th month of losses which has not been seen in nearly 13 years. Interestingly while gold in dollar term is off 6% in May, the sharp fall in the euro means that gold has again risen in euro terms and is up 0.3% in euro terms in the month. Gold may have turned a corner. It was going down with stocks and other commodities. But on Wednesday, stocks fell hard...while gold bounced. Then, yesterday, gold held steady...while stocks fell again. What’s going on? Ultimately, gold is money. It is the only money you can trust. And when you begin to have doubts about the other currencies — those made from wood and controlled by wooden heads — your enthusiasm for real money increases. Which makes us wonder who is holding so many dollar-based US Treasury bonds? It must be the chumps. Yields fell to their lowest point ever on Wednesday. That means that a lot of people are buying them. Which is remarkable for a couple of reasons. First, US credit quality has declined substantially over the last 5 years. Deficits have pushed up the national debt from 60% of GDP to over 100%. Both S&P and Egon Jones downgraded US debt as a result. Unlike Europe, which tries to squeeze the reckless spending out of the system, the feds are still at it...and unrepentant. They now fritter and consume about $1.30 per dollar received in tax revenues. Second, in times of stress, the custodians of the dollar at the Fed have shown themselves ready, willing and able to throw the greenback out of the lifeboat. If it’s a choice between saving the dollar...or saving their jobs, or their campaign contributors...or their power...we know what they will do. Third, unlike Japan, the US still runs a substantial trade deficit. The last month tallied was March, in which imports beat exports by more than $50 billion, or about $600 billion, annualized. The Japanese and others used to use a lot of that money to buy US debt and support US deficit spending. Now, they need it for their own purposes...or to buy gold. This leaves the US with neither a net flow of funds coming in from overseas...nor high domestic savings. It has no means of sustaining a long spell of deficit spending. Fourth, last year, nearly two out of every three dollars in deficits were funded by printing press money — or a near equivalent — from the Fed. All of those reasons should give bond buyers pause. But they can’t seem to find the pause button. They buy US bonds without hesitating. And who knows? Maybe they’re right. It has been five years since the crack up in subprime. There is still no relief in sight. No recovery. Instead, bond yields themselves signal a deep economic sleep setting in. Like a Japanese Rip Van Winkle, the US economy could slumber for 5...10...20 years. And the yield on the 10-year note could fall some more...maybe to as low as 1%. Then, the bond buyers will look like geniuses, not chumps. People who mortgaged their homes to lock-in a 4% rate will regret not having waited for 3%. People who bought stocks because they didn’t want to miss the big recovery boom, will regret ever leaving cash...as their stocks fall 20% to 50%. And people who bought houses at a 30% discount from 2007 will cringe every time they look at the real estate section of the local paper. Those same houses will be down 40%...and 50%. Yes, it will be the Revenge of the Chumps...the poor shmucks who bought US Treasury debt in the spring and summer of ’12. They’ll be right. We’ll be wrong... ..for a while. More below...   The One Retirement Plan Obama Can’t Touch If you’ve already retired, or want to retire soon, I urge you to watch this video presentation before we have to pull it down. This “Secret $200 Retirement Blueprint” shows you step-by-step how to grow a monster-sized nest egg with a little time and a tiny grubstake. Click here to watch this video presentation now. The Daily Reckoning Presents Spain’s Housing Crisis Will Be Good for Gold   Dan Amoss Like a zombie in a horror movie, the Eurozone crisis just won’t die. Instead, it keeps lurching at investors from different shadows on the European continent. This same zombie that has been terrorizing the Greeks for months is now terrorizing the Spanish...and all of Europe is shuddering with fear. Spanish government bond yields are soaring again...as are Italian bond yields. The chart below shows the spread between 10-year Spanish and Italian government bond yields and 10-year US Treasury yields. The Spanish 10-year, for example, is yielding 6.56%, which is a whopping 5% more than the measly 1.56% yield on 10-year Treasurys. Meanwhile, the price of insuring Spanish bonds against a default keeps climbing from one all-time high to another. When the European Central Bank (ECB) launched its long-term refinancing operation (LTRO) earlier this year and began providing three-year loans to European banks, it literally bought time for the most financially distressed members of the Eurozone. The Bank of Spain, for example, recently announced that during the month of March, Spanish bank borrowings from the ECB soared from €152 billion to €227 billion. But the Eurozone’s “bought time” is ending. Spanish banks are in big trouble. Not only are they sitting on a mountain of distressed real estate loans, but their depositors are fleeing in droves. The only place Spanish banks can turn to replace this lost funding is the ECB. Spanish banks have taken up 30% of the LTRO loans issued thus far. The Spanish banks, in turn, are propping up the Spanish government by purchasing Spanish government bonds. “Weaker lenders are merely parking the ECB’s ultra-cheap funds in [Spanish government] bonds until they need the money to roll over their own debts,” writes Ambrose Evans-Pritchard in his latest Telegraph column. “That [moment is fast approaching] since European banks have €600 billion in redemptions over the rest of the year.” Considering the turmoil we’ll surely see in the Spanish economy, €600 billion in maturing debt is going to be a huge challenge for the banks. Meanwhile, the Spanish economy is fraying at the edges. It has many unresolved issues. A backlog of mortgage-related losses lurks unrecognized on the balance sheets of Spanish banks. The restructuring of the Spanish housing bubble has yet to begin. Housing prices remain at levels far above what would be justified by Spanish incomes. I’ll highlight a shocking figure: 80% of Spanish household wealth is in real estate. And 24% of households own second homes. So when (not if) housing prices fall further, this decline will crush the rest of the economy. There are no identifiable demand-side catalysts to prevent the Spanish housing market from falling. Spain’s population is aging, and its youth, living with a 50% unemployment rate, is in no position to buy houses — especially at today’s asking prices. The “bid” side of the market is well aware that it’s a buyer’s market. Buyers know that there are plenty of excess vacant housing units. The new government can make heroic efforts to cut spending. It can also push to reform the highly rigid labor markets. But these efforts will fail to get the country out of its hole. Support from the European Central Bank is the only force propping up Spain’s teetering tower of debt. Carmel Asset Management estimates Spanish banks are undercapitalized by €200 billion, or 20% of Spanish GDP. To give you a frame of reference, this sum would be equivalent to US banks being undercapitalized by $3 trillion (or four times the amount of money that Treasury Secretary Hank Paulson requested from Congress for TARP in late 2008). Spain will need “four TARPs” to recapitalize its banks...if nothing changed! But both sides of the Spanish balance sheet are deteriorating. On the asset side, real estate loans continue to go bad, and on the liabilities side, depositors are fleeing Spanish banks. Meanwhile, investors are also fleeing the scene by dumping Spanish government bonds. This situation is screaming for a bankruptcy and restructuring. Delaying this inevitability will only result in larger losses in the future. The Spanish economy will not rebound until its debt is restructured. The deficit targets that Spanish politicians are promising to EU paymasters are unreachable. The layers of bureaucracy are thick. Each level of government in Spain — central, regional, provincial and municipal — will fight for its turf and its budget. Bureaucracy has made the labor market very inflexible. According to a Word Bank index of wage rigidity, the Spanish work force ranks as the least flexible among developed economies — worse than even France, with its legendary socialist labor policies. Furthermore, austerity measures in a country so reliant on government spending and employment would be self-defeating, as it was in Greece. Even if government spending falls, GDP would fall as fast, or even faster. Business lobbying group Circulo de Empresarios points out that since 1996, the number of Spanish public employees has grown from 2.2 million to 3.2 million. What does this mountain of evidence mean for the future twists and turns of the Euro crisis? It means that the EU, if it’s going to have a chance of holding things together, is “going to need a bigger boat,” as Roy Scheider’s Chief Martin Brody says in Jaws...or else toss a few passengers overboard. The European Financial Stability Fund (EFSF) EFSF is not a viable solution for this mess. The political will of countries like Germany to increase their funded financial commitments to the EFSF is fading. More European politicians will wake to the fact that Spain’s official 60% debt-to-GDP ratio rises closer to 90% if you adjust for regional government debts, loan guarantees and state-run businesses. The picture gets much worse if you project how insolvent the banks will be when they finally deal with their backlog of mortgage and construction loan losses. The sugar rush from the ECB’s LTRO is wearing off. More pressure will fall on the ECB to resume its direct purchases of PIIGS debt. More than likely, the ECB will respond to the challenge in the only way it knows how: Print euros. Considering the explosive nature of this situation, gold’s sluggishness is puzzling. Gold and other tangible stores of value have been rather dormant over the past six months. Perhaps most investors will wait to act until the gravity of this situation in Spain is hitting them squarely between the eyes...rather than merely staring them in the face. But I think it’s only a matter of time before gold awakens from its slumber. Regards, Dan Amoss for The Daily Reckoning Editor’s Note: If you read that last paragraph and thought, “That’s exactly what I’ve been saying!” we completely understand. We’re still convinced gold has a ton of upside potential, and we just came across a report that seems to agree... In this shocking presentation, one gold expert predicts that gold could reach as high as $5,000 by the end of this year. A bold forecast, to be sure. And we were pretty skeptical when we first heard it. Then we watched the whole presentation, and it all made sense. Click here to check it out for yourself.   And now over to Bill Bonner, with the rest of today’s reckoning from Baltimore, Maryland...   Bill Bonner We had lunch with hedge fund manager, John Prout — and others — last Sunday. We were invited to join a small group of largely paleo- conservatives in the foothills of the Blue Ridge mountains. They were an interesting bunch. Whether they were suffering from a kind of nostalgic weltschmerz...or just kvetching about the lost Republic...we weren’t sure. But they were gracious, entertaining and charming; what more can you ask for? Besides, Rappahannock County, Virginia, must be one of the prettiest places in the nation. Small country roads snake around big farms...with picturesque barns, lazy cattle, and stately mansions. The tall fescue was ready to mow...as the humid air of early summer sank into the copses and green hollows. It was a delightful place for a meeting...or “gencon” (general conversation), as our host called it. And a comfortable place to talk about the broken continent. John had analyzed the euro crisis and come to a startling conclusion. If Greece tried to leave the euro, he believed, it would cause a godawful mess. There is just no way for a country to hobble out of the euro without getting its cane knocked out from under it...and then being trampled by currency speculators, bank depositors and angry mobs. A cripple will die before he reaches the exit. Unlike Argentina, which could seal its financial borders, and rob its own people blind, the whole point of the European project is that the borders are open. And the more the Greeks try to keep money in their country, the more people with money are eager to leave. As soon as they let it be known that they are leaving the euro, the retreat will be like the French heading south after Dunkirk. Money and people would leak out of every mountain gap and river crossing.... ..and the rest would start smashing windows and setting German cars on fire. And then, what about Spain? Portugal? Italy? And even France? Who would want to hold euros in Europe? The solution to this problem will have to be a radical one...or none at all. John’s big wonder...as reported on CNN yesterday: Could Germany save eurozone by leaving it? Editor’s note: Clyde Prestowitz writes on globalization for ForeignPolicy.com and is president of the Economic Strategy Institute. John Prout is the former Paris-based treasurer of Credit Commercial de France. By Clyde Prestowitz and John Prout, Special to CNN With Greece probably heading for an exit from the euro, the European and global economies may be facing disaster. However, there is still time for European leaders to reverse this destructive dynamic with one simple, outside-the-box solution: Instead of pushing Greece out of the eurozone, Germany should voluntarily withdraw and reissue its beloved deutsche mark. The analysis of the problems of the euro and the European Union has long been upside down, focused on the debt and competitive weaknesses of the so-called peripheral countries (Greece, Italy, Spain, Portugal and Ireland) and especially of Greece. But issues of debt and competitiveness existed and were dealt with rather easily long before the euro arrived, through periodic devaluation of the currencies of the less-competitive countries against those of the more competitive countries, and especially against the deutsche mark. If Greece or Spain leave, it will be a disaster for everyone, says John. If Germany leaves, it will merely be a surprise. No riots. No revolutions. No currency debacles. The deutschemark will go up. The euro will go down. Problem solved. Regards, Bill Bonner for The Daily Reckoning ---------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Were it Not for Dumb Money... Dead Presidents Stay Dead US Unemployment and the Ubiquitous “Zombie Job” Market Dollar Bugs Beat Up Risk Assets Brazil Cuts Rates and Signals for More Cuts! EJR Downgrades Spanish Debt The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. 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