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US Markets Are Best Haven in Global Storm

Tuesday, 01 June 2010 07:01 AM Current | Bio | Archive

Uncertainty surrounding the health of the euro zone economy remains paramount, questions about the EU-IMF rescue package and its use remain unrequited, and investors continue to wonder whether the underlying structure of the Economic and Monetary Union, or EMU, is such that future crises cannot be averted in the absence of a fiscal union.

At some point, the current crisis will subside. But because a suitable remedy remains elusive, the crisis may linger for some time.

Meanwhile, another European country has come into the fray. Spain is in the spotlight amid renewed concern that the country’s banking sector may be buckling under duress.

Spain’s parliament passed a 15 billion euro ($18.5 billion) austerity package by just one vote, leaving the Socialist government nakedly exposed to popular fury.

The conservatives voted against the measure, prompting a fiery rebuke from Spain’s finance minister Elena Salgado. “Unpatriotic, irresponsible, and hardly very European: one day they will pay for this,” she said.

The bill was saved from defeat when 10 deputies from the center-right Catalan nationalists CiU abstained after criticizing the bill, saying they didn’t want Spain to be plunged into a Greek-style crisis. Interestingly, the CiU also said they wouldn’t support the Spanish 2011 budget bill.

Yes, Spanish fireworks in the making.

The 1930s-style pay squeeze imposed by Brussels as a quid pro quo for the European Union's 750 billion euro ($920 billion) “shield” for euro zone debtors is starting to run into clear demonstrations of public discontent.

In France, unions went on strike to keep the right to retire at 60 from being raised to 61 or 62 as demanded by President Nicolas Sarkozy’s government. By the way, Germany raised its retirement age from 65 to 67 in March 2007.

In Italy, the main CGIL trade union is launching two sets of strikes in June to protest an “unjust and unsustainable” 24 billion euro ($29.5 billion) two-year austerity package (1.6 percent of Italian GDP) that aims to cut the bloated bureaucracy, chiefly by reducing grants to regional governments.

Greek labor unions, which represent 2.5 million workers, or half the country's workforce, has announced they will strike in June (so far, the fifth time this year) to protest pension reform.

They also said they are going to try to mobilize workers across Europe to take joint action against austerity measures. It could become a hot summer over there.

Interestingly, Ageas, the Belgian insurance group formerly known as Fortis Holding, has offloaded 4.8 billion euros ($5.9 billion) of southern European government bonds in just eleven days in an effort to reassure investors over the quality of its investment portfolio.

“At the end of last year, we decided to gradually reduce our exposure to southern European countries subject to opportunities and liquidity in the market,” said Bart De Smet, chief executive of Ageas. “Due to increased market uncertainties, we chose to accelerate the rebalancing of our portfolio in the second quarter.”

Ageas moved its funds mainly into bonds from Belgium, Germany, the Netherlands and France.

Believe me, there’s more to come.

And yes, there was also the report in the Financial Times claiming that China’s State Administration of Foreign Exchange (SAFE), the institution responsible for managing China’s $2.4 trillion reserves, was “reviewing its holdings of euro zone debt” in the wake of the latter’s crisis.

But SAFE denied the report. “This report has no basis in fact … China is a responsible and long-term investor … Europe was, is and will remain one of the major investment markets for China's foreign exchange reserves.”

This discrepancy in view between two highly reputable entities probably comes down to expedient interpretation.

Investors should keep in mind that on April 19, SAFE was reported as saying that “Greece's debt problems could trigger a chain reaction and slow economic recovery in the euro zone” before it pointedly reiterated the aforementioned “We’ll safeguard our assets” mantra.

Shortly beforehand, PBOC Vice Governor Zhu Min called Greece the “tip of the iceberg” in the euro zone debt crisis. In fact, SAFE simply commented that the report had no “basis in fact,” but you need only rudimentary mathematical skills to appreciate that SAFE can still buy euros while also reducing the currency’s proportionate representation in its overall holdings.

In my opinion, it would be irrational for China not to feel a similar level of concern about its euro holdings as it has about its U.S. Treasury holdings.

I don’t think it’s an overstatement to say the events of the past few months are leading to a wholesale (and warranted) re-evaluation of what the euro actually represents.

No, the euro is just not the new German mark but it is also the new Greek drachma, the new Spanish peseta, etc. Yes, it is hard to believe that the euro’s steep slide hasn’t resonated with reserve managers mandated to safeguard the value of their foreign exchange reserves.

And finally, all major industries in China will have to face salary disputes after years of stringent wage strategies.

Chinese workers, at the bottom of the income scale, are uneasy with the increasing development of the country. Prices in the country are rising faster than their wages.

It becomes finally clear that wage rises are definitively coming in China and consequently inflation will go up.

Bottom line: For now at least, being “overweight” invested in the U.S., from Treasuries to shares, doesn’t seem like such a bad idea to me.

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Uncertainty surrounding the health of the euro zone economy remainsparamount, questions about the EU-IMF rescue package and its use remainunrequited, and investors continue to wonder whether the underlyingstructure of the Economic and Monetary Union, or EMU, is such...
Tuesday, 01 June 2010 07:01 AM
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