The continued barrage of negative U.S. economic numbers took its toll on the U.S. dollar. For the bears, today's numbers did not disappoint. The NFP showed only 54K jobs were created in May, and March/April jobs were reduced by 39K. The unemployment rate increased to 9.1%, more fodder for the bears. This, combined with positive vibes coming from the meetings with Greece, the EU, IMF and ECB, has given the euro a boost.
Terms of the bail-out, which will make the bankers and technocrats backed by IMF and ECB money ward of Greece, are still being negotiated. In addition to austerity requirements, Greece will be required to sell the government's interest in various property. The goal is to raise 50 billion euros or so to repay outstanding debt. I doubt they will be sellers of the Acropolis. But might they not give the concession stands at the Acropolis to the ECB to service the debt on the 110B euros in loans?
The good news has sent the euro soaring, blowing through both the 1.45 and the 1.46 handles. Is the excessive exuberance justified, giving the Greek government 20 or 30 billion euros to postpone recognition of the fact Greece is broke, and default is inevitable, although the date has merely been postponed.
An article by Robert Samuelson entitled "Europe at the Abyss" made some interesting observations.
"At the end of 2010, Europe's banks had about $1.3 trillion of loans and investments - both governmental and private - in Greece, Ireland, Spain and Portugal, reports the Institute of International Finance, an industry research group. A banking crisis would imperil economic recovery."
Continuing Samuelson says:
"What's called a "debt crisis" is increasingly a political and social crisis. Looming over the financial complexities is the broader question of the ability - or willingness - of weak debtor nations to endure growing hardship to service their massive government debts. Already, unemployment is 14.1% in Greece, 14.7% in Ireland, 11.1% in Portugal and 20.7% in Spain. What are the limits of austerity? Steep spending cuts and tax increases do curb budget deficits; but they also create deep recessions, lowering tax revenues and offsetting some of the deficit improvement.
Some causes of Europe's plight are well-known: the harsh recession following the 2008-2009 financial crisis; aging populations coupled with costly welfare states. But there's also another less recognized culprit: the euro, the single currency now used by 17 countries. When each country had its own currency, the country's central bank (its Federal Reserve) regulated local interest rates and credit conditions. With the euro, the European Central Bank (ECB) assumed that job. But one policy didn't fit all: Interest rates suited to Germany and France were too low for "periphery" countries (Greece, Ireland, Portugal and Spain).
Now that the credit bubble has burst, the euro impedes recovery. One way countries revive from financial crises is by depreciating their currencies. This makes exports and local tourism cheaper, creating some job gains that cushion the ill effects of austerity elsewhere. But latched to the euro, Greece and other vulnerable debtors forfeit this safety valve."
Not only do the weak economies lose their ability to discount products to increase sales, or attract tourists, the strong currency will shift manufacturing jobs elsewhere. Volkswagen (VKLAF.PK) has announced it is building a new production plant in Chattanooga, Tennessee. An article by Avery Goodman in Seeking Alpha entitled "Soaring Sales of Diesel Cars Supports Higher Platinum Prices" made the following comments:
"Volkswagen is making plans to vastly increase its sales in the U.S. for all of its cars. The German carmaker recently opened a new manufacturing facility in Chattanooga, Tennessee. The Tennessee assembly plant will build a newly designed Passat that will sell for about $7,000 less than its German-built models.
Volkswagen expects to build 150,000 American Passats in 2012. The new Passat factory will produce clean TDI diesel engines made in America. The diesel version of the Passat has been able to achieve 43 mpg on the highway compared to 32 mpg for the 2.5-liter gasoline version."
In a free market, the cure for high prices is high prices. We suspect there is some "irrational exuberance" at work propelling the rally in the euro. Besides, what additional fundamental bear news will there be to report on the U.S. economy? The fundamentals calendar looks sparse.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.