Gold, Greece, Germany and Grimace

by: Carlos X. Alexandre

Now that Greece voted to postpone solving Europe's problems, equity markets showed their relief in style. And the debt was not only thrown forward like a football, but continues to increase beyond manageability.

The apparent positive impact of the acceptance of the austerity measures leaves a simple fact in place and a single question in limbo. The fact is that close to 50% of the Greek population depends on the government to earn a living, either through jobs or entitlements. And the question is "If government spending is cut, how does it affect that segment of the population and where does the growth and tax income to service the debt and maintain operations come from?"

According to the Portuguese press, Estela Barbot, an economist and advisor to the IMF, sees it plainly as a matter of increasing taxes without any alternatives, which is typical thinking across the board. Furthermore, the possibility of actually creating a federation of states with a central government akin to the U.S. as a long-term solution, is viewed by economists at Deutsche Bank as improbable because the various countries will not give up their sovereignty. Then they shouldn't have given up their currencies – and they'll never understand what they got themselves into!

Certainly we know that the money being sent to Athens was last seen by those that handled the wire and will be missing in action forever. In addition, word of a second Greek bailout is old news and now the possibility that Ireland may need to double dip is also making the rounds.

But let's change gears and look at the two largest economies in Europe – Germany and France – and these two countries combined account for about 48% of GDP in the euro-zone.

As a quick side note and contrasted with a weak economic background, ECB's Jean-Claude Trichet only fell short of stating "rate increase in July" recently -- which I doubted that he would do -- and chose instead the usual "strong vigilance" statement, as reported by Reuters. In the process he lent a hand to the euro, although inflation subsided slightly to 2.7% and the same held true in Germany, dropping to 2.3% from 2.4%.

The European Central Bank signaled it would raise interest rates again next week as data on Thursday showed inflation in June stabilized well above the bank's target.

But to Mr. Trichet, attracting capital to the old continent is the top priority and what better way than to pay more.

Over the last three months, Germany's retail sales have disappointed every time and the latest reading of a negative 2.8% truly surprised economists with a consensus forecast of a 0.6% gain. The previous month was revised to unchanged from the original 0.6% growth and April was changed to –2.7% from –2.1%.

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Bloomberg ran an article on Germany's retail sales and not everyone sees the issue in the same light, although I am not certain how the trend is being read, especially when German taxpayers know that they have to pick up the bill for their less fortunate neighbors.

"Oil and gasoline prices were still quite high in May and that may have kept people from spending," said Christian Schulz, an economist at Joh. Berenberg Gossler & Co. in London. "At the same time, Germany is booming and the overall trend is for stronger consumer spending."

France's consumer spending is somewhat similar and for the last three months expectations have been far more positive than the actual numbers.

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In the U.S., private consumption accounts for roughly 70% of GDP and according to Credit Agricole CIB, consumer spending in Europe is in the neighborhood of 60%. That's all fine and dandy, but consider this. If for example, ASML (NASDAQ:ASML) sells chip making equipment to Intel (NASDAQ:INTC) and Intel sells chips to Dell (DELL), who's buying the end product? The consumer. And without a final consumer the other 30% or 40% of GDP doesn't exist. Thus, the consumer, directly or indirectly, accounts for 100% of GDP, regardless of geographic location and that is why retail sales and consumer sentiment are far more important than the other economic measurements.

Finally, considering the global economic state of affairs and the flurry of uncertainty along with wavering currencies, the price of gold has behaved like a deer in headlights, not knowing where to turn. One outstanding item that keeps the metal afloat is the expectation of inflation – or hyperinflation as some will tell us – but increasingly commodity prices are subsiding, with corn being the latest, registering the largest drop in 15 years. Even the ISM showed a large reduction in input prices.

Maybe Glencore got it right!

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.