Eye on EuropeJune 2012

Daryl MontgomeryJune 22, 2012

Copyright 2012, All Rights Reserved

The contents of this presentation are not intended as a recommendation to buy or sell any security.

Europe on the Verge

• Debt/Banking Crisis will continue to grow this summer /fall and probably into next year.

• Crisis now centered in Spain; Italy will be next.

• Some rates in Germany, Denmark negative.

• IMF says Ireland will need a new bailout.

• Greece on hold, but expect trouble again soon.Socialists win in France.

• 5 month decline in PMI (data imply 0.6% decline in GDP for Q2). UK and 8 other EU countries in recession (China’s PMI negative for 8 months).

Greek Election

• Greece has a parliamentary system. The gov’t can fall on a no confidence vote.

• Party Vote in last 3 elections:New Democracy 34% 19% 30%Syriza (far left) 5%17% 27%Pasok 44% 13% 12%Golden Dawn (fascist) 0% 7% 7%

• Coalition formed with ND and Pasok (rivals).Could have been done after last election.

• First act was to ask for another bailout.

The Pain in Spain

• Spanish 10-years bonds highest yield:- May meeting: 6.35%- June meeting: 7.25%

• 1-year bill auction: 5.07% vs. 2.99% previous

• €100 billion bank bailout results in country downgrade from rating agencies (structured as debt to Spain): Moody’s 1 notch above junk, Egan-Jones well into junk.

• Spain has $3 trillion in bank debt, €1 trillion GDP

• ESM & EFSF will buy €750 billion (in theory) in PIIGS bonds (decided at G20 meeting).

Spanish 10-year Bond Yields

Italy 10-year Bond Yield

Greek 10-year Bond Yields

Spain, Italy Yields Compared to Germany, US

How Future Problems Will be Handled

Monetary Policy Worldwide• Central Bank Interest Rates:

- U.S. and Japan close to 0.0%- UK at 0.5%- ECB at 1.0%

• Fed announces Operation Twist until December.

• Central bank balance sheets not growing that fast,dollar swaps have calmed down.

• BOE: more QE2 voted down yesterday!

• ECB balance sheet choppy.

• Fed balance sheet flat.

• U.S. Monetary Base pauses, money supply rising.

ECB Balance Sheet

BOE Balance Sheet

Fed Balance Sheet

Fed & ECB Balance Sheets vs S&P 500

Dollar Swap Lines

Demand coming from EU and Japan.

U.S. Monetary Base (Indication of Future Inflation)

Money Supply M1

U.S. Economic Numbers• U.S. Q3 GDP forecast 2.0% (vs. 1.9% in Q1)

• Employment:- May Jobs up 69,000, previous months revised downward; seasonal adjustments created better numbers in the winter. - Unemployment 8.2% (11/12% more reasonable).

• Retail Sales down 0.2% in May (with inflation).

• Industrial production down 0.1% in May

• Consumer Confidence: 64.9 ( > 90 is good)

This Year’s GDP Revisions Compared to Last Year

Blue line original numbers. Red line revised numbers.

Consumer Confidence vs. Spending

• National Debt: $15.8 trillionState and Local Debt $2.8 trillionUnfunded liabilities $119 trillion.

• Debt to GDP ratio >104% (actually much greater).• Debt doesn’t include Federal Reserve or Fannie

Mae, Freddie Mac and FHA obligations. • Debt Ceiling at $16.4 trillion. Will be hit before the

election and become an issue. • Federal budget deficit for 2012 at least $1.3 trillion.

California at $17 billion. • 2012 Trade Deficit could reach $700 billion.

U.S. Fiscal State