A default would have severe reverberations in global markets, a top Federal Reserve official said just hours after Fitch Ratings warned it could slash credit ratings if the government misses bond payments.

St. Louis Federal Reserve Bank President James Bullard told Reuters on Wednesday “the U.S. fiscal situation, if not handled correctly, could turn into a global macro shock.

“The idea that the U.S. could threaten to default is a dangerous one,” he said in an interview.

“The reverberations in those global markets would be very severe. That’s where the real risk comes in,” Bullard warned.

The White House said Fitch’s warning makes it clear that “there is no alternative to raising the debt ceiling.”

Moody’s and Standard and Poor’s have issued similar warnings. But Fitch was the first among the big-three rating agencies to say Treasury securities could be downgraded, even for a short period, to a non-investment grade.

The agency said even a short-lived default, also called a technical default, “would suggest a crisis of governance from a sovereign credit and rating perspective.”

But the real deadline comes on August 15, when $27 billion in Treasury notes and $25 billion in coupon payments come due. If the government misses those, Fitch would downgrade the sovereign issuer ratings to “restricted default” and lower all Treasuries securities to B-plus.

[source]

JK Comment: Couple of thoughts….If we raise the debt ceiling yet again, as we always have, won’t we just be asking these exact same questions, facing these exact same consequences, at some point in the not-too-distant future? What interest rate would we/will we have to offer to attract buyers of our debt if we are aggressively downgraded? With the US debt already expected to exceed GDP this year, what would the impact be on our financial system of higher and higher costs of maintaining that debt as interest rates are effectively forced higher?

A rock and a hard place might be a nicer place to be than in the situation unfolding before our eyes.

Homburg, 8 June 2011 – The Bad Homburg €uro Feri Rating & Research AG downgraded the first credit rating agency’s credit rating for the United States from AAA to AA. Feri analysts justify the downgrade by the continuing deterioration of the creditworthiness of the country due to high public debt, inadequate fiscal measures, and weaker growth prospects.

“The U.S. government has fought the effects of the financial market crisis primarily by an increase in government debt. We do not see thank that there is sufficient attention being paid to other measures, “said Dr. Tobias Schmidt, CEO of Feri Rating & Research AG €. “Our rating system shows a deterioration in economic health, so the downgrading of the credit ratings of U.S. is warranted.”

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PG View: Feri is not S&P, Moody’s or Fitch, but their downgrade of US sovereign debt is certainly a piece of the developing trend centered on rising concern over America’s creditworthiness.

A recent Treasury report noted that national debt will exceed the size of the economy this year — a first since World War II. A year ago, the Treasury had estimated that notorious record wouldn’t be hit until 2014.

Now the expectation is that total debt to GDP will top 102 percet this year, up from the earlier estimate of 96.4 percent.

Why the change?

Two factors are likely the biggest cause.

First, the White House’s 2011 GDP estimate is $219 billion lower today than it was a year ago. So debt as percentage of a lower number will always look higher.

Second, the debt grew larger because of a tax cut deal brokered by President Obama and Republicans last December. That deal will add an estimated $858 billion to the deficits over a decade — $410 billion of it in 2011 alone, according to the Congressional Budget Office.

The tax cut package extended all the 2001 and 2003 tax cuts for another two years, enacted a one-year Social Security tax holiday and reduced the estate tax.

Democrats and Republicans disagree on a lot, but both sides have indicated a desire to make the 2001 and 2003 tax cuts permanent for at least the majority of Americans — a costly proposition.

[source]

PG View: Keep in mind that all this doesn’t take into consideration the dramatic rise in entitlement obligations. In 2010, Social Security added $1.4 trillion and Medicare took on $1.8 trillion in new obligations. That’s on top of the national debt. Entitlement spending is only expected to accelerate as the baby boom generation ages.

St. Louis Fed’s Bullard doesn’t think the economy is weak enough to warrant further stimulus after QE2 terminates at the end of the month. Of course that very thing could provide the additional weakness the Fed needs to potentially spring back into action.

Reports from the twelve Federal Reserve Districts indicated that economic activity generally continued to expand since the last report, though a few Districts indicated some deceleration. Some slowing in the pace of growth was noted in the New York, Philadelphia, Atlanta, and Chicago Districts. In contrast, Dallas characterized that region’s economy as accelerating. Other Districts indicated that growth continued at a steady pace. Manufacturing activity continued to expand in most parts of the country, though a number of Districts noted some slowing in the pace of growth. Activity in the non-financial service sectors expanded at a steady pace, led by industries related to information technology and business and professional services.

Consumer spending was mixed, with most Districts indicating steady to modestly increasing activity. Elevated food and energy prices, as well as unfavorable weather in some parts of the country, were said to be weighing on consumers’ propensity to spend. Auto sales were mixed but fairly robust in most of the country, though some slowing was noted in the Northeastern regions. Widespread supply disruptions–primarily related to the disaster in Japan–were reported to have substantially reduced the flow of new automobiles into dealers’ inventories, which in turn held down sales in some Districts. Widespread shortages of used cars were also reported to be driving up prices. Tourism activity improved in most Districts.

Residential construction and real estate continued to show widespread weakness, except in the rental segment, where market conditions have strengthened and construction activity and development have picked up. Non-residential real estate leasing markets have been generally stable, while construction activity has remained very subdued. Loan demand was steady to stronger in most Districts, especially in the commercial and industrial sector, and widespread improvement was reported in credit quality.

Agricultural conditions were unfavorable across much of the nation, largely reflecting unseasonably cool and wet weather; widespread flooding along the Mississippi River hampered agricultural production in the Atlanta and St. Louis Districts. In the Dallas District, in contrast, drought conditions hurt the wheat crop and led to broader damage from wildfires. The energy industry showed continued strength, with robust expansion in oil drilling and extraction activity.

Labor market conditions continued to improve gradually across most of the nation, with a number of Districts noting a short supply of workers with specialized technical skills. Wage growth generally remained modest, though there were scattered reports of steeper increases for highly skilled workers in certain occupations. Most Districts continued to report widespread increases in commodity prices; manufacturers are said to be passing along a portion of the higher costs in the form of price hikes and fuel surcharges.

[source]

The ECB/IMF/EU troika is desperately in search of a solution for the Greek problem that doesn’t trigger a “credit event,” but the ratings agencies are not playing ball. That is weighing on the single currency.

Traditionally, gold tends to take a bit of a breather during the Northern Hemisphere summer. But, there are some, like Sprott Asset Management chief investment strategist, John Embry, who believe this year might be a little different.

“I don’t like putting numbers and dates in the same sentence because you always make yourself look bad – but I would be very surprised if it doesn’t take out $1,650 this summer and maybe headed towards $1,800 over the next three months,” he said.

“People forget,” Embry said, “that the gold market is changing fairly significantly from traditional sources of demand into investment demand as an alternative to currencies… investment demand doesn’t know seasons – it buys gold because it is fearful of other assets.”

Fear is a dominant theme in another of this summer’s big economic events – the end of quantitative easing in the U.S and worries about the country reaching its constitutionally mandated debt ceiling.

In my opinion we have reached the point of no return. We are either going to take a collapse in the dollar or a collapse in the economy depending on which direction they take. The idea that they can return to normalcy in my opinion is out of the question at this point. They are way too far off line.”

But having said that, for you to say that the bull market in gold is over is essentially by saying that we are going to re-establish paper currency as viable and I don’t think that’s going to happen – I am of the mind that before this whole mess is ended we are going to have a new monetary system and as we make our way towards that, gold and silver will be refuges.”

[source]

Pressure Mounts on US to Strike Deal to Raise Debt Ceiling

Fitch Ratings has joined the chorus begun by S&P back in late-April, warning that the US risks losing its AAA credit rating if the stalemate in Congress over the debt ceiling hike persists. The head of Fitch’s sovereign-ratings division said, “Failure to raise the debt ceiling in a timely manner would imply a crisis of governance that could imperil the US ‘AAA’ status.” He went on to say “More importantly, default by the world’s largest borrower and issuer of the pre-eminent reserve currency would be extraordinary and threaten the still-fragile financial stability in the U.S. and the world as a whole, especially against the backdrop of the European sovereign-debt crisis.”

S&P did in fact put the US on negative watch in April and Moody’s indicated it might review America’s sovereign debt rating as soon as July. Treasury Secretary Geithner has marked 02-Aug as the date when he’ll run out of accounting gimmicks that have allowed the Federal government to continue borrowing, despite the debt ceiling being hit on May 16.

The CBO reported yesterday that the US budget deficit was $929 bln through the first 8-months of FY2011. That’s a big number to be sure, but it’s actually a $6 bln improvement from the same period last year. However, USA Today pointed out that beyond the budget deficit, “The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.” They further quantified that astronomical figure as being “$534,000 per household.” And its worth noting that those unfunded obligations aren’t accounted for until the Federal government writes the checks.

Not surprisingly, the United State’s largest creditor is concerned about the games being played in Washington. Li Daokui, an adviser to the People’s Bank of China, expressed concerns about a technical US, warning that it could undermine the dollar and negatively impact China’s substantial holdings of US Treasuries. Li told reporters at a forum in Beijing that the implications of a US default, “will be very serious and I really hope that they would stop playing with fire.”

Seemingly, China is increasingly disinclined to incur the risk of dollar denominated reserve holdings. CNS News reported late last week that China has now reduced its exposure to US Treasury Bills by 97%, from $210.4 bln in May 2009 to just $5.69 bln in March 2011. The article points out that China also began reducing exposure to longer-term US bonds back in October of last year. Given this action on the part of China and the scheduled end of QE2 at the end of the month, it begs the question: Who is going to step-up to fill the demand void for US debt, assuming the debt ceiling does get raised?

Secretary General Abdullah El-Badri said the effective decision was no change in policy and that OPEC hoped to meet again in three months time to assess the situation.

Saudi Arabia and other Gulf producers had been seeking to push through an increase to help the economies of consumer nations, but price hawks such as Iran, Venezuela and Algeria refused to consider a hike.

Oil prices, jumped more then $2 a barrel, pushing U.S. crude above $100 a barrel, after the news.

“They can’t even coordinate their statements to the press. The Saudis must be angry. This decision was not relevant to physical output anyway — it was symbolic. I suppose the Venezuelans and Iranians are already producing as much as they can; the only way they get extra revenue is from a higher price. And they aren’t going to get any gold stars from the U.S. or Western powers that be anyway. The Saudis would have liked the gold star for political good behavior.”

One factor is a diverging market view. Another is politics. At times of heated politics/ideological debate, Saudi struggled to dominate as much as it could have given its size vis-a-vis others in OPEC. Radicals — in the political sense — could push Saudi ahead of themselves to some extent and punch above their weight, although only to a certain degree. Gaddafi in the 70s is a good example, Venezuela in the early 70s another.

[source]

Sterling fell to a one-month low against the euro and slid against the dollar on Wednesday after a media report quoting a Moody’s analyst saying the UK was at risk of losing its top-notch rating.

According to the report, the analyst said the UK could lose its AAA rating if growth remained weak and the government failed to meet its fiscal consolidation targets.

The fragility of Britain’s economy is holding the BoE back from raising rates even as inflation risks remain stubbornly high.

Adding to concerns about a slowing recovery in the British economy, a survey on Wednesday showed recruiters filled permanent and temporary vacancies at the slowest pace in seven months in May

[source]

Gold is under pressure this morning, weighed by declining commodity prices, amid concerns about the health of the US economy. Despite signs that the economic recovery is faltering, Fed chairman Ben Bernanke gave no clear indication in a speech on Tuesday that fresh accommodations would be forthcoming. The absence of any remark about the possibility of a QE3 has prompted some unwinding of long positions in stocks, commodities and gold, but everyone knows the Fed still has the QE arrow in its quiver and has proven that it isn’t afraid to use it.

The dollar has gotten a bit of a bid as the euro backs off from recent highs and sterling is weighed by a Moody’s warning that the UK’s AAA debt rating may be in jeopardy if economic growth continues to slow.

Oil prices rebounded after OPEC Secretary General Badri announced that members were unable to reach consensus on output, offering some support for gold.

China’s NDRC said inflation pressures remain elevated, citing higher prices for imported goods. Risk of tighter PBoC policy.

UK KPMG/Rec employment survey saw permanent placements fall to 7-mo low of 55.1 in May, vs 60.6 in April.

UK BRC shop prices decelerated in May to 2.3% y/y, vs 2.5% in Apr, led by non-food prices at 0.8%, vs1.2%. Food prices 4.9%, vs 4.7%.

Eurozone Q1 GDP confirmed at 0.8% q/q, 2.5% y/y.

German industrial production unexpectedly declined 0.6% m/m in Apr, below market expectations of +0.1%.

If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery.

Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar.

Although it is moving in the right direction, the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term.

U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments.

[source]

By Simon Rabinovitch in Hong Kong
China is running a major risk in holding so many dollars because the US may deliberately devalue its currency, a senior Chinese official has warned.

The comments by Guan Tao, head of the international payments department in the State Administration of Foreign Exchange, knocked the dollar on Tuesday, adding to fears about the struggling US economy. The dollar fell to a one-month low against a basket of six leading currencies.

…“The United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home,” he added.

…The article was removed from the Chinese website after financial markets took notice and the dollar fell.

[source]

By Andrew Ackerman
WASHINGTON (Dow Jones)–The federal government was running a budget deficit of $929 billion through eight months of fiscal year 2011, $6 billion less than at the same point in fiscal 2010, the Congressional Budget Office said Tuesday in its monthly analysis of the government’s finances.

CBO projected a May deficit of $59 billion, compared with a deficit of $136 billion in May 2010. It also reported the deficit in April was $40 billion, about $1 billion less than an earlier estimate.

The CBO said May’s decrease in the deficit was mostly attributable to “shifts in the timing of certain payments” and a reduction in the overall estimated cost of the Troubled Asset Relief Program.

[source]

By Martin Wolf
The eurozone, as designed, has failed. It was based on a set of principles that have proved unworkable at the first contact with a financial and fiscal crisis. It has only two options: to go forwards towards a closer union or backwards towards at least partial dissolution. This is what is at stake.

The eurozone was supposed to be an updated version of the classical gold standard. Countries in external deficit receive private financing from abroad. If such financing dries up, economic activity shrinks. Unemployment then drives down wages and prices, causing an “internal devaluation”.

…At last month’s Munich economic summit, Hans-Werner Sinn, president of the Ifo Institute for Economic Research, brilliantly elucidated the implications of the response to this threat of the European System of Central Banks (ESCB). The latter has acted as lender of last resort to troubled banks. But, because these banks belonged to countries with external deficits, the ESCB has been indirectly financing those deficits, too. Moreover, because national central banks have lent against discounted public debt, they have been financing their governments. Let us call a spade a spade: this is central bank finance of the state.

…Debt restructuring looks inevitable. Yet it is also easy to see why it would be a nightmare, particularly if, as Mr Bini Smaghi insists, the ECB would refuse to lend against the debt of defaulting states. In the absence of ECB support, banks would collapse. Governments would surely have to freeze bank accounts and redenominate debt in a new currency. A run from the public and private debts of every other fragile country would ensue. That would drive these countries towards a similar catastrophe. The eurozone would then unravel. The alternative would be a politically explosive operation to recycle fleeing outflows via public sector inflows.

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PG View: As Wolf points out, some national central banks are financing their states and it’s worth noting that the ECB is prohibited by its charter from financing government deficits. Yet the ECB seems to be turning itself inside out these days to find a way to ensure solvency of certain states without violating their charter.

Federal Reserve Chairman Ben S. Bernanke is scheduled to speak today at the International Monetary Conference in Atlanta as the bank’s second round of bond buying, called quantitative easing or QE2, ends this month.

“The market’s still very sensitive to what’s happening in Greece and Europe, and at the same time sensitive to U.S. data,” Darren Heathcote, head of trading at Investec Bank (Australia) Ltd., said by phone. “There doesn’t seem to be many reasons to be selling gold at this present moment.”

China Universal Asset Management Co. received approval from the nation’s financial-market regulator to start a fund that will invest holdings in overseas exchange-traded products backed by precious metals. Liu Ming, a spokesperson for China Universal, didn’t give details of when the fund would start raising money, nor how the extent of the holdings in each metal will be set.

“All the market participants we met with in China last week expect a slowdown in physical demand before buying picks up again in September,” Edel Tully, a London-based analyst at UBS AG said today in a report. While there may be “summer headwinds” for gold, “this would be viewed by most as a short- term correction within a bullish market. It’s very difficult to leave Asia, and in particular China, without feeling bullish about gold.”

[souce]

The federal government’s financial condition deteriorated rapidly last year, far beyond the $1.5 trillion in new debt taken on to finance the budget deficit, a USA TODAY analysis shows.

The government added $5.3 trillion in new financial obligations in 2010, largely for retirement programs such as Medicare and Social Security. That brings to a record $61.6 trillion the total of financial promises not paid for.

…The $61.6 trillion in unfunded obligations amounts to $534,000 per household. That’s more than five times what Americans have borrowed for everything else — mortgages, car loans and other debt. It reflects the challenge as the number of retirees soars over the next 20 years and seniors try to collect on those spending promises.

[source]

PG View: While Greece continues to steal the headlines with its debt problems, the US is in a heap of trouble as well. The debt is mounting in large part to surging entitlement spending, made worse by a dramatic shift in the nation’s demographics. Yet those very entitlements have proven to be a political third-rail. While many people are adamantly opposed to entitlement reform, one need look no further than the numbers to see how necessary the conversation is.

Gold remains generally well bid, supported by dollar weakness. The euro extended to a new 5-week high as previous hard-line stances on Greece continue to erode.

The EU’s Olli Rehn has conceded that the eurozone debt crisis has moved into a critical stage, saying that Greece is facing default and that a solution must be found by 20-Jun. As to that solution, the IMF is pushing for rapid asset sales. The ECB on the other hand seems to have warmed further to the idea of coerced rollover of Greek debt.

ECB President Trichet said of such a rollover: “That is not a default.” Ratings agencies however have already warned to the contrary.

Austan Goolsbee, the Chairman of the Council of Economic Advisers to President Obama, has announced that he will resign his post this summer to return to teaching. His tenure has been less than a year, having replaced Christina Romer in September of last year. Romer also left to return to teaching.

Fed chairman Bernanke will speak to a banking conference in Atlanta today. This will be his first opportunity to comment on last week’s grim economic data. While Bernanke is likely to stick to his “transitory” meme, the financial press will be looking for hints about the possibility of QE3 if the current ‘slow patch’ ends up being longer in duration than expected.

Japan’s leading composite index -3.7 m/m in Apr, below expectations, vs -3.9 m/m in Mar as earthquake/tsunami continues to weigh.

Eurozone retail sales better than expected at +0.9% m/m in Apr.

German Apr manufacturing orders beat expectations at +2.8% m/m.

Swiss CPI was in line with expectations at 0.4% y/y in May, vs 0.3% y/y in Apr.

UK BRC retail sales unexpectedly fell 2.1% y/y, market was looking for +2.0%, vs +5.2% in Apr. Apr gain was likely one-off event associated with late Easter and royal wedding.

By Kenneth Rogoff
As many commentators have rightly observed, the euro experiment is at a crossroads. Either the eurozone will deepen into a fiscal union, or the weak members will be forced to break off. But the euro experiment has also brought us to a crossroads in the whole international monetary system. Will our grandchildren inherit a world with a huge number of national currencies, or a very small number of multi-country currencies?

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A deepening budget crisis in Washington has gold sailing high again in some buyers’ dreams. The reason? A budget crisis could trim the currency further. Gold’s strength comes largely from the erosion of the dollar, which has lost 37 percent of its value since its last peak in mid-2001.

And investors haven’t missed the boat.

“Definitely still time and there always will be ‘still time’” to buy gold, says Al Korelin, chairman of AB Korelin and Associates in Semiahmoo, Washington. “You buy gold as insurance and not necessarily as a short term investment.”

“Gold will eventually go up to $2,000 an ounce,” said Mike Frawley, global head of metals at the Newedge Group in New York, though “probably not much before early next year.”

Frawley said the price of the currency now has backing based on supply and demand fundamentals. But the currency factor could swing back into play.

“The value of the dollar vis-a-vis other major world currencies is considerably important,” he said. “Global demand (for gold) is still strong from Asia Pacific, India and China in particular.”

CitiFX Technicals, a note from Citigroup, said gold could test an all-time high in the weeks ahead, top $1,700 this year and rally to more than $2,000.

[source]

But for gold and gold stocks investors, the latest data are good news, according to Swiss precious metals firm MKS.

“Speculations of a generous third quantitative easing (QE3) package will grow” if a string of subsequent depressed data come in, MKS told BullionVault. “Expectations in the market suggest that gold prices will benefit in the short term by the belief that slowing growth in the U.S. will prompt the Federal Reserve to maintain favorable monetary conditions.”

That means some form of QE3 by the Fed could be inevitable by as early as the third quarter some economists speculate, which will result in a further expansion of the U.S. monetary base and put a strong bid under the yellow metal.

“This is gold-friendly data,” said Credit Agricole analyst Robin Bhar. “In the worst case scenario, we could have a double-dip in the U.S. economy and possibly deflation, which would also help gold.”

[source]

The Summer of Discontent

Temperatures and the euro are rising as the summer solstice approaches, amid rising expectations that a new bailout for Greece is at hand. Tempers are rising as well, with Greeks taking to the street en mass over the weekend to protest the additional austerity measures that are part of that proposed bailout deal. However, the fact that Greece even requires further aid, just about a year after its initial €110 bln bailout, has resulted in a growing political backlash in core-Europe (particularly in Germany) as well.

The Germans are already starting to view Greece as the Continent’s persistently down on his luck uncle, constantly returning for just one more hand-out. As a Der Spiegel article pointed out today, the Greek version of “consolidation” doesn’t exactly mesh with what the Germans were thinking. Yet in forcing further concessions from labor; well, you can only squeeze them so much before the inevitable civil unrest.

There is no easy solution for the Greeks. As the economy contracts under increasingly severe austerity measures, tax revenues decline, reducing the countries ability to repay its debts. Then again, attaching fewer conditions to a bailout doesn’t really improve the odds of repayment either. Somebody needs to pay the price for years of fiscal irresponsibility, either the Greeks or core-Europe…and I wouldn’t necessarily rule out US participation if our government (or the Fed) deems there is a broader contagion risk.

The ECB/IMF/EU troika has been desperately searching for a resolution that doesn’t result in a credit event for Greece. There has been much talk of a soft-restructure, a voluntary elongation in the terms of Greek debt. However, the credit rating agencies have been thwarting those efforts. Even if the troika manages to orchestrate a voluntary rollover of debt by bondholders, Fitch said today that it would consider that a technical default.

In Portugal, the government was ousted in the weekend snap-election. The Social Democrat winners are expected to form a coalition government with the Conservatives, but Portugal’s position hasn’t fundamentally changed. The new government is going to have to sell further austerity to the Portuguese people, that clearly have no appetite for more austerity.

With a contentious debate over the debt ceiling ongoing right here in America, the implications of a potential default on US bonds can not be discounted. Recent activity in the CDS market and warnings from the credit agencies are reflective of this uncomfortable reality. The one monumental difference between Greece and the US: We have the ability to print as many dollars as necessary to meet any obligation…the Greeks do not.

Meanwhile, across the Middle East and North Africa, unrest prevails. The war in Libya is escalating, with the West committing further resources to the battle. Yemen is a mess. Protests in Bahrain continue. Tensions on the Syrian/Israel border are heating up.

There is potential that this ends up being a long, hot summer indeed, conceivably squelching the seasonal lull in the gold price that tends to occur in June/July. That may also end up amplifying the seasonal gains in gold that have historically occurred between August and the end of the year.

Demonstrations over Greece’s plans to increase austerity measures to get new EU and IMF loans brought 80,000 people into the streets of Athens over the weekend. Prime Minister George Papandreou may get the money his nation desperately needs–a figure which has been put as high as 100 billion euro. Greece’s labor force may be the biggest threat to the plan.

Germany in particular believes that Greece may not be able to meet its financial obligations. And, the rescheduling of the southern European country’s sovereign debt may also need private bondholders to bear some of the financial burden. Obtaining that support will not be simple

The bailouts of Greece, Portugal, and Ireland have all lacked support from public unions. Large unions and other worker groups have effectively shut the public transportation system in Greece more than once. These actions are a sort of financial suicide. Greece cannot make its debt obligations if the central government’s revenue falls sharply. Greece relies on tourism for much of its GDP. Travelers are understandably reluctant to visit countries where their ability to travel is made nearly impossible.

[source]

PG View: Selling working people on further austerity is not going to be easy. The deal is, they make most of the sacrifices to ensure that bond-holders remain whole and the banking system doesn’t collapse. One might argue that workers benefit in the long-run if the country remains solvent, but demands from elsewhere in Europe for lower pay, higher taxes and a higher retirement age in exchange for the next bailout is understandably being met with considerable objection.

Greece needs even more money — EU officials estimate that a new bailout will cost over 100 billion euros rather than the previously assumed 60 billion. It will get the aid, even though the rescue strategy adopted so far seems doomed. The economy is shrinking, and ambitious privatization plans are illusory.

…Greece’s partners in the euro zone are gradually losing patience with Prime Minister Papandreou and his team. A year after receiving €110 billion in international financial aid commitments, Greece has hopelessly failed to reach the agreed austerity goals. Its lenders are now questioning the government’s ability to reform, the economy has declined even further than feared, and important tax revenues have failed to materialize.

…The only certainty is that Greece needs more money than it was provided with last year. The goals stipulated in the bailout package can only be reached under highly unrealistic assumptions, the envoys of the EU, IMF and ECB concluded after analyzing the situation in Greece in recent weeks.

[source]

Portugal’s governing Socialist Party has admitted defeat in the general election.

Socialist leader Jose Socrates said he accepted responsibility for the defeat and resigned as head of his party.

The victorious centre-right Social Democrats (PSD) led by Pedro Passos Coelho are expected to form a majority with the conservative CDS.

The new government must implement a demanding austerity programme as a condition for an EU bail-out.

[source]

PG View: I find it doubtful that a new coalition government will be any more successful than the socialist party was in selling further austerity to the Portuguese people. It’s a losing proposition even for the winners because the options are so limited…and they’re all painful.

Gold remains generally well bid, despite a modest uptick in the dollar. The euro remains underpinned amid expectations that a second rescue of Greece is at hand, suggesting the upside for the dollar — and therefore the downside for gold — remains limited.

However, more than 100,000 protesters took the streets of Athens on Sunday in objection to further austerity measures that would be attached to a new deal for Greece. Meanwhile the Portuguese government was ousted in the snap-election over the weekend. Yet another glaring indication of the growing discontent in Europe.

Eurozone PPI eased to +6.7% y/y in Apr, in line with consensus. Mar revised up to +6.8% y/y.

Canadian building permits plunged 21.1% in Apr, way below market expectations of -5.0%, vs +16.8% in Mar.

Terrible Payrolls Print Caps a Grim Week of US Data, Buoying Gold

Gold jumped and equities tumbled in reaction to nonfarm payrolls, which showed the economy added a mere 54k jobs in May. That was dramatically below even the significantly scaled back forecasts that emerged in the wake of Wednesday’s way-below expectations ADP report. The unemployment rate ticked higher to 9.1%. This came on the heels of troubling news earlier in the week on home prices, business activity, manufacturing, factory orders and consumer confidence. I think only April construction spending and May ISM-NMI beat market expectations this week.

Given the general tenor of data this week, further downgrades to growth forecasts for the US economy can be reasonably expected. That of course has sparked heightened debate about the likelihood of additional quantitative easing by the Fed. Clearly über-easy monetary policy on top of various forms of stimulus have done little to truly reinvigorate the flagging US economy, perhaps giving credence to those that have suggested the government and the central bank simply haven’t done enough. While chairman Bernanke has expressed worries about the detrimental impact of further accommodations relative to benefits, growth and deflation risks unquestionably remain the Fed’s biggest concerns. In an FT op-ed this week, former Labor Secretary Robert Reich said pretty definitively, “The recovery has stalled.”

With our Representatives in Washington embroiled in a contentious partisan battle surrounding the terms of a debt ceiling hike, there is little political appetite for further deficit spending to provide fiscal stimulus, particularly with an election year looming. Consequently, the onus will likely remain on the Fed to provide stimulus from the monetary side. With interest rates stuck at essentially 0%, there isn’t much left in the toolbox other than more QE. The stock market appears poised for a 5th consecutive weekly decline, which hasn’t happened since 2004. Many Americans continue to use the DJIA as their measure of the economy’s health, providing further impetus for more Fed action. Barring some miraculous surge in economic activity, I’m expecting the Fed’s respite from new asset purchases to be a brief one.

The realization that we won’t be seeing a rate hike any time soon, along with rising expectations of further monetary accommodations, has kept downside pressure on the dollar and buoyed gold. Meanwhile, the political game of chicken on the debt ceiling risks further undermining of our nation’s currency and our bond market. Moody’s warned on Thursday that it would put the US government’s Aaa credit rating under review for a downgrade unless there was progress on a deal to raise the debt limit in the next several weeks. S&P has already put US sovereign debt on negative watch for a potential downgrade. The market will become increasingly nervous about a potential US default the closer we get to 02-Aug — the date that Treasury has deemed the point where they can no-longer fund the government — without some sort of deal to raise the debt ceiling.

In Europe, the ECB/IMF/EU troika appears to have issued another stay for Greece, saying that negotiations have concluded “positively.” Reportedly, a new plan that includes more asset sales and structural reforms will be presented to the Greek cabinet and Parliament in the days ahead. This is certainly not a resolution of the Greek debt crisis, merely another kick of the can down the road. Nonetheless, the euro loves it, surging to new 4-week highs above 1.4600 versus the dollar. The new Greek deal is lipstick on a pig, making the single currency look marginally more attractive than the greenback for the time being.

Historically, the early part of the summer is a time when gold prices experience a seasonal lull, generally followed by renewed gains in the last 5-months of the year. Given all the uncertainty in the world, and in particular the likelihood that the US government takes these debt ceiling negotiations right down to the August wire, the negative seasonal influence may be muted — perhaps even negated — this year.

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Gold prices popped on a much weaker than expected US nonfarm payrolls report for May. The US economy added just 54k jobs in May and the unemployment rate rose to 9.1%. Equities came under additional selling pressure on this latest indication that an already tepid economic recovery is faltering. All-in-all, it’s been a pretty grim week data-wise.

Most analysts had tempered expectations for NFP in the wake of Wednesday’s weak ADP report, but today’s actual number was well below even the deepest revisions. April and March payrolls data were revised lower as well. Those 39k in back-month revisions negate all-but 15k of the paltry 54k jobs added in May.

Further flows out of equities may have a short term positive impact on the dollar and Treasuries, but the country’s debt woes and rising expectations of QE3 suggest cash and debt investments might not prove terribly sticky. Gold will likely be increasingly seen as a safe-haven amid rising economic uncertainty.

Nonfarm payroll employment changed little (+54,000) in May, and the unemployment
rate was essentially unchanged at 9.1 percent, the U.S. Bureau of Labor Statistics
reported today. Job gains continued in professional and business services, health
care, and mining. Employment levels in other major private-sector industries were
little changed, and local government employment continued to decline.

…In May, average hourly earnings for all employees on private nonfarm payrolls increased
by 6 cents, or 0.3 percent, to $22.98.

…The change in total nonfarm payroll employment for March was revised from +221,000 to
+194,000, and the change for April was revised from +244,000 to +232,000.

[source]

PG View: Expectations for the May payrolls report had been revised lower in the wake of Wednesday’s weak ADP report, but NFP came in well below even the deepest revisions.