The Greatest Show On Earth

Things are getting interesting.  Last week, for instance, markets offered up both a rich comedy and tragedy above any story a Hollywood screenwriter could imagine.  The comedy, of course, was the Facebook IPO flop.  The tragedy, fittingly, was courtesy of the Greeks.

Yet the plot for both episodes was the same…it centered on market exploration.  The comedy garnered plenty of laughs as markets’ explored the true value of Facebook shares.  The tragedy received an abundance of tears while markets’ explored a Greek exit from the Eurozone.

Here at the Economic Prism we watched the shows with the hypnotized gaze of a child at the circus.  We knew the juggling clown on the unicycle was headed for a crackup…yet we couldn’t stop watching.

Obviously, Facebook shares are not worth the $38 price tag they were initially offered to the public at.  In fact, Mark Hulbert, at MarketWatch, crunched some numbers, and determined Facebook’s stock should trade for $13.80.  That’s 63 percent less than the IPO price.

Similarly, a Greek exit from the euro would cut the value of Greek citizens’ savings in half as prices rise.  Still, the Greeks may want out bad enough.  On June 17 we’ll find out, as the Greek populace will have the opportunity to vote in an anti-austerity government, which could default on their euro debt and return the country to the drachma.

In the meantime, the show must go on.  Nonetheless, some guys can’t appreciate a good act from the audience.  By their nature, or perhaps their nurture, they’re compelled to get in the way just when things are getting good…

The Show Must Go On

For example, before the week was over two different congressional committees had taken it upon themselves to make a federal case out of the Facebook IPO.  Apparently, the insiders profited at the expense of everyone else and congress wants a piece of the action.  This means Mark Zuckerberg will soon discover how markets really work…Washington style.

The Greeks, on the other hand, as they prepare to exit the Eurozone, turned the spotlight on their brethren in Rome and Madrid.  If Greece leaves the Eurozone the solvency of other over indebted countries, like Spain and Italy, will become the central issue.  In fact, it already is…

“Foreign investors are likely to keep cutting their holdings of Italian and Spanish government bonds this year, after slashing their share of each country’s public debt to around a third of the total in the first quarter of 2012,” said Fitch on Wednesday.

So if foreign investors are withdrawing money from Spanish and Italian government debt, then how will Madrid and Rome fund their deficits?

Without central bankers, they’d be forced to default and live within their means.  But thanks to the magic of the European Central Bank – and their abundance of funny money – Spain and Italy will be bailed-out.  Unfortunately, this will work just great until they are out of money again.  Then they’ll need another bailout.

What we mean is bailouts won’t fix Spain’s and Italy’s debt problem.  They’ll just perpetuate and magnify it until the Eurozone finally loses the will to keep things together or Spain and Italy exit the euro.  Greece, no doubt, will provide the blueprint for how to go about it.

The Greatest Show On Earth

Here in the United States we’ve reserved front row seats for the greatest show on earth.  If you didn’t know it, the U.S. government is aiming the economy for a “fiscal cliff.”  Impact will be felt on January 1, 2013, or sooner.  CNBC reports

“The United States’ economy could shrink as much as 4 percentage points in the first half of 2013 if Congress fails to address the expiration of $600 billion worth of tax breaks and jobless benefits by the end of this year, according to Goldman Sachs.

“Goldman said in the worst-case scenario, the ‘fiscal cliff’ facing the U.S. will shave almost 4 percentage points off gross domestic product (GDP) in the first half of 2013.

“The fiscal cliff refers to the expiration of Bush-era tax cuts and the payroll tax holiday, as well as the end of extended unemployment benefits and the automatic spending and budget cuts mandated by Congress if lawmakers fail to reach deficit reduction goals.

“According to Goldman, if the knock-on effects of a GDP contraction are considered, that is, reduced growth in one quarter weighs on the following quarter, the U.S. economy could experience a 5-percentage-point reduction in annualized quarter-on-quarter GDP.”

To put this in perspective, during the Great Recession – late-2007 to mid-2009 – the biggest reductions in annualized GDP were 8.9 percent in the fourth quarter of 2008 and 6.7 percent in the first quarter of 2009.  By comparison, a 5 percent annualized contraction in the first quarter of 2013, while not as dramatic, will be more painful because the economy never really recovered from the recession.  Just look at the unemployment rate…

In November of 2007, the unemployment rate was 4.7 percent.  By May of 2009, the unemployment rate peaked at 10 percent.  The unemployment rate for April of 2012 was still 8.1 percent.  Using the infallible forecasting tools of guesswork and conjecture, it’s likely that a 5 percent annualized contraction will cause the unemployment rate to spike back up to 10 percent – or higher.

Unquestionably, these things always happen at the wrong time for everyone.

Sincerely,

MN Gordon
for Economic Prism

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