Jun 11, 2012

Spain Asks, and Recieves

Equity markets are continuing their rebound this morning after news of a rescue package for Spanish banks was announced yesterday.  Yields in Spain fell and equity markets jumped last night as investors showed relief after the bailout announcement, which totaled 100 billion Euro ($125 billion).  APAC markets rocketed last night on news of the deal, with the Hang Seng jumping 2.1%, Nikkei 1.9%, Kospi 1.5%, and the Taiex 1.4%.  In the US and Europe financial shares are rallying.  The S&P 500 (chart below) has bounced off support.

US Treasury yields continue to fall as uncertainty about the global economy heightens.  Interestingly, Federal Reserve data shows retail investors bought more treasuries than both the Fed and foreign investors combined in the first quarter.  Retail investors are typically a contra-indicator-could it finally be time to move away from treasuries after a 30 year bull market?

Weakness in foreign economies have conspired to slow down the fledgling US economic recovery.  US exports to China were down by 14% in April, and down 11% to Europe.  Exports have been one of the bright points for the US over the past few years.  Domestic consumption will have to accelerate to offset the declines, an unlikely scenario given the recent declines in savings rates and stagnant earnings. 

The Bipartisan Policy Center is reporting that the $1 trillion in spending cuts that kick in at the end of 2012 will cost the US 1 million jobs and won’t help the budget deficit due to the impact on economic growth.  I do find it interesting that their report suggests that for each $1 million in cuts the US will lose one job.  There must be some pretty good benefits with those positions. 

I’m not sure that it is a surprise to anyone that the twin entitlement programs Social Security and Medicare are on track to consume 100% of US tax revenues in a few years.  The chart below, courtesy of Bloomberg, shows the trajectory using a baseline for tax collections of 18.46% of GDP.  Without structural changes these two programs are unsustainable in the long run. 

Sky-rocketing college tuitions are no surprise to anyone with a  high school or college aged student.  In response to the rising costs, government aid in the form of grants and loans has also soared.  Now it appears that the Department of Education is beginning to understand the impact of money on inflation as they believe there is a link between the jump in federal aid and tuition increases.  My first boss in the money management world once told me that “inflation is a monetary event”, and it would appear the secondary education world is beginning to learn that lesson.   The difficult part for the universities will be when the tuition increases slow or even decline as the population of college bound teens begins to wane, yet the expensive fixed cost infrastructure and salaries continue to rise. 

A surprise in the NFL came from the Kansas City Chiefs as they announced signing quarterback Alex Tanney.  Who?  Alex Tanney, from Division 3 Monmouth College.  Tanney is the D-III record holder for yards passing (14,250) and TD’s (157).  He wasn’t drafted, but became famous for his trick shot videos (see below) 

Have a great day


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