PIGS in space.

When I go down on the trading floor and talk about pigs, normally I am referring to hogs or pork bellies. But this week is something different. We'll focus our attention on Portugal, Ireland, Greece and Spain. Or you can exchange or add another I if you want to throw in Italy. In this case PIGS - or PIIGS - is not the other white meat, but a cause of great concern on the global economic scene.
Portugal now seems to be the main epicenter of the constantly shifting risk factors in the ongoing global economic crisis. Even casual observers of the global market place have been aware of the recent problems growing in the Eurozone particularly with Greece. The massive debt in Greece has roiled the global market for most of the year and now there are fears that their problems may be spreading throughout the region. Oh sure, the other countries within the designation PIGS or PIIGS if you prefer, did not want to be coupled together with Greece perhaps because they did not want to be part of something called PIGS or because they were fearful that the association with Greece and their problems could spread to them faster than a winter cold. Spain's Finance Minister Elena Salgado was one of the first to speak out and said that Spain's situation is not like that of Greece. Yet earlier this week it seems that when one of these little PIGS's went to the market and found that things were not that good.
The market really got fearful after Portugal basically had a failed bond auction. The Portuguese treasury and Government Debt Agency tried to sell €500 million in 12 month bills but was only able to sell €300 million. This raised concern that buyers of debt are getting tired of getting low rates of return when sovereign countries credit worthiness is not what should be. Last year Portugal's debt was 9% of its GDP and with a potential softening in the EURO zone, bond buyers think that their chances to be paid back might not be that good. Obviously that means that bond buyers will demand a higher rate of return to take on more risk thus ultimately driving up interest rates in Portugal and throughout the region as debt strapped nations vie for capital to fund their out of control spending.
What kind of warning does this send to the rest of the world and even the US? It is clear that this out of control massive spending is going to have to come to an end as the market is going to be wary of investing in what may turn out to be a massive global spending and borrowing Ponzi scheme. Debt buyers will demand either outrageously high rates of return for continued out of control spending or demand that these governments get their fiscal house in order before investors feed money into the globes massive borrowing binge.
In the short term even though this should be an early warning to the US and policy makers of the rising risks associated with the perilous path we are on. In other words, don't keep spending like PIGS. This also has the ability to change the major market play that has basically been in place since March of last year. That was the US Federal reserve went to a policy of quantitative easing. That was the day Fed decided to fight deflation by printing a floor under the price of oil and gold and other commodities to fight off the demons of a deflationary death spiral. That was the day that the dollar became the doormat for the world and Europe, allowing the creation of the carry trade so banks could dig themselves out of debt by borrowing in overnight lending markets at rates near zero and invests in higher-yielding securities in other places around the globe. This drove the dollar lower and drove commodities and risk takers when in the mood took their free money returns from the carry trade tried to maximize their profits by buying gold and copper and other commodities may flee those investments in the short term back to the more familiar global risk currency the dollar and the never defaulted US Treasury (at least not so far). Yet this uncertain outlook and PIGS cloud that hangs over Europe. Other PIGS countries are on the watch list and it is clear that these countries are going to have to or get bailed out or ultimately collapse. Yet a government reigning in spending and taking away free goodies is not as easy as it seems. Greece is in an all out effort to get its fiscal house in order.
The AP reported of strikes in Greece and political wrangling in Portugal amid concerns that leaders in Athens and Lisbon would not be able to push through unpopular austerity programs to tame their ballooning deficits. The AP says that Greece, under intense pressure from markets and other European Union governments to get a grip on its deficit, faced a first wave of strikes, with customs and tax officials walking off the job for 48 hours. This won't be easy.
Of course if the lack of investor confidence spreads throughout the PIGs and the rest of Europe all the places that money has flowed will flow elsewhere. We could see a massive unwinding of the global carry trade and that could have huge impact on the value of the dollar and on global stock markets. If the US is going to be that safe haven. then the US is going to have to lead by getting its spending under control. That too would be much easier with a strong jobs market. Bottom line: if we see renewed fears in Europe look for surge in the dollar and for the commodity correction to continue.
For oil this involvement of the PIGS problem is another reason why we are still very bearish on oil. As I have said for some time, oil is headed down towards $40 a barrel. Not straight down mind you, but things are bearish in so many ways. We are bearish because demand is bad and these types of credit concerns could lead to more demand destruction. We are bearish because some of the money that has been flowing to Asia may go back to the US dollar as concerns about a bubble in China would rise as they try to reign in credit. Still oil must get below $7240 before we see the next leg down. Until then check me out each day on the Fox Business Network or call me at 800-935-6487 or email me at pflynn@pfgbest.com to open your account.


Phil Flynn
Senior Market Analyst