Since 1945, Greek elections have swung back and forth between two parties, similar to the Republicans and the Democrats here in the U.S.—very predictable.

With the Greek unemployment rate at a record 21.7% in February and youth unemployment at an alarming 54%, the elections in Greece held earlier in May saw this 60-year political cycle come to an abrupt end.

The parties that support the European Union and the austerity measures—and the parties that traditionally held power for over 60 years—only garnered 34% of the vote. The other minority extreme right-wing and left-wing parties, which gained seats as a consequence, stand against the European Union and the austerity measures.

Greek law states that the minority party with the most votes must attempt to form a coalition government in order to run the country. The party in support of the European Union and the austerity measures was, of course, unsuccessful in forming a coalition government.

According to Greek law, the party with the second-most votes is next to try to form a coalition government. Although these extreme parties are against the European Union and the austerity measures, their ideals are so different that they were unable to form a coalition.

Now that this has failed, Greek law states that another election must be held in the hopes of finding a majority government. This new election should take place sometime in mid-June. Of course, there is no way that the pro-European Union groups will get elected. The question is: will the people of Greece provide either the more extreme left- or right-wing parties with enough seats to run the country?

The European Union has already responded to this shift in Greek politics by saying that, if they don’t implement the austerity measures required of them, the country will not get any further bailout money. And if Greece does not receive the bailout money, it will be in default and will risk having to leave the European Union.

This situation is further complicated by the fact that certain interest payments on Greek bonds are due this week. Will Greece be able to pay for them? If the country doesn’t pay, it will be in default and could cause a cascade of events that may lead to Greece having to leave the European Union.

I can see the European Union holding together even if Greece leaves, as everyone has been painfully aware over the last few years that Greece will be unable to pay its massive debt.

However, besides Germany, there are not many other countries that are happy with the austerity measures. Therefore, will Greece leaving make Spain, Italy, Portugal, Ireland and now France take their leave of the European Union?

The other issue is that, if Greece defaults on its debt, well, someone is going to lose a lot of money. That someone could be a German or French bank. Also, the derivatives tied to Greece defaulting mean that someone will lose a lot of money. The European Union may need to step in and print who knows how much money to contain the crisis.

This mess is cloudier than trying to look through a body of water after an oil spill.

Compounding things…Ireland is holding a referendum at the end of May to vote on the austerity measures imposed on it by the European Union. Will Ireland indirectly vote to leave the European Union?

The situation in the European Union continues to erode. For the first time, one euro trades below $1.30 U.S. With so many U.S. S&P 500 companies having revenue exposure to Europe, is it any wonder the stock market has been in a free-fall as of late?

Michael’s Personal Notes:

When the competitors of Cisco Systems, Inc. (NASDAQ/CSCO) reported weaker first-quarter 2012 earnings, market participants bid up Cisco’s stock believing that Cisco was taking market share away from its competitors.

Polycom, Inc. (NASDAQ/PLCM), a videoconferencing company, reported weaker first-quarter earnings. This competitor to Cisco noted that lower government spending caused revenues to decline more sharply than anticipated.

The company also provided its earnings outlook for 2012. It noted that the economic landscape looked weak. It cited business in North America and in Asia as being weak. This earnings outlook flies in the face of those who say that the U.S. economy will remain strong, despite what the rest of the world is doing.

Juniper Networks, Inc. (NYSE/JNPR) is a major communications equipment maker, the main competitor of which is Cisco Systems. Juniper’s earnings outlook for 2012 was provided with a very cautious tone. The company believes that the slowing U.S. economy and the European debt crisis are preventing telecommunications companies from spending, which in turn will affect its bottom line.

Many traders thought it is easy to blame a weak U.S. economy and the European debt crisis on a weak earnings outlook when Cisco is taking market share.

Cisco System reported earnings last week, which were fine, but its earnings outlook for 2012 painted the picture of a very nervous business sector that was unwilling to spend on Internet gear and a weaker global economic environment.

Despite the cash large corporations have on their balance sheets, they are not spending. Cisco noted that the European debt crisis not only meant weaker consumer and business spending in Europe, but it is also preventing large corporations from spending here in the U.S. and in Asia because of the perception of a coming global economic slowdown.

Yes, business in Asia was strong in the quarter for Cisco, but the company is uncertain about its earnings outlook in Asia going forward. Cisco is considered a leader in the technology space and its earnings outlook is a barometer of how the economy is doing.

Cisco also noted that weak government spending in the U.S. and in Europe—with the European debt crisis—was also an issue that was going to persist in 2012.

Due to Cisco and other technology firms’ weak earnings outlook, Internet technology spending growth worldwide has been slashed by many forecasters and analysts for the remainder of 2012.

There are clear signs the U.S. economy is weakening considerably (see: The Missing Economic Recovery), especially when considering the earnings outlook for the remainder of 2012 from key companies within the S&P 500. (Also see: Many Public Companies Predicting Soft Earnings for Balance of 2012.)

Where the Market Stands; Where it’s Headed:

After a great start to the year, May is proving to be a terrible month for stocks. The Dow Jones Industrial Average has dropped 518 points since the beginning of May.

Corporate insider selling of stock is at a record high. I’ve written repeatedly about the recessions amongst European countries and about the slowdown in China. Now corporate America is pulling back on its corporate earnings forecasts for the remainder of 2012.

Is this the end of the bear market rally that started back in March of 2009? We’ll soon see, dear reader, we’ll soon see.

Note on Gold:

Reports in the media have it that investors are unloading their gold and running for the “safety of the U.S. dollar.” I don’t buy this at all. Firstly, central banks have been big buyers of gold bullion in 2012. Central banks just don’t turn around and dump gold they just bought.

Secondly, the only “security” in the U.S. dollar is the fact that it’s a currency backed by a central bank that will simply print more of it in the event more dollars are needed. Money printing is something Germany has held the European Central Bank back from.

So you tell me, dear reader. Would you rather own a currency that is limited in circulation or one that is issued by a country that just prints more of it as needed?

Finally, after years of rising gold bullion prices, we are seeing a meaningful correction in the gold market. Gold is up five percent from where it traded one year ago. It’s all in the way you look at it and where you see inflation and the U.S. dollar in the next two to three years out.

I’m in the camp that sees the glass as half-full. When I could, over the past decade, during the bull market in gold bullion, I have been buying gold-related investments as the price of the metal corrected. I believe this strategy has worked well for me.

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October 2011—doubling the price of the bonds Michael recommended.

The unemployment rate in the eurozone reached a 15-year high in March at 10.9%, up from the previous record set just a month earlier at 10.8% (source: The Guardian, May 2, 2012). This is the highest unemployment rate since the inception of the eurozone.

March 2012 marks the 11th month in a row that the unemployment rate has increased among the 17 nations that make up the eurozone.

The European Central Bank (ECB) kept interest rates at one percent at its last meeting saying that its policies need to change so that growth is given as much emphasis as austerity. (It would have been nice if the ECB would have thought of that a year ago, before hundreds of thousands of more people joined the unemployment lines.)

I spoke about the quickly deteriorating conditions in Spain recently in these pages. It is worse than most could have imagined. Spain holds the highest unemployment rate in the eurozone. As of March 2012, almost one in four people is unemployed: 24.1%. Spain also has the second-highest youth unemployment at 51.2%.

One in two young people under the age of 25 is unemployed in Spain…an absolutely mind-numbing statistic.

In Greece, the latest unemployment figures available are for January. Its unemployment rate stands at 21.7%.

I’m going to list the youth unemployment rates for March 2012 for the eurozone (except for Greece, whose latest statistics are for January), so my readers understand that some of these countries are placing their youth in a severely dangerous position of being a lost generation. Or will this be the center of the social unrest and the reason why the eurozone will unravel?

  (Source: Reuters)

Going back to the regular unemployment rates…the unemployment rate in Portugal is 15.3%, while the unemployment rate in Ireland is 14.5%.

Some analysts have been saying Germany would be able to decouple from the rest of the eurozone and experience strong economic growth. I don’t but this. In fact, I believe Germany’s economy is contracting while its manufacturing numbers continue to deteriorate.

Germany cannot decouple from the rest of the eurozone as much as the U.S. can decouple from the global economic slowdown. The big question on my readers’ minds: How bad will unemployment eventually be here in the U.S. as world economic growth falters?

The pressures in the eurozone are mounting. Something will have to give soon, as the situation is clearly unsustainable. This weekend, France took a big step to the left and ushered in a socialist government led by new French President Francois Hollande. The new President campaigned on a variety of promises, including an easing of austerity measures.

A reduction in austerity measures…so where will the money come from? Better crank up those money printing presses again.

Michael’s Personal Notes :

Moving to our own problems…

American April 2012 unemployment numbers released Friday disappointed. Economists were looking for 160,000 in new jobs growth, but only 115,000 in new jobs growth was created (source: Bureau of Labor Statistics). However, mysteriously, the unemployment rate fell from 8.2% to 8.1% (more on that in moment).

Looking closer at the unemployment numbers; temporary help, general merchandise stores and food and drink places contributed the most to jobs growth by adding 62,000 jobs. This means that these low-paying jobs represented 54% of the new jobs growth created.

With this persistent theme of low-paying jobs growth being created in the U.S. economy, it is no surprise the jobs growth report showed average hourly earnings were flat in April 2012, when compared to March. Year-over-year, average hourly earnings have increased by a measly 1.8%, but when one adjusts for inflation, the average American’s real disposable income is declining!

Since 70% of gross domestic product (GDP) is consumer spending, I don’t see how consumer spending can increase in 2012 with pathetic jobs growth and no meaningful increases in average hourly earnings.

U6, as reported by the Bureau of Labor Statistics, is a broader measure of the unemployment rate, because it takes into account discouraged people who are still looking for work, as well as those working part-time, who want full-time work. The U6 unemployment rate was flat in April 2012 when compared to March at 14.5%.

The good news (yes, there is some) is that the previous two months saw higher revisions to jobs growth, with 54,000 more jobs created than originally reported. Not to take away from that positive news…typically in an economic recovery we should consistently be hitting 200,000 news jobs a month. We are far from this number.

One more quick note on U.S. April job numbers…

The labor participation rate measures all people in the working population (from ages 16-64) who are actually employed. In January, the rate hit a 30-year low of 63.7% (that is, only 63.7% of the people who can work and want to work are actually working). In February, it improved somewhat to 63.9%, but in March it dipped to 63.8%; while, in April, it fell further to its lowest level since December 1981 at 63.6%.

So how does the “official” unemployment rate drop to 8.1%? Simply, the figure is misleading. Discouraged workers who stop looking for work and those unemployed after one year are no longer counted in the unemployment rate.

Accordingly, the number of persons not in the labor force continues to climb higher: 88,879 million people, with the seasonally adjusted number being 88,419 million. This is absolutely mind-boggling.

Where the Market Stands; Where it’s Headed:

After a difficult Friday for stocks, stock market futures point to a weak opening this morning, with the Dow Jones Industrial Average slated to open below the pivotal 13,000 range again.

I continue with the belief that the market is putting in a “huge” top here. The stock market rally that started in March of 2009 is near the end of its cycle.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public haven taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

In the recent months, we have been able to shift our focus away from the eurozone and concentrate on the economic renewal in the U.S. Yet, as I have been saying, you cannot forget the risk in the eurozone and Europe. GDP growth in the eurozone is muted and the heavy debt loads have destroyed Greece, which had to receive two rounds of emergency capital in excess of $330 billion in order to stay afloat and avoid a financial Armageddon.

Greece will face decades of hardship. It will be very difficult for Greece to expand and grow its extremely fragile economy. The austerity measures are not popular and will wreak havoc. It could be decades before the country can emerge out of its crisis mode. Take a look at Japan, which has been caught in its mini recessions and stagnant growth for over 20 years, as I discussed in China & India vs. Japan: The Best Place to Put Your Capital.

With Europe and the eurozone still trying to find their legs and struggling to grow, I firmly believe there will be more issues down the road and likely sooner than later.

Spanish bond yields are rising again at over six percent. The feeling is that bond yields of over seven percent are dangerous and represent a red flag. Investors demand higher yields to compensate for the added risk of investing in countries such as Spain. Just think back to Greece where the bond yields at one point were above 90%! And take a look at what happened as the country was allowed to move into a controlled default and investors holding the bonds had no choice but to absorb a loss of about 75% on their investments.

On Tuesday morning, the International Monetary Fund (IMF) came out and said it was more optimistic about the global economies and pleased with the broad measures to deal with the debt issues in Europe and the eurozone. The IMF pegged U.S. GDP growth at 2.1% this year, which is okay but nothing to get excited about.Europe is estimated to see its economy contract by 0.3%. The one thing I can agree with is the IMF’s assessment that the eurozone debt crisis will be the most significant risk to the global economies.

You only have to take a look at China to see the negative impact of a slower Europe and eurozone on the massive idling manufacturing facilities in China, which is facing slowing.

And then you still have the risk in Portugal, Ireland, Italy and Spain. These countries are not on solid ground.Portugal and Ireland have already received handouts and will likely ask for more funds if Europe stalls. Italy is also sitting on a massive mountain of debt.

But the carnage is not confined to these countries. The two biggest countries in the eurozone, Germany and France, are also facing their own difficulties.

So, while traders are focused on the economic renewal and job creation in the U.S., the eurozone region remains a high risk area vulnerable to continued stalling. Before the global economies move into sustained recovery, the eurozone must expand and rebound. Even if the U.S. economy strengthens, we need to see demand growth out of Europe in order to feel more confident in the sustainability of growth in the U.S. and elsewhere.

When it comes to currency trading right now, there is one country’s currency that that has moved very substantially. You might be thinking that, with all of the turmoil in Europe, I would be referring to the euro, but I’m not. In fact, I’m talking about the Japanese yen. I wrote an article on December 22, 2011, called Should You Bet on a Euro Squeeze Against the U.S. Dollar?, in which I outlined that, when it comes to currency trading, there are many things to consider, not just the current credit crisis in Europe.

There are many players when it comes to currency trading. Some of the largest currency trading participants are buyers of government bonds. We all know how difficult the European situation has been recently regarding its government bonds, so many new participants to currency trading might think that the euro should go down against every other currency. It’s not always that simple.

A credit crisis will always scare investors out of government bonds and therefore they would sell and engage in currency trading. Speculators also try to determine what’s most likely in the market and are participants in currency trading, even if they aren’t necessarily investors in government bonds. Traders can see a credit crisis building and actively trade to get ahead of the slower crowd of investors, some of whom are still holding government bonds.

Active currency trading will be a very big part of the markets over the next couple of years, as Japan is about to enter its own credit crisis.Japan has been fortunate over the last couple of decades in that its own citizens were the biggest buyers of the country’s own government bonds. A former senior Ministry of Finance official in Japan stated his belief that, within the next couple of years,Japan will need inflows of foreign capital to buy its government bonds.

This is when the situation will get tough for Japan and the price of its government bonds. Bond investors, who have a big effect on currency trading, will demand more yield for their money, which means higher costs for the government. Current yields on 10-year Japanese bonds are at less than one percent. Considering Japan has the highest debt load of any developed nation, bonds investors would certainly demand a higher yield for their government bonds.

This is in addition to the stated goal of the Bank of Japan and the government in general to lower the value of the yen, as the country’s currency strength has hurt exporters. This implicit goal will push traders out of the yen, changing the nature of currency trading over the next few years.

While Greece might appear to be a big deal, the nation is tiny compared toJapan.Greece’s GDP is approximately $305 billion, while Japan’s GDP is just under $5.5 trillion, all in U.S. dollars.

Even with the negativity of the credit crisis in Europe, since my article on December 22, the euro was valued at 1.3054 against the U.S. dollar and it reached a high of 1.3485 just a couple of days ago. The Japanese yen, meanwhile, weakened significantly from 78.16 for every U.S. dollar to a recent low of 81.87. This yen weakness will continue for some time and many including myself believe that the yen will weaken to 100 for every U.S. dollar and perhaps even 150 is attainable within the next few years.