Next Tiny Country in the Eurozone to Bust

Eurozone to BustWhile cutting the growth outlook of the global economy, Chief Economist of the International Monetary Fund (IMF) Olivier Blanchard said yesterday, “…the main challenge is very much in Europe.” (Source: “IMF Cuts Global Growth Outlook as Europe Demand Urged,” Bloomberg, April 16, 2013.)

Blanchard showed further concerns regarding the economic slowdown in the eurozone, saying, “Europe should do everything it can to strengthen private demand. What this means is aggressive monetary policy and what this means is getting the financial system stronger…” (Source: Ibid.) In other words, print more paper money.

Greece, Spain, Italy, and Portugal are facing a staggering economic slowdown and are dragging the stronger eurozone nations down with them. The countries that were supposedly “immune” to the debt crisis in the region are now feeling the pressures.

Germany, the strongest nation in the eurozone and the fourth-largest economy in the world, is having troubles; demand is falling. German car sales plummeted 13% in the first quarter of 2013. (Source: Financial Times, April 17, 2013.) The Bundesbank, Germany’s central bank, expects the country’s gross domestic product (GDP) to increase by only 0.5% in 2013. (Source: MNI News, April 16, 2013.) But being so early in the year, this 0.5% GDP growth can easily turn into a 0.5% contraction, considering the problems in the eurozone.


As I have been writing since the beginning of 2012, the economic slowdown in the eurozone will spread to other parts of the world, rather than it being contained.

The events in Cyprus sent a significant amount of fear into the global economy. And the crisis there still isn’t over. The country is being forced to sell its gold to pay for the expenses.

Next on the “hit list” is the tiny eurozone country of Slovenia.

The Organization for Economic Cooperation and Development (OECD) has reported that bad loans on the books of Slovenia’s banks account for about one-fifth of the country’s GDP! (Source: New York Times, April 9, 2013.)

The economic slowdown in the eurozone is troublesome for the global economy, especially the U.S. economy. About 40% of the companies on the S&P 500 stock index derive sales from the eurozone—they have to be feeling the pressure.

Michael’s Personal Notes:

According to CoreLogic, there were 54,000 foreclosures in the U.S. housing market in February. At the same time, and what is still even more worrisome, is the fact that there were 1.2 million homes in the foreclosure inventory. (Source: CoreLogic, March 28, 2013.)

The top-five states with the highest level of foreclosure inventory to mortgaged homes are Florida with 9.9%, New Jersey with 7.2%, New York with 5.0%, Nevada with 4.6%, and Illinois with 4.5%.

As has been well documented in these pages, there is a significant number of American homeowners living in homes with negative equity—the value of their homes is less than the mortgage they borrowed. And first-time home buyers, those who actually buy a house to live in, are missing from the action in this housing market.

Those who are closest to the U.S. housing market, homebuilders, are worried again. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell in April for the fourth consecutive month. It stands at 42. (Source: National Association of Homes Builders, April 15, 2013.) Any number below 50 on the HMI indicates that homebuilders view conditions as being more poor than good.

Remember: homebuilders see the conditions changing in the housing market very quickly, and their continuous pessimism shouldn’t be taken lightly.

Dear reader, this is all contrary to the recovery in the housing market that we keep hearing about in the news. I agree that increasing home prices are a good sign. But when I look at the bigger picture, price changes in the U.S. housing market have not been significant enough. Prices in the U.S. housing market are still far from the highs they made in 2006.

Assisted by the Federal Reserve’s unprecedented quantitative easing program, mortgage rates have plummeted. The Home Affordability Index—a measure of which shows if a typical U.S. family can afford monthly mortgage payments on a home—is hovering near its all-time high, showing that Americans are more than able to buy a house and make their mortgage payments. Regardless, buyers are shying away from the housing market, as their concern about the overall economy continues.

My feeling is that institutional investors were able to move home prices higher in the U.S. housing market through their aggressive and massive absorption of depressed housing units. Take the action of institutional investors out of the U.S. housing market, and recovery in the housing market is questionable at best.

What He Said:

“A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on over extended consumers.” Michael Lombardi in Profit Confidential, March 26, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.