Next European Country to Default;
Why It Means More Money Printing

mortgage-backed securitiesBefore the financial crisis hit in 2008, Spain enjoyed a property boom similar to what we experienced in the U.S., pre-2008.

In 2009, home prices fell 7.7% in Spain and are currently 20% off their 2008 peak (source: Wall Street Journal, Mar. 15, 2012). The problem is that, in 2012, the housing market and home prices in Spain are collapsing at an accelerated rate. In the fourth quarter of 2011, home prices were off 11.2% from 2010’s fourth quarter.

In January of 2012, home prices in Spain were off 26% year-over-year! As with the U.S. housing market collapse, prices have further to fall in Spain.

How bad is the housing market crisis in Spain? In the U.S., our population is roughly 313 million and we had approximately 1.4 million homes in the foreclosure process. In a country of 44 million people, Spain has approximately 1.4 million homes empty in its housing market with foreclosures rising rapidly (source: Bloomberg, April 1, 2012).

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There are those who remain optimistic and believe that the Spanish housing market will not fall that dramatically in 2012, but they are not basing their assumptions on facts. Where is the demand going to come for homes when the unemployment rate in Spain is 23.6% as of January, the latest data available (source: The Telegraph, April 2, 2012)?

Spain youth unemployment in January was 50.5%! The poverty rate is 21.8%, the third worst in the Europe after Romania and Latvia (source: Telegraph, Feb. 26, 2012)!

Spain is officially in a recession. Gross domestic product (GDP) contracted 0.3% in the fourth quarter of 2011 and 0.4% in the first quarter of 2012. The Spanish government expects GDP to contract by 1.7% this year!

Spanish banks hold €400 billion in mortgage-backed securities in the housing market. Right now, the Bank of Spain is saying that the Spanish banks need to take a loss of €88.0 billion, but that is based on the housing market stabilizing. Just the opposite is occurring, which means that mortgage-backed securities will continue to lose value.

S&P has conducted a study that says if the housing market in Spain falls another 20%, which is very likely in their analysis and mine, one in four homes will have mortgages that will exceed the value of the home! This will mean that the Spanish banks will take more losses on their mortgage-backed securities, as people walk away from their homes and mortgages, like they did here in the U.S.

With skyrocketing unemployment, a contracting GDP, and a housing market that is falling at an accelerated rate, the Spanish government still has to implement European austerity measures. They cut spending in health services and education by €10.0 billion just last week, on top of the €40.0 billion cut in January of 2012. Unions have announced protests against the measures, to take place next week.

Spain has officially joined Greece in going into a death spiral. As the housing market continues to collapse in Spain, along with the value of mortgage-backed securities, the only way to save both Spain and Greece is if the European Central Bank steps in and prints money again.

Michaels’ Personal Notes:

In response to Spain, which I’ve detailed above, Greece, and other problem spots in Europe, the International Monetary Fund (IMF) has asked the world to provide more funds to help Europe out of its financial crisis.

Many parts of the world have expressed concern over Europe and have demanded the European Union do what is necessary to stem the financial crisis. Despite nations of the world feeling that Europe should handle its own financial crisis, the world has come together to provide the IMF with an additional $430 billion.

Japan is contributing $60.0 billion and the BRICS countries—Brazil, Russia, India, China, and South Africa—are providing $68.0 billion, although they won’t say how the money is split amongst their group. China has bought European debt in the billions of dollars to help support its largest customer during their financial crisis; China’s biggest export market is Europe.

The question I have, dear reader, is with China dealing with its slowing economy and Japan faced with its own financial crisis, and with their contributions to help Europe with its financial crisis, who is going to buy U.S. Treasuries?

In the first six months of the U.S. government’s fiscal year 2012, the budget deficit has reached $779 billion, which is better than the $829 billion in the first six months of 2011 (source: Congressional Budget Office). The U.S. Treasury is saying that, despite this better performance, the budget deficit for the full year 2012 will still come in at $1.3 trillion.

What is somewhat troubling—talk about a financial crisis of our own—is that, for February 2012, we recorded the worst monthly deficit in our history at $229 billion. The previous record was a year before in February of 2011: $223 billion. In February, the government spent $229 billion more than it took in!

In March, it was expected that the budget deficit would come in at $196 billion, but it came in worse than expected at $198 billion. However, this is much worse than March 2011, when the budget deficit came in at $188 billion.

I have written in these pages recently about the Federal Reserve buying 61% of net debt issued by the U.S. Treasuries. I have also written about the decrease in demand of U.S. Treasuries by our previous biggest buyers: China and Japan.

Japan has its own financial crisis to deal with, while China must contend with its slowing economy. Couple this with the fact that both Japan and China are pouring billions into the IMF and into Europe to help with the financial crisis, who then is going to buy U.S. Treasuries?

The only answer that makes sense is what worked in 2011 and that is the Federal Reserve. If that is the case, there will have to be a QE3. Gold bullion and those gold stocks are looking awfully cheap when QE3 is right around the corner.

Where the Market Stands; Where it’s Headed:

Yesterday, the tech-heavy NASDAQ had its biggest single daily advance in 2012, compliments of the better-than-expected quarterly earnings of Apple Inc. (NASDAQ/AAPL). It is quite interesting: The NASDAQ closed at 3,029 yesterday, still down 40% from its peak of over 5,000 in January 2000—12 years ago.

The Dow Jones Industrial Average and the S&P 500 continue to trade in a bear market rally that started in March of 2009. The rally is getting long and tired. I do not believe the potential upside reward is worth the risk for the majority of my readers.

What He Said:

“The conversation at parties is no longer about the stock market; it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate, because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.