Courtesy of Daniel Sckolnik, ETF Periscope
Spain Protests Just May Cause the Running Away of the Bulls
“Economics is extremely useful as a form of employment for economists.” – John Kenneth Galbraith
One of the great ironies regarding our elected officials can be found in the fact that they often consider the people that put them in office not quite wise enough to understand what is best for them. There’s some truth to this, of course, for if their constituents were arguably more intelligent they likely would never have voted for the rascals in the first place.
Case in point: the Prime Minister of Greece, who has declared that his constituents must tighten their belts further, unconcerned that many of them have apparently run out of notches.
It’s simple, really. Greece’s government requires more money, or it implies it will be unable to avoid defaulting on its debt, even though it is little more than a year since they received over $150 billion in bailout funds from The International Monetary Fund and the European Union.
The IMF, currently without the services of its seriously indisposed former chief, and the EU may need to prop up Greece yet again, lest the specter of default whips into a full-blown banshee of “contagion” that spreads throughout the EU. The IMF and the Euro bankers will be, apparently, willing, though likely not very happy, to oblige with billions of dollars in new funds as long as Greece doesn’t insist on restructuring its debt.
Again, simple. Except for a minor detail.
The singularly most likely way not to restructure the debt lies in the Greek government imposing further austerity measures upon its population. However, according to a recent poll, a large majority of Greeks refuse to endure any further austerity.
A conundrum, for certain.
The thing is, of the group of European Union countries known by the acronym PIIGS (which includes Portugal, Italy, Ireland, Greece and Spain), Greece is not the most serious problem. Because even though there have been protestors shouting from the streets of Athens for a while, it is another country that is creating a larger sense of dread among economists, politicians and investors in Europe and beyond.
That country is Spain.
Tens of thousands of protesters throughout Spain’s cities gathered to howl in frustration at the state of their economy, which appears to be dismal without much sign of improvement. Perhaps the most indicative statistic would be the staggeringly high number of unemployed, which is over 20%, generally attributed to a construction sector crash and a sharp drop-off in consumer spending. Even worse, unemployment among those between the age group of 18-25 is at 45%. Spain’s government, too, is insisting on additional belt-tightening, which doesn’t seem to sit well with those who actually have to suck in their stomachs.
One of the reasons Spain is more problematic than Greece is the size of its economy, which ranks a surprising #12 in the world. Take Greece, Ireland and Portugal’s GDP, double that number, and that’s where you’ll find Spain.
It is questionable if the EU’s strained bailout fund could handle a default by Spain, with an estimated $600 billion dollars required. Add that number to the approximately $400 billion previously given to bail out Greece, Ireland, and Portugal, and you can begin to understand why those tracking the global economy might be feeling a little bit edgy.
The concern rippling across the Atlantic from the EU seems to have reached Wall Street last week. The Dow Jones Industrial Average (DJIA) ended the week at 12,512, down 0.7%. The S&P 500 Index (SPX) was down 0.4%, landing at 1,333, a technically significant support level that has been tested several times over the last few weeks. The SPX struggled mightily to maintain that level on Friday.
Investor confidence was certainly being tested last week, and skittishness was evident. For the time being, it appears that the days of the market shrugging off any and all bad news with a bellow and a charge may have ended or, at the very least, taken a moment to regroup.
In any event, while the Bulls may continue to run through the streets of the equity market, it is plain that their reign may become derailed, at least partly, due to Spain.
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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