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Economic Update for the Week of 5/18/2012

The Greek tragedy continues. With the election of a new president, Greece is openly talking of not paying back bailout funds that would result in losses for taxpayers of other countries either through direct injections of capital or printing more Euros which could cause inflation. Either way, Greece can walk away leaving other countries in the lurch. There is also more discussion of Greece leaving the Eurozone and the effects of such an exit. This continuing debacle has seemingly been a cause for much of the market volatility and will likely continue to cause volatility and downward price movements.

As a result of the deteriorating financial position of Greece and Spain, the banks of these countries are experiencing runs on their banks, or in other words, depositors are losing faith in the institutions and are pulling their money out. The interesting aspect of such fear is that the run on the banks actually causes the bank to fail. When a bank takes in a deposit, it will typically loan out 90% of those funds; this is referred to as the fractional reserve system. The bank only must keep about 10% of funds on reserves to meet deposits. If the depositors all want to take their money out, then the bank has to come up with the money somehow either by selling loans or investment capital. In either case, if they are unable to sell these assets or generate enough funds to meet the redemptions, then it becomes a nasty downward spiral resulting in failure of the bank.

Empire State Manufacturing came in at 17.09 from an expectation of 0, while the Philly Fed Index expectations of 10.0 came in a negative 5.8.

Inflation as measured by the CPI (Consumer Price Index) fell to 2.3% year over year; the month number was unchanged. Despite massive stimulus and printing of money, the inflation rate is not rising, it is slowing but not negative. While prices are still rising albeit slowly, with wages staying flat, this still hurts the wallet. Meanwhile the slowing rate of inflation will bring us closer to possible QE3 stimulus from The Fed.

The Facebook IPO (initial public offering) with all the hype fell flat and has been plagued by claims of insiders not releasing information to the public. This debacle just shows why individual investors have no business getting involved in IPOs. The current revenue simply doesn't justify a $100 billion valuation. It should be considered that for the long term, Facebook's ability to raise this money from the IPO will give it many option of acquiring other tech companies and we may see significant growth in the future from Facebook depending upon how the business goes. This should be interesting to watch over the coming years.

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