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Economic Update for the Week of 9/7/2012

The European Central Bank (ECB) released details of the latest stimulus program which is unlimited purchases of short-term bonds from Euro countries that are in trouble. This news sent the markets up after the announcement however we need to take a closer look. The program requires the ECB to sell as much as it buys which is referred to as "Sterilization" so that the number of Euros outstanding remains at the same level; this is not the printing of Euros. So if the ECB buys 50 billion Euros of Spanish and Greek debt, it must sell 50 billion Euros of something it already owns. The ECB would be limited by the current size of its balance sheet and thus this program cannot be unlimited. This program will result in the ECB buying up questionable bonds and selling good ones which is what the banks are already doing. Once the details of this plan get out, the markets may remain so enthusiastic. 

US payrolls added only 96,000 jobs, 87,000 of which were estimated based upon the birth/death model. In other words it is questionable whether jobs were actually added. This type of low jobs numbers should help to pave the way for QE3 stimulus. Meanwhile the unemployment rate dropped a tick not because more jobs were added, but less people looking for work. 

US Auto sales jump to 14.5 million units per year however the quality of the sales is declining. Larger dealer incentives and more than half of sales are sub-prime auto loans. Sound familiar? We can't keep growing by lending to more and more questionable borrowers. This just doesn't work and you would think that the lending industry learned its lesson; oh how people forget. 

Greek unemployment is up to 24.4%; enough said. Spanish corporate bankruptcies jump higher to about 2,000 from 1,000 in 2008 when the normal level is about 200. These corporations are not doing well because sales are down because people don't have money. We are seeing this negative feedback cycle occur before our very eyes.

Adding to the pain, Euro Money Market funds have started to inform clients that they will receive less than they put in due to flat and negative interest rates. This is known as "breaking the buck." It is only a matter of time before we see this at home especially given that the US Treasury is now authorized to issue bonds at negative interest rates. If you can't hide in a money market fund, where can you? I can't help but think that we are getting closer to the "endgame" as author John Mauldin puts it.

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