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Farrell: The PIIGS are Back and Japan Said What?

Wednesday, 12 Jan 2011 | 9:13 AM ET

The early morning hoopla Tuesday was that Japan had pledgedto support the Eurozone in its continuing fight against the ill winds of threatened illiquidity by buying bonds. Probably bonds issued by the Financial Stability thing that has been set up by the European central bank.

But, I didn't read the word 'pledge'. I read the words 'will consider' buying. Maybe that's the same as a pledge in international finance speak, but I don't think so. I'm probably just splitting hairs.

The Japanese probably will buy some Euro stuff. They sure buy their own stuff. Japan' debt to GDP is about 200% but much of it is financed internally by the very high savings rate in that country. Euro debt is running out of natural buyers so the Japanese had better come into the market.

Portugal, Spain, Greece, and Italy all will offer bonds this week, $43 billion worth. Actually, Greece sold 6 month bills at a 4.9% annual yield Tuesday. Italy sold12 month bills to yield 2.07%. Portugal will try its luck Wednesday.

To compare and contrast, US 10 year paper trades at a 3.3% yield. Greece at 12.6%, Ireland at 9.27%, and Portugal at 7.1% last I looked, although that has probably improved with the thought that Japan might come into the market. When Greece and Ireland pierced 7% yields on their 10 year, the market knew they were cooked and a bail-out was needed. It is rumored that France and Germany are pressuring Portugal to accept their fate and seek help (to get aid a country has to ask for it according to EU rules). The 'peripheral' countries need to raise tens of billions this year and the market does not appear to have that kind of appetite.

The US has a total federal debt outstanding just shy of $14 trillion. Yep, that's trillion. That is about the size of the GDP. "Publically" held debt is around $800 trillion, maybe a little more. The rest is held by the US government in retirement accounts (think social security) and other vehicles. The publically held portion of the debt has doubled since 2008. Central banks around the world, including our own central bank, the Federal Reserve, own a bit more than 40% of the publically held debt. The Fed owns just over $1 trillion, much of it recently purchased in the Quantitative Easing programs. The allowed amount of debt, the debt ceiling, is $14.29 trillion, so we will hit that very soon.

The PIGS Are Back!
Bond auctions this week in European periphery countries could be the litmus test for the Euro Zone's future, with Vince Farrell, Soleil Securities, and Michael Farr, Farr, Miller & Washington.

Treasury Secretary Geithner has publically worried about getting the debt ceilingexpanded else the Federal Government would have to shut down.

There has been rumblings that the bitter political divisions that exist could bring about just such a situation.

Republican Congressman Paul Ryan (R. Wis.), a well known fiscal conservative and a leader in the new Republican dominated House, has called for calm and the need to get the ceiling expanded and not shut the government. This will probably add to his bona fides and enhance his stature. The drop dead date for getting this done is likely early March.

The House debate about repealing the health care law passed last year will come first. It may be delayed a bit by the Arizona tragedy, but most likely will be passed by the House this month. It will die in the Senate but the lines will have been drawn. Revenue bills originate in the House and the House Republicans will try to starve the bill of funding. But the Arizona horror has shed a different light on the bitter debate and vitriolic dialogue so common in politics today. Paul Krugman's piece in the NY Timeson Monday essentially blamed politicians for poisoning the atmosphere to an extent where such a terrible thing could happen. That is a highly debatable point, but the political rhetoric should often be at least R-rated.

On the US economic front, wholesale inventories(about 30% of all inventories, factory inventories are about 40% and retail the rest) fell -.2% last month. That was a surprise and will probably cause fourth quarter GDP to be slightly reduced. But it will enhance first quarter prospects as it is apparent inventories need to be rebuilt. A 4% annual rate of GDP growth for Q1 looks good.

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.

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