Another Credit Crisis Blooming
Research for Online Investors

by John Dalt

6/6/11

Mercedes-Benz sales rose in May by 7.4%.  The company sold 118, 931 vehicles according to Bloomberg.  Sales growth was led by Brazil, Russia, India and China, the original BRIC countries.  This was the best May since 2008.  What is a company to do that has the breeze at its back?  Look to see what is gaining on them!

The problem Mercedes Benz has is the euro.  The currency took a dip last month, but is back on the upswing since the last week of May.  Neither we, nor the company should be concerned about small moves on a month to month basis.  Their concern, and ours, needs to be with the long term health of their currency.

The euro is used by seventeen countries.  Germany is the strongest financially, with the number one export economy.  A strong euro hurts their export competitiveness.  Since the Chinese Yuan is almost tied to the hip with the dollar, imports from China become cheaper when the Euro increases in price.

That is the short term problem.  Long Term, the euro is in trouble.  It looks like the European Central Bank (ECB), IMF and Eurozone governments through the Eurozone Financial Stability Facility (EFSF) are ready to pump more money into the dead carcass called Greece. Where does this money go?  The IMF money goes to the government, the ECB money goes to any bank that holds Greek debt and wants to use it as collateral, and the EFSF money goes to the government.  This EFSF money comes from member countries.  The money is not a grant.

Greece has to pay it back.  The terms are great, below market.  The problem is the market recognizes that Greece cannot pay the debts back.  Not in the near term, and probably not in the long term.  Eventually, the debt will have to be reduced.  Greek public debt is approaching 160% of the country’s GDP.

Is it any wonder that citizens are upset?  Germany’s government is taking tax money to support other government’s weak economies that are collapsing under the weight of their current debt.  This is like U.S. tax money going to rescue European banks, we would be mad as hell!  Oh, wait a minute.  That is what happened to the TARP money.  Never mind.

So, how does this affect Mercedes Benz?  The currency they are tied to is fluctuating now, but about to become a major liability.  The banks they do business with are sitting on debt worse than the subprime stuff that U.S. Banks sold them four years ago.  At least they had a credit default swap (CDS) on those debts!  Even if they were worthless until the U.S. government bailed out AIG.

The German government will come under pressure when Greece, and other weak eurozone counties, collapse.  This means higher taxes and austerity measures in Germany’s future, as they tackle budget problems.

The weak eurozone countries are in financial trouble and have no wiggle room left to pull out of the death spiral they are in.  The strong eurozone countries are in a long dark tunnel, and the train is picking up speed.  The sharp curve ahead is just becoming visible.  The markets are starting to realize that the brakes must be applied.  Governments evidently do not.

The eurozone faces a “pay me now, or pay me later” decision.  Do they cut off aid to the weak countries and leave them to fail and restructure on their own?  It would be painful to all involved.  There is a lot of bad debt floating around the world.  It appears they would prefer to “kick the can down the road” a little farther, hoping the problem will go away.  It will not, it will only get bigger.

I believe we are now looking at a credit crisis in the eurozone as serious as the one in the U.S. in 2008.  It has been developing, and we have been aware of it, for the last 16 months.  We should not be surprised when it comes to full bloom.

Mailbag:
Keep telling it like it is!---subscriber L.H.

What a great article on Friday.  I continue to enjoy and learn from your newsletter.---subscriber S.H.

I think your remarks on the debt ceiling negotiations are uncommonly real world astute. No one in the political press has figured out what you plainly explained.  If Obama was a leader, he would have long since started cutting government spending. A simple solution is whack everything two maybe three percent. Everything, including his salary.---subscriber J.R.

John’s reply:  That is a start, but why not all government employees (except military below $50,000).  You can forward “Intractable Negotiators” to your congressmen.  There is an updated “clean” version on the website, with an additional paragraph suggesting a House resolution instructing the White House to start cutting spending.  You can just cut and paste it from our page to your email and send to them.

“Intractable Negotiators” has been picked up by other conservative “News” websites. If one of your favorites doesn’t have it…send it.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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