Economic Headlines for the Week Ending October 28, 2011, and What it Really Means.

All Europe, All Week (Almost)… Equity markets around the world staged massive rallies on the announcement of a preliminary deal to address the European debt crisis.

 What it means… The deal included a 50% reduction in value on Greek debt held by banks, and a call for a recapitalization of banks of about 106 billion euros, as well as the raising of almost 1 trillion in funds that will be backed by the euro zone bailout program (EFSF). Who will invest in European banks? Who will invest in the euro zone bailout fund? These unanswered questions are left for another day. The deal shows a mindset to address the problem, but the details show that a real solution is nowhere to be found.

Greek Pensioners in the Crosshairs… Following on the Greek Tragedy, the national pension system holds 35 billion worth of Greek government debt. This is about to be cut in half, courtesy of the aforementioned agreement.

What it means… There is no way to overstate the size of the problem inGreece and the growing issue in Italy. These economies are shrinking, not growing, and the turnaround plans of the region rely on the fantastical notion of budget surpluses in these countries through dramatic spending cuts with no resulting loss of tax revenue. How likely is it? Ask the nations that have already tried it –Greece, theUK,Italy,Portugal,Spain, andIreland. Close on the heels of this group is France, which is not in a death spiral, but is teetering on the edge of recession and just announced another round of austerity measures.

US GDP Up 2.5%… The 3rd quarter GDP of the US grew at a 2.5% annualized rate, which is better than many had hoped for over the course of the summer.

What it means… Many breathed a sigh of relief that the US moved away from recession instead of toward it, as 3rd quarter GDP doubled the rate of the 2nd quarter. In fact, GDP is now above its pre-recession levels. The problem is that in the 3+ years since the last GDP high we have added millions of new people to the economy, so on a per person or per capita basis, we are still about 3% down. Either way, our current growth rate will not add jobs, and wages have fallen, which is why personal confidence remains low.

No Population Movement… The Census Bureau and the IRS released data showing that the population movement of the US is at its lowest point since the measurement began in the 1940s. The sun states are not gaining, in fact NV and FL lost people, and the large cities of the Northeast staunched their losses.

What it means… If you cannot sell your house, and you are not gaining new employment, then moving is hard. In addition, the previously attractive states were in a feedback loop where more people meant more development which meant more jobs, which attracted more people, and so on. Now the feedback loop is negative, where fewer people mean less development, which means fewer jobs, which requires less people, and so on. Young people are hanging around major population centers hoping the size of the cities will lead to employment opportunities.

Home Prices Continue to Slide…The Case Shiller 20-city Home Price Index fell 3.8% year-over-year, and the median price of a new home fell 10.4% year-over-year.

 What it means… This is no surprise, of course. Housing is still in the dumps, and the main drivers – access to credit, earnings, and savings – are still suffering. Don’t look for a turnaround soon, especially with foreclosed inventory about to hit the markets.

 (source: HSDent Publishing)

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