Political risk moves stock markets.
Investors are getting a reminder of that today from Japan where the resignation of Prime Minister Yukio Hatoyama has sent the yen falling against all but one of the world’s most traded currencies. The Nikkei 225 stock index is down more than 1%.
And they’re likely to get another refresher in coming weeks from Spain where the government of Prime Minister Jose Luis Rodriguez Zapatero is struggling to stay in power.
In Japan Prime Minister Hatoyama has said he will resign less than two months before elections scheduled for July 11. The move raises huge questions about whether Japan can pull itself out of the economic and political malaise that has gripped the country for the last twenty years. Hatoyama is the fourth Japanese prime minister to resign in the last four years.
Hatoyama’s Democratic Party came to power a year ago in an election that broke the 54-year near-monopoly on power of the Liberal Democratic Party. The hope was that his team would be able to revive Japan’s flagging economy and reform a political system that gives inordinate representation to rural districts with declining populations.
The retreat in the yen this morning—the yen was down 1.3% against the U.S. dollar as of 9 a.m. in New York—is related to speculation that whoever from the Democratic Party replaces Hatoyama in the run up to the election will advocate a weaker yen to revive Japan’s economy and prevent deflation.
One potential candidate to replace Hatoyama is Finance Minister Naoto Kan. In his first day as Finance Minister back in January Kan roiled global currency markets by saying he wanted the yen to fall and called on the Bank of Japan to support the national economy with cheaper money.
Meanwhile back in the European Union, the Zapatero government barely survived a vote on cutting $18 billion from Spain’s budget in order to reduce the county’s deficit to 6% of GDP in 2011 from 11% in 2009. The margin of victory was a single vote.
No one expects that a government presiding over an economy with 20% unemployment will be popular or have an easy time advancing its legislative agenda. But the Zapatero team has made things tougher on itself by initially denying that Spain had a budget problem. International economic watchdogs and economists doubt that current plans will reduce the Spanish deficit by as much as the government is projecting.
Zapatero’s term ends in 2012 but if the government loses a key upcoming budget vote the prime minister will be forced to call early elections. The government’s margin of error is miniscule: Zapatero’s Socialist Party does not control a majority in Parliament and relies on votes from minor parties to stay in power. It doesn’t help that the government’s budget plans have raised fierce opposition from the unions that traditionally provide much of his party’s electoral support.
What would replace a Zapatero government? That’s what worries international investors. The Popular Party, a likely winner in any early election, has voted against the government’s deficit cutting plans but doesn’t seem to have anything better to offer.
More dithering would seem to be in the cards.
Spain isn’t the basket case that Greece is, even though the country’s budget deficit and balance of trade deficit are worryingly large. The Spanish savings rate has climbed during the global financial and economic crisis to 19% now so the country has a fair amount of domestic liquidity in reserve. The Spanish central bank raised reserve requirements as the Spanish housing market overheated so the country’s largest banks are in decent shape—as opposed the regional and local cajas, which are in so much trouble that the central bank has begun to take them over or arrange for mergers. The International Monetary Fund estimates that Spanish banks need to raise just $31 billion against their bad loans.
But none of that will stop investors from selling off Spanish assets and forcing down the euro even further if the Zapatero government totters and then falls.
Markets just don’t like political uncertainty.

Most American homes are equipped with a coffee maker and most American days are equipped with the coffee maker part of the day. Most of us take it for granted without stopping to appreciate the wonderful satisfaction that comes with true communion with the coffee and its maker and the part it plays in our overall wellbeing . Now is as good a time as any to stop and smell the coffee.
Morning is a great time for coffee. Plan your day on a morning cup of coffee.
Our mornings are difficult at best, especially during the work week. The unwinding, after dinner part of the day is so far off and the previous day’s unwinding part was often so good that we let it go on a bit later than is good for us. That’s what makes morning a necessary component of the coffee maker part of the day. How anyone can go through the day’s preparation for self and family without resorting to the coffee and its maker is beyond me.
Show me a dissatisfied, frustrated commuter and I’ll show you someone holding a store-bought cup of coffee. As annoying as these people are, try to work up a little sympathy for the poor soul who has groomed, dressed, prepared, traveled to a coffee shop, stood in line (with grumpy people), juggled a hot cup with a newspaper and work papers or whatever, and is now forced to behold the more satisfied people who drank home brewed coffee that surround him.
It’s so much easier to allow the aroma of a brewing cup to accompany the grooming and preparation of the day, to allow the sounds of family to blend with the soothing sounds of coffee dripping into the pot, to allow a few decadent minutes of sitting and sipping before starting off. That’s the way the morning goes when it’s included in the coffee maker part of the day.
Evening time can be a time to enjoy coffee. Many people forget how relaxing a cup of coffee can be. Coffee is more than a morning drink.
And what about the benefits derived from making one’s homecoming an element of the coffee maker part of the day? It’s the empowering part of a frustratingly powerless day at work. You can select exactly the kind of coffee to put into the maker along with the amount. Contrast this with making do with the coffee pot in the break room where the consensus brand of coffee has either run out again or has been sitting for hours scorching on the heating pad. And you pick your own cup instead of using the cheap, disposable one provided by the coffee fund or the dollar store mug you chose to bring to the office because it isn’t nice enough for anyone to steal. And best of all, you and your coffee and your cup settle into whatever chair in the house you feel like using.
It could be the one in front of the TV or the one in the kitchen full of family or the quiet one next to the window in the bedroom. Power is the gift you get from the evening coffee maker part of the day.
Fill in the joys of the coffee maker part of weekends and holidays and remember to enjoy.
Hi Jim,
Could you tell us if there are any labour-intensive exporting Euro-zone companies that stand to gain from the fall of the Euro?
sliman,
The initial rush to gold has pushed up the price. But will the demand for gold be sustained, or just temporary?
One thing that concerns me is how the central banks are propping up the euro. That could lead to a decreased demand for gold if it keeps up for an extended period of time. If demand for gold drops off, the price of gold would quickly follow.
Ed
GLD has been moving up in dollars too, which makes for a bullish case. Some traders like Gartman buy gold in other currencies. However when you sell and go back to dollars it works out the same.
reisdorf… thanks for the info. I did see that announcement, but didn’t know of its positive iimpact on MXWL.
Run 262 (MXWL)
Thales was recently awarded a contract to supply Iridium with with 72 communications satelites. MXWL’s Space Microelectronics group is a subcontractor to Thales and will supply the onboard computers for use in the satellites.
As things worsen in Spain, the wealthier regions (esp. Catalunya) might well seek independence (greater autonomy is a given). Many in Catalunya, including the elite, will be seeing this as the opportunity they’ve been waiting for to break from Spain. And why not? Interesting political developments involving certain regions are assured over the next year……
Listening to all the Prime Ministers resigning and such made me realize that I didn’t know so many countries use the Prime Minister/Parliament model for their government.
As weird as it may sound you need to factor in the World Cup to the Spain Thesis. Give the people entertainment and they forget about other problems
Off topic…
Anyone know why the pop in MXWL?
I used this as an opportunity to take some profits so i’m sure there will be some huge announcement.
STL-
Jim’s STD choice was for his Dividend Portfolio- the “play” is that somewhere-around-10%-div [and pretty high div growth over time, too], not
where this stock will be in a week or a month or a year.
Of course, if you bot some when Jim said to, you will probably get some great opps to add more in the continuing Spanish bear market and government whoopsie-up. Average your price down, increase your dividend yield further.
Like Seaturtlelady, I am intrigued by the timing of your recommendation to buy Bco Santander. Before plunging, I will wait until Zapatero’s (Joe’s in your words) government’s future gets clearer.
sliman,
If you’re living in one of those countries, I’d agree with you. But keep this in mind: As their currencies grow weaker, the dollar seems to be getting stronger. The stronger the dollar is, the lower the value of gold is in dollars.
Having said that, I think demand for gold and the strengthening dollar will balance out in the long term, basically leaving gold at roughly the same price in dollars.
Jim:
Cramer was saying that until the oil spill stopped, there will be no stock rally. What’s your thought?
I usually don’t take Cramer too serously, because he is doing a “show”. A show needs attention. He has to do what draws attention. But on this one, I am sort of agree with him.
BTW, the Japanese PM is a joke!
The case for holding GLD just gets stronger. Governments will not have the courage to cut spending. Any thoughts Jim?
Wondering how this will play out for/against the STD stock you bought???