Good morning,

After better than expected NFIB and hope that Europe will compose a bailout plan for Greece, the "Risk-On" trade is back with equities rallying and the greenback/yen losing value. The US dollar index is down .29 at 80.00. 1yr OIS are: US at .335%, UK at .6195%, EU .654%, JP .105%, Cad 0.5105%, Aus 4.255%, and NZ is 3.17%. The 1yr OIS spread between US/UK is -28.85, US/EU is -32.35, US/JP +22.55, US/CA -18.0, US/AU -392.45, and US/NZ -283.95. All of these have moved strongly in favor of the US dollar from last Thursday.

10:00 Wholesale Trade
1:00 PM 3-Yr Note Auction
5:00 PM ABC Consumer Confidence Index

CNBC reports that Dow component Coca-Cola (KO) is the most prominent company releasing quarterly earnings this morning. Others include Agco (AGCO), Biogen Idec (BIIB), Coventry Health (CVH), InterActiveCorp (IACI), Pulte Homes (PHM), and Molson Coors (TAP). After this afternoon's closing bell, Dow component Walt Disney (DIS) will be out with its quarterly numbers. McDonald's (MCD) is another Dow component that will be in the news this morning, as it releases its latest sales figures at around 8am ET."

Global equities are rallying on Greece optimism and are in positive territory with the S&P 500 is up 9 at 1064. Commodities are mildly rallying with gold at $1073, crude is $72.50, nat. gas is $5.34, and home heating oil is at $1.91. The CRB is at 262.10. Wheat is at 4.86 and corn is at 3.59. The US 10 yr note yield is at 3.60% and the 2yr note at 0.80% with the spread to 280. The TED spread is at 15.56, the VIX is at 26.51, and the CVIX closed at 12.87. Today starts the US Treasury auctions for 3yr ($40 b), tomorrow 10yr ($25 b), and on Thursday 30 yr ($16 b).

AM MO: Interesting note in the FT yday: "Speculators make $8bn bet against euro. Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a Eurozone debt crisis. Figures from the Chicago Mercantile Exchange, which are often used as a proxy of hedge fund activity, showed investors had increased their positions against the euro to record levels in the week to February 2." Bloomberg has a currency survey that shows extremely high pessimism on the Euro as well. To me, this means we're ripe for a pullback in the US dollar. I think we'll see some optimism leading up to the EU meetings on Thursday that Greece will get some help. But I wouldn't bet it'll last longer than the morning of the meetings.


The Global Debt Dilemma

Apparently, the Greek government has called in the big hitters to help them with their fiscal dilemma. Joseph Stiglitz has been advising the government and his first analysis is to state that the austerity plan will likely stifle the country's growth. The 2001 Nobel Peace Prize winner said that without balancing measures to stimulate the economy -- such as development funds and other ways to increase liquidity -- the deficit reduction could slow growth according to the WSJ.

"Slower growth could in turn lead to lower tax revenues and end up increasing the budget deficit. "I would give a strong cautionary note against deficit fetishism," Mr. Stiglitz told a news conference in Athens. "If you have less success [stimulating the economy through other means], then I start getting worried."

In essence, Greece's problems represent similar predicaments that other Western countries have: large deficit spending to stimulate/resuscitate economic growth. this is the modern interpretation of Keynesian economics. Or is it? Remember, Keynes didn't advocate running structural deficits to get the economy going (C+I+G+Ex-M=GDP) and thought they would chill rather than stimulate the economy.

In Fortune magazine, Carnegie Mellon's Allan Meltzer had this to say on the current US deficits, " Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn't understand that the proper policy in a democracy recognizes that today's increase in debt must be paid in the future....We paid down wartime deficits. Now we have continuous deficits. We used to have a rule people believed in, balanced budgets. And now that's gone."

"The type of stimulus he (Keynes) advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending as the source of durable job creation." If Meltzer is correct, then both Greece and the United States need to focus on increasing private investment.

Therefore, a plan that contains increasing taxes on corporations or on capital creation is not what Keynes had in mind to stimulate private investment. At some point, nations will have to decide that they can't spend money on programs they can't afford. The recent discussions surrounding European and United States structural deficits has been prompted by a perceived crisis within the financial community over lack of credible plans and polices.

Stiglitz believes this fear is overdone and sees little chance of a default by Greece, United Kingdom, or United States. However, this doesn't mean that the problems are going to be solved easily. In Greece, it's cutting popular pension programs and government workers pay. In this country, the NYT on Sunday ran a very helpful graph on the US budget deficit and debt. Although cutting earmarks and other spending is helpful, the conclusion is that cutting entitlement programs of Social Security, Medicare, and Medicaid is the key.

It would take strong leadership to bring these up for discussion and propose meetings in front of cameras for this purpose. Until this discussion occurs, debt holders will be left to speculate over the outcome of austerity measures that don't address the true issues.

Andy

© 2010 BMO Capital Markets Corp.