The inflation rate across the 16-nation euro zone fell to zero in May, figures showed Friday, its lowest in 13 years of records, underlining the increasing risk of deflation — a damaging decline in wages and prices that could damp recovery prospects world-wide.

Prices are falling in six of the countries that share the euro. Spain logged a third consecutive month of negative inflation in May, with prices down an estimated 0.8% from the year before. German prices slipped 0.1% this month from May 2008.

The euro-zone estimate of 0% annual inflation for May surprised economists, whose consensus was for a 0.2% rise. Even that would have been the euro zone’s lowest rate since comparable records began in 1996. Economists at Royal Bank of Scotland estimate inflation hasn’t been as low since 1953.

Euro-zone consumers increasingly expect lower prices over the next year. Inflation expectations in May fell to their lowest level since records began in 1990, according to a European Commission survey Thursday. If consumers expect prices to fall, they may hold back on purchases, pushing prices down further.

In Spain, unemployment reached 17.4% in March and prices have been falling since. Some economists dismiss the deflation threat. But a rising number of retailers are giving consumers the option to trade down to discount brands

said on Tuesday it had accepted a $200m investment from Digital Sky Technologies, a private Russian internet investment group, valuing the fast growing social network’s preferred stock at $10bn.

The investment, which represents a 1.96 per cent equity stake, gives Facebook an additional cash cushion but the $10bn valuation is a come-down.

A year and a half ago, Microsoft invested $240m on similar terms but valued Facebook’s preferred stock at $15bn

“The fundamental challenge for all of these social network companies is: How do they convert traffic and consumer interest into revenue and earnings? The jury is still out.” said Bob Akerman.

Facebook and MySpace may have $820 million in combined sales this year, a fraction of the $45.7 billion online advertising market, according to New York-based research firm EMarketer Inc.

About 70 percent of marketers surveyed by Forrester Research Inc. plan to increase spending on social-networking sites. Still, 75 percent of those surveyed will spend only about $100,000 a year or less.

The team at Variant Perception just gave their opinion about Spanish crisis:

“As we have repeatedly said, Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level, a real estate collapse and general banking insolvencies. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That’s almost 50% of Spanish GDP. Most of these loans will go bad.

Spanish banks are now facing a very bleak outlook. Spain’s unemployment rate reached over 17% last month; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. Spain and Ireland had the worst housing bubbles in the world and now Spain has as many unsold homes as the US, even though the US is about six times bigger.

Why are Spanish banks not insolvent? Spanish banks are not marking their real estate loans to market. We’ve often wondered how it is that our thesis for Spanish real estate and industrial collapse has not created more victims. The answer is simple according to an article in Expansion, the Spanish equivalent of the Financial Times, from the 19th of April titled ‘Spanish banks control half of all real estate appraisals.’ You can’t make this stuff up. We haven’t even begun to see the worst in Spain yet.”

From green shoots to yellow weeds to …

U.S. bank-wide delinquency rates hit a fresh 18-year high in the first quarter, rising to 5.60% from 4.64% in the fourth quarter and 2.86% a year ago.  The data is obviously coincident as opposed to leading, but there is no sign that default rates have peaked for the cycle.

In addition to credit cards, commercial real estate delinquencies are the next major cloud over the outlook for financials.  The delinquency rate rose to 5.6% in the first quarter from 4.64% in 2008Q$ and double the 2.86% rate a year ago.  Of all the various lending classes, this area likely has the furthest to rise – the prior peak in the early 1990s broke above the 12% barrier.  We would not be surprised at all to see that prior peak taken out this cycle.

Who said that we are out of the woods ?

The figure 1 above ( Woody Brock www.sendinc.com ) offers a simple way of understanding what killed growth in the US economy. The variables shown remind us of the old adage that “History rhymes, but does not repeat”.

More specifically, the contents of the figure will disturb those seeking to identify today’s US recession with earlier ones in 2001 or 1991 or 1981 or 1973 or even 1931. No such identification is possible since the three developments highlighted in the chart and their improbable synergies are different from anything we have seen before. This sui generic nature of today’s crisis explains why traditional theories of recessions and “debt super-cycles” possess little explanatory and predictive power.

For example, according to standard business cycle theory, “pent-up demand” on the part of consumers is a principal driver of recovery—but it will not be this time around. The shift towards less consumption and more savings due to the implosion of household balance sheets and to demographics is most probably permanent. If so, this bodes poorly for hopes of a pent-updemand-driven recovery.

In the graphic above, we can see the evolution of the SP 500 during  four Bear Markets. After the impressive last 9 weeks, we are still clearly in a downtrend that can stay with us for a while .

The “green shoots” of the Economy, and the hopes for a fast recovery have translated in a Bear market rally that is comparable to the ones that we had during the Great Depression 1929-1932.

U.S. railroad freight traffic is running about a fifth lower than a year ago. It’s one of several less obvious indicators that all is not well, despite the strong financial market rally since early March.

The continuing slump in weekly railroad traffic reflects sluggish industrial activity and consumption. Shipments of industrial products are down almost a third over the past year, while raw materials like coal, metals, and even crops also show steep drops.

We think that  we are not out of the woods yet…

The world that took as to where we are today was the glamorous new world of finance through  the process of securitization.

As Paul Krugman said : ” Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption”.

One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

To see how we are reacting to the problem, let´s see Stock´s Market latest reaction :

Impressive at least !!! The worst sectors and the ones with more problems are leading the rally…

Have we learned anything yet ???

Swine flu has spread to 30 U.S. states and the number of countries with confirmed cases jumped to 19 from two in little more than a week. The expansion comes amid signs of a waning epidemic in Mexico.

Officially called H1N1, the virus is probably circulating in “virtually all” U.S. states, said Anne Schuchat of the U.S. Centers for Disease Control and Prevention. First reported in the U.S. and Mexico, H1N1 also has been confirmed in Central America, Europe, the Middle East, Asia and New Zealand.

The World Health Organization said this weekend it is on the verge of declaring a pandemic, which would mean the new virus is transmissible from person-to-person as it spreads among nations.

China has nearly doubled its gold reserves in the last five years as it diversified its enormous foreign exchange reserves away from US dollar assets.

The country now holds 1,054 tons of gold, up from the 600 tons it last disclosed in 2003, according to Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE) , which manages the country’s $1,954bn in foreign exchange reserves.

“China still has only a very small percentage of its forex reserves held in gold, much less than the United States or other developed countries,” said Paul Atherley, Beijing-based managing director of Leyshon Resources. “Those holdings are still too low in terms of the size of its economy and the growing significance of its currency.”

At current prices, China’s reserve of gold only accounts for around 1.6 per cent of its entire foreign exchange reserves. The value of its total holding was reported as $31bn.

The move comes as European central banks continue to sell their gold and the International Monetary Fund has discussed selling some of its bullion reserves.

China now has the fifth-largest gold pile of any country and is one of only six countries with public holdings of more than 1,000 tons, according to Ms Hu.

Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tons.